First Bancorp, Inc quarterly report, Q2 FY2022

The First Bancorp, Inc. — Q2 2022 Form 10-Q Summary

Business Context and Reporting Period

The First Bancorp, Inc. is a Maine-based financial holding company whose principal subsidiary is First National Bank. The unaudited filing covers the quarter and six months ended June 30, 2022, with comparisons to the corresponding 2021 periods and December 31, 2021 balance-sheet data. The interim financial statements were reviewed by the independent registered public accounting firm but were not audited.

Financial Performance and Position

Metric	Six Months 2022	Six Months 2021	Q2 2022	Q2 2021
Net interest income	$37.3 million	$31.6 million	$18.7 million	$15.7 million
Provision for loan losses	$0.9 million	$1.1 million	$0.5 million	$0.5 million
Non-interest income	$8.3 million	$10.2 million	$4.1 million	$4.9 million
Non-interest expense	$20.8 million	$19.4 million	$10.2 million	$9.5 million
Net income	$19.7 million	$17.7 million	$10.0 million	$8.8 million
Diluted EPS	$1.79	$1.61	$0.91	$0.80

Net income increased 11.3% year over year for the six months and 13.8% for the quarter.
Tax-equivalent net interest margin increased to 3.18% for the six months from 2.93% and to 3.13% for the quarter from 2.86%.
Return on average equity was 16.61% for the six months and 17.29% for the quarter. Return on average tangible common equity was 19.07% and 19.94%, respectively.
The non-GAAP efficiency ratio improved to 44.45% for the six months from 45.14% in the prior-year period.
Total assets were $2.63 billion at June 30, 2022, up 4.1% from December 31, 2021 and 7.3% from June 30, 2021. Loans were $1.79 billion, up 8.5% year to date and 12.6% year over year.
Total deposits were $2.25 billion, up 6.1% from year-end and 14.8% year over year. Certificates of deposit increased materially, while low-cost deposits declined slightly year to date.
Shareholders’ equity was $227.7 million, down from $245.7 million at year-end, primarily reflecting a $31.1 million after-tax unrealized loss on available-for-sale securities.

Cash Flow, Debt, Liquidity, and Capital

Operating cash flow was $19.3 million for the six months, compared with $32.3 million in 2021. Investing activities used $128.2 million, principally from a $141.0 million net increase in loans. Financing activities provided $111.8 million, including a $138.2 million increase in certificates of deposit and a $45.3 million increase in short-term borrowings, partly offset by repayment of $55.0 million of long-term borrowings.
Cash and cash equivalents ended at $23.5 million, compared with $27.1 million at June 30, 2021.
Borrowed funds totaled $126.6 million at June 30, 2022, down from $136.3 million at December 31, 2021 and $228.6 million a year earlier.
Management reported primary liquidity sources of approximately $964.0 million, including $482.0 million of contingent liquidity, and considered liquidity sufficient under a broad range of scenarios.
The Company’s total risk-based capital ratio was 13.63%, above the 10.0% well-capitalized threshold. Management’s stress testing indicated that the Bank would remain well capitalized under the scenarios described.
Dividends declared were $0.66 per share for the first six months, including $0.34 per share in the second quarter. The six-month payout ratio was 36.67%.

Material Changes Versus Comparable Periods

Net interest income benefited from earning-asset growth and lower funding costs; interest expense declined 21.2% for the six months.
Non-interest income declined 18.6%, primarily because mortgage banking revenue fell 73.6% as mortgage refinancing activity slowed. Wealth management, debit card, and service-charge revenue increased.
Non-interest expense increased 7.5%, led by salaries and employee benefits and occupancy costs.
Loan growth was concentrated in commercial real estate and construction loans, which increased by approximately $90.9 million from year-end, and residential loans. Remaining PPP balances were only $56,000 at June 30, 2022, compared with substantial balances and fee recognition in the prior-year period.
The allowance for loan losses increased to $16.2 million from $15.5 million at year-end but declined from $17.0 million a year earlier. The allowance ratio decreased to 0.91% of loans from 1.07% a year earlier.
Nonperforming loans declined to $4.8 million, or 0.27% of total loans, from $7.0 million, or 0.44%, a year earlier. Total past-due loans were 0.18% of loans versus 0.22% a year earlier.
Unrealized losses on investment securities expanded significantly with rising interest rates. Securities with unrealized losses totaled $85.7 million at June 30, 2022, versus $8.4 million at December 31, 2021. Management concluded these losses were temporary and expected full recovery of contractual cash flows.

Guidance, Outlook, Risks, and Unusual Items

No formal earnings or revenue guidance was provided. Management described record earnings in each of the first two quarters and expects interest rates to increase slightly over the next year.
Management’s interest-rate simulation projected first-year net interest income to be unchanged if rates declined 1.0% and to decrease 3.8% if rates increased 2.0%; both were within internal policy limits. These scenarios are not forecasts.
Key risks include inflation, aggressive Federal Reserve rate increases, a potential recession, financial-market volatility, supply-chain disruption, and the Russia-Ukraine conflict.
COVID-19 restrictions had largely eased, but future variants, the expiration of government support programs, and effects on Maine’s tourism, lodging, restaurant, and hospitality sectors could impair borrowers, collateral values, loan demand, and credit quality.
Commercial real estate and construction exposures remain important concentrations. Hotel and motel loans were $200.5 million, or 11.21% of total loans, and loans to lessors of residential buildings and dwellings were $181.3 million, or 10.13%.
Fifty-three loans totaling $7.5 million were classified as troubled debt restructurings. Four COVID-related loan modifications remained at quarter-end, totaling less than $0.4 million.
The Company plans to adopt the current expected credit loss model on January 1, 2023 and anticipates that adoption may have a material impact on the financial statements.
Six legacy customer loan swaps reference LIBOR tenors expected to continue through June 2023; management anticipated amending those contracts and transitioning them to a replacement rate in late 2022.

Important Facts for Investors to Verify

Whether continued loan growth, rising deposit costs, and future Federal Reserve rate actions sustain or compress the net interest margin.
The magnitude and regulatory-capital impact of unrealized securities losses if rates remain elevated or increase further.
The eventual effect of CECL adoption on the allowance for credit losses, retained earnings, and capital ratios.
Credit performance in hotel, motel, commercial real estate, and construction portfolios, including delinquencies, nonperforming loans, charge-offs, and TDRs.
The sustainability of earnings as PPP-related benefits have largely ended and mortgage banking activity remains below 2021 levels.
Deposit pricing, uninsured deposits of $222.8 million, wholesale funding reliance, and the adequacy of available liquidity under stress.