Business Context and Reporting Period
The First Bancorp, Inc. is a Maine-based financial holding company whose principal subsidiary is First National Bank. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2022, with comparisons to the corresponding 2021 periods. The interim financial statements were reviewed by the independent registered public accounting firm, but were not audited.
Key Financial Metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net interest income | $19.4 million | $17.0 million | $56.7 million | $48.6 million |
| Provision for loan losses | $0.4 million | $0.5 million | $1.3 million | $1.6 million |
| Non-interest income | $4.7 million | $4.4 million | $13.0 million | $14.6 million |
| Non-interest expense | $11.4 million | $9.9 million | $32.2 million | $29.3 million |
| Net income | $10.1 million | $9.0 million | $29.8 million | $26.7 million |
| Diluted EPS | $0.91 | $0.82 | $2.70 | $2.43 |
| Tax-equivalent net interest margin | 3.14% | 2.96% | 3.17% | 2.94% |
- Total assets were $2.74 billion at September 30, 2022, up 8.2% from December 31, 2021 and 8.1% from September 30, 2021.
- Total loans were $1.86 billion, up 12.8% year to date and 14.9% year over year, led by commercial real estate, construction and other commercial loans.
- Total deposits were $2.37 billion, up 11.6% from year-end 2021 and 16.6% year over year. Certificates of deposit increased $220.0 million year to date, primarily reflecting growth in wholesale CDs.
- Borrowed funds totaled $118.3 million, down from $136.3 million at December 31, 2021 and $233.2 million at September 30, 2021.
- Shareholders’ equity was $219.9 million, compared with $245.7 million at year-end 2021, primarily reflecting a $45.9 million after-tax unrealized loss on available-for-sale securities.
- Return on average assets was 1.54% for the first nine months, return on average equity was 16.78%, and the non-GAAP efficiency ratio was 44.99%.
- Operating cash flow was $32.4 million for the first nine months, while investing activities used $243.6 million, principally from a $210.8 million increase in loans. Financing activities provided $217.9 million, resulting in a $6.8 million increase in cash and cash equivalents to $27.4 million.
Material Changes Versus Comparable Periods
- Earnings improved: Nine-month net income increased 11.5%, and third-quarter net income increased 11.9%. Management reported record earnings in each of the first three quarters of 2022.
- Net interest income expanded: Nine-month net interest income increased 16.6%, primarily from earning-asset growth and a wider margin. Deposit interest expense increased as rates rose, but interest expense on borrowed funds declined.
- Fee income mix shifted: Nine-month non-interest income declined 10.7%. Debit card income increased 26.0%, wealth management income increased 4.8%, and service charges increased 20.0%, while mortgage origination and servicing income declined 71.6% as refinancing activity fell.
- Expenses increased: Nine-month non-interest expense rose 9.9%. The third quarter included $681,000 of one-time charges related to the sale of a block of residential mortgage loans.
- Credit metrics improved: Nonperforming loans declined to $1.9 million, or 0.10% of total loans, from $6.1 million, or 0.39%, a year earlier. Total past-due loans declined to $1.5 million, or 0.08% of loans, from $4.1 million, or 0.25%.
- Allowance declined relative to loans: The allowance for loan losses was $16.4 million, or 0.88% of loans, compared with 1.08% a year earlier. Net charge-offs were $434,000 for the first nine months, versus $321,000 in the prior-year period.
- Investment marks increased materially: The after-tax unrealized loss on available-for-sale securities increased to $47.7 million from $0.6 million a year earlier, primarily due to higher market interest rates. Management concluded the securities were not other-than-temporarily impaired.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide formal earnings or revenue guidance. Management expects interest rates to increase slightly over the next year and considers current interest-rate risk acceptable.
- Interest-rate simulation indicated that a gradual 2.0% increase in short-term rates could reduce first-year net interest income by approximately 3.8%, within the company’s 10.0% policy limit. The filing states these scenarios are not forecasts.
- Management reported $901.0 million of primary liquidity and $499.0 million of contingent liquidity, and believes available funding is sufficient under a broad range of scenarios.
- The company remained well capitalized. Its total risk-based capital ratio was 13.59% at September 30, 2022, compared with the 10.0% well-capitalized threshold applicable to the bank.
- Key risks include recessionary effects from inflation and Federal Reserve tightening, deposit pricing and runoff, loan demand and credit deterioration, collateral values, Maine tourism and hospitality exposure, COVID-19 developments, geopolitical and supply-chain disruption, and securities-market volatility.
- The company had 31 troubled debt restructurings totaling $4.9 million, down from 64 totaling $10.1 million at September 30, 2021. Six TDR loans totaling $430,000 were on nonaccrual status.
- The company plans to adopt the current expected credit loss standard on January 1, 2023. Management expects adoption may have a material effect, but the filing does not provide a quantified estimate.
- Six customer loan swap arrangements totaling $77.3 million in notional value referenced LIBOR tenors expected to continue through June 2023. The company anticipated amending these contracts and transitioning them to a replacement rate in late 2022.
- Disclosure controls and procedures were deemed effective, and no material change in internal control over financial reporting was reported during the quarter.
Investor Verification Checklist
- Verify the sustainability of loan growth, particularly in commercial real estate and construction, as well as exposure to hotels and motels representing 10.84% of total loans.
- Monitor deposit costs and the increased reliance on certificates of deposit as interest rates continue to rise.
- Assess the effect of the $47.7 million after-tax accumulated unrealized securities loss on tangible capital, liquidity flexibility and future securities income.
- Review the quantified impact of CECL adoption when the company reports the January 1, 2023 transition adjustment.
- Determine whether mortgage banking weakness and the $681,000 loan-sale charge are temporary or indicative of a longer-term reduction in fee income.
- Track credit migration, charge-offs, nonaccrual loans, TDR performance and the adequacy of the $16.4 million allowance under recessionary scenarios.
- Confirm completion and terms of the LIBOR-to-SOFR transition for the six legacy customer swap contracts.