Business Context and Reporting Period
The First Bancorp, Inc. is a financial holding company that owns First National Bank, serving primarily Maine markets. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2021, with comparisons to September 30, 2020 and, for balance-sheet items, December 31, 2020. The interim financial statements were reviewed by the independent registered public accounting firm, but not audited.
Financial Performance and Condition
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net interest income | $17.0 million | $14.7 million | $48.6 million | $44.2 million |
| Provision for loan losses | $0.5 million | $1.8 million | $1.6 million | $4.6 million |
| Non-interest income | $4.4 million | $4.8 million | $14.6 million | $13.6 million |
| Non-interest expense | $9.9 million | $9.3 million | $29.3 million | $29.2 million |
| Net income | $9.0 million | $7.1 million | $26.7 million | $20.2 million |
| Diluted EPS | $0.82 | $0.65 | $2.43 | $1.84 |
- Tax-equivalent net interest margin was 2.96% in Q3 2021 and 2.94% for the first nine months, compared with 2.82% and 2.93%, respectively, in the prior-year periods.
- Return on average equity was 14.92% for Q3 and 15.28% for nine months; return on average tangible common equity was 17.14% and 17.62%, respectively.
- The non-GAAP efficiency ratio improved to 44.85% in Q3 and 45.04% for nine months, compared with 45.97% and 50.00% in the prior-year periods.
- At September 30, 2021, total assets were $2.53 billion, total loans were $1.62 billion, investment securities were $693.8 million, deposits were $2.03 billion, and shareholders’ equity was $238.7 million.
- Loan balances increased 9.5% from December 31, 2020 and 12.6% year over year, led by commercial real estate and construction lending. PPP loans totaled approximately $39.6 million at quarter-end.
- Low-cost deposits increased $253.0 million, or 23.5%, from year-end, while certificates of deposit decreased $91.0 million. Borrowed funds declined $28.8 million from year-end to $233.2 million.
- Cash and cash equivalents were $27.1 million. Management reported approximately $1.0 billion of primary liquidity and $505.0 million of contingent liquidity sources.
- The allowance for loan losses was $17.5 million, or 1.08% of loans, compared with 1.10% at December 31, 2020 and 1.07% at September 30, 2020. Net charge-offs for nine months were $321,000.
- Nonperforming loans were $6.1 million, or 0.39% of loans; nonperforming assets were 0.25% of total assets. Total past-due loans were 0.25% of loans.
- The Company’s total risk-based capital ratio was 14.48%, above the 10.0% well-capitalized threshold applicable to the Bank.
Material Changes Versus Comparable Periods
- Nine-month net income increased 32.6%, while Q3 net income increased 27.0%. Earnings benefited primarily from higher net interest income and a substantially lower loan-loss provision.
- Net interest income increased 10.1% for nine months and 15.4% for Q3. Lower deposit funding costs and balance-sheet growth more than offset lower earning-asset yields.
- Interest expense declined 38.7% for nine months, primarily because of lower deposit costs. PPP origination-fee recognition contributed $2.9 million to nine-month interest income in 2021 versus $788,000 in 2020.
- Nine-month non-interest income increased 7.0%, supported by wealth management, debit-card, and mortgage banking revenue. Net securities gains declined from $1.2 million to $22,000.
- Nine-month non-interest expense was essentially flat, increasing $66,000. Salaries and employee benefits increased, while other operating expense declined.
- Credit quality improved materially: nonperforming loans declined from $9.1 million at September 30, 2020, past-due loans declined from $12.8 million, and impaired loans declined from $19.3 million to $14.5 million.
- Unrealized losses on available-for-sale securities increased, with accumulated other comprehensive income for these securities moving from a $5.0 million gain at December 31, 2020 to a $627,000 loss at September 30, 2021. Management attributed the losses primarily to interest-rate and market-spread changes and did not identify other-than-temporary impairment.
Guidance, Outlook, Risks and Unusual Items
- No formal earnings or financial guidance is provided. Management stated that 2021 results are not necessarily indicative of the full-year results.
- Management described operating results and asset quality as strong and stable and expects interest rates to increase slightly over the next year. Interest-rate simulations indicated a projected first-year net-interest-income decline of 1.6% if rates fall 1 percentage point and an increase of 0.3% if rates rise 2 percentage points.
- COVID-19 remains a key uncertainty, particularly for Maine’s tourism, lodging, restaurant, and hospitality sectors. Of approximately $287.9 million of COVID-related loan modifications completed, $6.6 million remained in an original or subsequent modification at quarter-end.
- The Delta variant, economic disruption, collateral values, borrower liquidity, loan demand, and future credit losses could adversely affect results. Hotel and motel loans totaled $165.6 million, or 10.23% of total loans.
- The Company continues preparing for the transition away from LIBOR. Nine hedge swaps had aggregate notional amounts of $210.0 million; seven contracts totaling $165.0 million mature after June 30, 2023. A replacement index for new transactions was expected to be selected before year-end 2021, with legacy contract amendments anticipated in late 2022.
- The Company qualifies as a smaller reporting company and has not yet adopted the current expected credit loss standard, which Management continues to expect could have a material impact upon adoption.
- Investment securities with a fair value of $332.0 million had $8.5 million of unrealized losses at quarter-end. Management concluded these losses were temporary and stated it had the intent and ability to hold the securities for recovery.
- The quarter included a $142,000 net securities loss, while the prior-year quarter had no net securities gain or loss. The 2020 comparison period also included unusual interest-rate-swap restructuring charges in the first quarter.
Important Facts for Investors to Verify
- Reconcile reported earnings growth to net interest income, PPP fee recognition, funding costs, and the lower loan-loss provision.
- Monitor the sustainability of loan growth, especially commercial real estate, construction, and hotel and motel exposure.
- Evaluate whether current delinquency and nonperforming-loan improvements persist as COVID-related modifications expire.
- Assess the adequacy of the allowance for loan losses, including the $1.5 million unallocated reserve and qualitative reserves tied to economic and COVID-19 uncertainty.
- Review interest-rate sensitivity, securities unrealized losses, hedge performance, and the LIBOR-to-replacement-rate transition.
- Confirm liquidity availability, deposit stability, borrowing maturities, capital ratios, and the Board’s future dividend decisions.
- Consider the potential effect of CECL adoption on reserves, capital, and reported earnings when the Company implements the standard.