The First Bancorp(FNLC) - 2022 Q2 - Quarterly Report

Part I. Financial Information Selected Financial Data (Unaudited) This section presents key financial performance and position data for the six months ended June 30, 2022 Selected Financial Data (in thousands, except per share and ratio data) | Metric | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net Income | $19,702 | $17,709 | | Basic Earnings per Share | $1.80 | $1.63 | | Diluted Earnings per Share | $1.79 | $1.61 | | Net Interest Margin Tax-Equivalent | 3.18% | 2.93% | | Total Assets | $2,630,354 | $2,450,443 | | Total Loans | $1,788,355 | $1,588,264 | Item 1 – Financial Statements This section contains the unaudited consolidated financial statements and accompanying detailed notes - The financial statements are unaudited and prepared in accordance with GAAP for interim financial information[26] - All significant intercompany transactions and balances are eliminated in consolidation[26] - The income reported for the 2022 period is not necessarily indicative of full-year results[26] Report of Independent Registered Public Accounting Firm The independent accounting firm's review found no material modifications needed for GAAP conformity - The firm reviewed the interim consolidated financial information for the three-month and six-month periods ended June 30, 2022 and 2021[11] - Based on the review, no material modifications were found to be necessary for the interim financial information to conform with GAAP[11] - The review is substantially less in scope than an audit, and therefore, no opinion regarding the financial statements as a whole is expressed[12] Consolidated Balance Sheets (Unaudited) The balance sheets show asset and loan growth, offset by decreased shareholders' equity from security losses Consolidated Balance Sheets (in thousands) | Metric | June 30, 2022 | December 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | :--- | | Total Assets | $2,630,354 | $2,527,099 | $2,450,443 | | Loans (net of allowance) | $1,772,154 | $1,632,128 | $1,571,230 | | Total Deposits | $2,252,022 | $2,123,297 | $1,961,321 | | Total Shareholders' Equity | $227,685 | $245,657 | $234,155 | | Net unrealized gain (loss) on securities available for sale | $(32,795) | $(1,718) | $1,190 | Consolidated Statements of Income and Comprehensive Income (Unaudited) The statements reflect increased net income driven by higher net interest income, despite a comprehensive loss Consolidated Statements of Income and Comprehensive Income (in thousands, except per share data) | Metric | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Total Interest Income | $41,964 | $37,494 | $21,431 | $18,541 | | Total Interest Expense | $4,646 | $5,898 | $2,733 | $2,818 | | Net Interest Income | $37,318 | $31,596 | $18,698 | $15,723 | | Net Income | $19,702 | $17,709 | $9,997 | $8,787 | | Basic Earnings per common share | $1.80 | $1.63 | $0.91 | $0.81 | | Diluted Earnings per common share | $1.79 | $1.61 | $0.91 | $0.80 | | Other comprehensive income (loss) | $(30,917) | $(950) | $(12,583) | $362 | | Comprehensive income (loss) | $(11,215) | $16,759 | $(2,586) | $9,149 | Consolidated Statements of Changes in Shareholders' Equity (Unaudited) Shareholders' equity decreased in 2022 due to unrealized security losses offsetting net income Consolidated Statements of Changes in Shareholders' Equity (in thousands) | Metric | June 30, 2022 (6 Months) | June 30, 2021 (6 Months) | | :--- | :--- | :--- | | Balance at beginning of period (Dec 31, 2021/2020) | $245,657 | $223,726 | | Net income | $19,702 | $17,709 | | Net unrealized loss on securities available for sale, net of tax | $(31,077) | $(3,819) | | Cash dividends declared | $(7,278) | $(6,920) | | Equity compensation expense | $412 | $490 | | Balance at end of period | $227,685 | $234,155 | Consolidated Statements of Cash Flows (Unaudited) Net cash increased as financing activities offset cash used in investing and reduced operating cash flow Consolidated Statements of Cash Flows (in thousands) | Metric | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $19,255 | $32,341 | | Net cash used by investing activities | $(128,246) | $(107,971) | | Net cash provided by financing activities | $111,810 | $76,510 | | Net increase in cash and cash equivalents | $2,819 | $880 | | Cash and cash equivalents at end of period | $23,453 | $27,092 | Notes to Consolidated Financial Statements These notes detail accounting policies, financial instrument breakdowns, and risks from the economic environment Note 1 – Basis of Presentation This note clarifies the interim statements' GAAP basis and highlights economic risks like inflation - Unaudited consolidated financial statements are prepared in accordance with GAAP for interim financial information and instructions to Form 10-Q[26] - The Company's primary market is the State of Maine, which relies upon tourism for a significant percentage of its economic activity[28] - The nation's economy has entered an inflationary phase, with the Federal Reserve aggressively increasing short-term interest rates, which are intended to slow economic activity and risk a recession[29] Note 2 – Investment Securities This note details the investment portfolio, highlighting increased unrealized losses on securities Investment Securities Portfolio (in thousands) | Category | June 30, 2022 (Fair Value) | December 31, 2021 (Fair Value) | June 30, 2021 (Fair Value) | | :--- | :--- | :--- | :--- | | Securities available for sale | $301,737 | $320,566 | $306,247 | | Securities to be held to maturity | $335,950 | $375,327 | $383,454 | | Restricted equity securities | $4,720 | $5,365 | $8,839 | - At June 30, 2022, there were 773 securities with unrealized losses, of which 83 had been temporarily impaired for 12 months or more, primarily due to changes in interest rates[36] - Management has the ability and intent to hold its impaired securities until a recovery of their amortized cost and does not consider them other-than-temporarily impaired[36] Note 3 – Loans This note breaks down the loan portfolio by class and details non-accrual and restructured loans Loan Portfolio by Class (in thousands) | Loan Class | June 30, 2022 | December 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | :--- | | Commercial Real Estate | $617,488 | $576,198 | $527,415 | | Commercial Construction | $128,927 | $79,365 | $65,794 | | Other Commercial | $275,714 | $264,570 | $298,747 | | Residential Term | $582,313 | $550,783 | $523,344 | | Total Loans | $1,788,355 | $1,647,649 | $1,588,264 | Nonaccrual Loans (in thousands) | Nonaccrual Loans | June 30, 2022 | December 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | :--- | | Total | $4,812 | $5,602 | $6,981 | Troubled Debt Restructured (TDRs) (balance in thousands) | Troubled Debt Restructured (TDRs) | June 30, 2022 | December 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | :--- | | Number of Loans | 53 | 60 | 72 | | Balance | $7,484 | $8,341 | $10,782 | Note 4 – Allowance for Loan Losses This note details the methodology and composition of the allowance for loan losses (ALL) Allowance for Loan Losses (ALL) by Component (in thousands) | ALL Component | June 30, 2022 | December 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | :--- | | Specific Reserves | $613 | $576 | $707 | | General Reserves | $1,966 | $1,856 | $2,052 | | Qualitative Factors | $11,772 | $11,307 | $12,930 | | Unallocated Reserves | $1,850 | $1,782 | $1,345 | | Total Allowance for Loan Losses | $16,201 | $15,521 | $17,034 | | ALL as % of Total Loans | 0.91% | 0.94% | 1.07% | - The qualitative portion of the allowance for loan losses increased $465,000 between December 31, 2021, and June 30, 2022, due to changes in macroeconomic measures and portfolio volume[72] - Net charge-offs for the six months ended June 30, 2022, were $220,000, down from $269,000 in the same period in 2021[262] Note 5 – Stock-Based Compensation This note outlines the company's equity incentive plans and associated compensation expenses - The 2020 Equity Incentive Plan reserves 400,000 shares of common stock for issuance in connection with stock options, restricted stock awards, and other equity-based awards[105] - As of June 30, 2022, 80,527 restricted shares remain restricted, with $1,155,000 in unrecognized compensation expense[106] Equity Compensation Expense (in thousands) | Metric | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | | Equity compensation expense | $412 | $490 | Note 6 – Common Stock This note states the proceeds from the sale of common stock for the six months ended June 30 Proceeds from Common Stock Sale (in thousands) | Metric | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | | Proceeds from sale of common stock | $385 | $340 | Note 7 – Earnings Per Share This note provides the computation of basic and diluted earnings per share (EPS), showing an increase Earnings Per Share Calculation (Net Income in thousands) | Metric | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $19,702 | $17,709 | $9,997 | $8,787 | | Basic EPS | $1.80 | $1.63 | $0.91 | $0.81 | | Diluted EPS | $1.79 | $1.61 | $0.91 | $0.80 | Note 8 – Employee Benefit Plans This note describes the company's employee benefit plans and details the related expenses Employee Benefit Plan Expenses (in thousands) | Metric | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | | 401(k) plan expense | $550 | $405 | | Deferred compensation expense | $154 | $84 | - The accumulated postretirement benefit obligation at June 30, 2022, was $1,326,000[114] Note 9 - Other Comprehensive Income (Loss) This note summarizes activity in other comprehensive income, highlighting significant unrealized security losses Other Comprehensive Income (Loss) Activity (in thousands) | Metric | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net unrealized gain (loss) on securities available for sale, net of taxes | $(31,077) | $(3,819) | | Net unrealized gain on transferred securities, net of taxes | $14 | $20 | | Net unrealized gain (loss) on cash flow hedging derivative instruments, net of taxes | $146 | $2,849 | | Balance at end of period (securities available for sale) | $(32,795) | $1,190 | Note 10 - Financial Derivative Instruments This note explains the use of derivative instruments for risk management, not speculation - The Bank uses derivative financial instruments for risk management purposes and not for trading or speculative purposes[120] - As of June 30, 2022, the Bank had three outstanding cash flow hedges with notional principal amounts totaling $30.0 million and an unrealized gain of $146,000 (net of taxes)[123][119] - The Bank also had six customer loan swap arrangements in place with a total notional value of $77.8 million at June 30, 2022[125][126] - The Company has adopted SOFR as its replacement reference rate index for new transactions, with legacy LIBOR contracts expected to be amended in late 2022[127] Note 11 – Mortgage Servicing Rights This note describes the accounting for mortgage servicing rights (MSRs), which are carried at lower of cost or fair value Mortgage Servicing Rights Activity (in thousands) | Metric | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | | Servicing rights capitalized | $237 | $646 | | Servicing rights amortized | $291 | $319 | Mortgage Servicing Rights Valuation (in thousands) | Metric | June 30, 2022 | December 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | :--- | | Fair value of servicing rights | $3,751 | $3,041 | $2,777 | | Carrying value | $2,644 | $2,671 | $2,548 | - There was no impairment reserve recorded for mortgage servicing rights as of June 30, 2022[131] Note 12 – Income Taxes This note states the company is open to IRS audit for tax years 2019 through 2021 - The Company is currently open to audit by the IRS for the years ended December 31, 2019 through 2021[132] Note 13 - Certificates of Deposit This note provides a breakdown of certificates of deposit by amount, showing an overall increase Certificates of Deposit by Category (in thousands) | CD Category | June 30, 2022 | December 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | :--- | | Certificates of deposit < $100,000 | $340,876 | $252,568 | $226,924 | | Certificates $100,000 to $250,000 | $282,180 | $258,211 | $310,068 | | Certificates $250,000 and over | $81,354 | $55,426 | $59,210 | | Total Certificates of Deposit | $704,410 | $566,205 | $596,202 | Note 14 – Reclassifications This note indicates prior-year items were reclassified to conform with current presentation without material impact - Certain items from the prior year were reclassified in the consolidated financial statements to conform with the current year presentation[134] - These reclassifications did not have a material impact on the consolidated balance sheet or statement of income and comprehensive income presentations[134] Note 15 – Fair Value Disclosures This note provides fair value disclosures for financial instruments, categorized by input observability levels - Fair value measurements are grouped into three levels: Level 1 (quoted prices), Level 2 (observable inputs), and Level 3 (unobservable inputs)[136][137][138] - Investment securities, mortgage servicing rights, time deposits, and borrowed funds are generally classified as Level 2[139][143][144][145] - Loans are generally classified as Level 3, except for certain collateral-dependent impaired loans which are classified as Level 2[140] Assets Measured at Fair Value on a Recurring Basis (in thousands) | Metric | June 30, 2022 (Total Fair Value) | | :--- | :--- | | Securities available for sale | $301,737 | | Interest rate swap agreements | $185 | | Customer loan interest swap agreements | $3,440 | | Total assets measured at fair value on a recurring basis | $305,362 | Note 16 – Impact of Recently Issued Accounting Standards This note discusses the anticipated impact of new accounting standards, particularly CECL - ASU No 2016-13 (CECL) will be effective for the Company on January 1, 2023, and is anticipated to have a material impact upon adoption[163] - ASU No 2022-01 (Derivatives and Hedging) and ASU No 2022-02 (TDRs and Vintage Disclosures) are not expected to have a material impact on the consolidated financial statements[164][165] - The Company qualifies as a Smaller Reporting Company, which changed the effective implementation date for CECL to fiscal years beginning after December 15, 2022[163] Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, condition, risk management, and critical accounting policies - Net income for the six months ended June 30, 2022, was $19.7 million, up $2.0 million or 11.3% from the same period in 2021, primarily driven by growth in net interest income[185][186] - Total assets increased $103.3 million or 4.1% year-to-date, with the loan portfolio increasing $140.7 million or 8.5% in the first six months of 2022[192] - Asset quality remains strong and stable, with non-performing assets at 0.18% of total assets as of June 30, 2022, down from 0.30% a year ago[190] Forward-Looking Statements This section cautions readers about forward-looking statements and associated risks and uncertainties - Forward-looking statements are identified by words such as 'believe,' 'expect,' 'anticipate,' 'intend,' 'estimate,' 'assume,' and 'outlook'[167] - Actual results may differ materially from anticipated results due to known and unknown risks, uncertainties, and other factors beyond the Company's control[167] - Factors causing differences include changes in economic conditions, interest rates, credit quality, competition, and the COVID-19 pandemic[168] Critical Accounting Policies This section outlines accounting policies requiring significant management estimates and assumptions - The Allowance for Loan Losses requires the most significant estimates and assumptions, based on portfolio size, quality trends, historical losses, and economic conditions[171] - The valuation of Mortgage Servicing Rights is a critical policy, with the anticipated loan prepayment rate being the most important assumption[174] - Fair Value of Securities is estimated by independent pricing services and validated quarterly, subject to changes in market interest rates and risk tolerance[175] - Other-Than-Temporary Impairment on Securities is evaluated quarterly based on fair value declines, issuer's financial condition, and management's intent to retain the investment[176] Use of Non-GAAP Financial Measures This section explains the use of non-GAAP measures to enhance comparability and understanding of performance - Non-GAAP measures are used to provide a greater understanding of ongoing operations and enhance comparability of results with prior periods[180] - Tax-equivalent net interest income adjusts for tax-exempt interest income, improving clarity for financial analysis[181] - The non-GAAP efficiency ratio excludes securities losses/gains and adds the tax-equivalent adjustment to net interest income[182] - Tangible common equity ratios are used by management, regulators, and analysts to compare capital adequacy, excluding goodwill and other intangible assets[183] Executive Summary The company reported record earnings for the first half of 2022, driven by net interest income growth Key Performance Metrics | Metric | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net Income | $19.7 million | $17.7 million | | Diluted EPS | $1.79 | $1.61 | | Tax-equivalent Net Interest Income | $38.4 million | $32.8 million | | Tax-equivalent Net Interest Margin | 3.18% | 2.93% | | Non-GAAP Efficiency Ratio | 44.45% | 45.14% | - Total assets increased $103.3 million (4.1%) year-to-date, and the loan portfolio grew $140.7 million (8.5%) in the first six months of 2022[192] - Non-performing assets stood at 0.18% of total assets as of June 30, 2022, down from 0.30% a year ago, indicating strong asset quality[190] Net Interest Income Net interest income increased significantly due to earning asset growth and reduced funding costs Net Interest Income Summary (in millions) | Metric | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | | Total Interest Income | $42.0 | $37.5 | | Total Interest Expense | $4.6 | $5.9 | | Net Interest Income | $37.3 | $31.6 | | Net Interest Margin (tax-equivalent) | 3.18% | 2.93% | - The increase in net interest income was primarily attributable to growth in earning assets and reduced funding costs[195] - Interest income included $137,000 in net origination fees from PPP loans in Q2 2022, down from $641,000 in Q2 2021[198] Average Daily Balance Sheets Average daily balances show growth in total assets, net loans, and total deposits Average Daily Balance Sheets (in thousands) | Metric | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | | Average Total Assets | $2,560,362 | $2,381,273 | | Average Net Loans | $1,699,472 | $1,497,791 | | Average Total Deposits | $2,171,151 | $1,896,524 | | Average Total Shareholders' Equity | $239,267 | $230,760 | Non-Interest Income Non-interest income decreased due to a significant decline in mortgage banking revenues - Non-interest income for the six months ended June 30, 2022, was $8.3 million, a decrease of $1.9 million or 18.6% compared to the same period in 2021[205] - Mortgage banking revenue decreased by $2.4 million or 73.6%, primarily due to a significant year-to-year decrease in mortgage refinance activity[205] - Revenue at First National Wealth Management increased $209,000 (9.4%), debit card revenue was up $213,000 (8.4%), and service charge revenue was up 25.7%[205] Non-Interest Expense Non-interest expense increased, mainly due to higher salaries, benefits, and occupancy expenses - Non-interest expense for the six months ended June 30, 2022, was $20.8 million, an increase of $1.5 million or 7.5% compared to the same period in 2021[206] - Increases were observed in salaries and employee benefits, as well as occupancy expense[206] - The Company's non-GAAP efficiency ratio stood at 44.45% for the six months ended June 30, 2022, down from 45.14% for the same period in 2021[206] Income Taxes Income taxes on operating earnings increased for the first six months of 2022 - Income taxes on operating earnings were $4.2 million for the six months ended June 30, 2022, up $530,000 from the same period in 2021[207] Investments The investment portfolio's carrying value decreased, with significant unrealized losses from rising interest rates - The carrying value of the Company's investment portfolio decreased by $9.8 million between December 31, 2021, and June 30, 2022[208] - The portfolio is primarily invested in U.S. Government agency securities, mortgage-backed securities, and tax-exempt obligations of states and political subdivisions[210] - The remaining unamortized balance of net unrealized losses for securities transferred from available for sale to held to maturity was $73,000 (net of taxes) at June 30, 2022[211] Impaired Securities Unrealized losses on securities increased substantially due to rising rates but are not deemed other-than-temporarily impaired Temporarily Impaired Securities (in thousands) | Metric | June 30, 2022 (Fair Value) | June 30, 2022 (Unrealized Losses) | | :--- | :--- | :--- | | Temporarily impaired securities | $554,911 | $(85,708) | | U.S. Government-sponsored agencies | $51,778 | $(12,344) | | Mortgage-backed securities | $286,288 | $(38,404) | | State and political subdivisions | $194,851 | $(34,328) | - The increase in unrealized losses since 2021 year-end is a result of the significant increase in market interest rates during the period[217] - Management concluded that these securities were not other-than-temporarily impaired based on the issuer's performance and the intent to hold them until recovery[222][223] Federal Home Loan Bank Stock The company's investment in Federal Home Loan Bank (FHLB) stock decreased and is reported at cost Investment in FHLB Stock (in thousands) | Metric | June 30, 2022 | December 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | :--- | | Investment in FHLB stock | $3,700 | $4,300 | $7,800 | - FHLB stock is a non-marketable equity security and is reported at cost[228] - No impairment losses have been recorded through June 30, 2022[228] Loans and Loans Held for Sale The loan portfolio expanded significantly, driven by commercial real estate and construction loans Loan Portfolio Growth (in thousands) | Metric | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total loans | $1,788,355 | $1,647,649 | | Commercial loans increase | $102,000 | N/A | | Loans held for sale | $689 | $835 | - Loan growth in the first six months of 2022 was centered in commercial real estate and construction loans, up $90.9 million[192] - At June 30, 2022, loan concentrations exceeding 10% of total loans included hotels ($200.5 million, 11.21%) and lessors of residential buildings ($181.3 million, 10.13%)[246] - The loan portfolio at June 30, 2022, was comprised of 43.1% fixed-rate loans and 56.9% adjustable-rate loans[245] Credit Risk Management and Allowance for Loan Losses Credit risk is managed through systematic evaluation and a four-element allowance for loan losses (ALL) methodology - Credit risk is managed by evaluating the borrower's risk profile, repayment sources, and collateral, with primary reliance on borrower cash flow[247] - The allowance for loan losses (ALL) consists of specific, general, qualitative, and unallocated reserves[250] Allowance for Loan Losses Summary (in thousands) | Metric | June 30, 2022 | December 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | :--- | | Total Allowance for Loan Losses | $16,201 | $15,521 | $17,034 | | ALL as a percentage of total loans | 0.91% | 0.94% | 1.07% | | Net loans charged off (6 months) | $220 | $357 (year) | $269 (6 months) | Non-Performing Loans and Troubled Debt Restructured Nonperforming loans (NPLs) and Troubled Debt Restructured (TDRs) both decreased, reflecting improved asset quality Nonperforming Loans (NPLs) (in thousands) | Metric | June 30, 2022 | December 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | :--- | | Total Nonperforming Loans | $4,812 | $5,602 | $6,981 | | Nonperforming loans as % of total loans | 0.27% | 0.35% | 0.44% | Troubled Debt Restructured (TDRs) (balance in thousands) | Metric | June 30, 2022 | December 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | :--- | | TDRs (Number of Loans) | 53 | 60 | 72 | | TDRs (Balance) | $7,484 | $8,341 | $10,782 | - As of June 30, 2022, 81.2% of TDRs were performing under modified terms, 17.9% were on nonaccrual, and 0.86% were past due and accruing[271][273] Impaired Loans Impaired loans decreased, though the specific allowance for impaired commercial loans increased Impaired Loans Summary (in thousands) | Metric | June 30, 2022 | December 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | :--- | | Total Impaired Loans | $10,955 | $12,052 | $15,578 | - The number of impaired loans decreased to 92 at June 30, 2022, from 107 at December 31, 2021[277] - The specific allowance for impaired commercial loans increased from $439,000 to $510,000 as of June 30, 2022, reflecting fair value deficiencies[277] Past Due Loans The overall loan delinquency ratio improved, though loans 90 days delinquent and accruing increased slightly Past Due Loans Summary (in thousands) | Metric | June 30, 2022 | December 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | :--- | | Total Past Due Loans | $3,147 | $4,345 | $3,420 | | Overall loan delinquency ratio | 0.18% | 0.26% | 0.22% | | Loans 90+ days past due and accruing | $76 | $32 | $104 | Potential Problem Loans and Loans in Process of Foreclosure Potential problem loans emerged in 2022, and six loans were in the process of foreclosure - Potential problem loans totaled $111,000 (0.006% of total loans) across two loans at June 30, 2022, compared to none at December 31, 2021[280] - As of June 30, 2022, there were six loans in the process of foreclosure with a total balance of $727,000[281] - The Bank follows specific residential and commercial foreclosure processes, which are subject to annual review by its internal audit provider[281][282][283] Other Real Estate Owned Other Real Estate Owned (OREO) assets totaled $51,000 across two properties with no loss allowance OREO Summary (in thousands) | Metric | June 30, 2022 | December 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | :--- | | OREO balance | $51 | $0 | $224 | | Number of properties | 2 | 0 | 1 | - No allowance for losses was recorded for OREO at June 30, 2022[284] Liquidity Management The company maintains strong liquidity with substantial primary and contingent funding sources - Primary sources of liquidity totaled $964.0 million at June 30, 2022[287] - Contingent sources of liquidity totaled $482.0 million at June 30, 2022[287] - Deposits funded 84.8% of total average assets in the first six months of 2022, up from 79.6% a year ago[288] - The Bank has established collateralized borrowing capacity with the FRB of Boston and FHLB, as well as Fed Funds lines with correspondent banks[289] Deposits Total deposits increased, driven by a significant rise in certificates of deposit - Total deposits increased by $128.7 million or 6.1% in the first six months of 2022 from December 31, 2021 levels[290] - Low-cost deposits (demand, NOW, and savings accounts) decreased by $8.9 million or 0.7% year-to-date[290] - Certificates of deposit increased $138.2 million or 24.4% year-to-date[290] - Estimated uninsured deposits totaled $222.8 million at June 30, 2022[290] Borrowed Funds Borrowed funds decreased due to a reduction in customer repurchase agreements and FHLB repayments - Borrowed funds decreased $9.8 million or 7.2% during the six months ended June 30, 2022, from December 31, 2021, all in customer repurchase agreements[291] - Between June 30, 2021, and June 30, 2022, borrowed funds decreased by $102.1 million or 44.6%, primarily from repayment of various FHLB borrowings[291] Shareholders' Equity Shareholders' equity decreased due to unrealized security losses, though the company remains well-capitalized Shareholders' Equity Summary (in millions) | Metric | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Shareholders' equity | $227.7 | $245.7 | | Net unrealized loss on available-for-sale securities, net of tax | $32.8 | $1.7 | | Dividend payout ratio (6 months) | 36.67% | 38.65% | - The Company's total risk-based capital ratio was 13.63% as of June 30, 2022, solidly above the well-capitalized threshold of 10.0%[193][297] - The Bank's capital plan projects it will remain well-capitalized throughout a five-year horizon, even under various stress scenarios[297] Off-Balance Sheet Financial Instruments and Contractual Obligations The company uses off-balance sheet derivatives for risk management and has various contractual obligations - At June 30, 2022, the Bank had three outstanding off-balance sheet derivative instruments designated as cash flow hedges, with notional principal amounts totaling $30.0 million[299] - The Bank had six customer loan swap agreements in place with a total notional value of $77.8 million as of June 30, 2022[301] Contractual Obligations Summary | Obligation Type | Total (Thousands) | Less than 1 year (Thousands) | 1-3 years (Thousands) | 3-5 years (Thousands) | More than 5 years (Thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | | Borrowed funds | $126,588 | $126,501 | $87 | $— | $— | | Operating leases | $919 | $113 | $207 | $154 | $445 | | Certificates of deposit | $704,410 | $437,726 | $183,394 | $83,290 | $— | | Total | $831,917 | $564,340 | $183,688 | $83,444 | $445 | Item 3 – Quantitative and Qualitative Disclosures About Market Risk This section details market risk management, focusing on interest rate risk analysis and modeling - The Company's market risk is composed primarily of interest rate risk, managed by the Bank's Asset/Liability Committee (ALCO)[303] - Interest rate risk is monitored through static gap analysis and earnings simulation modeling[304] - The Company's cumulative one-year gap at June 30, 2022, was (2.93)% of total assets, compared to 7.09% at December 31, 2021[305] - Earnings simulation projects net interest income would be unchanged if rates decrease by 1.0% and decrease by approximately 3.8% if rates increase by 2.0%, both within ALCO's policy limits[309][310] Market-Risk Management Market risk, primarily interest rate risk, is managed by the ALCO through policies and monitoring - Market risk is defined as the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates[303] - The Bank's ALCO is responsible for reviewing the interest rate sensitivity position and establishing policies to monitor and limit exposure to interest rate risk[303] Asset/Liability Management Asset/liability management aims to maximize net interest income within established interest rate risk limits - The primary goal of asset/liability management is to maximize net interest income within the interest rate risk limits set by ALCO[304] - The Company's cumulative one-year gap at June 30, 2022, was (2.93)% of total assets, compared to 7.09% of total assets at December 31, 2021[305] - The earnings simulation model projects net interest income changes are within ALCO's policy limit of 10.0% for various rate scenarios[309][310] Interest Rate Risk Management The company uses financial instruments like interest rate swaps to manage interest rate sensitivity - A variety of financial instruments, including investment securities and interest rate swaps, are used to manage interest rate sensitivity[312] - As of June 30, 2022, the Company was using interest rate swaps for interest rate risk management[312] - An independent consultant periodically reviews the Company's interest rate risk position, and Management believes the current level of interest risk is acceptable[313] Cessation of LIBOR The company is actively managing the transition away from LIBOR by adopting SOFR for new transactions - Certain USD denominated LIBOR indices ceased publication after December 31, 2021, with other tenors expected to continue until June 30, 2023[314] - The Company has adopted SOFR as its replacement reference rate index for new transactions[314] - Necessary actions to amend legacy LIBOR-tied customer loan interest rate swap contracts are anticipated to be undertaken in late 2022[314] Item 4 - Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2022 - The Company's management, including the CEO and CFO, concluded that disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2022[315] - No material changes to the Company's internal control over financial reporting occurred during the quarter ended June 30, 2022[315] Part II. Other Information Item 1 – Legal Proceedings The company was not involved in any material legal proceedings during the reporting period - The Company was not involved in any legal proceedings requiring disclosure under Item 103 of Regulation S-K during the reporting period[316] Item 1a – Risk Factors This section updates risk factors, emphasizing ongoing uncertainties from the COVID-19 pandemic - Ongoing effects of COVID-19 on the broader economy and the markets served remain uncertain[318] - Potential adverse impacts include declines in loan demand, reduced consumer spending, and declines in credit quality leading to increased provisions for loan losses[319] - The significant contribution of tourism and hospitality businesses to the State of Maine's economy may result in a disproportionate effect on the Company[318] Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds This section reports the company's repurchases of common stock during the first half of 2022 Common Stock Repurchases | Metric | 6 Months Ended June 30, 2022 | | :--- | :--- | | Total shares purchased | 8,640 | | Average Price Per Share | $31.15 | Item 3 – Default Upon Senior Securities This section states there were no defaults upon senior securities during the reporting period - No defaults upon senior securities were reported during the period[321] Item 4 – Other Information This section indicates there is no other information to report under this item - No other information to report under this item[322][323] Item 5 – Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate amendments and certifications - Exhibits include amendments to the Registrant's Articles of Incorporation and Bylaws[325][326] - The list includes Director and Executive Split Dollar Insurance Plans and amendments to Restricted Stock Agreements[327][328] - Certifications of the Chief Executive Officer and Chief Financial Officer (Exhibits 31.1, 31.2, 32.1, 32.2) are included[330] Signatures This section contains the certifying signatures of the CEO and CFO - The report is signed by Tony C. McKim, President & Chief Executive Officer[333] - The report is signed by Richard M. Elder, Executive Vice President & Chief Financial Officer[333]