Notes to Consolidated Financial Statements
Nature of Operations
The First Bancorp, Inc. (the "Company") through its wholly-owned subsidiary, First National Bank (the "Bank"), provides a full range of banking services to individual and corporate customers from eighteen offices in coastal and eastern Maine. First National Wealth Management, a division of the Bank, provides investment management, private banking and financial planning services. On January 28, 2016, the Board of Directors voted to change the Bank's name to First National Bank from The First, N.A.
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and the Bank. All intercompany accounts and transactions have been eliminated in consolidation.
Subsequent Events
Events occurring subsequent to December 31, 2022 have been evaluated as to their potential impact on the financial statements.
Use of Estimates in Preparation of Financial Statements
In preparing the financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP"), Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the balance sheet and revenues and expenses for the reporting period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses, the valuations of mortgage servicing rights, derivative financial instruments the securities portfolio and other-than-temporary impairment of securities, and goodwill.
Investment Securities
Investment securities are classified as available for sale or held to maturity when purchased. There are no trading account securities. Securities available for sale consist primarily of debt securities which Management intends to hold for indefinite periods of time. They may be used as part of the Bank's funds management strategy, and may be sold in response to changes in interest rates or prepayment risk, changes in liquidity needs, or for other reasons. They are accounted for at fair value, with unrealized gains or losses adjusted through shareholders' equity, net of related income taxes. The cost basis is adjusted for the amortization of premiums and accretion of discounts, computed using the effective interest method over the securities' contractual lives. Securities to be held to maturity consist primarily of debt securities which Management has acquired solely for long-term investment purposes, rather than for purposes of trading or future sale. For securities to be held to maturity, Management has the intent and the Bank has the ability to hold such securities until their respective maturity dates. Such securities are carried at cost adjusted for the amortization of premiums and accretion of discounts, computed using the effective interest method over the securities' contractual lives. Effective January 1, 2022 securities purchases are accounted for on a trade date basis; prior to January 1, 2022 a settlement date basis was used. Reported amounts would not be materially different if basis had not changed. Gains and losses on the sales of investment securities are determined using the amortized cost of the specifically identified security.
Fair Value of Securities. Determining a market price for securities carried at fair value is a critical accounting estimate in the Company's financial statements. Pricing of individual securities is subject to a number of factors including changes in market interest rates, changes in prepayment speeds and assumptions, changes in market tolerance for risk, and any changes in the risk profile of the security. The Company subscribes to a widely recognized, independent pricing service and updates carrying values no less frequently than monthly. It also validates the values provided by the pricing service no less frequently than quarterly by measuring against security prices provided by a secondary source. Results of the validation are reported to the Bank's Asset Liability Committee each quarter and any variances between the two sources above defined thresholds are investigated by management.
Other-Than-Temporary Impairment on Securities. Another significant estimate related to investment securities is the evaluation of other-than-temporary impairment. The evaluation of securities for other-than-temporary impairment is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the fair value of investments should be recognized in current period earnings. The risks and uncertainties include changes in general economic conditions, the issuer's financial condition and/or future prospects, the effects of changes in interest rates or credit spreads and the expected recovery period of unrealized losses. Securities that are in an unrealized loss position are reviewed at least quarterly to determine if other-than-temporary impairment is present based on certain quantitative and qualitative factors and measures. The primary factors considered in evaluating whether a decline in value of securities is other-than-temporary include: (a) the length of time and extent to which the fair value has been less than cost or amortized cost and the expected recovery period of the security, (b) the financial condition, credit rating and future prospects of the issuer, (c) whether the debtor is current on contractually obligated interest and principal payments, (d) the volatility of the securities' market price, (e) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery, which may be at maturity and (f) any other information and
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observable data considered relevant in determining whether other-than-temporary impairment has occurred, including the expectation of receipt of all principal and interest when due.
Derivative Financial Instruments Designated as Hedges
The Bank recognizes all derivatives in the consolidated balance sheets at fair value. On the date the Bank enters into the derivative contract, the Bank designates the derivative as a hedge of either a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), or a held for trading instrument (“trading instrument”). The Bank formally documents relationships between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedge transactions. The Bank also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are effective in offsetting changes in cash flows or fair values of hedged items. Changes in fair value of a derivative that is effective and that qualifies as a cash flow hedge are recorded in other comprehensive income (loss) and are reclassified into earnings when the forecasted transaction or related cash flows affect earnings. Changes in fair value of a derivative that qualifies as a fair value hedge and the change in fair value of the hedged item are both recorded in earnings and offset each other when the transaction is effective. Those derivatives that are classified as trading instruments are recorded at fair value with changes in fair value recorded in earnings. The Bank discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item, that it is unlikely that the forecasted transaction will occur, or that the designation of the derivative as a hedging instrument is no longer appropriate.
Loans Held for Sale
Loans held for sale consist of residential real estate mortgage loans and are carried at the lower of aggregate cost or fair value, as determined by current investor yield requirements.
Loans
Loans are generally reported at their outstanding principal balances, adjusted for chargeoffs, the allowance for loan losses and any deferred fees or costs to originate loans. Loan commitments are recorded when funded.
Loan Fees and Costs
Loan origination fees and certain direct loan origination costs are deferred and recognized in interest income as an adjustment to the loan yield over the life of the related loans. The unamortized net deferred fees and costs are included on the balance sheets with the related loan balances, and the amortization is included with the related interest income.
Allowance for Loan Losses
Loans considered to be uncollectible are charged against the allowance for loan losses. The allowance for loan losses is maintained at a level determined by Management to be appropriate to absorb probable losses under the incurred loss methodology. The allowance is increased by provisions charged to operating expenses and recoveries on loans previously charged off. Arriving at an appropriate level of allowance for loan losses necessarily involves a high degree of judgment. In determining the appropriate level of allowance for loan losses, Management takes into consideration a number of factors including size and growth trajectory of the portfolio, quality trends as measured by key indicators, prior loan loss experience in major portfolio segments, local and national business and economic conditions, the results of any stress testing undertaken during the period, reviews of individual non-performing loans and performing loans listed on the watch report requiring periodic evaluation, and Management's estimation of potential losses. For all loan classes, loans over 30 days past due are considered delinquent. Impaired loans include troubled debt restructured ("TDR") loans and loans placed on non-accrual status when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. These loans are measured at the present value of expected future cash flows discounted at the loan's effective interest rate or at the fair value of the collateral if the loan is collateral dependent. Management takes into consideration impaired loans in addition to the above mentioned factors in determining the appropriate level of allowance for loan losses. The Company will adopt the current expected credit loss methodology (CECL), required under Accounting Standards Update (ASU) 2016-13, effective January 1, 2023.
TDR
A restructuring of debt constitutes a TDR if the Bank, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that it would not otherwise consider. To determine whether or not a loan should be classified as a TDR, Management evaluates a loan to first determine if the borrower demonstrates financial difficulty. Common indicators of this include past due status with bank obligations, substandard credit bureau reports, or an inability to refinance with another lender. If the borrower is experiencing financial difficulty and concessions are granted, such as maturity date extension, interest rate adjustments to below market pricing, or a deferral of payments, the loan will generally be classified as a TDR. Regulatory guidance issued in March 2020 in response to the consequences of the COVID-19 pandemic, the CARES Act passed shortly thereafter, and
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the Supplemental Appropriations Act passed in December 2020 granted exemption to TDR classification for certain qualified loan modification actions that normally would have been classified as TDRs. ASU 2022-02 published in March 2022 eliminates TDR guidance and introduces new standards for loan modification disclosure; the Company will adopt ASU 2022-02 effective January 1, 2023.
Accrual of Interest Income and Expense
Interest on loans and investment securities is taken into income using methods which relate the income earned to the balances of loans and investment securities outstanding. Interest expense on liabilities is derived by applying applicable interest rates to principal amounts outstanding. For all classes of loans, recording of interest income on problem loans, which includes impaired loans, ceases when collectibility of principal and interest within a reasonable period of time becomes doubtful. Cash payments received on non-accrual loans, which includes impaired loans, are applied to reduce the loan's principal balance until the remaining principal balance is deemed collectible, after which interest is recognized when collected. As a general rule, a loan may be restored to accrual status when payments are current for a substantial period of time, generally six months, and repayment of the remaining contractual amounts is expected or when it otherwise becomes well secured and in the process of collection.
Premises and Equipment
Premises, furniture and equipment are stated at cost, less accumulated depreciation. Depreciation expense is computed by straight-line methods over the asset's estimated useful life.
Other Real Estate Owned ("OREO")
Real estate acquired by foreclosure or deed in lieu of foreclosure is transferred to OREO and recorded at fair value, less estimated costs to sell, based on appraised value at the date actually or constructively received. Loan losses arising from the acquisition of such property are charged against the allowance for loan losses. Subsequent provisions to reduce the carrying value of a property are recorded to the allowance for OREO losses and a charge to operations on a property specific basis.
Goodwill and Identified Intangible Assets
Intangible assets include the excess of the purchase price over the fair value of net assets acquired (goodwill) from the acquisitions of FNB Bankshares in 2005, a bank branch in Rockland, Maine and bank building in Bangor, Maine in 2012, and a bank branch in Belfast, Maine in 2020, as well as the core deposit intangible related to the respective acquisitions. The Company annually evaluates goodwill, and periodically evaluates other intangible assets, for impairment. At December 31, 2022, the Company determined goodwill and other intangible assets were not impaired.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases, and for tax credits that are available to offset future taxable income. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period the change is enacted.
Mortgage Servicing Rights
The valuation of mortgage servicing rights is a critical accounting policy which requires significant estimates and assumptions. The Bank often sells mortgage loans it originates and retains the ongoing servicing of such loans, receiving a fee for these services, generally 0.25% of the outstanding balance of the loan per annum. Mortgage servicing rights are recognized at fair value when they are acquired through the sale of loans, and are reported in other assets. They are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. The rights are subsequently carried at the lower of amortized cost or fair value. Management uses an independent firm which specializes in the valuation of mortgage servicing rights to determine the fair value that is recorded on the balance sheet. The most important assumption is the anticipated loan prepayment rate, and increases in prepayment speed results in lower valuations of mortgage servicing rights. The valuation also includes an evaluation for impairment based upon the fair value of the rights, which can vary depending upon current interest rates and prepayment expectations, as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms. The use of different assumptions could produce a different valuation. All of the assumptions are based on standards the Company believes would be utilized by market participants in valuing mortgage servicing rights and are consistently derived and/or benchmarked against independent public sources.
Post-Retirement Benefits
The cost of providing post-retirement benefits is accrued during the active service period of the employee or director.
The First Bancorp - 2022 Form 10-K - Page 62
Earnings Per Share
Basic earnings per share data are based on the weighted average number of common shares outstanding during each year. Diluted earnings per share gives effect to restricted stock granted and stock options and warrants outstanding, determined by the treasury stock method.
Comprehensive Income (Loss)
Comprehensive income (loss) includes net income and other comprehensive income (loss), which is comprised of the change in unrealized gains and losses on securities available for sale, net of tax, change in unrealized gains and losses on securities transferred from available for sale to held to maturity, net of amortization, change in unrealized gain and losses on cash flow hedging derivative instruments, net of tax, and unrecognized gains and losses related to post-retirement benefit costs, net of tax.
Segments
The First Bancorp, Inc., through the branches of its subsidiary, First National Bank, provides a broad range of financial services to individuals and companies in coastal Maine. These services include demand, time, and savings deposits; lending; payment processing; and investment management and trust services. Operations are managed and financial performance is evaluated on a corporate-wide basis. Accordingly, all of the Company's banking operations are considered by Management to be aggregated in one reportable operating segment.
Risks & Uncertainties
As of December 31, 2022, local and state governments in the US have eased or eliminated most restrictions imposed to curtail the spread of the global pandemic, COVID-19. There continues to be uncertainty surrounding the duration of the pandemic, its potential economic ramifications, and any further government actions to mitigate them. Accordingly, while management has considered the effect of the pandemic on collectability of loans receivable and other business impacts, it is possible that this matter may have a further financial impact on the Company's financial position and results of future operations, such potential impact of which cannot be reasonably estimated.
Government economic programs intended to backstop and bolster the economy through the pandemic, such as the Payroll Protection Program (PPP) have ended, and the nation's economy has entered an inflationary phase. The Consumer Price Index has risen at levels not experienced since the 1980s while the labor market remains very tight, contributing additional inflationary pressure. To address the inflation problem, the Federal Reserve has removed accommodative monetary policies and aggressively increased short-term interest rates. These actions are intended to slow overall economic activity and risk entering the economy into a recession. The conflict between Russia and Ukraine has exacerbated pandemic-related supply chain issues, upset numerous global markets including energy and certain raw materials, and generally added to economic uncertainty and geopolitical instability. Any or all could have negative downstream effects on the Company's operating results, the extent of which is indeterminable at this time.
Note 2. Cash and Cash Equivalents
For the purposes of reporting consolidated cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. The Company maintains a portion of its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant risk with respect to these accounts.
The First Bancorp - 2022 Form 10-K - Page 63
Note 3. Investment Securities
The following tables summarize the amortized cost and estimated fair value of investment securities at December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized | | Unrealized | | Unrealized | | Fair Value |
| As of December 31, 2022 | Cost | | Gains | | Losses | | (Estimated) |
| Securities available for sale | | | | | | | |
| U.S. Government-sponsored agencies | $ | 26,025,000 | | | $ | — | | | $ | (6,878,000) | | | $ | 19,147,000 | |
| Mortgage-backed securities | 271,068,000 | | 55,000 | | (42,447,000) | | 228,676,000 |
| State and political subdivisions | 40,472,000 | | | 2,000 | | | (7,283,000) | | | 33,191,000 | |
| Asset-backed securities | 3,548,000 | | | — | | | (53,000) | | | 3,495,000 | |
| | | | | | | |
| $ | 341,113,000 | | | $ | 57,000 | | | $ | (56,661,000) | | | $ | 284,509,000 | |
| Securities to be held to maturity | | | | | | | |
| U.S. Government-sponsored agencies | $ | 40,100,000 | | | $ | 4,000 | | | $ | (10,477,000) | | | $ | 29,627,000 | |
| Mortgage-backed securities | 60,497,000 | | | 42,000 | | | (11,392,000) | | | 49,147,000 | |
| State and political subdivisions | 258,549,000 | | | 154,000 | | | (30,733,000) | | | 227,970,000 | |
| | | | | | | |
| Corporate securities | 34,750,000 | | | — | | | (2,483,000) | | | 32,267,000 | |
| $ | 393,896,000 | | | $ | 200,000 | | | $ | (55,085,000) | | | $ | 339,011,000 | |
| Restricted equity securities | | | | | | | |
| Federal Home Loan Bank Stock | $ | 2,846,000 | | | $ | — | | | $ | — | | | $ | 2,846,000 | |
| Federal Reserve Bank Stock | 1,037,000 | | | — | | | — | | | 1,037,000 | |
| | $ | 3,883,000 | | | $ | — | | | $ | — | | | $ | 3,883,000 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized | | Unrealized | | Unrealized | | Fair Value |
| As of December 31, 2021 | Cost | | Gains | | Losses | | (Estimated) |
| Securities available for sale | | | | | | | |
| U.S. Government-sponsored agencies | $ | 23,045,000 | | | $ | — | | | $ | (1,146,000) | | | $ | 21,899,000 | |
| Mortgage-backed securities | 256,992,000 | | 1,803,000 | | (3,895,000) | | | 254,900,000 |
| State and political subdivisions | 38,127,000 | | | 1,083,000 | | | (88,000) | | | 39,122,000 | |
| Asset-backed securities | 4,577,000 | | | 68,000 | | | — | | | 4,645,000 | |
| | | | | | | |
| | $ | 322,741,000 | | | $ | 2,954,000 | | | $ | (5,129,000) | | | $ | 320,566,000 | |
| Securities to be held to maturity | | | | | | | |
| U.S. Government-sponsored agencies | $ | 35,600,000 | | | $ | 2,000 | | | $ | (1,149,000) | | | $ | 34,453,000 | |
| Mortgage-backed securities | 60,646,000 | | | 261,000 | | | (1,795,000) | | | 59,112,000 | |
| State and political subdivisions | 250,544,000 | | | 7,925,000 | | | (302,000) | | | 258,167,000 | |
| Corporate securities | 23,250,000 | | | 411,000 | | | (66,000) | | | 23,595,000 | |
| | $ | 370,040,000 | | | $ | 8,599,000 | | | $ | (3,312,000) | | | $ | 375,327,000 | |
| Restricted equity securities | | | | | | | |
| Federal Home Loan Bank Stock | $ | 4,328,000 | | | $ | — | | | $ | — | | | $ | 4,328,000 | |
| Federal Reserve Bank Stock | 1,037,000 | | | — | | | — | | | 1,037,000 | |
| | $ | 5,365,000 | | | $ | — | | | $ | — | | | $ | 5,365,000 | |
The First Bancorp - 2022 Form 10-K - Page 64
The following table summarizes the contractual maturities of investment securities at December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Securities available for sale | | Securities to be held to maturity |
| Amortized Cost | | Fair Value (Estimated) | | Amortized Cost | | Fair Value (Estimated) |
| Due in 1 year or less | $ | — | | | $ | — | | | $ | 1,787,000 | | | $ | 1,782,000 | |
| Due in 1 to 5 years | 3,609,000 | | | 3,409,000 | | | 14,998,000 | | | 14,480,000 | |
| Due in 5 to 10 years | 18,591,000 | | | 15,203,000 | | | 86,833,000 | | | 81,443,000 | |
| Due after 10 years | 318,913,000 | | | 265,897,000 | | | 290,278,000 | | | 241,306,000 | |
| | | | | | | |
| | $ | 341,113,000 | | | $ | 284,509,000 | | | $ | 393,896,000 | | | $ | 339,011,000 | |
The following table summarizes the contractual maturities of investment securities at December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Securities available for sale | | Securities to be held to maturity |
| Amortized
Cost | | Fair Value (Estimated) | | Amortized
Cost | | Fair Value (Estimated) |
| Due in 1 year or less | $ | — | | | $ | — | | | $ | 2,515,000 | | | $ | 2,521,000 | |
| Due in 1 to 5 years | 5,004,000 | | | 5,173,000 | | | 17,624,000 | | | 18,338,000 | |
| Due in 5 to 10 years | 52,782,000 | | | 53,057,000 | | | 174,982,000 | | | 180,081,000 | |
| Due after 10 years | 264,955,000 | | | 262,336,000 | | | 174,919,000 | | | 174,387,000 | |
| | | | | | | |
| $ | 322,741,000 | | | $ | 320,566,000 | | | $ | 370,040,000 | | | $ | 375,327,000 | |
At December 31, 2022, securities with a carrying value of $350,411,000 were pledged to secure borrowings from the Federal Home Loan Bank of Boston, public deposits, repurchase agreements, and for other purposes as required by law. This compares to securities with a fair value of $347,456,000 as of December 31, 2021 pledged for the same purposes.
Gains and losses on the sale of securities available for sale are computed by subtracting the amortized cost at the time of sale from the security's selling price, net of accrued interest to be received.
The following table shows securities gains and losses for 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Proceeds from sales of securities | $ | 1,301,000 | | | $ | 19,240,000 | | | $ | 112,179,000 | |
| Gross realized gains | 8,000 | | | 628,000 | | | 1,689,000 | |
| Gross realized losses | (1,000) | | | (605,000) | | | (534,000) | |
| Net gain | $ | 7,000 | | | $ | 23,000 | | | $ | 1,155,000 | |
| Related income taxes | $ | 1,000 | | | $ | 5,000 | | | $ | 243,000 | |
In the second quarter of 2020, 28 municipal securities were sold that had been designated as Held to Maturity. Proceeds from these sales totaled $8,600,000 against a cumulative book value of $8,332,000 resulting in a net realized gain of $268,000. At the time of the sale the economic potential impact of COVID-19 was considered to be an isolated and unusual event that could not be reasonably anticipated as outlined in Accounting Standards Codification ("ASC") Section 320-10-25. Management conducted a review of its municipal bond portfolio in conjunction with risk mitigation efforts related to the onset of the COVID-19 virus; the intent of the review was to identify investment exposures with lower relative credit ratings, locales with perceived above average economic risk, municipal entities with reliance upon sales tax or income tax revenue, or any combination of these factors. Each of the sold positions met one or more of the criteria.
Management reviews securities with unrealized losses for other than temporary impairment. As of December 31, 2022, there were 869 securities with unrealized losses held in the Company's portfolio. These securities were temporarily impaired as a result of changes in interest rates reducing their fair value, of which 300 had been temporarily impaired for 12 months or more. At the present time, there have been no material changes in the credit quality of these securities resulting in other than temporary impairment, and in Management's opinion, no additional write-down for other-than-temporary impairment is warranted.
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Information regarding securities temporarily impaired as of December 31, 2022 is summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 months | | 12 months or more | | Total |
| | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized |
| As of December 31, 2022 | Value | | Losses | | Value | | Losses | | Value | | Losses |
| U.S. Government-sponsored agencies | $ | 4,804,000 | | | $ | (675,000) | | | $ | 41,965,000 | | | $ | (16,680,000) | | | $ | 46,769,000 | | | $ | (17,355,000) | |
| Mortgage-backed securities | 73,509,000 | | | (6,486,000) | | | 197,102,000 | | | (47,353,000) | | | 270,611,000 | | | (53,839,000) | |
| State and political subdivisions | 149,517,000 | | | (13,769,000) | | | 67,932,000 | | | (24,247,000) | | | 217,449,000 | | | (38,016,000) | |
| Asset-backed securities | 3,495,000 | | | (53,000) | | | — | | | — | | | 3,495,000 | | | (53,000) | |
| Corporate securities | 19,857,000 | | | (2,143,000) | | | 3,160,000 | | | (340,000) | | | 23,017,000 | | | (2,483,000) | |
| | $ | 251,182,000 | | | $ | (23,126,000) | | | $ | 310,159,000 | | | $ | (88,620,000) | | | $ | 561,341,000 | | | $ | (111,746,000) | |
As of December 31, 2021, there were 163 securities with unrealized losses held in the Company's portfolio. These securities were temporarily impaired as a result of changes in interest rates reducing their fair value, of which 27 had been temporarily impaired for 12 months or more. Information regarding securities temporarily impaired as of December 31, 2021 is summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 months | | 12 months or more | | Total |
| | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized |
| As of December 31, 2021 | Value | | Losses | | Value | | Losses | | Value | | Losses |
| U.S. Government-sponsored agencies | $ | 24,030,000 | | | $ | (920,000) | | | $ | 29,170,000 | | | $ | (1,375,000) | | | $ | 53,200,000 | | | $ | (2,295,000) | |
| Mortgage-backed securities | 216,461,000 | | | (4,768,000) | | | 26,772,000 | | | (922,000) | | | 243,233,000 | | | (5,690,000) | |
| State and political subdivisions | 29,528,000 | | | (390,000) | | | — | | | — | | | 29,528,000 | | | (390,000) | |
| Corporate securities | 3,434,000 | | | (66,000) | | | — | | | — | | | 3,434,000 | | | (66,000) | |
| | $ | 273,453,000 | | | $ | (6,144,000) | | | $ | 55,942,000 | | | $ | (2,297,000) | | | $ | 329,395,000 | | | $ | (8,441,000) | |
During the third quarter of 2014, the Company transferred securities with a total amortized cost of $89,780,000 and a corresponding fair value of $89,757,000 from available for sale to held to maturity. The net unrealized loss, net of taxes, on these securities at the date of the transfer was $15,000. The net unrealized holding loss at the time of transfer continues to be reported in accumulated other comprehensive income (loss), net of tax, and is amortized over the remaining lives of the securities as an adjustment of the yield. The amortization of the net unrealized loss reported in accumulated other comprehensive income (loss) will offset the effect on interest income of the discount for the transferred securities. The remaining unamortized balance of the net unrealized losses for the securities transferred from available for sale to held to maturity was $64,000, net of taxes, at December 31, 2022. This compares to $87,000, net of taxes, at December 31, 2021. These securities were transferred as a part of the Company's overall investment and balance sheet strategies.
The Bank is a member of the Federal Home Loan Bank ("FHLB") of Boston, a cooperatively owned wholesale bank for housing and finance in the six New England States. As a requirement of membership in the FHLB, the Bank must own a minimum required amount of FHLB stock, calculated periodically based primarily on its level of borrowings from the FHLB. The Bank uses the FHLB for a portion of its wholesale funding needs. As of December 31, 2022 and 2021, the Bank's investment in FHLB stock totaled $2,846,000 and $4,328,000, respectively. FHLB stock is a restricted equity security and therefore is reported at cost, which equals par value.
The Bank is also a member of the Federal Reserve Bank (FRB) of Boston. As a requirement for membership in the FRB, the Bank must own a minimum required amount of FRB stock. The Bank uses FRB for certain correspondent banking services and maintains borrowing capacity at its discount window. The Bank's investment in FRB stock totaled $1,037,000 at December 31, 2022 and 2021.
The Company periodically evaluates its investment in FHLB and FRB stock for impairment based on, among other factors, the capital adequacy of each institution and their overall financial condition. No impairment losses have been recorded through December 31, 2022. The Bank will continue to monitor its investment in these restricted equity securities.
Note 4. Mortgage Servicing Rights
At December 31, 2022 and 2021, the Bank serviced loans for others totaling $342,870,000 and $356,522,000, respectively. Net gains from the sale of loans, serviced by the Bank, totaled $406,000 in 2022, $3,078,000 in 2021, and $3,308,000 in 2020. In 2022, mortgage servicing rights of $312,000 were capitalized and amortization for the year totaled $517,000. At December 31, 2022,
The First Bancorp - 2022 Form 10-K - Page 66
mortgage servicing rights had a fair value of $3,734,000. In 2021, mortgage servicing rights of $1,042,000 were capitalized and amortization for the year totaled $660,000. At December 31, 2021, mortgage servicing rights had a fair value of $3,041,000.
FASB ASC Topic 860, "Transfers and Servicing", requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. Servicing assets and servicing liabilities are reported using the amortization method or the fair value measurement method. In evaluating the carrying values of mortgage servicing rights, the Company obtains third party valuations based on loan level data including note rate, type and term of the underlying loans. The model utilizes several assumptions, the most significant of which are loan prepayments, calculated using a three-month moving average of weekly prepayment data published by the Public Securities Association ("PSA") and modeled against the serviced loan portfolio, and the discount rate to discount future cash flows. As of December 31, 2022, the prepayment assumption using the PSA model was 134, which translates into an anticipated annual prepayment rate of 6.43%. The discount rate is 9.00%. Other assumptions include delinquency rates, foreclosure rates, servicing cost inflation, and annual unit loan cost. All assumptions are adjusted periodically to reflect current circumstances. Amortization of mortgage servicing rights, as well as write-offs due to prepayments of the related mortgage loans, are recorded as a charge against mortgage servicing fee income.
The Bank recorded an impairment reserve as of December 31, 2021 for strata with a fair value lower than cost. Mortgage servicing rights are included in other assets and detailed in the following table:
| | | | | | | | | | | |
| As of December 31, | 2022 | | 2021 |
| Mortgage servicing rights | $ | 8,654,000 | | | $ | 8,341,000 | |
| Accumulated amortization | (6,161,000) | | | (5,644,000) | |
| Amortized cost | 2,493,000 | | | 2,697,000 | |
| Impairment reserve | — | | | (26,000) | |
| Carrying value | $ | 2,493,000 | | | $ | 2,671,000 | |
Note 5. Loans
The following table shows the composition of the Company's loan portfolio as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
| Commercial | | | | | | | |
| Real estate | $ | 699,340,000 | | | 36.5 | % | | $ | 576,198,000 | | | 35.0 | % |
| Construction | 93,907,000 | | | 4.9 | % | | 79,365,000 | | | 4.8 | % |
| Other | 319,359,000 | | | 16.7 | % | | 264,570,000 | | | 16.1 | % |
| Municipal | 40,619,000 | | | 2.1 | % | | 48,362,000 | | | 2.9 | % |
| Residential | | | | | | | |
| Term | 613,919,000 | | | 32.1 | % | | 550,783,000 | | | 33.4 | % |
| Construction | 49,907,000 | | | 2.6 | % | | 31,763,000 | | | 1.9 | % |
| Home equity line of credit | 76,560,000 | | | 4.0 | % | | 73,632,000 | | | 4.5 | % |
| Consumer | 21,063,000 | | | 1.1 | % | | 22,976,000 | | | 1.4 | % |
| Total loans | $ | 1,914,674,000 | | | 100.0 | % | | $ | 1,647,649,000 | | | 100.0 | % |
Loan balances include net deferred loan costs of $10,132,000 in 2022 and $7,890,000 in 2021. Net deferred loan costs have increased from a year ago a due to loan origination unit volume over the period. Unearned fees and deferred costs associated with SBA PPP loans originated in 2020 and 2021 were fully recognized as of June 30, 2022. Pursuant to collateral agreements, qualifying first mortgage loans and commercial real estate, which totaled $475,233,000 and $364,968,000 at December 31, 2022 and 2021, respectively, were used to collateralize borrowings from the Federal Home Loan Bank of Boston. In addition, commercial, residential construction and home equity loans totaling $338,636,000 at December 31, 2022 and $295,090,000 at December 31, 2021 were used to collateralize a standby line of credit at the Federal Reserve Bank of Boston. In September 2022 the Bank sold a block of 41 mixed performing residential mortgage loans. This block of loans carried general ledger balances that totaled $5.2 million and included a number of past-due, non-accrual, and TDR loans.
The Bank is a designated SBA preferred lender and participated in both the 2020 (PPP1) and 2021 (PPP2) rounds of the Payroll Protection Program. Under PPP1, 1,718 loans were granted totaling $97,755,000 in funds disbursed to qualified small businesses and under PPP2, 1,263 loans were granted totaling $52,053,000. The Bank worked actively with these borrowers to process applications for forgiveness per PPP guidelines. As of December 31, 2022, remaining PPP balances totaled $12,000.
At December 31, 2022 and 2021, non-accrual loans were $1,755,000 and $5,602,000, respectively. For the years ended December 31, 2022 and 2021, interest income which would have been recognized on these loans, if interest had been accrued, was
The First Bancorp - 2022 Form 10-K - Page 67
$223,000 and $345,000. Loans more than 90 days past due accruing interest totaled $241,000 at December 31, 2022 and $32,000 at December 31, 2021. The Company continues to accrue interest on these loans because management believes collection of principal and interest is reasonably assured.
Loans to directors, officers and employees totaled $48,001,000 at December 31, 2022 and $42,784,000 at December 31, 2021. A summary of loans to directors and executive officers is as follows:
| | | | | | | | | | | |
| For the years ended December 31, | 2022 | | 2021 |
| Balance at beginning of year | $ | 26,307,000 | | | $ | 21,214,000 | |
| New loans | 5,159,000 | | | 10,074,000 | |
| Repayments | (1,976,000) | | | (2,498,000) | |
| Retired executive officers | — | | | (2,483,000) | |
| Balance at end of year | $ | 29,490,000 | | | $ | 26,307,000 | |
For all loan classes, loans over 30 days past due are considered delinquent. Information on the past-due status of loans by class of financing receivable as of December 31, 2022, is presented in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 30-59 Days
Past Due | | 60-89 Days
Past Due | | 90+ Days
Past Due | | All
Past Due | | Current | | Total | | 90+ Days
&
Accruing |
| Commercial | | | | | | | | | | | | | |
| Real estate | $ | — | | | $ | 3,000 | | | $ | 190,000 | | | $ | 193,000 | | | $ | 699,147,000 | | | $ | 699,340,000 | | | $ | — | |
| Construction | — | | | — | | | — | | | — | | | 93,907,000 | | | 93,907,000 | | | — | |
| Other | 118,000 | | | 23,000 | | | 85,000 | | | 226,000 | | | 319,133,000 | | | 319,359,000 | | | 34,000 | |
| Municipal | — | | | — | | | — | | | — | | | 40,619,000 | | | 40,619,000 | | | — | |
| Residential | | | | | | | | | | | | | |
| Term | 135,000 | | | 33,000 | | | 284,000 | | | 452,000 | | | 613,467,000 | | | 613,919,000 | | | 118,000 | |
| Construction | — | | | — | | | — | | | — | | | 49,907,000 | | | 49,907,000 | | | — | |
| Home equity line of credit | 241,000 | | | 29,000 | | | 151,000 | | | 421,000 | | | 76,139,000 | | | 76,560,000 | | | 86,000 | |
| Consumer | 131,000 | | | 33,000 | | | 3,000 | | | 167,000 | | | 20,896,000 | | | 21,063,000 | | | 3,000 | |
| Total | $ | 625,000 | | | $ | 121,000 | | | $ | 713,000 | | | $ | 1,459,000 | | | $ | 1,913,215,000 | | | $ | 1,914,674,000 | | | $ | 241,000 | |
On March 22, 2020, banking regulators issued an Interagency Statement on Loan Modifications and Reporting in response to the onset of COVID-19; shortly thereafter, on March 30, 2020, the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was passed. Both the Interagency Statement and the CARES Act provided an exemption for qualified modifications from TDR designation, which was extended by the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020. So long as modified terms were met, loans in an active modification were not included in past due loan totals and continued to accrue interest. As of December 31, 2021, 18 loans totaling $2.9 million remained in their original modification or had had a subsequent modification, representing 0.17% of the overall portfolio. As of December 31, 2022, COVID-19 related loan modifications have all been resolved.
The First Bancorp - 2022 Form 10-K - Page 68
Information on the past-due status of loans by class of financing receivable as of December 31, 2021, is presented in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 30-59 Days Past Due | | 60-89 Days Past Due | | 90+ Days Past Due | | All Past Due | | Current | | Total | | 90+ Days & Accruing |
| Commercial | | | | | | | | | | | | | |
| Real estate | $ | 249,000 | | | $ | — | | | $ | 191,000 | | | $ | 440,000 | | | $ | 575,758,000 | | | $ | 576,198,000 | | | $ | — | |
| Construction | 12,000 | | | — | | | 12,000 | | | 24,000 | | | 79,341,000 | | | 79,365,000 | | | — | |
| Other | 30,000 | | | 23,000 | | | 104,000 | | | 157,000 | | | 264,413,000 | | | 264,570,000 | | | — | |
| Municipal | — | | | — | | | — | | | — | | | 48,362,000 | | | 48,362,000 | | | — | |
| Residential | | | | | | | | | | | | | |
| Term | 348,000 | | | 169,000 | | | 1,780,000 | | | 2,297,000 | | | 548,486,000 | | | 550,783,000 | | | — | |
| Construction | — | | | — | | | — | | | — | | | 31,763,000 | | | 31,763,000 | | | — | |
| Home equity line of credit | 741,000 | | | 159,000 | | | 135,000 | | | 1,035,000 | | | 72,597,000 | | | 73,632,000 | | | — | |
| Consumer | 168,000 | | | 192,000 | | | 32,000 | | | 392,000 | | | 22,584,000 | | | 22,976,000 | | | 32,000 | |
| Total | $ | 1,548,000 | | | $ | 543,000 | | | $ | 2,254,000 | | | $ | 4,345,000 | | | $ | 1,643,304,000 | | | $ | 1,647,649,000 | | | $ | 32,000 | |
For all classes, loans are placed on non-accrual status when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement or when principal and interest is 90 days or more past due unless the loan is both well secured and in the process of collection (in which case the loan may continue to accrue interest in spite of its past due status). A loan is "well secured" if it is secured (1) by collateral in the form of liens on or pledges of real or personal property, including securities, that have a realizable value sufficient to discharge the debt (including accrued interest) in full, or (2) by the guarantee of a financially responsible party. A loan is "in the process of collection" if collection of the loan is proceeding in due course either (1) through legal action, including judgment enforcement procedures, or, (2) in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to a current status in the near future.
Cash payments received on non-accrual loans, which are included in impaired loans, are applied to reduce the loan's principal balance until the remaining principal balance is deemed collectible, after which interest is recognized when collected. As a general rule, a loan may be restored to accrual status when payments are current for a substantial period of time, generally six months, and repayment of the remaining contractual amounts is expected, or when it otherwise becomes well secured and in the process of collection. Information on nonaccrual loans as of December 31, 2022 and 2021 is presented in the following table:
| | | | | | | | | | | |
| As of December 31, | 2022 | | 2021 |
| Commercial | | | |
| Real estate | $ | 193,000 | | | $ | 242,000 | |
| Construction | 23,000 | | | 27,000 | |
| Other | 663,000 | | | 1,068,000 | |
| Municipal | — | | | — | |
| Residential | | | |
| Term | 572,000 | | | 3,808,000 | |
| Construction | — | | | — | |
| Home equity line of credit | 304,000 | | | 457,000 | |
| Consumer | — | | | — | |
| Total | $ | 1,755,000 | | | $ | 5,602,000 | |
The First Bancorp - 2022 Form 10-K - Page 69
Information regarding impaired loans is as follows:
| | | | | | | | | | | | | | | | | |
| For the years ended December 31, | 2022 | | 2021 | | 2020 |
| Average investment in impaired loans | $ | 9,536,000 | | | $ | 13,121,000 | | | $ | 21,088,000 | |
| Interest income recognized on impaired loans, all on cash basis | 204,000 | | | 242,000 | | | 478,000 | |
| | | | | | | | | | | |
| As of December 31, | 2022 | | 2021 |
| Balance of impaired loans | $ | 6,160,000 | | | $ | 12,052,000 | |
| Less portion for which no allowance for loan losses is allocated | (4,359,000) | | | (8,968,000) | |
| Portion of impaired loan balance for which an allowance for loan losses is allocated | $ | 1,801,000 | | | $ | 3,084,000 | |
| Portion of allowance for loan losses allocated to the impaired loan balance | $ | 398,000 | | | $ | 576,000 | |
Impaired loans include TDR loans and loans placed on non-accrual. These loans are measured at the present value of expected future cash flows discounted at the loan's effective interest rate or at the fair value of the collateral if the loan is collateral dependent. If the measure of an impaired loan is lower than the recorded investment in the loan and estimated selling costs, a specific reserve is established for the difference, or, in certain situations, if the measure of an impaired loan is lower than the recorded investment in the loan and estimated selling costs, the difference is written off.
The First Bancorp - 2022 Form 10-K - Page 70
A breakdown of impaired loans by class of financing receivable as of December 31, 2022, is presented in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Recorded Investment | | Unpaid
Principal Balance | | Related Allowance | | Average
Recorded Investment | | Recognized Interest
Income |
| With No Related Allowance | | | | | | | | | |
| Commercial | | | | | | | | | |
| Real estate | $ | 1,236,000 | | | $ | 1,532,000 | | | $ | — | | | $ | 1,440,000 | | | $ | 50,000 | |
| Construction | 685,000 | | | 687,000 | | | — | | | 81,000 | | | 35,000 | |
| Other | 301,000 | | | 348,000 | | | — | | | 408,000 | | | 13,000 | |
| Municipal | — | | | — | | | — | | | — | | | — | |
| Residential | | | | | | | | | |
| Term | 1,833,000 | | | 2,035,000 | | | — | | | 4,507,000 | | | 56,000 | |
| Construction | — | | | — | | | — | | | — | | | — | |
| Home equity line of credit | 304,000 | | | 340,000 | | | — | | | 295,000 | | | — | |
| Consumer | — | | | — | | | — | | | 1,000 | | | — | |
| $ | 4,359,000 | | | $ | 4,942,000 | | | $ | — | | | $ | 6,732,000 | | | $ | 154,000 | |
| With an Allowance Recorded | | | | | | | | | |
| Commercial | | | | | | | | | |
| Real estate | $ | — | | | $ | — | | | $ | — | | | $ | 11,000 | | | $ | — | |
| Construction | — | | | — | | | — | | | 606,000 | | | — | |
| Other | 545,000 | | | 647,000 | | | 298,000 | | | 693,000 | | | — | |
| Municipal | — | | | — | | | — | | | — | | | — | |
| Residential | | | | | | | | | |
| Term | 1,256,000 | | | 1,259,000 | | | 100,000 | | | 1,486,000 | | | 50,000 | |
| Construction | — | | | — | | | — | | | — | | | — | |
| Home equity line of credit | — | | | — | | | — | | | 8,000 | | | — | |
| Consumer | — | | | — | | | — | | | — | | | — | |
| $ | 1,801,000 | | | $ | 1,906,000 | | | $ | 398,000 | | | $ | 2,804,000 | | | $ | 50,000 | |
| Total | | | | | | | | | |
| Commercial | | | | | | | | | |
| Real estate | $ | 1,236,000 | | | $ | 1,532,000 | | | $ | — | | | $ | 1,451,000 | | | $ | 50,000 | |
| Construction | 685,000 | | | 687,000 | | | — | | | 687,000 | | | 35,000 | |
| Other | 846,000 | | | 995,000 | | | 298,000 | | | 1,101,000 | | | 13,000 | |
| Municipal | — | | | — | | | — | | | — | | | — | |
| Residential | | | | | | | | | |
| Term | 3,089,000 | | | 3,294,000 | | | 100,000 | | | 5,993,000 | | | 106,000 | |
| Construction | — | | | — | | | — | | | — | | | — | |
| Home equity line of credit | 304,000 | | | 340,000 | | | — | | | 303,000 | | | — | |
| Consumer | — | | | — | | | — | | | 1,000 | | | — | |
| | $ | 6,160,000 | | | $ | 6,848,000 | | | $ | 398,000 | | | $ | 9,536,000 | | | $ | 204,000 | |
Substantially all interest income recognized on impaired loans for all classes of financing receivables was recognized on a cash basis as received.
The First Bancorp - 2022 Form 10-K - Page 71
A breakdown of impaired loans by class of financing receivable as of December 31, 2021, is presented in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Recorded Investment | | Unpaid
Principal Balance | | Related Allowance | | Average
Recorded Investment | | Recognized Interest
Income |
| With No Related Allowance | | | | | | | | | |
| Commercial | | | | | | | | | |
| Real estate | $ | 1,386,000 | | | $ | 1,689,000 | | | $ | — | | | $ | 1,590,000 | | | $ | 63,000 | |
| Construction | 28,000 | | | 28,000 | | | — | | | 22,000 | | | — | |
| Other | 917,000 | | | 1,009,000 | | | — | | | 1,051,000 | | | 15,000 | |
| Municipal | — | | | — | | | — | | | — | | | — | |
| Residential | | | | | | | | | |
| Term | 6,178,000 | | | 7,238,000 | | | — | | | 6,429,000 | | | 87,000 | |
| Construction | — | | | — | | | — | | | — | | | — | |
| Home equity line of credit | 457,000 | | | 487,000 | | | — | | | 461,000 | | | — | |
| Consumer | 2,000 | | | 2,000 | | | — | | | — | | | 1,000 | |
| | $ | 8,968,000 | | | $ | 10,453,000 | | | $ | — | | | $ | 9,553,000 | | | $ | 166,000 | |
| With an Allowance Recorded | | | | | | | | | |
| Commercial | | | | | | | | | |
| Real estate | $ | 42,000 | | | $ | 71,000 | | | $ | 42,000 | | | $ | 614,000 | | | $ | — | |
| Construction | 661,000 | | | 661,000 | | | 16,000 | | | 661,000 | | | 22,000 | |
| Other | 386,000 | | | 411,000 | | | 381,000 | | | 396,000 | | | — | |
| Municipal | — | | | — | | | — | | | — | | | — | |
| Residential | | | | | | | | | |
| Term | 1,995,000 | | | 2,164,000 | | | 137,000 | | | 1,897,000 | | | 54,000 | |
| Construction | — | | | — | | | — | | | — | | | — | |
| Home equity line of credit | — | | | — | | | — | | | — | | | — | |
| Consumer | — | | | — | | | — | | | — | | | — | |
| | $ | 3,084,000 | | | $ | 3,307,000 | | | $ | 576,000 | | | $ | 3,568,000 | | | $ | 76,000 | |
| Total | | | | | | | | | |
| Commercial | | | | | | | | | |
| Real estate | $ | 1,428,000 | | | $ | 1,760,000 | | | $ | 42,000 | | | $ | 2,204,000 | | | $ | 63,000 | |
| Construction | 689,000 | | | 689,000 | | | 16,000 | | | 683,000 | | | 22,000 | |
| Other | 1,303,000 | | | 1,420,000 | | | 381,000 | | | 1,447,000 | | | 15,000 | |
| Municipal | — | | | — | | | — | | | — | | | — | |
| Residential | | | | | | | | | |
| Term | 8,173,000 | | | 9,402,000 | | | 137,000 | | | 8,326,000 | | | 141,000 | |
| Construction | — | | | — | | | — | | | — | | | — | |
| Home equity line of credit | 457,000 | | | 487,000 | | | — | | | 461,000 | | | — | |
| Consumer | 2,000 | | | 2,000 | | | — | | | — | | | 1,000 | |
| | $ | 12,052,000 | | | $ | 13,760,000 | | | $ | 576,000 | | | $ | 13,121,000 | | | $ | 242,000 | |
The First Bancorp - 2022 Form 10-K - Page 72
A breakdown of impaired loans by category as of December 31, 2020, is presented in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Recorded Investment | | Unpaid
Principal Balance | | Related Allowance | | Average
Recorded Investment | | Recognized Interest
Income |
| With No Related Allowance | | | | | | | | | |
| Commercial | | | | | | | | | |
| Real estate | $ | 2,060,000 | | | $ | 2,368,000 | | | $ | — | | | $ | 4,123,000 | | | $ | 127,000 | |
| Construction | 89,000 | | | 89,000 | | | — | | | 358,000 | | | — | |
| Other | 1,591,000 | | | 1,623,000 | | | — | | | 999,000 | | | 15,000 | |
| Municipal | — | | | — | | | — | | | — | | | — | |
| Residential | | | | | | | | | |
| Term | 7,335,000 | | | 8,629,000 | | | — | | | 8,773,000 | | | 193,000 | |
| Construction | — | | | — | | | — | | | — | | | — | |
| Home equity line of credit | 1,015,000 | | | 1,089,000 | | | — | | | 1,219,000 | | | — | |
| Consumer | 8,000 | | | 8,000 | | | — | | | 1,000 | | | 1,000 | |
| $ | 12,098,000 | | | $ | 13,806,000 | | | $ | — | | | $ | 15,473,000 | | | $ | 336,000 | |
| With an Allowance Recorded | | | | | | | | | |
| Commercial | | | | | | | | | |
| Real estate | $ | 969,000 | | | $ | 995,000 | | | $ | 112,000 | | | $ | 1,018,000 | | | $ | 43,000 | |
| Construction | 681,000 | | | 681,000 | | | 18,000 | | | 579,000 | | | 30,000 | |
| Other | 188,000 | | | 202,000 | | | 169,000 | | | 1,193,000 | | | 3,000 | |
| Municipal | — | | | — | | | — | | | — | | | — | |
| Residential | | | | | | | | | |
| Term | 2,079,000 | | | 2,134,000 | | | 163,000 | | | 2,073,000 | | | 65,000 | |
| Construction | — | | | — | | | — | | | — | | | — | |
| Home equity line of credit | 24,000 | | | 24,000 | | | — | | | 744,000 | | | 1,000 | |
| Consumer | — | | | — | | | — | | | 8,000 | | | — | |
| $ | 3,941,000 | | | $ | 4,036,000 | | | $ | 462,000 | | | $ | 5,615,000 | | | $ | 142,000 | |
| Total | | | | | | | | | |
| Commercial | | | | | | | | | |
| Real estate | $ | 3,029,000 | | | $ | 3,363,000 | | | $ | 112,000 | | | $ | 5,141,000 | | | $ | 170,000 | |
| Construction | 770,000 | | | 770,000 | | | 18,000 | | | 937,000 | | | 30,000 | |
| Other | 1,779,000 | | | 1,825,000 | | | 169,000 | | | 2,192,000 | | | 18,000 | |
| Municipal | — | | | — | | | — | | | — | | | — | |
| Residential | | | | | | | | | |
| Term | 9,414,000 | | | 10,763,000 | | | 163,000 | | | 10,846,000 | | | 258,000 | |
| Construction | — | | | — | | | — | | | — | | | — | |
| Home equity line of credit | 1,039,000 | | | 1,113,000 | | | — | | | 1,963,000 | | | 1,000 | |
| Consumer | 8,000 | | | 8,000 | | | — | | | 9,000 | | | 1,000 | |
| $ | 16,039,000 | | | $ | 17,842,000 | | | $ | 462,000 | | | $ | 21,088,000 | | | $ | 478,000 | |
The First Bancorp - 2022 Form 10-K - Page 73
Troubled Debt Restructured
A TDR constitutes a restructuring of debt if the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that it would not otherwise consider. To determine whether or not a loan should be classified as a TDR, Management evaluates a loan based upon the following criteria:
•The borrower demonstrates financial difficulty; common indicators include past due status with bank obligations, substandard credit bureau reports, or an inability to refinance with another lender, and
•The Company has granted a concession; common concession types include maturity date extension, interest rate adjustments to below market pricing, and deferment of payments.
As of December 31, 2022, the Company had 29 loans with a value of $4,744,000 that have been classified as TDRs. This compares to 60 loans with a value of $8,341,000 classified as TDRs as of December 31, 2021. The impairment carried as a specific reserve in the allowance for loan losses for TDRs is calculated by present valuing the cash flow modification on the loan, or, for collateral-dependent loans, using the fair value of the collateral less costs to sell.
The following table shows TDRs by class and the specific reserve as of December 31, 2022:
| | | | | | | | | | | | | | | | | |
| Number of Loans | | Balance | | Specific Reserves |
| Commercial | | | | | |
| Real estate | 5 | | | $ | 1,044,000 | | | $ | — | |
| Construction | 1 | | | 661,000 | | | — | |
| Other | 3 | | | 361,000 | | | 81,000 | |
| Municipal | — | | | — | | | — | |
| Residential | | | | | |
| Term | 20 | | | 2,678,000 | | | 100,000 | |
| Construction | — | | | — | | | — | |
| Home equity line of credit | — | | | — | | | — | |
| Consumer | — | | | — | | | — | |
| | 29 | | | $ | 4,744,000 | | | $ | 181,000 | |
The following table shows TDRs by class and the specific reserve as of December 31, 2021:
| | | | | | | | | | | | | | | | | |
| Number of Loans | | Balance | | Specific Reserves |
| Commercial | | | | | |
| Real estate | 8 | | | $ | 1,227,000 | | | $ | 42,000 | |
| Construction | 1 | | | 661,000 | | | 16,000 | |
| Other | 5 | | | 765,000 | | | 337,000 | |
| Municipal | — | | | — | | | — | |
| Residential | | | | | |
| Term | 45 | | | 5,686,000 | | | 137,000 | |
| Construction | — | | | — | | | — | |
| Home equity line of credit | — | | | — | | | — | |
| Consumer | 1 | | | 2,000 | | | — | |
| | 60 | | | $ | 8,341,000 | | | $ | 532,000 | |
The First Bancorp - 2022 Form 10-K - Page 74
As of December 31, 2022, one of the loans classified as TDR with a total balance of $97,000 was more than 30 days past due and was not placed on TDR status in the previous 12 months. The following table shows past-due TDRs by class and the associated specific reserves included in the allowance for loan losses as of December 31, 2022:
| | | | | | | | | | | | | | | | | |
| | Number of Loans | | Balance | | Specific Reserves |
| Commercial | | | | | |
| Real estate | — | | | $ | — | | | — | |
| Construction | — | | | — | | | — | |
| Other | 1 | | | 97,000 | | | — | |
| Municipal | — | | | — | | | — | |
| Residential | | | | | |
| Term | — | | | — | | | — | |
| Construction | — | | | — | | | — | |
| Home equity line of credit | — | | | — | | | — | |
| Consumer | — | | | — | | | — | |
| | 1 | | | $ | 97,000 | | | — | |
As of December 31, 2021, five of the loans classified as TDRs with a total balance of $349,000 were more than 30 days past due. One of these loans had been placed on TDR status in the previous 12 months. The following table shows past-due TDRs by class and the associated specific reserves included in the allowance for loan losses as of December 31, 2021:
| | | | | | | | | | | | | | | | | |
| Number of Loans | | Balance | | Specific Reserves |
| Commercial | | | | | |
| Real estate | — | | | $ | — | | | — | |
| Construction | — | | | — | | | — | |
| Other | 1 | | | 83,000 | | | — | |
| Municipal | — | | | — | | | — | |
| Residential | | | | | |
| Term | 4 | | | 266,000 | | | — | |
| Construction | — | | | — | | | — | |
| Home equity line of credit | — | | | — | | | — | |
| Consumer | — | | | — | | | — | |
| | 5 | | | $ | 349,000 | | | — | |
The First Bancorp - 2022 Form 10-K - Page 75
For the year ended December 31, 2022, one loan was placed on TDR status. The following table shows this TDR by class and the associated specific reserves included in the allowance for loan losses as of December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Loans | | Pre-Modification
Outstanding
Recorded Investment | | Post-Modification Outstanding
Recorded
Investment | | Specific Reserves |
| Commercial | | | | | | | |
| Real estate | — | | | $ | — | | | $ | — | | | — | |
| Construction | — | | | — | | | — | | | — | |
| Other | — | | | — | | | — | | | — | |
| Municipal | — | | | — | | | — | | | — | |
| Residential | | | | | | | |
| Term | 1 | | | 38,000 | | | 38,000 | | | — | |
| Construction | — | | | — | | | — | | | — | |
| Home equity line of credit | — | | | — | | | — | | | — | |
| Consumer | — | | | — | | | — | | | — | |
| 1 | | | $ | 38,000 | | | $ | 38,000 | | | — | |
For the year ended December 31, 2021, four loans were placed in TDR status. The following table shows these TDRs by class and the associated specific reserves included in the allowance for loan losses as for December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of Loans | | Pre-Modification
Outstanding
Recorded Investment | | Post-Modification Outstanding
Recorded
Investment | | Specific Reserves |
| Commercial | | | | | | | |
| Real estate | — | | | $ | — | | | $ | — | | | $ | — | |
| Construction | 1 | | | 80,000 | | | 80,000 | | | — | |
| Other | 1 | | | 251,000 | | | 247,000 | | | 247,000 | |
| Municipal | — | | | — | | | — | | | — | |
| Residential | | | | | | | |
| Term | 2 | | | 142,000 | | | 124,000 | | | — | |
| Construction | — | | | — | | | — | | | — | |
| Home equity line of credit | — | | | — | | | — | | | — | |
| Consumer | — | | | — | | | — | | | — | |
| | 4 | | | $ | 473,000 | | | $ | 451,000 | | | $ | 247,000 | |
As of December 31, 2022, Management is aware of four loans classified as TDRs that are involved in bankruptcy with an outstanding balance of $550,000. As of December 31, 2022, there were five loans with an outstanding balance of $339,000 that were classified as TDRs and were on non-accrual status, of which none were in the process of foreclosure.
Residential Mortgage Loans in Process of Foreclosure
As of December 31, 2022, there were two mortgage loans collateralized by residential real estate in the process of foreclosure with a balance of $166,000; this compares to four mortgage loans collateralized by residential real estate in the process of foreclosure with a total balance of $367,000 as of December 31, 2021.
The First Bancorp - 2022 Form 10-K - Page 76
Note 6. Allowance for Loan Losses
The Company provides for loan losses through the establishment of an allowance for loan losses, which represents an estimated reserve for existing losses in the loan portfolio. A systematic methodology is used for determining the allowance that includes a quarterly review process, risk rating changes, and adjustments to the allowance. Major risk characteristics relevant to each portfolio segment are as follows:
Commercial Real Estate - Commercial real estate loans are impacted by factors such as competitive market forces, vacancy rates, cap rates, net operating incomes, lease renewals and overall economic demand. In addition, loans in the recreational and tourism sector can be affected by weather conditions, such as unseasonably low winter snowfalls. Commercial real estate lending also carries a higher degree of environmental risk than other real estate lending.
Commercial Construction - Commercial construction loans are impacted by factors similar to those for commercial real estate loans in addition to risks related to contractor financial capacity and ability to complete a project within acceptable time frames and within budget.
Commercial Other - A weakened economy, soft consumer spending, and the rising cost of labor or raw materials are examples of issues that can impact the credit quality in this segment.
Municipal Loans - The overall health of the economy, including unemployment rates and housing prices, has an impact on the credit quality of this segment.
Residential Real Estate Term - The overall health of the economy, including unemployment rates and housing prices, has an impact on the credit quality of this segment.
Residential Real Estate Construction - The overall health of the economy, including unemployment rates and housing prices, has an impact on the credit quality of this segment. Residential construction loans are impacted by factors similar to those for residential real estate term loans in addition to risks related to contractor financial capacity and ability to complete a project within acceptable time frames and within budget.
Home Equity Line of Credit - The overall health of the economy, including unemployment rates and housing prices, has an impact on the credit quality of this segment.
Consumer -The overall health of the economy, including unemployment rates, has an impact on the credit quality of this segment.
The appropriate level of the allowance is evaluated continually based on a review of significant loans, with a particular emphasis on nonaccruing, past due, and other loans that may require special attention. Other factors include general conditions in local and national economies; loan portfolio composition and asset quality indicators; and internal factors such as changes in underwriting policies, credit administration practices, experience, ability and depth of lending management, among others.
The First Bancorp - 2022 Form 10-K - Page 77
The following table summarizes the composition of the allowance for loan losses, by class of financing receivable and allowance, as of December 31, 2022 and 2021:
| | | | | | | | | | | |
| As of December 31, | 2022 | | 2021 |
| Allowance for Loans Evaluated Individually for Impairment |
| Commercial | | | |
| Real estate | $ | — | | | $ | 42,000 | |
| Construction | — | | | 16,000 | |
| Other | 298,000 | | | 381,000 | |
| Municipal | — | | | — | |
| Residential | | | |
| Term | 100,000 | | | 137,000 | |
| Construction | — | | | — | |
| Home equity line of credit | — | | | — | |
| Consumer | — | | | — | |
| Total | $ | 398,000 | | | $ | 576,000 | |
| Allowance for Loans Evaluated Collectively for Impairment |
| Commercial | | | |
| Real estate | $ | 6,116,000 | | | $ | 5,325,000 | |
| Construction | 821,000 | | | 730,000 | |
| Other | 2,799,000 | | | 2,449,000 | |
| Municipal | 162,000 | | | 157,000 | |
| Residential | | | |
| Term | 2,459,000 | | | 2,596,000 | |
| Construction | 199,000 | | | 148,000 | |
| Home equity line of credit | 1,029,000 | | | 925,000 | |
| Consumer | 1,062,000 | | | 833,000 | |
| Unallocated | 1,678,000 | | | 1,782,000 | |
| Total | $ | 16,325,000 | | | $ | 14,945,000 | |
| Total Allowance for Loan Losses |
| Commercial | | | |
| Real estate | $ | 6,116,000 | | | $ | 5,367,000 | |
| Construction | 821,000 | | | 746,000 | |
| Other | 3,097,000 | | | 2,830,000 | |
| Municipal | 162,000 | | | 157,000 | |
| Residential | | | |
| Term | 2,559,000 | | | 2,733,000 | |
| Construction | 199,000 | | | 148,000 | |
| Home equity line of credit | 1,029,000 | | | 925,000 | |
| Consumer | 1,062,000 | | | 833,000 | |
| Unallocated | 1,678,000 | | | 1,782,000 | |
| Total | $ | 16,723,000 | | | $ | 15,521,000 | |
The First Bancorp - 2022 Form 10-K - Page 78
The allowance consists of four elements: (1) specific reserves for loans evaluated individually for impairment; (2) general reserves for each portfolio segment based on historical loan loss experience; (3) qualitative reserves judgmentally adjusted for local and national economic conditions, concentrations, portfolio composition, volume and severity of delinquencies and nonaccrual loans, trends of criticized and classified loans, changes in credit policies, and underwriting standards, credit administration practices, and other factors as applicable for each portfolio segment; and (4) unallocated reserves. All outstanding loans are considered in evaluating the appropriateness of the allowance.
A breakdown of the allowance for loan losses as of December 31, 2022 and 2021, by class of financing receivable and allowance element, is presented in the following tables:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2022 | Specific Reserves on Loans Evaluated Individually for Impairment | | General Reserves on Loans Based on Historical Loss Experience | | Reserves for Qualitative Factors | | Unallocated Reserves | | Total Reserves |
| Commercial | | | | | | | | | |
| Real estate | $ | — | | | $ | 974,000 | | | $ | 5,142,000 | | | $ | — | | | $ | 6,116,000 | |
| Construction | — | | | 131,000 | | | 690,000 | | | — | | | 821,000 | |
| Other | 298,000 | | | 446,000 | | | 2,353,000 | | | — | | | 3,097,000 | |
| Municipal | — | | | — | | | 162,000 | | | — | | | 162,000 | |
| Residential | | | | | | | | | |
| Term | 100,000 | | | 83,000 | | | 2,376,000 | | | — | | | 2,559,000 | |
| Construction | — | | | 7,000 | | | 192,000 | | | — | | | 199,000 | |
| Home equity line of credit | — | | | 101,000 | | | 928,000 | | | — | | | 1,029,000 | |
| Consumer | — | | | 286,000 | | | 776,000 | | | — | | | 1,062,000 | |
| Unallocated | — | | | — | | | — | | | 1,678,000 | | | 1,678,000 | |
| $ | 398,000 | | | $ | 2,028,000 | | | $ | 12,619,000 | | | $ | 1,678,000 | | | $ | 16,723,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2021 | Specific Reserves on Loans Evaluated Individually for Impairment | | General Reserves on Loans Based on Historical Loss Experience | | Reserves for Qualitative Factors | | Unallocated Reserves | | Total Reserves |
| Commercial | | | | | | | | | |
| Real estate | $ | 42,000 | | | $ | 831,000 | | | $ | 4,494,000 | | | $ | — | | | $ | 5,367,000 | |
| Construction | 16,000 | | | 114,000 | | | 616,000 | | | — | | | 746,000 | |
| Other | 381,000 | | | 382,000 | | | 2,067,000 | | | — | | | 2,830,000 | |
| Municipal | — | | | — | | | 157,000 | | | — | | | 157,000 | |
| Residential | | | | | | | | | |
| Term | 137,000 | | | 175,000 | | | 2,421,000 | | | — | | | 2,733,000 | |
| Construction | — | | | 10,000 | | | 138,000 | | | — | | | 148,000 | |
| Home equity line of credit | — | | | 101,000 | | | 824,000 | | | — | | | 925,000 | |
| Consumer | — | | | 243,000 | | | 590,000 | | | — | | | 833,000 | |
| Unallocated | — | | | — | | | — | | | 1,782,000 | | | 1,782,000 | |
| | $ | 576,000 | | | $ | 1,856,000 | | | $ | 11,307,000 | | | $ | 1,782,000 | | | $ | 15,521,000 | |
The First Bancorp - 2022 Form 10-K - Page 79
Qualitative adjustment factors are taken into consideration when determining reserve estimates. These adjustment factors are based upon our evaluation of various current conditions, including those listed below.
•General economic conditions.
•Credit quality trends with emphasis on loan delinquencies, nonaccrual levels and classified loans.
•Recent loss experience in particular segments of the portfolio.
•Loan volumes and concentrations, including changes in mix.
•Other factors, including changes in quality of loan originations; loan policy changes; changes in credit risk management processes; results of credit stress tests; Bank regulatory and external loan review examination results.
Qualitative factors applied to the portfolio or segments of the portfolio may include judgments concerning general economic
conditions that may affect credit quality, credit concentrations, the pace of portfolio growth, the direction of risk rating movements, policy exception levels, and delinquency levels; these qualitative factors are also considered in connection with the unallocated portion of our allowance for loan losses.
The qualitative portion of the allowance for loan losses was 0.66% of related loans as of December 31, 2022 and 0.69% of related loans as of December 31, 2021. The qualitative portion increased $1,312,000 between December 31, 2021 and December 31, 2022 due to a mix of factors. These factors included changes in various macroeconomic measures used in the qualitative model, volume changes in certain portfolio segments, and ongoing analysis of the loan portfolio in multiple stress scenarios.
The unallocated component totaled $1,678,000 at December 31, 2022, or 10.0% of the total reserve. This compares to $1,782,000 or 11.5% as of December 31, 2021. Maintenance of an unallocated component reflects general imprecision related to portfolio growth along with lingering uncertainty regarding the potential impacts of COVID-19 on the loan portfolio.
The allowance for loan losses as a percent of total loans stood at 0.87% as of December 31, 2022, compared to 0.94% of total loans as of December 31, 2021.
Commercial loans are comprised of three major classes: commercial real estate loans, commercial construction loans and other commercial loans.
Commercial real estate loans consist of mortgage loans to finance investments in real property, such as multi-family residential, commercial/retail, office, industrial, hotels, educational and other specific or mixed use properties. Commercial real estate loans are typically written with amortizing payment structures. Collateral values are determined based on appraisals and evaluations in accordance with established policy and regulatory guidelines. Commercial real estate loans typically have a loan-to-value ratio of up to 80% based upon current valuation information at the time the loan is made. Commercial real estate loans are primarily paid by the cash flow generated from the real property, such as operating leases, rents, or other operating cash flows from the borrower.
Commercial construction loans consist of loans to finance construction in a mix of owner- and non-owner occupied commercial real estate properties. Commercial construction loans typically have maturities of less than two years. Payment structures during the construction period are typically on an interest only basis, although principal payments may be established depending on the type of construction project being financed. During the construction phase, commercial construction loans are primarily paid by cash flow generated from the construction project or other operating cash flows from the borrower or guarantors, if applicable. At the end of the construction period, loan repayment typically comes from a third party source in the event that the Bank will not be providing permanent term financing. Collateral valuation and loan-to-value guidelines follow those for commercial real estate loans.
Other commercial loans consist of revolving and term loan obligations extended to business and corporate enterprises for the purpose of financing working capital or capital investment. Collateral generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, plant and equipment, and/or real estate, if applicable. Commercial loans are primarily paid by the operating cash flow of the borrower. Commercial loans may be secured or unsecured. In 2022 and 2021, other commercial loans also include loans made under the SBA PPP. These loans are unsecured and carry a 100% guarantee from the SBA.
Municipal loans are comprised of loans to municipalities in Maine for capitalized expenditures, construction projects or tax-anticipation notes. All municipal loans are considered general obligations of the municipality and are collateralized by the taxing ability of the municipality for repayment of debt.
Residential loans are comprised of two classes: term loans and construction loans.
Residential term loans consist of residential real estate loans held in the Bank's loan portfolio made to borrowers who demonstrate the ability to make scheduled payments with full consideration of underwriting factors. Borrower qualifications include favorable credit history combined with supportive income requirements and loan-to-value ratios within established policy and regulatory guidelines. Collateral values are determined based on appraisals and evaluations in accordance with established policy and regulatory guidelines. Residential loans typically have a loan-to-value ratio of up to 80% based on appraisal information at the time the loan is made. Collateral consists of mortgage liens on one- to four-family residential properties. Loans are offered with fixed or adjustable rates with amortization terms of up to thirty years.
Residential construction loans typically consist of loans for the purpose of constructing single family residences to be owned and occupied by the borrower. Borrower qualifications include favorable credit history combined with supportive income requirements and loan-to-value ratios within established policy and regulatory guidelines. Residential construction loans normally have terms of one year or less and payment during the construction term is typically on an interest only basis from sources including
The First Bancorp - 2022 Form 10-K - Page 80
interest reserves, borrower liquidity and/or income. Residential construction loans will typically convert to permanent financing from the Bank or have another financing commitment in place from an acceptable mortgage lender. Collateral valuation and loan-to-value guidelines are consistent with those for residential term loans.
Home equity lines of credit are made to qualified individuals and are secured by senior or junior mortgage liens on owner-occupied one- to four-family homes, condominiums, or vacation homes. The home equity line of credit typically has a variable interest rate and is billed as interest-only payments during the draw period. At the end of the draw period, the home equity line of credit payments are billed as a percentage of the principal balance plus all accrued interest. Loan maturities are normally 300 months. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to- value ratios usually not exceeding 80% inclusive of priority liens. Collateral valuation guidelines follow those for residential real estate loans.
Consumer loan products including personal lines of credit and amortizing loans made to qualified individuals for various purposes such as auto, recreational vehicles, debt consolidation, personal expenses or overdraft protection. Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines. Consumer loans may be secured or unsecured.
Construction, land and land development loans, both commercial and residential, comprise a small portion of the portfolio, and at 55.8% of capital at December 31, 2022 are below the regulatory guidance of 100.0% of capital. Construction loans and non- owner-occupied commercial real estate loans are at 226.3% of total capital at December 31, 2022, below the regulatory guidance of 300.0% of capital.
The process of establishing the allowance with respect to the commercial loan portfolio begins when a Loan Officer or Senior Officer (or designee) initially assigns each loan a risk rating, using established credit criteria. Approximately 60% of a trailing four quarter average gross commercial portfolio is subject to review and validation annually by an independent consulting firm. Additionally, commercial loan relationships with exposure greater than or equal to $500,000 are subject to review annually by the Company's internal credit review function. The methodology employs Management's judgment as to the level of losses on existing loans based on internal review of the loan portfolio, including an analysis of a borrower's current financial position, and the consideration of current and anticipated economic conditions and their potential effects on specific borrowers or lines of business.
The First Bancorp - 2022 Form 10-K - Page 81
In determining the Company's ability to collect certain loans, Management also considers the fair value of underlying collateral. The risk rating system has eight levels, defined as follows:
1 Strong Credits rated "1" are characterized by borrowers fully responsible for the credit with excellent capacity to pay principal and interest. Loans rated "1" may be secured with acceptable forms of liquid collateral.
2 Above Average
Credits rated "2" are characterized by borrowers that have better than average liquidity, capitalization, earnings and/or cash flow with a consistent record of solid financial performance.
3 Satisfactory
Credits rated "3" are characterized by borrowers with favorable liquidity, profitability and financial condition with adequate cash flow to pay debt service.
4 Average
Credits rated "4" are characterized by borrowers that present risk more than 1, 2 and 3 rated loans and merit an ordinary level of ongoing monitoring. Financial condition is on par or somewhat below industry averages while cash flow is generally adequate to meet debt service requirements.
5 Watch
Credits rated "5" are characterized by borrowers that warrant greater monitoring due to financial condition or unresolved and identified risk factors.
6 Other Assets Especially Mentioned (OAEM)
Loans in this category are currently supported but are potentially weak and constitute an undue and unwarranted credit risk, but not to the point of justifying a classification of substandard. OAEM have potential weaknesses which may, if not checked or corrected, weaken the asset or inadequately protect the Bank's credit position at some future date.
7 Substandard
Loans in this category are inadequately supported by the current paying capacity of the borrower or of the collateral, if any. These loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Bank may sustain some loss if deficiencies are not corrected.
8 Doubtful
Loans classified "Doubtful" have the same weaknesses as those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is high, but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.
The following table summarizes the risk ratings for the Company's commercial construction, commercial real estate, commercial other and municipal loans as of December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Commercial
Real Estate | | Commercial
Construction | | Commercial
Other | | Municipal
Loans | | All Risk-
Rated Loans |
| 1 Strong | $ | — | | | $ | — | | | $ | 2,215,000 | | | $ | — | | | $ | 2,215,000 | |
| 2 Above average | 5,702,000 | | | — | | | 23,624,000 | | | 37,921,000 | | | 67,247,000 | |
| 3 Satisfactory | 125,721,000 | | | 1,018,000 | | | 64,613,000 | | | 1,198,000 | | | 192,550,000 | |
| 4 Average | 459,087,000 | | | 57,920,000 | | | 187,374,000 | | | 1,500,000 | | | 705,881,000 | |
| 5 Watch | 108,302,000 | | | 34,969,000 | | | 40,119,000 | | | — | | | 183,390,000 | |
| 6 OAEM | 144,000 | | | — | | | 85,000 | | | — | | | 229,000 | |
| 7 Substandard | 384,000 | | | — | | | 1,329,000 | | | — | | | 1,713,000 | |
| 8 Doubtful | — | | | — | | | — | | | — | | | — | |
| Total | $ | 699,340,000 | | | $ | 93,907,000 | | | $ | 319,359,000 | | | $ | 40,619,000 | | | $ | 1,153,225,000 | |
The First Bancorp - 2022 Form 10-K - Page 82
The following table summarizes the risk ratings for the Company's commercial construction, commercial real estate, commercial other and municipal loans as of December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Commercial
Real Estate | | Commercial
Construction | | Commercial
Other | | Municipal
Loans | | All Risk-
Rated Loans |
| 1 Strong | $ | — | | | $ | — | | | $ | 2,118,000 | | | $ | — | | | $ | 2,118,000 | |
| 2 Above average | 6,977,000 | | | 169,000 | | | 7,328,000 | | | 46,547,000 | | | 61,021,000 | |
| 3 Satisfactory | 98,473,000 | | | 2,589,000 | | | 60,787,000 | | | 349,000 | | | 162,198,000 | |
| 4 Average | 378,147,000 | | | 47,196,000 | | | 154,247,000 | | | 1,466,000 | | | 581,056,000 | |
| 5 Watch | 88,679,000 | | | 29,411,000 | | | 37,942,000 | | | — | | | 156,032,000 | |
| 6 OAEM | 3,482,000 | | | — | | | 52,000 | | | — | | | 3,534,000 | |
| 7 Substandard | 440,000 | | | — | | | 2,096,000 | | | — | | | 2,536,000 | |
| 8 Doubtful | — | | | — | | | — | | | — | | | — | |
| Total | $ | 576,198,000 | | | $ | 79,365,000 | | | $ | 264,570,000 | | | $ | 48,362,000 | | | $ | 968,495,000 | |
Commercial loans are generally charged off when all or a portion of the principal amount is determined to be uncollectible. This determination is based on circumstances specific to a borrower including repayment ability, analysis of collateral and other factors as applicable.
Residential loans are comprised of two classes: term loans, which include traditional amortizing home mortgages, and construction loans, which include loans for owner-occupied residential construction. Residential loans typically have a 75% to 80% loan to value ratio based upon current appraisal information at the time the loan is made. Home equity loans and lines of credit are typically written to the same underwriting standards. Consumer loans are primarily amortizing loans to individuals collateralized by automobiles, pleasure craft and recreation vehicles, typically with a maximum loan to value ratio of 80% to 90% of the purchase price of the collateral. Consumer loans also include a small amount of unsecured short-term time notes to individuals.
Residential loans, consumer loans and home equity lines of credit are segregated into homogeneous pools with similar risk characteristics. Trends and current conditions are analyzed and historical loss experience is adjusted accordingly. Quantitative and qualitative adjustment factors for these segments are consistent with those for the commercial and municipal classes. Certain loans in the residential, home equity lines of credit and consumer classes identified as having the potential for further deterioration are analyzed individually to confirm impairment status, and to determine the need for a specific reserve; however, there is no formal rating system used for these classes. Consumer loans greater than 120 days past due are generally charged off. Residential loans 90 days or more past due are placed on non-accrual status unless the loans are both well secured and in the process of collection. One-to four-family residential real estate loans and home equity loans are written down or charged-off no later than 180 days past due, or for residential real estate secured loans having a borrower in bankruptcy, within 60 days of receipt of notification of filing from the bankruptcy court, whichever is sooner. This is subject to completion of a current assessment of the value of the collateral with any outstanding loan balance in excess of the fair value of the property, less costs to sell, written down or charged-off.
There were no changes to the Company's accounting policies or methodology used to estimate the allowance for loan losses during the year ended December 31, 2022.
The First Bancorp - 2022 Form 10-K - Page 83
The following tables present allowance for loan losses activity by class, allowance for loan loss balances by class and related loan balances by class for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the year ended December 31, 2022 | Commercial | | | | Residential | | Home Equity
Line of Credit | | | | | | |
| Real Estate | | Construction | | Other | | Municipal | | Term | | Construction | | | Consumer | | Unallocated | | Total |
| Allowance for loan losses: | | | | | | | | | | | | | | | | | | | |
| Beginning balance | $ | 5,367,000 | | | $ | 746,000 | | | $ | 2,830,000 | | | $ | 157,000 | | | $ | 2,733,000 | | | $ | 148,000 | | | $ | 925,000 | | | $ | 833,000 | | | $ | 1,782,000 | | | $ | 15,521,000 | |
| Chargeoffs | — | | | — | | | 309,000 | | | — | | | 8,000 | | | — | | | 29,000 | | | 412,000 | | | — | | | 758,000 | |
| Recoveries | 20,000 | | | — | | | 13,000 | | | — | | | 29,000 | | | — | | | 4,000 | | | 144,000 | | | — | | | 210,000 | |
| Provision (credit) | 729,000 | | | 75,000 | | | 563,000 | | | 5,000 | | | (195,000) | | | 51,000 | | | 129,000 | | | 497,000 | | | (104,000) | | | 1,750,000 | |
| Ending balance | $ | 6,116,000 | | | $ | 821,000 | | | $ | 3,097,000 | | | $ | 162,000 | | | $ | 2,559,000 | | | $ | 199,000 | | | $ | 1,029,000 | | | $ | 1,062,000 | | | $ | 1,678,000 | | | $ | 16,723,000 | |
| Ending balance specifically evaluated for impairment | $ | — | | | $ | — | | | $ | 298,000 | | | $ | — | | | $ | 100,000 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 398,000 | |
| Ending balance collectively evaluated for impairment | $ | 6,116,000 | | | $ | 821,000 | | | $ | 2,799,000 | | | $ | 162,000 | | | $ | 2,459,000 | | | $ | 199,000 | | | $ | 1,029,000 | | | $ | 1,062,000 | | | $ | 1,678,000 | | | $ | 16,325,000 | |
| Related loan balances: | | | | | | | | | | | | | | | | | | | |
| Ending balance | $ | 699,340,000 | | | $ | 93,907,000 | | | $ | 319,359,000 | | | $ | 40,619,000 | | | $ | 613,919,000 | | | $ | 49,907,000 | | | $ | 76,560,000 | | | $ | 21,063,000 | | | $ | — | | | $ | 1,914,674,000 | |
| Ending balance specifically evaluated for impairment | $ | 1,236,000 | | | $ | 685,000 | | | $ | 846,000 | | | $ | — | | | $ | 3,089,000 | | | $ | — | | | $ | 304,000 | | | $ | — | | | $ | — | | | $ | 6,160,000 | |
| Ending balance collectively evaluated for impairment | $ | 698,104,000 | | | $ | 93,222,000 | | | $ | 318,513,000 | | | $ | 40,619,000 | | | $ | 610,830,000 | | | $ | 49,907,000 | | | $ | 76,256,000 | | | $ | 21,063,000 | | | $ | — | | | $ | 1,908,514,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the year ended December 31, 2021 | Commercial | | | | Residential | | Home Equity
Line of Credit | | | | | | |
| Real Estate | | Construction | | Other | | Municipal | | Term | | Construction | | | Consumer | | Unallocated | | Total |
| Allowance for loan losses: | | | | | | | | | | | | | | | | | | | |
| Beginning balance | $ | 5,178,000 | | | $ | 662,000 | | | $ | 3,438,000 | | | $ | 171,000 | | | $ | 2,579,000 | | | $ | 102,000 | | | $ | 1,211,000 | | | $ | 778,000 | | | $ | 2,134,000 | | | $ | 16,253,000 | |
| Chargeoffs | 106,000 | | | — | | | 288,000 | | | — | | | 42,000 | | | — | | | — | | | 312,000 | | | — | | | 748,000 | |
| Recoveries | 95,000 | | | — | | | 84,000 | | | — | | | 66,000 | | | — | | | 61,000 | | | 85,000 | | | — | | | 391,000 | |
| Provision (credit) | 200,000 | | | 84,000 | | | (404,000) | | | (14,000) | | | 130,000 | | | 46,000 | | | (347,000) | | | 282,000 | | | (352,000) | | | (375,000) | |
| Ending balance | $ | 5,367,000 | | | $ | 746,000 | | | $ | 2,830,000 | | | $ | 157,000 | | | $ | 2,733,000 | | | $ | 148,000 | | | $ | 925,000 | | | $ | 833,000 | | | $ | 1,782,000 | | | $ | 15,521,000 | |
| Ending balance specifically evaluated for impairment | $ | 42,000 | | | $ | 16,000 | | | $ | 381,000 | | | $ | — | | | $ | 137,000 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 576,000 | |
| Ending balance collectively evaluated for impairment | $ | 5,325,000 | | | $ | 730,000 | | | $ | 2,449,000 | | | $ | 157,000 | | | $ | 2,596,000 | | | $ | 148,000 | | | $ | 925,000 | | | $ | 833,000 | | | $ | 1,782,000 | | | $ | 14,945,000 | |
| Related loan balances: | | | | | | | | | | | | | | | | | | | |
| Ending balance | $ | 576,198,000 | | | $ | 79,365,000 | | | $ | 264,570,000 | | | $ | 48,362,000 | | | $ | 550,783,000 | | | $ | 31,763,000 | | | $ | 73,632,000 | | | $ | 22,976,000 | | | $ | — | | | $ | 1,647,649,000 | |
| Ending balance specifically evaluated for impairment | $ | 1,428,000 | | | $ | 689,000 | | | $ | 1,303,000 | | | $ | — | | | $ | 8,173,000 | | | $ | — | | | $ | 457,000 | | | $ | 2,000 | | | $ | — | | | $ | 12,052,000 | |
| Ending balance collectively evaluated for impairment | $ | 574,770,000 | | | $ | 78,676,000 | | | $ | 263,267,000 | | | $ | 48,362,000 | | | $ | 542,610,000 | | | $ | 31,763,000 | | | $ | 73,175,000 | | | $ | 22,974,000 | | | $ | — | | | $ | 1,635,597,000 | |
The First Bancorp - 2022 Form 10-K - Page 84
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the year ended December 31, 2020 | Commercial | | | | Residential | | Home Equity
Line of Credit | | | | | | |
| Real Estate | | Construction | | Other | | Municipal | | Term | | Construction | | | Consumer | | Unallocated | | Total |
| Allowance for loan losses: | | | | | | | | | | | | | | | | | | | |
| Beginning balance | $ | 3,742,000 | | | $ | 365,000 | | | $ | 3,329,000 | | | $ | 27,000 | | | $ | 1,024,000 | | | $ | 25,000 | | | $ | 1,078,000 | | | $ | 867,000 | | | $ | 1,182,000 | | | $ | 11,639,000 | |
| Chargeoffs | 1,088,000 | | | — | | | 27,000 | | | — | | | 66,000 | | | — | | | 153,000 | | | 327,000 | | | — | | | 1,661,000 | |
| Recoveries | — | | | — | | | 37,000 | | | — | | | 34,000 | | | — | | | 22,000 | | | 132,000 | | | — | | | 225,000 | |
| Provision | 2,524,000 | | | 297,000 | | | 99,000 | | | 144,000 | | | 1,587,000 | | | 77,000 | | | 264,000 | | | 106,000 | | | 952,000 | | | 6,050,000 | |
| Ending balance | $ | 5,178,000 | | | $ | 662,000 | | | $ | 3,438,000 | | | $ | 171,000 | | | $ | 2,579,000 | | | $ | 102,000 | | | $ | 1,211,000 | | | $ | 778,000 | | | $ | 2,134,000 | | | $ | 16,253,000 | |
| Ending balance specifically evaluated for impairment | $ | 112,000 | | | $ | 18,000 | | | $ | 169,000 | | | $ | — | | | $ | 163,000 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 462,000 | |
| Ending balance collectively evaluated for impairment | $ | 5,066,000 | | | $ | 644,000 | | | $ | 3,269,000 | | | $ | 171,000 | | | $ | 2,416,000 | | | $ | 102,000 | | | $ | 1,211,000 | | | $ | 778,000 | | | $ | 2,134,000 | | | $ | 15,791,000 | |
| Related loan balances: | | | | | | | | | | | | | | | | | | | |
| Ending balance | $ | 442,121,000 | | | $ | 56,565,000 | | | $ | 285,015,000 | | | $ | 43,783,000 | | | $ | 522,070,000 | | | $ | 21,600,000 | | | $ | 79,750,000 | | | $ | 25,857,000 | | | $ | — | | | $ | 1,476,761,000 | |
| Ending balance specifically evaluated for impairment | $ | 3,029,000 | | | $ | 770,000 | | | $ | 1,779,000 | | | $ | — | | | $ | 9,414,000 | | | $ | — | | | $ | 1,039,000 | | | $ | 8,000 | | | $ | — | | | $ | 16,039,000 | |
| Ending balance collectively evaluated for impairment | $ | 439,092,000 | | | $ | 55,795,000 | | | $ | 283,236,000 | | | $ | 43,783,000 | | | $ | 512,656,000 | | | $ | 21,600,000 | | | $ | 78,711,000 | | | $ | 25,849,000 | | | $ | — | | | $ | 1,460,722,000 | |
Note 7. Premises and Equipment
Premises and equipment are carried at cost and consist of the following:
| | | | | | | | | | | |
| As of December 31, | 2022 | | 2021 |
| Land | $ | 6,404,000 | | | $ | 6,159,000 | |
| Land improvements | 1,883,000 | | | 1,788,000 | |
| Buildings | 30,873,000 | | | 30,685,000 | |
| Equipment | 11,659,000 | | | 11,807,000 | |
| 50,819,000 | | | 50,439,000 | |
| Less accumulated depreciation | 22,542,000 | | | 21,490,000 | |
| | | |
| | | |
| Total premises and equipment | $ | 28,277,000 | | | $ | 28,949,000 | |
Future minimum receipts under lease agreements at December 31, 2022 by year and in the aggregate are:
| | | | | |
| 2023 | $115,000 | |
| 2024 | 116,000 | |
| 2025 | 116,000 | |
| 2026 | 116,000 | |
| 2027 | 116,000 | |
| Thereafter | 15,000 | |
| $594,000 | |
Leases
As part of the acquisition of its branch in Belfast, Maine in December 2020, the Company entered into an operating lease pertaining to land upon which the branch is situated. As of December 31, 2022, the lease has a term of 20 years, including an option to renew. The discount rate used in determining the lease liability was 1.875%, the FHLB advance rate in December 2020 that corresponded to the lease term. Effective December 2021, the Company entered into an operating lease for a new branch facility in Brewer, Maine. As of December 31, 2022, the lease has a term of four years. The discount rate used in determining lease liability was 1.25%, corresponding to a synthesized rate for the same term; the synthesized rate was calculated based on several inputs including FHLB advance rates, brokered CD rates and US Treasury Bonds, all with five year terms.
The First Bancorp - 2022 Form 10-K - Page 85
The right‑of‑use asset and lease liability by lease type, and the associated balance sheet classifications as of December 31, 2022 and 2021 were as follows:
| | | | | | | | | | | |
| Balance Sheet Classification |
| 2022 | 2021 |
| Right-of-use assets: | | | |
| Operating leases | Premises and equipment, net | $737,000 | $822,000 |
| | | |
| Lease liabilities: | | | |
| Operating leases | Other liabilities | $737,000 | $822,000 |
Lease expense for the year ended December 31, 2022 related to these leases was $97,000. There was $34,000 lease expense for 2021 and none for 2020.
Future lease payments for operating leases with initial terms of one year or more as of December 31, 2022 are as follows:
| | | | | |
| 2023 | $97,000 |
| 2024 | 97,000 | |
| 2025 | 97,000 | |
| 2026 | 91,000 | |
| 2027 | 28,000 | |
| Thereafter | 431,000 | |
| |
| Total undiscounted lease payments | 841,000 | |
| Less: imputed interest | 104,000 | |
| Net lease liability | $737,000 |
Note 8. Other Real Estate Owned
The following summarizes other real estate owned:
| | | | | | | | | | | |
| As of December 31, | 2022 | | 2021 |
| Real estate acquired in settlement of loans | $ | — | | | $ | — | |
Changes in the allowance for losses from other real estate owned were as follows:
| | | | | | | | | | | | | | | | | |
| For the years ended December 31, | 2022 | | 2021 | | 2020 |
| Balance at beginning of year | $ | — | | | $ | 45,000 | | | $ | — | |
| Losses charged to allowance | — | | | (45,000) | | | — | |
| Provision charged to operating expenses | — | | | — | | | 45,000 | |
| Balance at end of year | $ | — | | | $ | — | | | $ | 45,000 | |
The First Bancorp - 2022 Form 10-K - Page 86
Note 9. Income Taxes
The current and deferred components of income tax expense (benefit) were as follows:
| | | | | | | | | | | | | | | | | |
| For the years ended December 31, | 2022 | | 2021 | | 2020 |
| Federal income tax | | | | | |
| Current | $ | 7,912,000 | | | $ | 6,058,000 | | | $ | 4,923,000 | |
| Deferred | (127,000) | | | 999,000 | | | (262,000) | |
| 7,785,000 | | | 7,057,000 | | | 4,661,000 | |
| State franchise tax | 611,000 | | | 587,000 | | | 460,000 | |
| $ | 8,396,000 | | | $ | 7,644,000 | | | $ | 5,121,000 | |
The actual tax expense differs from the expected tax expense (computed by applying the applicable U.S. Federal corporate income tax rate to income before income taxes) as follows:
| | | | | | | | | | | | | | | | | |
| For the years ended December 31, | 2022 | | 2021 | | 2020 |
| Expected tax expense | $ | 9,951,000 | | | $ | 9,222,000 | | | $ | 6,773,000 | |
| Non-taxable income | (1,756,000) | | | (1,833,000) | | | (1,808,000) | |
| State franchise tax, net of federal tax benefit | 483,000 | | | 444,000 | | | 348,000 | |
| Equity compensation | (54,000) | | | (41,000) | | | (43,000) | |
| Tax credits, net of amortization | (203,000) | | | (150,000) | | | (144,000) | |
| | | | | |
| Other | (25,000) | | | 2,000 | | | (5,000) | |
| $ | 8,396,000 | | | $ | 7,644,000 | | | $ | 5,121,000 | |
Deferred tax assets and liabilities are classified in other assets and other liabilities in the consolidated balance sheets. No valuation allowance is deemed necessary for the deferred tax asset. Items that give rise to the deferred income tax assets and liabilities and the tax effect of each at December 31, 2022 and 2021 are as follows:
| | | | | | | | | | | |
| | 2022 | | 2021 |
| Allowance for loan losses | $ | 3,512,000 | | | $ | 3,259,000 | |
| | | |
| Accrued pension and post-retirement | 828,000 | | | 887,000 | |
| Unrealized loss on securities available for sale | 11,887,000 | | | 457,000 | |
| | | |
| Unrealized loss on derivative instruments | 1,031,000 | | | 544,000 | |
| Unrealized loss on securities transferred from available for sale to held to maturity | 17,000 | | | 23,000 | |
| | | |
| Restricted stock grants | 320,000 | | | 308,000 | |
| Core deposit intangible | 34,000 | | | 29,000 | |
| Investment in flow through entities | 87,000 | | | 79,000 | |
| Other assets | 41,000 | | | 35,000 | |
| Total deferred tax asset | 17,757,000 | | | 5,621,000 | |
| Net deferred loan costs | (2,285,000) | | | (2,055,000) | |
| Depreciation | (2,272,000) | | | (2,334,000) | |
| | | |
| Goodwill | (267,000) | | | (214,000) | |
| Mortgage servicing rights | (524,000) | | | (561,000) | |
| Unrealized gain on derivative instruments | (1,176,000) | | | (544,000) | |
| | | |
| | | |
| Prepaid expense | (252,000) | | | (295,000) | |
| Total deferred tax liability | (6,776,000) | | | (6,003,000) | |
| Net deferred tax asset (liability) | $ | 10,981,000 | | | $ | (382,000) | |
At December 31, 2022 and 2021, the Company held investments in four limited partnerships with related low income housing tax credits. The tax credits from the investments are estimated at $354,000 for the years ended December 31, 2022 and 2021, and are recorded as a reduction of income tax expense. Amortization of the investment in the limited partnership totaled $305,000 and $309,000 for the years ended December 31, 2022 and 2021, respectively, and is recognized as a component of income tax expense in the consolidated statements of income. The carrying value of these investments was $1,448,000 at December 31, 2022 and
The First Bancorp - 2022 Form 10-K - Page 87
$1,753,000 at December 31, 2021, which is comprised of the Company's equity investment in the limited partnerships, and is recorded in other assets.
FASB ASC Topic 740, "Income Taxes," defines the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company's financial statements. Topic 740 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service ("IRS") for the years ended December 31, 2019 through 2022.
Note 10. Certificates of Deposit
The following table represents the breakdown of certificates of deposit at December 31, 2022 and 2021:
| | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
| Certificates of deposit < $100,000 | $ | 489,793,000 | | | $ | 252,568,000 | |
| Certificates $100,000 to $250,000 | 259,614,000 | | | 258,211,000 | |
| Certificates $250,000 and over | 118,264,000 | | | 55,426,000 | |
| | $ | 867,671,000 | | | $ | 566,205,000 | |
At December 31, 2022, the scheduled maturities of certificates of deposit are as follows:
| | | | | | | | | | | | | | | | | |
| Year of Maturity | Less than $100,000 | | $100,000 and Greater | | All Certificates of Deposit |
| 2023 | $ | 293,740,000 | | | $ | 247,466,000 | | | $ | 541,206,000 | |
| 2024 | 90,083,000 | | | 105,165,000 | | | 195,248,000 | |
| 2025 | 63,551,000 | | | 8,997,000 | | | 72,548,000 | |
| 2026 | 38,396,000 | | | 9,708,000 | | | 48,104,000 | |
| 2027 | 3,949,000 | | | 6,542,000 | | | 10,491,000 | |
| 2028 and thereafter | 74,000 | | | — | | | 74,000 | |
| | | | | |
| $ | 489,793,000 | | | $ | 377,878,000 | | | $ | 867,671,000 | |
Interest on certificates of deposit of $100,000 or more was $4,058,000, $2,462,000, and $5,327,000 in 2022, 2021 and 2020, respectively.
The First Bancorp - 2022 Form 10-K - Page 88
Note 11. Borrowed Funds
Borrowed funds may consist of Discount Window borrowings from the FRB, advances from the FHLB and securities sold under agreements to repurchase with municipal and commercial customers. Pursuant to collateral agreements, FHLB advances are collateralized by all stock in FHLB, qualifying first mortgage loans, U.S. Government and Agency securities not pledged to others, and funds on deposit with FHLB. All FHLB advances as of December 31, 2022 had fixed rates of interest until their respective maturity dates. Securities sold under agreements to repurchase include U.S. agencies securities and other securities. Repurchase agreements have maturity dates ranging from one to three days. The Bank also has in place $76,000,000 in credit lines with correspondent banks and a credit facility of $158,000,000 with the Federal Reserve Bank of Boston using commercial and home equity loans as collateral. Of the correspondent bank and FRB credit lines, none were in use as of December 31, 2022.
Borrowed funds at December 31, 2022 and 2021 have the following range of interest rates and maturity dates:
| | | | | | | | |
| As of December 31, 2022 | | |
| Federal Home Loan Bank Advances | | |
| 2023 | 4.26% - 4.38% | $ | 38,990,000 | |
| 2024 | 0.00% | 84,000 | |
| 2025 | 0.00% | — | |
| 2026 | 0.00% | — | |
| 2027 and thereafter | 0.00% | — | |
| | |
| | 39,074,000 | |
| Repurchase agreements | | |
| Municipal and commercial customers | 0.05% - 3.55% | 64,409,000 | |
| | $ | 103,483,000 | |
| | | | | | | | |
| As of December 31, 2021 | | |
| Federal Home Loan Bank Advances and Federal Reserve Bank Borrowings | | |
| 2022 | 0.00% | $ | — | |
| 2023 | 0.00% | — | |
| 2024 | 0.00% | 90,000 | |
| 2025 | 1.35% - 1.40% | 55,000,000 | |
| 2026 and thereafter | 0.00% | — | |
| | |
| | 55,090,000 | |
| Repurchase agreements | | |
| Municipal and commercial customers | 0.05% - 2.00% | 81,252,000 | |
| | $ | 136,342,000 | |
Note 12. Employee Benefit Plans
401(k) Plan
The Bank has a defined contribution plan available to substantially all employees who have completed three months of service. Employees may contribute up to Internal Revenue Service determined limits and the Bank may provide a match to employee contributions not to exceed 3.0% of compensation depending on contribution level. The Plan is a safe harbor plan whereby the Bank also contributes a minimum 3.0% of annual compensation to the plan for all eligible employees. The expense related to the 401(k) plan was $977,000, $775,000, and $981,000 in 2022, 2021, and 2020, respectively.
The First Bancorp - 2022 Form 10-K - Page 89
Deferred Compensation and Supplemental Retirement Plan
The Bank also provides unfunded supplemental retirement benefits for certain officers, payable in installments over 20 years commencing upon retirement or death. The agreements consist of individual contracts with differing characteristics that, when taken together, do not constitute a post-retirement plan. There are no active officers eligible for these benefits. The costs for these benefits are recognized over the service periods of the participating officers in accordance with FASB ASC Topic 712, "Compensation – Nonretirement Postemployment Benefits". The expense of these supplemental plans was $308,000 in 2022, $167,000 in 2021, and $450,000 in 2020. As of December 31, 2022 and 2021, the accrued liability of these plans was $2,893,000 and $2,872,000, respectively, and is recorded in other liabilities.
Postretirement Benefit Plans
The Bank sponsors two postretirement benefit plans. One plan currently provides a subsidy for health insurance premiums to certain retired employees; these subsidies are based on years of service and range between $40 and $1,200 per month per person. The other plan provides life insurance coverage to certain retired employees and health insurance for retired directors. None of these plans are prefunded. The Company utilizes FASB ASC Topic 712 to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in the funded status in the year in which the changes occur through comprehensive income (loss).
The following table sets forth the accumulated post-retirement benefit obligation and funded status:
| | | | | | | | | | | | | | | | | |
| At December 31, | 2022 | | 2021 | | 2020 |
| Change in benefit obligations | | | | | |
| Benefit obligation at beginning of year: | $ | 1,353,000 | | | $ | 1,523,000 | | | $ | 1,581,000 | |
| | | | | |
| Interest cost | 33,000 | | | 29,000 | | | 46,000 | |
| Benefits paid | (93,000) | | | (93,000) | | | (97,000) | |
| Actuarial gain | (243,000) | | | (106,000) | | | (7,000) | |
| Benefit obligation at end of year: | $ | 1,050,000 | | | $ | 1,353,000 | | | $ | 1,523,000 | |
| Funded status | | | | | |
| Benefit obligation at end of year | $ | (1,050,000) | | | $ | (1,353,000) | | | $ | (1,523,000) | |
| Unamortized gain | (345,000) | | | (133,000) | | | (35,000) | |
| | | | | |
| Accrued benefit cost | $ | (1,395,000) | | | $ | (1,486,000) | | | $ | (1,558,000) | |
| Weighted average discount rate as of December 31 | 4.75 | % | | 2.50 | % | | 2.00 | % |
The following table sets forth the net periodic benefit cost:
| | | | | | | | | | | | | | | | | |
| For the years ended December 31, | 2022 | | 2021 | | 2020 |
| Components of net periodic benefit cost | | | | | |
| | | | | |
| Interest cost | $ | 33,000 | | | $ | 29,000 | | | $ | 46,000 | |
| | | | | |
| | | | | |
| Other settlement income | (31,000) | | | (9,000) | | | (2,000) | |
| Net periodic benefit cost | $ | 2,000 | | | $ | 20,000 | | | $ | 44,000 | |
| Weighted average discount rate for net periodic cost | 2.50 | % | | 2.00 | % | | 3.00 | % |
The measurement date for benefit obligations was as of year-end for all years presented. The estimated amount of benefits to be paid in 2023 is $88,000. For years ending 2024 through 2027, the estimated amount of benefits to be paid is $97,000, $95,000, $93,000 and $90,000, respectively, and the total estimated amount of benefits to be paid for years ended 2028 through 2031 is $406,000. Plan expense for 2023 is estimated to be $19,000.
The First Bancorp - 2022 Form 10-K - Page 90
In accordance with FASB ASC Topic 715, "Compensation – Retirement Benefits", amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income (loss) are as follows:
| | | | | | | | | | | | | | | | | |
| At December 31, | 2022 | | 2021 | | Portion to Be Recognized in
Income in 2023 |
| Unamortized net actuarial gain | $ | 345,000 | | | $ | 133,000 | | | $ | — | |
| | | | | |
| | | | | |
| Deferred tax expense at 21% | (72,000) | | | (28,000) | | | — | |
| | | | | |
| Net unrecognized post-retirement benefits included in accumulated other comprehensive income | $ | 273,000 | | | $ | 105,000 | | | $ | — | |
Note 13. Other Comprehensive Income (Loss)
The following table summarizes activity in the unrealized gain or loss on available for sale securities included in other comprehensive income (loss) for the years ended December 31, 2022, 2021 and 2020.
| | | | | | | | | | | | | | | | | |
| For the years ended December 31, | 2022 | | 2021 | | 2020 |
| Balance at beginning of year | $ | (1,718,000) | | | $ | 5,009,000 | | | $ | 3,657,000 | |
| Unrealized gains (losses) arising during the year | (54,424,000) | | | (8,492,000) | | | 2,866,000 | |
| Reclassification of realized gains during the year | (7,000) | | | (23,000) | | | (1,155,000) | |
| Related deferred taxes | 11,431,000 | | | 1,788,000 | | | (359,000) | |
| | | | | |
| Net change | (43,000,000) | | | (6,727,000) | | | 1,352,000 | |
| Balance at end of year | $ | (44,718,000) | | | $ | (1,718,000) | | | $ | 5,009,000 | |
The reclassification of realized gains is included in the net securities gains line of the consolidated statements of income and comprehensive income and the tax effect is included in the income tax expense line of the same statement.
The following table summarizes activity in the unrealized loss on securities transferred from available for sale to held to maturity included in other comprehensive income (loss) for the years ended December 31, 2022, 2021, and 2020.
| | | | | | | | | | | |
| For the years ended December 31, | 2022 | 2021 | 2020 |
| Balance at beginning of year | $ | (87,000) | | $ | (133,000) | | $ | (182,000) | |
| | | |
| Amortization of net unrealized gains | 29,000 | | 58,000 | | 62,000 | |
| Related deferred taxes | (6,000) | | (12,000) | | (13,000) | |
| | | |
| Net change | 23,000 | | 46,000 | | 49,000 | |
| Balance at end of year | $ | (64,000) | | $ | (87,000) | | $ | (133,000) | |
The following table represents the effect of the Company's derivative financial instruments included in other comprehensive income (loss) for the years ended December 31, 2022, 2021, and 2020.
| | | | | | | | | | | |
For the years ended December 31, | 2022 | 2021 | 2020 |
| Balance at beginning of year | $ | — | | $ | (4,932,000) | | $ | 97,000 | |
| Unrealized gains (losses) on cash flow hedging derivatives arising during the year | 689,000 | | 6,243,000 | | (6,366,000) | |
| | | |
| Related deferred taxes | (145,000) | | (1,311,000) | | 1,337,000 | |
| | | |
| Net change | 544,000 | | 4,932,000 | | (5,029,000) | |
| Balance at end of year | $ | 544,000 | | $ | — | | $ | (4,932,000) | |
The First Bancorp - 2022 Form 10-K - Page 91
The following table summarizes activity in the unrealized gain or loss on postretirement benefits included in other comprehensive income (loss) for the years ended December 31, 2022, 2021, and 2020:
| | | | | | | | | | | | | | | | | |
| For the years ended December 31, | 2022 | | 2021 | | 2020 |
| Unrecognized postretirement benefits at beginning of year | $ | 105,000 | | | $ | 28,000 | | | $ | 24,000 | |
| | | | | |
| Change in unamortized net actuarial gain | 212,000 | | | 98,000 | | | 5,000 | |
| Related deferred taxes | (44,000) | | | (21,000) | | | (1,000) | |
| | | | | |
| Net change | 168,000 | | | 77,000 | | | 4,000 | |
| Unrecognized postretirement benefits at end of year | $ | 273,000 | | | $ | 105,000 | | | $ | 28,000 | |
The reclassification of accumulated losses is a component of net periodic benefit cost (see Note 12) and the income tax effect is included in the income tax expense line of the consolidated statements of income and comprehensive income.
The First Bancorp - 2022 Form 10-K - Page 92
Note 14 - Financial Derivative Instruments
The Bank uses derivative financial instruments for risk management purposes and not for trading or speculative purposes. As part of its overall asset and liability management strategy, the Bank periodically uses derivative instruments to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The Bank’s interest rate risk management strategy involves modifying the re-pricing characteristics of certain assets or liabilities so that changes in interest rates do not have a significant effect on net interest income.
The details of the interest rate swap agreements are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | December 31, 2022 | December 31, 2021 |
| Effective Date | Maturity Date | Variable Index Received | Fixed Rate Paid | Presentation on Consolidated Balance Sheet | Notional Amount | Fair Value | Notional Amount | Fair Value |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| 4/27/2022 | 10/27/2023 | USD-SOFR-COMPOUND | 2.498% | Other Assets | $ | 10,000,000 | | $ | 187,000 | | $ | — | | $ | — | |
| 4/27/2022 | 1/27/2024 | USD-SOFR-COMPOUND | 2.576% | Other Assets | $ | 10,000,000 | | $ | 233,000 | | $ | — | | $ | — | |
| 4/27/2022 | 4/27/2024 | USD-SOFR-COMPOUND | 2.619% | Other Assets | $ | 10,000,000 | | $ | 269,000 | | $ | — | | $ | — | |
| | | | | | $ | 30,000,000 | | $ | 689,000 | | $ | — | | $ | — | |
The Company would reclassify unrealized gains or losses accounted for within accumulated other comprehensive income (loss) into earnings if the interest rate swaps were to become ineffective or the swaps were to terminate. In the fourth quarter 2021, the Bank took advantage of market opportunities to terminate its interest rate swap position in order to de-lever the balance sheet and reset wholesale funding costs. A one-time gain of $336,000 was recognized in non-interest income. Amounts paid or received under the swaps are reported in interest expense in the consolidated statement of income, and in interest paid in the consolidated statement of cash flows.
Customer loan derivatives
The Bank will enter into interest rate swaps with qualified commercial customers. Through these arrangements, the Bank is able to provide a means for a loan customer to obtain a long-term fixed rate, while it simultaneously contracts with an approved, highly-rated, third-party financial institution as counterparty to swap the fixed rate for a variable rate. Such loan level arrangements are not designated as hedges for accounting purposes, and are recorded at fair value in the Company’s consolidated balance sheet.
At December 31, 2022 there were six customer loan swap arrangements in place, detailed below:
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | December 31, 2021 |
| Presentation on Consolidated Balance Sheet | Number of Positions | Notional Amount | Fair Value | Number of Positions | Notional Amount | Fair Value |
| Pay Fixed, Receive Variable | Other Assets | 6 | $ | 37,411,000 | | $ | 4,910,000 | | 3 | $ | 15,765,000 | | $ | 789,000 | |
| Pay Fixed, Receive Variable | Other Liabilities | — | — | | — | | 3 | 24,604,000 | | (1,802,000) | |
| | 6 | 37,411,000 | | 4,910,000 | | 6 | 40,369,000 | | (1,013,000) | |
| Receive Fixed, Pay Variable | Other Assets | — | — | | — | | 3 | 24,604,000 | | 1,802,000 | |
| Receive Fixed, Pay Variable | Other Liabilities | 6 | 37,411,000 | | (4,910,000) | | 3 | 15,765,000 | | (789,000) | |
| | 6 | 37,411,000 | | (4,910,000) | | 6 | 40,369,000 | | 1,013,000 | |
| Total | | 12 | $ | 74,822,000 | | $ | — | | 12 | $ | 80,738,000 | | $ | — | |
Derivative collateral
The Company has entered into a master netting arrangement with its counterparty and settles payments with the counterparty as necessary. The Bank's arrangement with its institutional counterparty requires it to post cash or other assets as collateral for its various swap contracts in a net liability position based on their fair values and the Bank's credit rating or receive cash collateral for contracts in a net asset position as requested. At December 31, 2022, there was no collateral posted on its swap contracts or required amount to be pledged.
The First Bancorp - 2022 Form 10-K - Page 93
Cessation of LIBOR
As discussed in Item 1A Risk Factors, the Company is aware that 1) certain tenors of USD denominated LIBOR indices ceased being published after December 31, 2021, while other tenors are expected to continue being published until June 30, 2023, and 2) use of LIBOR as an index for new contracts was to be discontinued after December 31, 2021. The Federal Reserve formed the ARRC to guide the transition process in the United States. ARRC has issued a number of recommendations including the adoption of the SOFR as a replacement for LIBOR. The International Swap and Derivatives Association ("ISDA"), the organization that oversees and guides swap and derivatives markets and participants, continues to work on transitions and has issued a voluntary fallback protocol for market participants. The Company has adopted SOFR as its replacement reference rate index for new transactions. Each of the customer loan swap contracts the Company has in place as of December 31, 2022 is tied to a LIBOR tenor expected to be published until June 30, 2023. The six customer loan swap contracts shown in the table immediately above have maturity dates of December 19, 2029, August 21, 2030, April 1, 2031, July 1, 2035, October 1, 2035 and October 1, 2039. It is anticipated that necessary actions to amend these legacy contracts to incorporate the new replacement reference rate index will be undertaken prior to June 30, 2023.
The First Bancorp - 2022 Form 10-K - Page 94
Note 15. Common Stock
In 2016, the Company reserved 250,000 shares of its common stock to be made available to directors and employees who elect to participate in the stock purchase or savings and investment plans. As of December 31, 2022, 94,193 shares had been issued pursuant to these plans, leaving 155,807 shares available for future use. The issuance price is based on the market price of the stock at issuance date. Prior to 2016, the Company had reserved 700,000 shares of its common stock to be made available to directors and employees who elected to participate in the stock purchase or savings investment plans. Sales of stock to directors and employees amounted to 14,990 shares in 2022, 12,267 shares in 2021, and 14,117 shares in 2020.
In 2001, the Company established a dividend reinvestment plan to allow shareholders to use their cash dividends for the automatic purchase of shares in the Company. The plan was amended in 2018 to reflect changes in its administration. When the plan was established, 600,000 shares were registered with the Securities and Exchange Commission, and as of December 31, 2022, 316,688 shares have been issued, leaving 283,312 shares available for future issuance. Participation in this plan is optional and at the individual discretion of each shareholder. Shares are purchased for the plan from the Company at a price per share equal to the average of the daily bid and asked prices reported on the NASDAQ System for the five trading days immediately preceding, but not including, the dividend payment date. Sales of stock under the dividend reinvestment plan amounted to 11,326 shares in 2022, 11,772 shares in 2021, and 15,064 shares in 2020.
Proceeds from issuances of common stock under these plans totaled $796,000, $689,000 and $670,000 for the years ended December 31, 2022, 2021 and 2020, respectively.
Note 16. Stock Options and Stock-Based Compensation
At the 2010 Annual Meeting, shareholders approved the 2010 Equity Incentive Plan (the "2010 Plan"). The 2010 Plan expired on April 28, 2020, leaving 215,513 shares not issued. At the 2020 Annual Meeting, shareholders approved the 2020 Equity Incentive Plan (the "2020 Plan"). The 2020 Plan reserves 400,000 shares of common stock for issuance in connection with stock options, restricted stock awards and other equity based awards to attract and retain the best available personnel, provide additional incentive to officers, employees and non-employee Directors and promote the success of the Company. Such grants and awards will be structured in a manner that does not encourage the recipients to expose the Company to undue or inappropriate risk. Options issued under the 2020 Plan qualify for treatment as incentive stock options for purposes of Section 422 of the Internal Revenue Code. Other compensation under the 2020 Plan will qualify as performance-based for purposes of Section 162(m) of the Internal Revenue Code, and will satisfy NASDAQ guidelines relating to equity compensation.
As of December 31, 2022, 184,487 shares of restricted stock had been granted under the 2010 Plan and 69,184 shares under the 2020 Plan, of which 81,777 shares remain restricted as of December 31, 2022 as detailed in the following table:
| | | | | | | | | | | |
Year
Granted | Vesting Term
(In Years) | Shares | Remaining Term
(In Years) |
| 2018 | 5.0 | 6,184 | | 0.0 |
| 2020 | 3.0 | 20,342 | | 0.1 |
| 2021 | 3.0 | 27,172 | | 1.1 |
| 2022 | 3.0 | 24,829 | | 2.1 |
| 2022 | 2.5 | 1,250 | | 2.1 |
| 2022 | 1.0 | 2,000 | | 0.1 |
| | 81,777 | | 1.1 |
The compensation cost related to these restricted stock grants was $2,319,000 and will be recognized over the vesting terms of each grant. In 2022, $809,000 of expense was recognized for these restricted shares, leaving $796,000 in unrecognized expense as of December 31, 2022. In 2021, $856,000 of expense was recognized for restricted shares, leaving $671,000 in unrecognized expense as of December 31, 2021.
The First Bancorp - 2022 Form 10-K - Page 95
Note 17. Earnings Per Share
The following table provides detail for basic earnings per share (EPS) and diluted (EPS) for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
| Income
(Numerator) | | Shares
(Denominator) | | Per-Share
Amount |
For the year ended December 31, 2022 | | | | | |
| Net income as reported | $ | 38,990,000 | | | | | |
| | | | | |
| Basic EPS: Income available to common shareholders | 38,990,000 | | | 10,931,328 | | | $ | 3.56 | |
| Effect of dilutive securities: restricted stock | | | 99,330 | | | |
| Diluted EPS: Income available to common shareholders plus assumed conversions | $ | 38,990,000 | | | 11,030,658 | | | $ | 3.53 | |
For the year ended December 31, 2021 | | | | | |
| Net income as reported | $ | 36,269,000 | | | | | |
| | | | | |
| Basic EPS: Income available to common shareholders | 36,269,000 | | | 10,903,844 | | | $ | 3.33 | |
| Effect of dilutive securities: restricted stock | | | 83,335 | | | |
| Diluted EPS: Income available to common shareholders plus assumed conversions | $ | 36,269,000 | | | 10,987,179 | | | $ | 3.30 | |
For the year ended December 31, 2020 | | | | | |
| Net income as reported | $ | 27,129,000 | | | | | |
| | | | | |
| Basic EPS: Income available to common shareholders | 27,129,000 | | | 10,858,606 | | | $ | 2.50 | |
| Effect of dilutive securities: restricted stock | | | 74,212 | | | |
| Diluted EPS: Income available to common shareholders plus assumed conversions | $ | 27,129,000 | | | 10,932,818 | | | $ | 2.48 | |
All EPS calculations have been made using the weighted average number of shares outstanding during the period. The dilutive securities are shares of restricted stock granted to certain key members of Management. The dilutive number of shares has been calculated using the treasury method, assuming that all granted stock was vested at the end of each period.
The First Bancorp - 2022 Form 10-K - Page 96
Note 18. Regulatory Capital Requirements
The ability of the Company to pay cash dividends to its shareholders depends primarily on receipt of dividends from its subsidiary, the Bank. The Bank may pay dividends to its parent out of so much of its net income as the Bank's directors deem appropriate, subject to the limitation that the total of all dividends declared by the Bank in any calendar year may not exceed the total of its net income of that year combined with its retained net income of the preceding two years and subject to minimum regulatory capital requirements. The amount available for dividends in 2023 will be 2023 earnings plus retained earnings of $49,602,000 from 2022 and 2021.
The payment of dividends by the Company is also affected by various regulatory requirements and policies, such as the requirements to maintain adequate capital. In addition, if, in the opinion of the applicable regulatory authority, a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), that authority may require, after notice and hearing, that such bank cease and desist from that practice. The Federal Reserve Bank and the Comptroller of the Currency have each indicated that paying dividends that deplete a bank's capital base to an inadequate level would be an unsafe and unsound banking practice. The Federal Reserve Bank, the Comptroller of the Currency and the Federal Deposit Insurance Corporation have issued policy statements which provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings.
In addition to the effect on the payment of dividends, failure to meet minimum capital requirements can also result in mandatory and discretionary actions by regulators that, if undertaken, could have an impact on the Company's operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measurements of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Financial institution regulators have established guidelines for minimum capital ratios for banks and bank holding companies. The net unrealized gain or loss on securities available for sale is generally not included in computing regulatory capital. The Company maintains its capital in accordance with the Basel III regulatory capital framework as approved by the federal banking agencies. To avoid limitations on capital distributions, including dividend payments, the Company must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. As of December 31, 2022, the Company's capital conservation buffer was 5.58%, and met the minimum requirement of 2.5%.
As of December 31, 2022, the most recent notification from the Office of the Comptroller of the Currency classified the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since this notification that Management believes have changed the Bank's category.
The First Bancorp - 2022 Form 10-K - Page 97
The actual and minimum capital amounts and ratios for the Bank are presented in the following table:
| | | | | | | | | | | | | | | | | |
| Actual | | For capital
adequacy
purposes | | To be well-capitalized
under prompt corrective
action provisions |
As of December 31, 2022 | | | | | |
| Tier 2 capital to | $ | 257,671,000 | | | $ | 152,467,000 | | | $ | 190,583,000 | |
| risk-weighted assets | 13.52 | % | | 8.00 | % | | 10.00 | % |
| Tier 1 capital to | $ | 240,848,000 | | | $ | 114,350,000 | | | $ | 152,467,000 | |
| risk-weighted assets | 12.64 | % | | 6.00 | % | | 8.00 | % |
| Common equity Tier 1 capital to | $ | 240,848,000 | | | $ | 85,762,000 | | | $ | 123,879,000 | |
| risk-weighted assets | 12.64 | % | | 4.50 | % | | 6.50 | % |
| Tier 1 capital to | $ | 240,848,000 | | | $ | 109,451,000 | | | $ | 136,814,000 | |
| average assets | 8.81 | % | | 4.00 | % | | 5.00 | % |
As of December 31, 2021 | | | | | |
| Tier 2 capital to | $ | 230,546,000 | | | $ | 130,118,000 | | | $ | 162,647,000 | |
| risk-weighted assets | 14.17 | % | | 8.00 | % | | 10.00 | % |
| Tier 1 capital to | $ | 214,925,000 | | | $ | 97,588,000 | | | $ | 130,118,000 | |
| risk-weighted assets | 13.21 | % | | 6.00 | % | | 8.00 | % |
| Common equity Tier 1 capital to | $ | 214,925,000 | | | $ | 73,191,000 | | | $ | 105,720,000 | |
| risk-weighted assets | 13.21 | % | | 4.50 | % | | 6.50 | % |
| Tier 1 capital to | $ | 214,925,000 | | | $ | 100,461,000 | | | $ | 125,576,000 | |
| average assets | 8.56 | % | | 4.00 | % | | 5.00 | % |
The First Bancorp - 2022 Form 10-K - Page 98
The actual and minimum capital amounts and ratios for the Company, on a consolidated basis, are presented in the following table:
| | | | | | | | | | | | | | | | | |
| Actual | | For capital
adequacy
purposes | | To be well-capitalized
under prompt corrective
action provisions |
As of December 31, 2022 | | | | | |
| Tier 2 capital to | $ | 258,855,000 | | | $ | 152,467,000 | | | n/a |
| risk-weighted assets | 13.58 | % | | 8.00 | % | | n/a |
| Tier 1 capital to | $ | 242,032,000 | | | $ | 114,350,000 | | | n/a |
| risk-weighted assets | 12.70 | % | | 6.00 | % | | n/a |
| Common equity Tier 1 capital to | $ | 242,032,000 | | | $ | 85,762,000 | | | n/a |
| risk-weighted assets | 12.70 | % | | 4.50 | % | | n/a |
| Tier 1 capital to | $ | 242,032,000 | | | $ | 107,442,000 | | | n/a |
| average assets | 9.01 | % | | 4.00 | % | | n/a |
As of December 31, 2021 | | | | | |
| Tier 2 capital to | $ | 232,053,000 | | | $ | 130,118,000 | | | n/a |
| risk-weighted assets | 14.27 | % | | 8.00 | % | | n/a |
| Tier 1 capital to | $ | 216,432,000 | | | $ | 97,588,000 | | | n/a |
| risk-weighted assets | 13.31 | % | | 6.00 | % | | n/a |
| Common equity Tier 1 capital to | $ | 216,432,000 | | | $ | 73,191,000 | | | n/a |
| risk-weighted assets | 13.31 | % | | 4.50 | % | | n/a |
| Tier 1 capital to | $ | 216,432,000 | | | $ | 100,312,000 | | | n/a |
| average assets | 8.63 | % | | 4.00 | % | | n/a |
Note 19. Off-Balance-Sheet Financial Instruments and Concentrations of Credit Risk
The Bank is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to originate loans, commitments for unused lines of credit, and standby letters of credit. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.
Commitments for unused lines of credit are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on Management's credit evaluation of the borrower. The Bank did not incur any losses on its commitments in 2022, 2021 or 2020.
Standby letters of credit are conditional commitments issued by the Bank to guarantee a customer's performance to a third party, with the customer being obligated to repay (with interest) any amounts paid out by the Bank under the letter of credit. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.
The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
The First Bancorp - 2022 Form 10-K - Page 99
At December 31, 2022 and 2021, the Bank had the following off-balance-sheet financial instruments, whose contract amounts represent credit risk:
| | | | | | | | | | | |
| As of December 31, | 2022 | | 2021 |
| Unused lines, collateralized by residential real estate | $ | 105,637,000 | | | $ | 94,650,000 | |
| Other unused commitments | 113,175,000 | | | 121,331,000 | |
| Standby letters of credit | 5,063,000 | | | 4,425,000 | |
| Commitments to extend credit | 100,508,000 | | | 143,498,000 | |
| Total | $ | 324,383,000 | | | $ | 363,904,000 | |
The Bank grants residential, commercial and consumer loans to customers principally located in the Mid-Coast and Down East regions of Maine. Collateral on these loans typically consists of residential or commercial real estate, or personal property. Although the loan portfolio is diversified, a substantial portion of borrowers' ability to honor their contracts is dependent on the economic conditions in the area, especially in the real estate sector.
Derivative Financial Instruments Designated as Hedges
As part of its overall asset and liability management strategy, the Bank periodically uses derivative instruments to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The Bank's interest rate risk management strategy involves modifying the re-pricing characteristics of certain assets and/or liabilities so that change in interest rates does not have a significant adverse effect on net interest income. Derivative instruments that Management periodically uses as part of its interest rate risk management strategy may include interest rate swap agreements, interest rate floor agreements, and interest rate cap agreements.
The Bank also enters into swap arrangements with qualified loan customers as a means to provide these customers with access to long-term fixed interest rates for borrowings, and simultaneously enters into a swap contract with an approved third- party financial institution. The terms of the two contracts are designed to offset one another resulting in their being neither a net gain or a loss. The notional amounts of the financial derivative instruments do not represent exposure to credit loss. The Bank is exposed to credit loss only to the extent that either counter-party defaults in its responsibility to pay interest under the terms of the agreements. Credit risk is mitigated by prudent underwriting of the loan customer and financial institution counterparties. As of December 31, 2022, the Bank had six customer loan swap contracts in place with a total notional value of $74,822,000.
Note 20. Fair Value Disclosures
Certain assets and liabilities are recorded at fair value to provide additional insight into the Company's quality of earnings. Some of these assets and liabilities are measured on a recurring basis while others are measured on a nonrecurring basis, with the determination based upon applicable existing accounting pronouncements. For example, securities available for sale are recorded at fair value on a recurring basis. Other assets, such as mortgage servicing rights, loans held for sale, and impaired loans, are recorded at fair value on a nonrecurring basis using the lower of cost or market methodology to determine impairment of individual assets. The Company groups assets and liabilities which are recorded at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. A financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement (with level 1 considered highest and level 3 considered lowest). A brief description of each level follows.
Level 1 – Valuation is based upon quoted prices for identical instruments in active markets.
Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates that market participants would use in pricing the asset or liability. Valuation includes use of discounted cash flow models and similar techniques.
The fair value methods and assumptions for the Company's financial instruments and other assets measured at fair value are set forth below.
The First Bancorp - 2022 Form 10-K - Page 100
Investment Securities
The fair values of investment securities are estimated by independent providers using a market approach with observable inputs, including matrix pricing and recent transactions. In obtaining such valuation information from third parties, the Company has evaluated their valuation methodologies used to develop the fair values in order to determine whether the valuations are representative of an exit price in the Company's principal markets. The Company's principal markets for its securities portfolios are the secondary institutional markets, with an exit price that is predominantly reflective of bid level pricing in those markets. Fair values are calculated based on the value of one unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, or estimated transaction costs. If these considerations had been incorporated into the fair value estimates, the aggregate fair value could have been changed. The carrying values of restricted equity securities approximate fair values. As such, the Company classifies investment securities as Level 2.
Loans
Fair values are estimated for portfolios of loans are based on an exit pricing notion. The fair values of performing loans are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest risk inherent in the loan. The estimates of maturity are based on the Company's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions, and the effects of estimated prepayments. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. Management has made estimates of fair value using discount rates that it believes to be reasonable. However, because there is no market for many of these financial instruments, Management has no basis to determine whether the fair value presented above would be indicative of the value negotiated in an actual sale. As such, the Company classifies loans as Level 3, except for certain collateral-dependent impaired loans. Fair values of impaired loans are based on estimated cash flows and are discounted using a rate commensurate with the risk associated with the estimated cash flows, or if collateral dependent, discounted to the appraised value of the collateral as determined by reference to sale prices of similar properties, less costs to sell. As such, the Company classifies collateral dependent impaired loans for which a specific reserve results in a fair value measure as Level 2. All other impaired loans are classified as Level 3.
Other Real Estate Owned
Real estate acquired through foreclosure is initially recorded at fair value. The fair value of other real estate owned is based on property appraisals and an analysis of sales prices of similar properties currently available. As such, the Company records other real estate owned as nonrecurring Level 2.
Mortgage Servicing Rights
Mortgage servicing rights represent the value associated with servicing residential mortgage loans. Servicing assets and servicing liabilities are reported using the amortization method and compared to fair value for impairment. In evaluating the fair values of mortgage servicing rights, the Company obtains third party valuations based on loan level data including note rate, type and term of the underlying loans. As such, the Company classifies mortgage servicing rights as Level 2.
Time Deposits
The fair value of maturity deposits is based on the discounted value of contractual cash flows using a replacement cost of funds approach. The discount rate is estimated using the cost of funds borrowing rate in the market. As such, the Company classifies deposits as Level 2.
Borrowed Funds
The fair value of borrowed funds is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently available for borrowings of similar remaining maturities. As such, the Company classifies borrowed funds as Level 2.
Derivatives
The fair value of interest rate swaps is determined using inputs that are observable in the market place obtained from third parties including yield curves, publicly available volatilities, and floating indexes and, accordingly, are classified as Level 2 inputs. The credit value adjustments associated with derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. As of December 31, 2022 and 2021, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives due to collateral postings.
Customer Loan Derivatives
The valuation of the Company’s customer loan derivatives is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The Company incorporates credit
The First Bancorp - 2022 Form 10-K - Page 101
valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of master netting arrangements and any applicable credit enhancements, such as collateral postings.
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These values do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on Management's judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial instruments include the deferred tax asset, premises and equipment, and other real estate owned. In addition, tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The following tables present the balances of assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Securities available for sale | | | | | | | |
| U.S. Government-sponsored agencies | $ | — | | | $ | 19,147,000 | | | $ | — | | | $ | 19,147,000 | |
| Mortgage-backed securities | — | | | 228,676,000 | | | — | | | 228,676,000 | |
| State and political subdivisions | — | | | 33,191,000 | | | — | | | 33,191,000 | |
| Asset-backed securities | — | | | 3,495,000 | | | — | | | 3,495,000 | |
| | | | | | | |
| Total securities available for sale | — | | | 284,509,000 | | | — | | | 284,509,000 | |
| Interest rate swap agreements | — | | | 689,000 | | | — | | | 689,000 | |
| Customer loan interest swap agreements | — | | | 4,910,000 | | | — | | | 4,910,000 | |
| Total interest rate swap agreements | — | | | 5,599,000 | | | — | | | 5,599,000 | |
| Total assets | $ | — | | | $ | 290,108,000 | | | $ | — | | | $ | 290,108,000 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | |
| Customer loan interest swap agreements | $ | — | | | $ | 4,910,000 | | | $ | — | | | $ | 4,910,000 | |
| Total liabilities | $ | — | | | $ | 4,910,000 | | | $ | — | | | $ | 4,910,000 | |
The First Bancorp - 2022 Form 10-K - Page 102
| | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Securities available for sale | | | | | | | |
| U.S. Government-sponsored agencies | $ | — | | | $ | 21,899,000 | | | $ | — | | | $ | 21,899,000 | |
| Mortgage-backed securities | — | | | 254,900,000 | | | — | | | 254,900,000 | |
| State and political subdivisions | — | | | 39,122,000 | | | — | | | 39,122,000 | |
| Asset-backed securities | — | | | 4,645,000 | | | — | | | 4,645,000 | |
| | | | | | | |
| Total securities available for sale | — | | | 320,566,000 | | | — | | | 320,566,000 | |
| | | | | | | |
| Customer loan interest swap agreements | — | | | 2,591,000 | | | — | | | 2,591,000 | |
| | | | | | | |
| Total assets | $ | — | | | $ | 323,157,000 | | | $ | — | | | $ | 323,157,000 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | |
| Customer loan interest swap agreements | $ | — | | | $ | 2,591,000 | | | $ | — | | | $ | 2,591,000 | |
| Total liabilities | $ | — | | | $ | 2,591,000 | | | $ | — | | | $ | 2,591,000 | |
Assets and Liabilities Recorded at Fair Value on a Non-Recurring Basis
The following tables present assets measured at fair value on a nonrecurring basis that have had a fair value adjustment since their initial recognition. Mortgage servicing rights are presented net of an impairment reserve of $26,000 at December 31, 2021. There was no impairment reserve as of December 31, 2022. The Company had no other real estate owned or related allowance at December 31, 2022 and 2021. Only collateral-dependent impaired loans with a related specific allowance for loan losses or a partial charge off are included in impaired loans for purposes of fair value disclosures. Impaired loans below are presented net of specific allowances of $135,000 and $441,000 at December 31, 2022 and 2021, respectively.
| | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Mortgage servicing rights | $ | — | | | $ | 3,734,000 | | | $ | — | | | $ | 3,734,000 | |
| | | | | | | |
| | | | | | | |
| Impaired loans | — | | | 20,000 | | | — | | | 20,000 | |
| Total assets | $ | — | | | $ | 3,754,000 | | | $ | — | | | $ | 3,754,000 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| Mortgage servicing rights | $ | — | | | $ | 3,041,000 | | | $ | — | | | $ | 3,041,000 | |
| | | | | | | |
| | | | | | | |
| Impaired loans | — | | | 224,000 | | | — | | | 224,000 | |
| Total assets | $ | — | | | $ | 3,265,000 | | | $ | — | | | $ | 3,265,000 | |
Fair Value of Financial Instruments
FASB ASC Topic 825, "Financial Instruments," requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet, if the fair values can be reasonably determined. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques using observable inputs when available. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. FASB ASC Topic 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
This summary excludes financial assets and liabilities for which carrying value approximates fair values and financial instruments that are recorded at fair value on a recurring basis. Financial instruments for which carrying values approximate fair value include cash equivalents, interest-bearing deposits in other banks, demand, NOW, savings and money market deposits. The estimated fair
The First Bancorp - 2022 Form 10-K - Page 103
value of demand, NOW, savings and money market deposits is the amount payable on demand at the reporting date. Carrying value is used because the accounts have no stated maturity and the customer has the ability to withdraw funds immediately.
The carrying amounts and estimated fair values for financial instruments as of December 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Carrying | | Estimated | | | | | | |
| As of December 31, 2022 | value | | fair value | | Level 1 | | Level 2 | | Level 3 |
| Financial assets | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Securities to be held to maturity | $ | 393,896,000 | | | $ | 339,011,000 | | | $ | — | | | $ | 339,011,000 | | | $ | — | |
| | | | | | | | | |
| | | | | | | | | |
| Loans (net of allowance for loan losses) | | | | | | | | | |
| Commercial | | | | | | | | | |
| Real estate | 692,541,000 | | | 669,752,000 | | | — | | | — | | | 669,752,000 | |
| Construction | 92,994,000 | | | 89,934,000 | | | — | | | — | | | 89,934,000 | |
| Other | 315,917,000 | | | 312,219,000 | | | — | | | 20,000 | | | 312,199,000 | |
| Municipal | 40,439,000 | | | 38,069,000 | | | — | | | — | | | 38,069,000 | |
| Residential | | | | | | | | | |
| Term | 611,350,000 | | | 558,274,000 | | | — | | | — | | | 558,274,000 | |
| Construction | 49,686,000 | | | 44,410,000 | | | — | | | — | | | 44,410,000 | |
| Home equity line of credit | 75,416,000 | | | 78,878,000 | | | — | | | — | | | 78,878,000 | |
| Consumer | 19,883,000 | | | 18,142,000 | | | — | | | — | | | 18,142,000 | |
| Total loans | 1,898,226,000 | | | 1,809,678,000 | | | — | | | 20,000 | | | 1,809,658,000 | |
| Mortgage servicing rights | 2,493,000 | | | 3,734,000 | | | — | | | 3,734,000 | | | — | |
| | | | | | | | | |
| | | | | | | | | |
| Financial liabilities | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Local certificates of deposit | $ | 291,152,000 | | | $ | 275,658,000 | | | $ | — | | | $ | 275,658,000 | | | $ | — | |
| National certificates of deposit | 576,519,000 | | | 569,883,000 | | | — | | | 569,883,000 | | | — | |
| Total certificates of deposit | 867,671,000 | | | 845,541,000 | | | — | | | 845,541,000 | | | — | |
| Repurchase agreements | 64,409,000 | | | 64,289,000 | | | — | | | 64,289,000 | | | — | |
| Other borrowed funds | 39,074,000 | | | 39,064,000 | | | — | | | 39,064,000 | | | — | |
| Total borrowed funds | 103,483,000 | | | 103,353,000 | | | — | | | 103,353,000 | | | — | |
| | | | | | | | | |
| | | | | | | | | |
The First Bancorp - 2022 Form 10-K - Page 104
The carrying amounts and estimated fair values for financial instruments as of December 31, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Carrying | | Estimated | | | | | | |
| As of December 31, 2021 | value | | fair value | | Level 1 | | Level 2 | | Level 3 |
| Financial assets | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Securities to be held to maturity | $ | 370,040,000 | | | $ | 375,327,000 | | | $ | — | | | $ | 375,327,000 | | | $ | — | |
| | | | | | | | | |
| | | | | | | | | |
| Loans (net of allowance for loan losses) | | | | | | | | | |
| Commercial | | | | | | | | | |
| Real estate | 570,134,000 | | | 570,187,000 | | | — | | | — | | | 570,187,000 | |
| Construction | 78,522,000 | | | 78,529,000 | | | — | | | — | | | 78,529,000 | |
| Other | 261,373,000 | | | 261,759,000 | | | — | | | 5,000 | | | 261,754,000 | |
| Municipal | 48,185,000 | | | 48,634,000 | | | — | | | — | | | 48,634,000 | |
| Residential | | | | | | | | | |
| Term | 548,530,000 | | | 553,098,000 | | | — | | | 219,000 | | | 552,879,000 | |
| Construction | 31,596,000 | | | 31,966,000 | | | — | | | — | | | 31,966,000 | |
| Home equity line of credit | 72,587,000 | | | 72,381,000 | | | — | | | — | | | 72,381,000 | |
| Consumer | 22,035,000 | | | 20,591,000 | | | — | | | — | | | 20,591,000 | |
| Total loans | 1,632,962,000 | | | 1,637,145,000 | | | — | | | 224,000 | | | 1,636,921,000 | |
| Mortgage servicing rights | 2,671,000 | | | 3,041,000 | | | — | | | 3,041,000 | | | — | |
| | | | | | | | | |
| | | | | | | | | |
| Financial liabilities | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Local certificates of deposit | $ | 232,724,000 | | | $ | 231,265,000 | | | $ | — | | | $ | 231,265,000 | | | $ | — | |
| National certificates of deposit | 333,481,000 | | | 337,025,000 | | | — | | | 337,025,000 | | | — | |
| Total certificates of deposit | 566,205,000 | | | 568,290,000 | | | — | | | 568,290,000 | | | — | |
| Repurchase agreements | 81,251,000 | | | 79,065,000 | | | — | | | 79,065,000 | | | — | |
| Other borrowed funds | 55,091,000 | | | 55,998,000 | | | — | | | 55,998,000 | | | — | |
| Total borrowed funds | 136,342,000 | | | 135,063,000 | | | — | | | 135,063,000 | | | — | |
| | | | | | | | | |
Note 21. Other Operating Income and Expense
There were no items within Other Operating Income that totaled more than 1% of revenues. Other operating expense includes the following items greater than 1% of revenues:
| | | | | | | | | | | | | | | | | |
| For the years ended December 31, | 2022 | | 2021 | | 2020 |
| | | | | |
| | | | | |
| | | | | |
| Other operating expense | | | | | |
| Advertising and marketing expense | $ | 1,296,000 | | | $ | 1,181,000 | | | $ | 983,000 | |
| | | | | |
| | | | | |
| ATM and interchange expense | 1,568,000 | | | 1,446,000 | | | 1,253,000 | |
| Swap termination expense | — | | | — | | | 1,756,000 | |
| Other loan expenses | 627,000 | | | 2,198,000 | | | — | |
| | | | | |
Note 22. Legal Contingencies
Various legal claims also arise from time to time in the normal course of business which, in the opinion of Management, will have no material effect on the Company's consolidated financial statements.
Note 23. Reclassifications
Certain items from prior years were reclassified in the financial statements to conform with the current year presentation. These do not have a material impact on the balance sheet or statement of income presentations.
The First Bancorp - 2022 Form 10-K - Page 105
Note 24. Condensed Financial Information of Parent
Condensed financial information for The First Bancorp, Inc. exclusive of its subsidiary is as follows:
Balance Sheets
| | | | | | | | | | | |
| As of December 31, | 2022 | | 2021 |
| Assets | | | |
| Cash and cash equivalents | $ | 879,000 | | | $ | 1,401,000 | |
| Dividends receivable | 3,600,000 | | | 3,200,000 | |
| | | |
| Investment in subsidiary | 200,180,000 | | | 216,591,000 | |
| | | |
| Goodwill | 27,559,000 | | | 27,559,000 | |
| Other assets | 466,000 | | | 431,000 | |
| Total assets | $ | 232,684,000 | | | $ | 249,182,000 | |
| Liabilities and shareholders' equity | | | |
| Dividends payable | $ | 3,755,000 | | | $ | 3,520,000 | |
| Other liabilities | 6,000 | | | 5,000 | |
| Total liabilities | 3,761,000 | | | 3,525,000 | |
| Shareholders' equity | | | |
| | | |
| Common stock | 110,000 | | | 110,000 | |
| Additional paid-in capital | 68,435,000 | | | 66,830,000 | |
| Retained earnings | 160,378,000 | | | 178,717,000 | |
| | | |
| | | |
| | | |
| Total shareholders' equity | 228,923,000 | | | 245,657,000 | |
| Total liabilities and shareholders' equity | $ | 232,684,000 | | | $ | 249,182,000 | |
The First Bancorp - 2022 Form 10-K - Page 106
Statements of Income
| | | | | | | | | | | | | | | | | |
| For the years ended December 31, | 2022 | | 2021 | | 2020 |
| | | | | |
| Net securities gains | $ | — | | | $ | — | | | $ | — | |
| Other operating income | 3,000 | | | — | | | 8,000 | |
| Total income | 3,000 | | | — | | | 8,000 | |
| Occupancy expense | — | | | — | | | — | |
| Other operating expense | 1,166,000 | | | 1,148,000 | | | 911,000 | |
| Total expense | 1,166,000 | | | 1,148,000 | | | 911,000 | |
| Loss before income taxes and Bank earnings | (1,163,000) | | | (1,148,000) | | | (903,000) | |
| Applicable income taxes | (299,000) | | | (269,000) | | | (246,000) | |
| Loss before Bank earnings | (864,000) | | | (879,000) | | | (657,000) | |
| Equity in earnings of Bank | | | | | |
| Remitted | 14,000,000 | | | 13,400,000 | | | 13,300,000 | |
| Unremitted | 25,854,000 | | | 23,748,000 | | | 14,486,000 | |
| Net income | $ | 38,990,000 | | | $ | 36,269,000 | | | $ | 27,129,000 | |
Statements of Cash Flows
| | | | | | | | | | | | | | | | | |
| For the years ended December 31, | 2022 | | 2021 | | 2020 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 38,990,000 | | | $ | 36,269,000 | | | $ | 27,129,000 | |
| Adjustments to reconcile net income to net cash provided by operating activities: |
| | | | | |
| Equity compensation expense | 809,000 | | | 856,000 | | | 652,000 | |
| | | | | |
| | | | | |
| Increase in other assets | (35,000) | | | (71,000) | | | (21,000) | |
| (Increase) decrease in dividends receivable | (400,000) | | | 200,000 | | | (200,000) | |
| Increase in dividends payable | 227,000 | | | 115,000 | | | — | |
| Increase in other liabilities | 1,000 | | | 5,000 | | | — | |
| Unremitted earnings of Bank | (25,854,000) | | | (23,748,000) | | | (14,486,000) | |
| Net cash provided by operating activities | 13,738,000 | | | 13,626,000 | | | 13,074,000 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Cash flows from financing activities: | | | | | |
| | | | | |
| Purchase of common stock | (277,000) | | | (253,000) | | | (156,000) | |
| Proceeds from sale of common stock | 796,000 | | | 689,000 | | | 670,000 | |
| | | | | |
| Dividends paid | (14,779,000) | | | (13,948,000) | | | (13,329,000) | |
| Net cash used in financing activities | (14,260,000) | | | (13,512,000) | | | (12,815,000) | |
| Net increase (decrease) in cash and cash equivalents | (522,000) | | | 114,000 | | | 259,000 | |
| Cash and cash equivalents at beginning of year | 1,401,000 | | | 1,287,000 | | | 1,028,000 | |
| Cash and cash equivalents at end of year | $ | 879,000 | | | $ | 1,401,000 | | | $ | 1,287,000 | |
The First Bancorp - 2022 Form 10-K - Page 107
Note 25. New Accounting Pronouncements
In June 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Under the new guidance, which will replace the existing incurred loss model for recognizing credit losses, banks and other lending institutions will be required to recognize the full amount of expected credit losses. The new guidance, which is referred to as the current expected credit loss model, requires that expected credit losses for financial assets, held at the reporting date that are accounted for at amortized cost, be measured and recognized based on historical experience and current and reasonably supportable forecasted conditions to reflect the full amount of expected credit losses. The ASU was to be effective for all SEC registrants for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. On October 16, 2019, FASB voted to finalize a proposal issued in August 2019 under which the effective implementation date was changed for SEC registrants meeting the definition of a Smaller Reporting Company to fiscal years beginning after December 15, 2022. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within such years. The Company qualified as a Smaller Reporting Company and did not early adopt. The Bank formed an implementation committee for ASU No. 2016-13. Committee members participated in educational seminars on the new standards, identified the historical data sets that will be necessary to implement the new standard, and chose a third-party vendor who provides software solutions for ASU No. 2016-13 modeling and calculation. An Allowance for Credit Loss Committee (ACLC) was later formed to guide the late stages of implementing the software and eventual adoption of the new standard. The ACLC will be responsible for model oversight and governance upon adoption. The impact of adoption of ASU No. 2016-13 on the Company's consolidated financial statements has been evaluated regularly and it is expected that an increase to the Allowance for Credit Losses will be recorded upon adoption.
In March 2022, the FASB issued ASU No. 2022-01 Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method. This ASU expands upon hedge accounting concepts introduced in ASU 2017-12 by allowing multiple hedged layers to be designated for a single closed portfolio of financial assets which may allow a greater proportion of interest rate risk inherent in the assets to be hedged. The last of layer method outlined in ASU 2017-12 is renamed the portfolio layer method in ASU 2022-01. ASU 2022-01 also allows, upon adoption, the reclassification of debt securities classified as held to maturity to the available for sale category provided the reclassification takes place within thirty days of adoption and the same debt securities are included in a portfolio layer method hedge within the thirty day period. ASU 2022-01 is effective for fiscal years beginning after December 15, 2022. Early adoption is permitted for entities, such as the Company, that have adopted ASU 2017-12. This ASU is not expected to have a material impact on the consolidated financial statements of the Company.
Also in March 2022, the FASB issued ASU No. 2022-02 Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings (TDRs) and Vintage Disclosures. The ASU eliminates the current guidance in ASC Subtopic 310-40 regarding troubled debt restructures in its entirety. After adoption, loan modifications will be determined to be a new loan or a continuation of an existing loan in accordance with current ASC guidance. Disclosure will consist of information on modifications to debtors experiencing financial difficulty that were in the form of principal forgiveness, an interest rate reduction, an other than insignificant payment delay, a term extension, or any combination of the foregoing. The ASU will also require disclosure of current-period gross write-offs by year of origination. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022. This ASU is not expected to have a material impact on the consolidated financial statements of the Company.
The First Bancorp - 2022 Form 10-K - Page 108
Note 26. Quarterly Information
The following tables provide unaudited financial information by quarter for each of the past two years:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Dollars in thousands except per share data | 2021Q1 | 2021Q2 | 2021Q3 | 2021Q4 | 2022Q1 | 2022Q2 | 2022Q3 | 2022Q4 |
| Balance Sheets | | | | | | | | |
| Cash and cash equivalents | $ | 20,029 | | $ | 27,092 | | $ | 27,126 | | $ | 20,634 | | $ | 22,051 | | $ | 23,453 | | $ | 27,408 | | $ | 22,728 | |
| Interest-bearing deposits in other banks | 104,602 | | 42,215 | | 93,779 | | 66,678 | | 18,427 | | 22,871 | | 65,786 | | 3,693 | |
| Investments | 679,889 | | 682,428 | | 684,923 | | 690,606 | | 690,198 | | 681,430 | | 665,174 | | 678,405 | |
| Restricted equity securities | 10,105 | | 8,839 | | 8,839 | | 5,365 | | 5,402 | | 4,720 | | 4,514 | | 3,883 | |
| Net loans and loans held for sale | 1,503,700 | | 1,572,377 | | 1,601,142 | | 1,632,963 | | 1,691,982 | | 1,772,843 | | 1,841,588 | | 1,898,226 | |
| Other assets | 118,543 | | 117,492 | | 113,782 | | 110,853 | | 120,547 | | 125,037 | | 130,595 | | 132,243 | |
| Total assets | $ | 2,436,868 | | $ | 2,450,443 | | $ | 2,529,591 | | $ | 2,527,099 | | $ | 2,548,607 | | $ | 2,630,354 | | $ | 2,735,065 | | $ | 2,739,178 | |
| Deposits | $ | 1,953,557 | | $ | 1,961,321 | | $ | 2,033,213 | | $ | 2,123,297 | | $ | 2,158,539 | | $ | 2,252,022 | | $ | 2,369,949 | | $ | 2,378,877 | |
| Borrowed funds | 229,648 | | 228,648 | | 233,201 | | 136,342 | | 133,712 | | 126,588 | | 118,343 | | 103,483 | |
| Other liabilities | 25,479 | | 26,319 | | 24,440 | | 21,803 | | 22,710 | | 24,059 | | 26,856 | | 27,895 | |
| Shareholders' equity | 228,184 | | 234,155 | | 238,737 | | 245,657 | | 233,646 | | 227,685 | | 219,917 | | 228,923 | |
Total liabilities
& equity | $ | 2,436,868 | | $ | 2,450,443 | | $ | 2,529,591 | | $ | 2,527,099 | | $ | 2,548,607 | | $ | 2,630,354 | | $ | 2,735,065 | | $ | 2,739,178 | |
| Income and Comprehensive Income Statements |
| Interest income | $ | 18,953 | | $ | 18,541 | | $ | 19,588 | | $ | 19,999 | | $ | 20,533 | | $ | 21,431 | | $ | 23,991 | | $ | 27,080 | |
| Interest expense | 3,080 | | 2,818 | | 2,577 | | 2,303 | | 1,913 | | 2,733 | | 4,627 | | 7,596 | |
| Net interest income | 15,873 | | 15,723 | | 17,011 | | 17,696 | | 18,620 | | 18,698 | | 19,364 | | 19,484 | |
| Provision for loan losses (credit) | 525 | | 525 | | 525 | | (1,950) | | 450 | | 450 | | 400 | | 450 | |
| Net interest income after provision for loan losses (credit) | 15,348 | | 15,198 | | 16,486 | | 19,646 | | 18,170 | | 18,248 | | 18,964 | | 19,034 | |
| Non-interest income | 5,298 | | 4,911 | | 4,375 | | 4,799 | | 4,232 | | 4,080 | | 4,715 | | 3,847 | |
| Non-interest expense | 9,874 | | 9,496 | | 9,932 | | 12,846 | | 10,650 | | 10,172 | | 11,371 | | 11,711 | |
| Income before taxes | 10,772 | | 10,613 | | 10,929 | | 11,599 | | 11,752 | | 12,156 | | 12,308 | | 11,170 | |
| Income taxes | 1,850 | | 1,826 | | 1,915 | | 2,053 | | 2,047 | | 2,159 | | 2,217 | | 1,973 | |
| Net income | $ | 8,922 | | $ | 8,787 | | $ | 9,014 | | $ | 9,546 | | $ | 9,705 | | $ | 9,997 | | $ | 10,091 | | $ | 9,197 | |
| Basic earnings per share | $ | 0.82 | | $ | 0.81 | | $ | 0.83 | | $ | 0.87 | | $ | 0.89 | | $ | 0.91 | | $ | 0.92 | | $ | 0.84 | |
| Diluted earnings per share | $ | 0.81 | | $ | 0.80 | | $ | 0.82 | | $ | 0.87 | | $ | 0.88 | | $ | 0.91 | | $ | 0.91 | | $ | 0.83 | |
| Other comprehensive income (loss), net of tax |
| Net unrealized gain (loss) on securities available for sale | $ | (4,790) | | $ | 971 | | $ | (1,817) | | $ | (1,091) | | $ | (18,343) | | $ | (12,734) | | $ | (14,866) | | $ | 2,943 | |
| Net unrealized gain on securities transferred from available for sale to held to maturity | 9 | | 11 | | 14 | | 12 | | 9 | | 5 | | 6 | | 3 | |
| Net unrealized gain (loss) on cash flow hedging derivative instruments | 3,469 | | (620) | | 546 | | 1,537 | | — | | 146 | | 354 | | 44 | |
| Unrecognized gain on postretirement benefit costs | — | | — | | — | | 77 | | — | | — | | — | | 168 | |
| Other comprehensive income (loss) | $ | (1,312) | | $ | 362 | | $ | (1,257) | | $ | 535 | | $ | (18,334) | | $ | (12,583) | | $ | (14,506) | | $ | 3,158 | |
| Comprehensive income (loss) | $ | 7,610 | | $ | 9,149 | | $ | 7,757 | | $ | 10,081 | | $ | (8,629) | | $ | (2,586) | | $ | (4,415) | | $ | 12,355 | |
The First Bancorp - 2022 Form 10-K - Page 109
Note 27. Acquisitions and Intangible Assets
On December 11, 2020, the Company acquired a branch at 1B Belmont Avenue, Belfast, Maine from Bangor Savings Bank. The acquisition added to its existing book of business in Belfast and Waldo County. The Company intends to leverage having a physical presence in Belfast and the base of new customers to grow its loan and deposit share in the market. Under the terms of the acquisition, the Company acquired approximately $19,000,000 in deposits as well as $23,000,000 in loans. There were no acquisitions in 2021 or 2022.
The following table summarizes the consideration paid in 2020 for the Belfast branch and the allocation to the assets acquired and liabilities assumed based on estimates of fair value at the acquisition date:
| | | | | |
| Assets | |
| Cash | $ | 381,000 | |
| Loans & accrued interest | 23,138,000 | |
| Premises and equipment | 696,000 | |
| Prepaid expenses | 10,000 | |
| Core deposit intangible | 262,000 | |
| Goodwill | 841,000 | |
| |
| Liabilities | |
| Deposits | 19,261,000 |
| Other liabilities | 7,000 |
| Consideration paid | 6,060,000 |
As part of the branch acquisition, the Company entered into a lease agreement for land upon which the branch is situated. The Company recorded a right of use asset and lease liability for $511,000.
One-time costs associated with the acquisition that were recognized by the Company and included in the consolidated statements of income and comprehensive income for 2020 were $310,000.
The core deposit intangible related to the FNB Bankshares acquisition was fully amortized in 2015. The core deposit intangible related to the Rockland branch acquisition has been amortized on a straight-line basis over ten years. Annual amortization expense for each of 2022, 2021 and 2020 was $43,000, and as of year-end 2022 is fully amortized. The core deposit intangible related to the Belfast branch acquisition is being amortized on a straight-line basis over ten years. Annual amortization expense for 2022 and 2021 was $26,000, and the amortization expense for each year until fully amortized (presently expected to be 2031) will be $26,000. The Belfast core deposit intangible is being amortized on a straight-line basis as the Company does not expect significant run off in the core deposits.
The First Bancorp - 2022 Form 10-K - Page 110