First Bancorp, Inc. — Form 10-Q Summary
Business context and reporting period
The First Bancorp, Inc. is a financial holding company whose subsidiary, First National Bank, operates primarily in Maine. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2020, compared primarily with the same periods in 2019 and December 31, 2019. The filing was reviewed by the independent registered public accounting firm, which reported no material modifications to the interim financial statements.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $14.7 million | $13.2 million | $44.2 million | $39.1 million |
| Provision for loan losses | $1.8 million | $0.3 million | $4.6 million | $0.9 million |
| Non-interest income | $4.8 million | $3.5 million | $13.6 million | $10.3 million |
| Non-interest expense | $9.3 million | $9.0 million | $29.2 million | $26.2 million |
| Net income | $7.1 million | $6.3 million | $20.2 million | $18.8 million |
| Diluted EPS | $0.65 | $0.58 | $1.84 | $1.73 |
| Tax-equivalent net interest margin | 2.82% | 2.88% | 2.93% | 2.90% |
- Total assets were $2.297 billion, compared with $2.069 billion at December 31, 2019 and $2.033 billion at September 30, 2019.
- Total loans were $1.437 billion, up 10.8% year to date and 13.7% year over year. PPP loans were approximately $97.3 million at September 30, 2020.
- Total investment securities were $682.6 million, total deposits were $1.763 billion, and shareholders’ equity was $219.4 million.
- Cash and cash equivalents were $22.7 million. Primary liquidity sources totaled $938.7 million, with an additional $390.0 million of contingent liquidity.
- Borrowed funds totaled $283.8 million, consisting of $228.7 million of short-term borrowings and $55.1 million of long-term borrowings.
- Operating cash flow was $21.1 million for the nine months, while investing activities used $214.6 million and financing activities provided $201.8 million. Cash increased $8.3 million during the period.
- The allowance for loan losses was $15.4 million, or 1.07% of total loans, compared with 0.90% at December 31, 2019 and 0.93% at September 30, 2019.
- Nonperforming loans were $9.1 million, or 0.63% of total loans; nonperforming assets were 0.43% of total assets. Total past-due loans were 0.89% of total loans.
- The company’s total risk-based capital ratio was 15.44%, above the 10.0% well-capitalized threshold applicable to the Bank. The Bank’s total risk-based capital ratio was 15.33%.
Material changes versus comparable periods
- Nine-month net income increased 7.0%, while third-quarter net income increased 12.8%. Diluted EPS increased 6.4% for the nine months and 12.1% for the quarter.
- Net interest income increased 13.0% for the nine months, principally because of earning-asset growth, lower deposit funding costs, stable margins, and interest recovered on resolved problem loans. Quarterly margin declined six basis points year over year.
- Non-interest income increased 32.5% year over year for the nine months. Mortgage banking income increased approximately $2.6 million, or 209.9%, due to strong purchase and refinancing activity. Securities gains contributed $1.2 million.
- Non-interest expense increased 11.7%, partly because of $1.76 million in first-quarter charges to restructure interest-rate swaps, as well as higher employee and equipment costs. Management stated that the nine-month non-GAAP efficiency ratio would have been 46.87% excluding the swap restructuring charges, compared with the reported 50.00%.
- Loan-loss provision increased materially because management increased qualitative reserves in response to COVID-19 uncertainty, despite improved nonperforming-loan levels and limited net charge-offs.
- Low-cost deposits increased $216.7 million year to date, while certificates of deposit declined $100.0 million. Borrowed funds increased $98.8 million from year-end.
- Nonperforming loans, impaired loans, and TDR balances declined from the prior year. TDRs totaled $13.4 million at September 30, 2020, compared with $24.3 million a year earlier.
Guidance, outlook, risks, contingencies, and unusual items
- Management did not provide formal earnings guidance. It expects short-term interest rates to remain near 0.00% to 0.25% for at least the next several quarters.
- COVID-19 remains the principal uncertainty. Maine’s tourism, hospitality, restaurant, and indoor-dining sectors are particularly exposed. Approximately 9% of the loan portfolio consisted of hospitality or restaurant borrowers.
- The filing states that approximately $279.7 million of loans had received COVID-related payment or interest-only modifications, with approximately $81.0 million still in an original or subsequent modification at September 30, 2020. The filing contains inconsistent counts of completed modifications, citing both 996 and 966 requests; this should be verified.
- Management cautioned that additional allowance increases may be necessary as borrower performance and economic conditions develop.
- The Bank processed 1,710 PPP loans totaling $97.3 million and was working with borrowers on forgiveness applications. Net unrecognized PPP origination fees were $2.7 million.
- The Bank sold 28 municipal securities previously designated as held to maturity during the second quarter, recognizing a $268,000 gain. Management treated the COVID-related sales as an isolated and unusual event.
- Interest-rate swap restructuring generated $1.76 million of first-quarter expense. At September 30, 2020, cash-flow hedge swaps had $260.0 million of notional value and a $7.3 million fair-value liability, with a $5.8 million after-tax unrealized loss in accumulated other comprehensive income.
- The company is preparing for the possible cessation of LIBOR after December 31, 2021. Nine hedge contracts totaling $210 million had maturities beyond that date, in addition to long-dated customer loan swaps.
- The Bank agreed to acquire a Belfast, Maine branch, expected to add $16.5 million of deposits and $23.5 million of loans. The estimated transaction value was $24.8 million, with closing expected in the fourth quarter of 2020.
- The company expects CECL adoption to potentially have a material effect, although the adoption date was deferred for smaller reporting companies to fiscal years beginning after December 15, 2022.
Important facts an investor should verify
- Reconcile the filing’s inconsistent COVID-modification counts of 996 and 966 and confirm the related $279.7 million balance.
- Assess the ultimate credit performance of modified loans, PPP borrowers, and the approximately 9% hospitality and restaurant exposure.
- Monitor whether further COVID-related provisioning increases are required beyond the $15.4 million allowance.
- Evaluate the sustainability of mortgage banking gains and lower deposit costs in a low-rate environment.
- Review the economic and accounting effects of the $1.76 million swap restructuring charge and the $5.8 million accumulated after-tax hedge loss.
- Confirm completion, purchase accounting, and deposit and loan retention following the Belfast branch acquisition.
- Assess liquidity and funding concentration, including $283.8 million of borrowed funds, certificate-of-deposit maturities, and the $938.7 million of primary liquidity.
- Monitor the LIBOR transition for the company’s swaps and customer loan derivatives maturing after 2021.