Business Context and Reporting Period
The First Bancorp, Inc., a financial holding company for First National Bank, filed this unaudited Form 10-Q for the quarter ended March 31, 2019. The filing was reviewed by the independent registered public accounting firm, which reported no material modifications were necessary for conformity with U.S. GAAP. Results for the quarter are not necessarily indicative of full-year performance.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Interest income | $19.3 million | $16.5 million | 17.1% increase |
| Interest expense | $6.4 million | $4.0 million | 57.6% increase |
| Net interest income | $12.9 million | $12.4 million | 3.9% increase |
| Tax-equivalent net interest income | $13.5 million | $12.9 million | 4.2% increase |
| Provision for loan losses | $375,000 | $500,000 | 25.0% decrease |
| Non-interest income | $3.1 million | $3.1 million | 0.4% increase |
| Non-interest expense | $8.4 million | $8.6 million | 2.1% decrease |
| Net income | $6.2 million | $5.5 million | 11.8% increase |
| Diluted EPS | $0.57 | $0.51 | 11.8% increase |
| Tax-equivalent net interest margin | 2.93% | 3.00% | 7 basis-point decrease |
| Non-GAAP efficiency ratio | 50.45% | 53.75% | Improved |
| Return on average equity | 12.78% | 12.27% | Improved |
Balance Sheet, Liquidity and Capital
- Total assets were $1.99 billion at March 31, 2019, up 2.4% from December 31, 2018 and 6.4% from March 31, 2018.
- Total loans were $1.265 billion, up 2.1% year to date and 6.5% year over year. Commercial and municipal lending provided most of the growth.
- Total investment securities were $615.5 million, up $30.8 million year to date and $44.0 million year over year.
- Total deposits were $1.607 billion, up 5.2% from year-end and 12.5% year over year. Certificates of deposit increased $121.1 million year to date, while lower-cost deposits declined seasonally.
- Borrowed funds were $170.4 million, down 19.0% from year-end and 30.2% year over year, primarily reflecting repayment of long-term borrowings.
- Shareholders’ equity was $197.8 million, compared with $191.5 million at December 31, 2018 and $181.4 million a year earlier. Book value per common share was $18.17 and tangible book value was $15.42.
- The Company’s total risk-based capital ratio was 14.97%; the Bank’s was 14.90%. The Bank exceeded all well-capitalized regulatory thresholds.
- Operating cash flow was $730,000, compared with $10.9 million in Q1 2018. Investing activities used $41.4 million, while financing activities provided $36.8 million. Cash and cash equivalents ended at $15.3 million.
- The filing states that primary liquidity sources totaled $612,000 and contingent sources totaled $313,000; the presentation does not clearly identify whether these figures are stated in thousands or millions and should be verified against the filed financial schedules.
Material Changes Versus the Prior Comparable Period
- Net income increased primarily because of earning-asset growth, lower loan-loss provision, lower operating expenses and improved securities-related comprehensive income.
- Interest income increased $2.8 million, but interest expense increased $2.3 million, principally because deposit costs rose. Deposit interest expense increased from $3.1 million to $5.6 million.
- The margin compressed to 2.93% from 3.00%, despite higher loan and securities balances.
- Non-interest income was broadly stable. Higher wealth-management and deposit-service revenue offset the absence of securities gains and lower mortgage-banking revenue.
- Credit indicators improved overall: nonperforming assets declined to 0.77% of total assets from 0.83% a year earlier, and total past-due loans declined to 0.89% of total loans from 1.34%.
- Nonperforming loans were $13.7 million, compared with $14.3 million a year earlier. Net charge-offs fell to $117,000 from $272,000.
- The allowance for loan losses increased to $11.5 million from $11.0 million a year earlier, while the allowance-to-loans ratio declined slightly to 0.91% from 0.92%. The unallocated portion increased to $1.6 million, or 14.3% of the total allowance, from $811,000, or 7.4%, a year earlier.
- Troubled debt restructurings increased to 80 loans totaling $25.4 million, compared with 69 loans totaling $18.7 million at March 31, 2018. Of the 2019 TDR balance, $8.6 million was on nonaccrual status.
Guidance, Outlook, Risks and Unusual Items
- Management described the Company as having a strong start to 2019 but provided no formal earnings or revenue guidance.
- Management expected short-term interest rates to remain stable over the next one to three quarters and considered the current interest-rate risk position acceptable.
- Interest-rate simulation indicated that a gradual 2.0% rate increase could reduce first-year net interest income by approximately 4.07% and second-year net interest income by approximately 8.59%. These are hypothetical sensitivity estimates, not forecasts.
- The Company uses five interest-rate swaps with total notional amounts of $125.0 million to hedge exposure to rising short-term rates. The swaps reference one-month LIBOR and mature before December 31, 2021.
- Management is monitoring the potential discontinuation of LIBOR after December 31, 2021 and stated that overall exposure is modest.
- The investment portfolio included $296.1 million of temporarily impaired securities with $5.6 million of unrealized losses. Management concluded these losses were not other-than-temporary and stated it had the intent and ability to hold the securities through recovery or maturity. One municipal issuer was downgraded below investment grade; affected securities represented approximately 0.4% of state and municipal holdings.
- The expected-credit-loss standard, ASU 2016-13, was scheduled to become effective for the Company in 2020. Management anticipated that adoption could have a material impact and was implementing modeling software and assembling historical data.
- Key risks include economic and regional banking conditions, deposit runoff and wholesale funding availability, interest-rate volatility, loan collectability and charge-offs, securities valuation, regulatory and accounting changes, mortgage-servicing-rights assumptions, and competition.
- No material changes were reported to previously disclosed risk factors, no reportable legal proceedings were identified, and management concluded disclosure controls were effective at the reasonable-assurance level.
Investor Verification Items
- Verify the units and composition of the reported $612,000 of primary liquidity and $313,000 of contingent liquidity.
- Assess whether deposit-cost increases and continued reliance on certificates of deposit could further pressure the net interest margin.
- Review the growth and performance of commercial loans, TDRs, nonaccrual loans and the increased unallocated allowance.
- Evaluate the potential balance-sheet and earnings impact of adopting the current expected credit loss standard.
- Monitor the $296.1 million temporarily impaired securities portfolio, including the downgraded municipal issuer and interest-rate sensitivity.
- Review LIBOR transition plans for the $125.0 million of interest-rate swaps and related contracts.
- Confirm capital ratios, dividend capacity and the sustainability of the $0.29-per-share dividend as funding costs and credit conditions change.