Business Context and Reporting Period
The First Bancorp, Inc. is a Maine-based financial holding company owning First National Bank. This unaudited Form 10-Q covers the three months ended March 31, 2018, with comparisons to March 31, 2017 and December 31, 2017 where applicable. Interim financial statements were reviewed by the independent registered public accounting firm, which reported no material modifications needed for GAAP conformity.
Financial Results and Key Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total interest income | $16.5 million | $14.5 million | +13.5% |
| Net interest income | $12.4 million | $11.5 million | +8.1% |
| Tax-equivalent net interest income | $12.9 million | $12.4 million | +4.0% |
| Provision for loan losses | $0.5 million | $0.5 million | Unchanged |
| Non-interest income | $3.1 million | $2.8 million | +10.2% |
| Non-interest expense | $8.6 million | $7.7 million | +11.4% |
| Net income | $5.5 million | $4.6 million | +18.7% |
| Diluted EPS | $0.51 | $0.43 | +18.6% |
| Net interest margin, tax-equivalent | 3.00% | 3.05% | Down 5 basis points |
| Efficiency ratio, non-GAAP | 53.75% | 50.17% | Higher |
| Return on average tangible common equity | 14.69% | 12.92% | Higher |
- Total assets were $1.872 billion at March 31, 2018, up 1.6% from year-end 2017 and 6.1% from March 31, 2017.
- Total loans were $1.188 billion, up 2.0% year to date and 9.0% year over year. Growth was concentrated in commercial, municipal and residential term loans.
- Total investment securities were $574.4 million, up from $567.1 million at December 31, 2017 and $566.8 million a year earlier.
- Total deposits were $1.428 billion, up 0.7% from year-end 2017 and 6.1% year over year. Certificates of deposit increased $75.7 million year to date, while money market deposits declined $55.2 million.
- Borrowed funds totaled $244.2 million, up 6.8% from year-end 2017 and 7.8% year over year.
- Cash and cash equivalents ended the quarter at $16.6 million. Operating activities provided $10.9 million of cash, investing activities used $35.7 million, and financing activities provided $22.2 million, resulting in a $2.6 million decrease in cash.
- Shareholders’ equity was $181.4 million, compared with $181.3 million at December 31, 2017 and $174.9 million at March 31, 2017. Book value per common share was $16.72 and tangible book value was $13.95.
- The company declared a quarterly cash dividend of $0.24 per share, representing a 47.06% payout ratio based on diluted EPS.
- The Company’s total risk-based capital ratio was 15.01%, and the Bank’s was 14.89%; the Bank met all applicable well-capitalized guidelines.
Material Changes Versus Comparable Periods
- Net income benefited from loan and investment growth, higher net interest income, increased fiduciary and investment-management revenue, and lower income tax expense following the Tax Cuts and Jobs Act. Income tax expense declined to $1.0 million from $1.5 million.
- Interest expense increased 34.1%, principally because deposit costs rose as the funding mix shifted toward certificates of deposit. The increase partly offset asset-driven interest income growth.
- Non-interest expense increased primarily from higher salaries and employee benefits and continued investment in personnel and technology. The efficiency ratio therefore worsened despite higher earnings.
- Credit metrics weakened compared with March 31, 2017 but improved in several respects from year-end. Non-performing loans were 1.20% of loans versus 0.78% a year earlier and 1.27% at December 31, 2017. Non-performing assets were 0.83% of assets versus 0.52% a year earlier and 0.86% at year-end.
- Total past-due loans were $15.9 million, or 1.34% of loans, compared with $10.4 million, or 0.96%, a year earlier and $18.7 million, or 1.60%, at year-end.
- The allowance for loan losses increased to $11.0 million from $10.7 million at year-end and $10.4 million a year earlier, but declined to 0.92% of loans from 0.95% a year earlier.
- Unrealized losses on available-for-sale securities increased to $6.2 million from $2.9 million at year-end, contributing to a $2.9 million decline in other comprehensive income. Management attributed the investment-security losses primarily to interest-rate and yield-curve movements and concluded that no other-than-temporary impairment was required.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide formal earnings or revenue guidance. Management characterized Q1 2018 as the Company’s best quarter and another record earnings quarter, while emphasizing continued earning-asset growth.
- Management expects short-term interest rates may continue to rise over the next one to three quarters and considers the current interest-rate risk position acceptable. Internal modeling estimated that a gradual 2.0 percentage-point rate increase would reduce first-year net interest income by approximately 4.32% and second-year net interest income by approximately 9.21%; these are sensitivity estimates, not forecasts.
- The Company had $434.4 million of primary liquidity and $416.4 million of contingent liquidity. Management stated that available funding should meet anticipated needs, but identified deposit runoff and inability to renew wholesale funding as key liquidity risks.
- Two interest-rate swaps had aggregate notional amounts of $50.0 million and fair value of $2.4 million at March 31, 2018. They were designated as cash-flow hedges against rising short-term funding costs.
- There were 69 troubled debt restructurings totaling $18.7 million. Eleven TDR loans totaling $1.3 million were on non-accrual status; four TDR loans totaling $684,000 were involved in bankruptcy.
- The Company had 18 loans totaling $1.9 million in foreclosure and five other real estate owned properties totaling $1.1 million.
- Management expects adoption of the current expected credit loss standard, ASU 2016-13, may materially affect the financial statements. The standard was scheduled to become effective for the Company in 2020, and implementation efforts were underway.
- Management identified no material changes to previously disclosed risk factors and no reportable legal proceedings during the quarter.
- Key ongoing risks include credit losses, commercial real estate and construction exposure, deposit pricing and runoff, interest-rate volatility, securities valuation changes, liquidity access, regulatory changes, and judgments involved in loan-loss, goodwill and mortgage-servicing-right valuations.
Important Facts for Investors to Verify
- Whether loan growth and the shift toward higher-cost certificates of deposit sustain earnings as deposit costs continue to rise.
- Trends in non-performing loans, TDRs, delinquencies, charge-offs and the allowance for loan losses, particularly within commercial loans.
- The effect of higher interest rates on net interest margin, securities valuations, deposit pricing and modeled net interest income sensitivity.
- The magnitude and timing of the eventual impact from CECL adoption, including changes to reserves and regulatory capital.
- The sustainability of the $0.24 per-share dividend given loan growth, capital requirements and the Bank’s statutory dividend capacity.
- The composition, maturity and unrealized-loss exposure of the investment portfolio, including the Company’s conclusion that current losses are temporary.
- Liquidity capacity, reliance on certificates of deposit and wholesale borrowings, and the availability of pledged collateral and contingent funding sources.