First Bancorp, Inc. — Form 10-Q Summary
Business context and reporting period
The First Bancorp, Inc. is a Maine-based financial holding company whose principal subsidiary is First National Bank. This unaudited Form 10-Q covers the three months ended March 31, 2017, with comparisons to March 31, 2016 and December 31, 2016. The interim financial statements were reviewed by the independent registered accounting firm, which reported no material modifications; they were not audited.
Key financial metrics
| Metric | Q1 2017 | Comparable period |
|---|---|---|
| Interest income | $14.5 million | $13.3 million |
| Net interest income | $11.5 million | $10.7 million |
| Provision for loan losses | $0.5 million | $0.4 million |
| Non-interest income | $2.8 million | $3.0 million |
| Non-interest expense | $7.7 million | $7.2 million |
| Net income | $4.6 million | $4.5 million |
| Diluted EPS | $0.43 | $0.42 |
| Tax-equivalent net interest margin | 3.05% | 3.13% |
| Efficiency ratio, non-GAAP | 50.17% | 51.45% |
| Return on average equity | 10.71% | 10.56% |
| Return on average tangible common equity | 12.92% | 12.80% |
Total assets were $1.764 billion at March 31, 2017, compared with $1.713 billion at December 31, 2016 and $1.575 billion at March 31, 2016. Total loans were $1.090 billion, net of the $10.4 million allowance, and investment securities totaled $566.8 million. Total deposits were $1.346 billion, while borrowed funds totaled $226.5 million. Shareholders’ equity was $174.9 million, or $16.17 of book value per common share and $13.39 of tangible book value per common share.
Operating cash flow was $3.1 million. Investing activities used $50.2 million, primarily reflecting securities purchases and loan growth, while financing activities provided $47.3 million. Cash and cash equivalents ended the quarter at $17.6 million.
The quarterly dividend was $0.23 per share, representing a 53.49% payout ratio. The company repurchased 5,258 shares for $146,000 during the quarter.
Material changes versus prior comparable periods
- Net income increased 3.0% and diluted EPS increased 2.4%, despite the absence of the $536,000 of securities gains recognized in Q1 2016.
- Tax-equivalent net interest income increased 8.2%, driven by growth in earning assets; the margin declined from 3.13% to 3.05%.
- Interest expense increased 18.4%, primarily from higher deposit costs, partially offset by lower expense on borrowed funds.
- Non-interest income decreased 4.1%, mainly because of lower securities gains, partly offset by a 157.4% increase in mortgage origination and servicing income.
- Non-interest expense increased 6.9%, primarily due to higher employee costs and furniture and equipment expense. The non-GAAP efficiency ratio nevertheless improved.
- Loans increased 1.7% from year-end and 8.4% year over year, with commercial and municipal lending contributing substantially to growth.
- Deposits increased 8.3% from year-end and 21.4% year over year, including significant municipal deposit inflows. Borrowed funds declined 18.8% from year-end as the company shifted funding toward certificates of deposit.
- Nonperforming loans increased to $8.5 million, or 0.78% of loans, from $7.8 million at December 31, 2016 and $6.7 million a year earlier. Total past-due loans improved to 0.96% of loans from 1.18% at year-end but exceeded the 0.82% prior-year level.
- The allowance for loan losses increased to $10.4 million, although the allowance-to-loans ratio declined to 0.95% from 1.02% a year earlier. Net charge-offs increased to $271,000 from $72,000.
- Troubled debt restructurings declined to 70 loans totaling $21.1 million, from 71 loans totaling $21.5 million at year-end and 82 loans totaling $23.6 million a year earlier.
Guidance, outlook, risks and unusual items
Management characterized Q1 2017 as the company’s best quarter and stated that growth in earning assets continued to drive performance. No formal earnings or financial guidance was provided. Management expects short-term interest rates may rise during the next one to three quarters and considers current interest-rate risk acceptable.
Liquidity was reported as adequate, with $202.8 million of primary liquidity and an additional $391.0 million of contingent liquidity. Management stated that funding sources should meet anticipated needs, but identified deposit runoff and inability to renew wholesale funding as key liquidity risks.
The company had two interest-rate swaps with total notional amounts of $50.0 million and a $1.9 million unrealized gain, designated as cash-flow hedges. Management’s simulation indicated that a gradual 2.0 percentage-point rate increase would reduce first-year net interest income by approximately 3.89%, within the company’s 10.0% policy limit.
Investment purchases and maturities were unusually high during the quarter because the company purchased and matured approximately $80.0 million of short-term U.S. Treasury bills to satisfy collateralization requirements for municipal deposits. Securities with unrealized losses had an aggregate fair value of $289.9 million and unrealized losses of $7.8 million. Management concluded that no other-than-temporary impairment was warranted.
Management considers the allowance for loan losses appropriate but cautions that future additions may be required if credit quality, economic conditions, loan growth or other factors deteriorate. The company expects the current expected credit loss standard, effective for fiscal years beginning after December 15, 2019, may materially affect its financial statements.
The company met well-capitalized regulatory guidelines. At March 31, 2017, the company’s total risk-based capital ratio was 15.53%, compared with 15.69% at December 31, 2016. No material changes to previously disclosed risk factors or legal proceedings were reported. Disclosure controls were deemed effective.
Investor verification priorities
- Verify whether loan growth and deposit growth remain sustainable and whether municipal deposits create concentration or funding sensitivity.
- Monitor nonperforming loans, delinquencies, TDRs, foreclosures and net charge-offs, particularly in commercial real estate and residential lending.
- Assess whether the 0.95% allowance-to-loans ratio remains adequate as the portfolio grows and the CECL adoption date approaches.
- Track net interest margin pressure from rising deposit costs and changes in short-term interest rates.
- Review the market value and unrealized losses in the investment portfolio, including potential effects of further yield-curve changes.
- Evaluate liquidity availability, deposit runoff assumptions, wholesale funding renewals and collateral requirements.
- Reconcile non-GAAP measures, including tax-equivalent net interest income, tangible book value and the efficiency ratio, to GAAP results.