First Bancorp, Inc quarterly report, Q3 FY2015

The First Bancorp, Inc. — Form 10-Q Summary

Business context and reporting period

The First Bancorp, Inc. is a Maine-based financial holding company whose primary subsidiary is The First, N.A. The filing covers the quarter and nine months ended September 30, 2015. Interim financial statements were reviewed, not audited, by Berry Dunn McNeil & Parker, LLC. The company had 10,751,035 common shares outstanding as of November 2, 2015.

Key financial metrics

Metric	Q3 2015	Nine months 2015	Comparable period
Net income	$4.188 million	$12.437 million	$4.108 million / $11.283 million
Diluted EPS	$0.39	$1.16	$0.38 / $1.05
Net interest income	$10.511 million	$30.291 million	$10.004 million / $29.550 million
Tax-equivalent net interest margin	3.11%	3.09%	3.07% / 3.10%
Non-interest income	$2.975 million	$9.467 million	$3.656 million / $8.446 million
Non-interest expense	$7.707 million	$21.952 million	$7.802 million / $22.345 million
Provision for loan losses	$0.200 million	$1.100 million	$0.350 million / $0.850 million

Amounts are in millions except per-share data. Comparable-period figures are Q3 2014 and the nine months ended September 30, 2014, respectively.

Total assets were $1.540 billion, compared with $1.482 billion at December 31, 2014 and $1.489 billion at September 30, 2014.
Total loans were $963.2 million, up 5.0% from year-end 2014 and 6.1% year over year. Commercial loans were the principal growth driver.
Total deposits were $1.058 billion, up 3.3% from year-end. Low-cost deposits increased 19.9% year to date, while certificates of deposit decreased 13.0%.
Total borrowed funds were $297.4 million, up 6.2% from year-end and 15.0% year over year. Long-term borrowed funds increased to $145.1 million.
Shareholders’ equity was $167.1 million. Book value per common share was $15.55 and tangible book value per common share was $12.75.
The company declared a quarterly cash dividend of $0.22 per share. The nine-month dividend payout ratio was 55.56%.
Return on average equity was 10.05%; return on average tangible common equity was 12.29%; return on average assets was 1.11%; and the non-GAAP efficiency ratio was 53.76%.

Cash flow, liquidity, debt and capital

Operating activities provided $14.4 million of cash during the first nine months of 2015, compared with $12.8 million in the prior-year period.
Investing activities used $52.5 million, principally reflecting a $48.3 million increase in loans, $96.9 million of securities purchases net of proceeds, and a $10.0 million investment in bank-owned life insurance.
Financing activities provided $44.2 million, including a $91.7 million increase in demand, savings and money market deposits, $55.0 million of long-term borrowings, and $40.0 million of long-term debt repayments.
Cash and cash equivalents increased to $19.2 million from $13.1 million at December 31, 2014.
Management reported primary liquidity sources of $301.1 million and additional contingent liquidity sources of $295.4 million, and believed available funding was sufficient under a broad range of scenarios.
Contractual obligations totaled $687.2 million, including $297.4 million of borrowed funds and $389.3 million of certificates of deposit. Loan commitments and unused lines of credit totaled $143.1 million.
At September 30, 2015, the company’s total risk-based capital ratio was 16.10%, compared with a 10.00% well-capitalized threshold applicable to the bank. The company met all well-capitalized guidelines.

Material changes versus prior comparable periods

Nine-month net income increased 10.2%, while third-quarter net income increased 1.9%. Management attributed the improvement primarily to higher net interest income, asset growth and lower operating costs.
Nine-month net interest income increased 2.5%; on a tax-equivalent basis it increased 1.3%. Higher loan income and lower funding costs more than offset reduced investment income.
Nine-month non-interest income increased 12.1%, supported by other operating income and mortgage origination and servicing income. Third-quarter non-interest income declined 18.6% because securities gains fell to $1,000 from $1.105 million.
Nine-month non-interest expense declined 1.8%, primarily because of lower employee costs. The non-GAAP efficiency ratio improved from 56.35% to 53.76%.
Credit quality improved. Nonperforming loans declined to $8.0 million, or 0.83% of total loans, from $11.8 million, or 1.30%, a year earlier. Nonperforming assets declined to 0.65% of total assets from 1.10%.
Total past-due loans declined to 1.01% of total loans from 1.17% a year earlier. Impaired loans declined to $30.8 million from $37.0 million.
The allowance for loan losses declined to $9.7 million, or 1.00% of total loans, from $11.6 million, or 1.28%, a year earlier. However, nine-month net charge-offs increased to $1.767 million from $0.723 million.
Troubled debt restructurings declined to 88 loans totaling $24.7 million, compared with 96 loans totaling $27.9 million a year earlier.
Other real estate owned declined to $1.9 million from $4.6 million a year earlier, and the number of properties declined to 17 from 30.

Guidance, outlook, risks and unusual items

No formal earnings or revenue guidance was provided. Management described the quarter as the company’s best quarter historically and noted three consecutive quarters with net income above $4.0 million.
Management expected short-term interest rates could increase during the next one to three quarters and considered the company’s interest-rate risk acceptable. The company used no interest-rate derivatives.
Interest-rate simulations projected first-year net interest income declines of approximately 0.99% under a gradual 1.0% rate decrease and 2.93% under a gradual 2.0% rate increase. These are hypothetical risk measures, not forecasts.
Management identified economic conditions, interest-rate volatility, loan demand and collectability, deposit runoff, wholesale funding availability, competition, regulation, accounting changes and securities valuations as significant risks.
The allowance for loan losses remains dependent on judgments regarding economic conditions, portfolio growth, delinquencies, collateral values and classified loans. Management considered the allowance appropriate but warned that future charge-offs could exceed current reserves.
The investment portfolio contained $112.9 million of temporarily impaired securities with $2.3 million of unrealized losses. Management concluded no other-than-temporary impairment was warranted.
There were 25 loans totaling $2.6 million in foreclosure, including 18 residential mortgage loans totaling $2.0 million. Eight TDR loans totaling $1.2 million were in bankruptcy, 14 totaling $1.9 million were non-accrual, and three totaling $265,000 were in foreclosure.
In May 2015, the U.S. Treasury sold warrants to private parties. The adjusted warrants covered 226,819 shares at a $16.53 strike price.
No material legal proceedings, material changes to previously disclosed risk factors, defaults or material control deficiencies were reported. Disclosure controls were considered effective.

Most important facts for investors to verify

Whether loan growth, particularly commercial loan growth, is accompanied by sustained credit quality and adequate allowance coverage.
Whether higher net charge-offs and the increased unallocated allowance component signal emerging portfolio risk.
The durability of lower deposit funding costs and the effect of replacing certificates of deposit with borrowed funds.
The sensitivity of net interest income and margins to the expected change in short-term interest rates.
The quality, duration and unrealized-loss exposure of the investment securities portfolio, including management’s other-than-temporary impairment conclusions.
The company’s continued ability to support dividends while maintaining capital above regulatory thresholds.
The assumptions used to value mortgage servicing rights, impaired loans, other real estate owned and goodwill.