The First Bancorp, Inc. — Form 10-Q Summary
Business context and reporting period
The First Bancorp, Inc. is a Maine-based financial holding company that owns First National Bank. The filing covers the three and six months ended June 30, 2020, with comparisons to June 30, 2019. The interim financial statements are unaudited and were reviewed by the independent registered public accounting firm. COVID-19 created significant economic uncertainty, particularly because Maine’s economy is materially dependent on tourism.
Financial performance and condition
| Metric | Six months ended June 30, 2020 | Six months ended June 30, 2019 | Change |
|---|---|---|---|
| Net interest income | $29.4 million | $25.8 million | Up 13.8% |
| Provision for loan losses | $2.8 million | $0.6 million | Up $2.1 million |
| Non-interest income | $8.8 million | $6.7 million | Up 30.7% |
| Non-interest expense | $20.0 million | $17.1 million | Up 16.5% |
| Net income | $13.1 million | $12.6 million | Up 4.1% |
| Diluted EPS | $1.20 | $1.15 | Up $0.05 |
| Tax-equivalent net interest margin | 2.99% | 2.90% | Up 9 basis points |
| Metric | June 30, 2020 | June 30, 2019 |
|---|---|---|
| Total assets | $2.27 billion | $2.00 billion |
| Total loans | $1.45 billion | $1.25 billion |
| Total deposits | $1.74 billion | $1.59 billion |
| Borrowed funds | $278.8 million | $181.9 million |
| Shareholders’ equity | $216.6 million | $204.6 million |
| Allowance for loan losses | $14.1 million | $11.5 million |
| Allowance-to-loans ratio | 0.97% | 0.92% |
Second-quarter 2020 net income was $6.6 million, compared with $6.4 million in the second quarter of 2019. Diluted EPS was $0.60 versus $0.59. Net interest income increased 11.9% year over year, while the tax-equivalent net interest margin declined modestly to 2.86% from 2.88%.
Operating cash flow for the six months was $5.2 million, compared with $6.4 million in the prior-year period. Investing activities used $174.6 million, primarily due to a $155.6 million net increase in loans and investment purchases. Financing activities provided $177.1 million through deposit growth and additional borrowings. Cash and cash equivalents ended at $22.1 million.
Liquidity sources totaled approximately $889.7 million, with an additional $344.8 million of contingent liquidity. Management stated that available funding was sufficient under a broad range of scenarios. The company’s total risk-based capital ratio was 15.03%, above the 10.00% well-capitalized threshold for the bank.
Material changes versus comparable periods
- Loans increased $154.5 million, or 11.9%, from December 31, 2019 and $202.5 million, or 16.2%, year over year. PPP loans contributed approximately $96.0 million to second-quarter commercial loan growth.
- Low-cost deposits increased $114.0 million year to date, partly reflecting economic stimulus and PPP proceeds deposited at the Bank. Certificates of deposit declined $33.3 million year to date.
- Borrowed funds increased $93.9 million from year-end 2019, including a $50 million Federal Reserve Discount Window advance and higher repurchase agreement balances.
- Non-interest income benefited from mortgage refinancing activity, with mortgage banking revenue increasing $1.2 million, or 190.0%, for the six-month period. Net securities gains added $1.2 million.
- Non-interest expense included approximately $1.76 million of first-quarter charges related to restructuring interest-rate swaps. Excluding those charges, management stated that the six-month non-GAAP efficiency ratio would have been 47.35%, versus the reported 52.13%.
- Asset quality improved: non-performing loans declined to $8.3 million from $15.4 million at June 30, 2019; non-performing assets were 0.41% of total assets versus 0.83%; and total past-due loans were 0.66% of total loans versus 0.98%.
- The allowance increased $2.5 million from year-end 2019, primarily from higher qualitative reserves reflecting COVID-19 risks. Net charge-offs remained low at approximately $0.3 million for the six-month period.
Guidance, outlook, risks and unusual items
- Management did not provide formal earnings guidance. It stated that 2020 results are not necessarily indicative of full-year results.
- As of June 30, 2020, 867 COVID-19-related loan modifications covering $239.5 million, or approximately 16.5% of the loan portfolio, had been completed. These qualified modifications were not classified as TDRs and were excluded from past-due data while modified terms were met.
- Approximately 8.7% of the loan portfolio consisted of hospitality or restaurant borrowers. The company completed 83 modifications in those sectors covering $64.8 million, or 51.5% of related loans.
- The company expects COVID-19 to adversely affect its financial position and future results, but stated that the impact could not be reasonably estimated as of August 7, 2020. Potential effects include weaker borrower repayment capacity, collateral declines, lower loan and fee demand, deposit or funding pressure, and additional provisions or charge-offs.
- Management indicated that additional increases to the allowance may be required as more information becomes available, particularly for lodging, restaurant and hospitality exposures.
- Twenty-eight municipal securities designated as held to maturity were sold during the second quarter as part of COVID-19-related risk mitigation. The sales generated proceeds of $8.6 million and a $268,000 net gain. Management treated the sales as an isolated and unusual event under applicable accounting guidance.
- The company restructured several interest-rate swaps in the first quarter, incurring $1.76 million of one-time charges. At June 30, 2020, cash-flow-hedge swaps had $260.0 million of notional principal and a $6.2 million after-tax unrealized loss in accumulated other comprehensive income.
- LIBOR may cease to be published after December 31, 2021. Nine existing swaps totaling $210 million had maturities beyond that date, and management formed a working group to address the transition.
- The company remains subject to interest-rate, credit, liquidity, market-value, regulatory and operational risks. The filing also notes that the expected-credit-loss standard may have a material impact upon adoption, although the company qualifies for delayed implementation as a smaller reporting company.
Most important facts for investors to verify
- Whether COVID-19-modified loans continue to perform when payment deferrals expire and whether additional provisions or charge-offs are required.
- The credit performance of the $96.0 million PPP portfolio and the timing and amount of related fee recognition; $3.1 million of PPP origination fees remained unrecognized at June 30, 2020.
- Exposure to hospitality and restaurant borrowers, municipal credits and other industries affected by economic restrictions.
- The sustainability of mortgage refinancing revenue and the effect of elevated refinancing activity on mortgage servicing rights.
- Future funding costs, deposit retention, borrowing levels and liquidity after the expiration of stimulus programs and the PPPLF availability period.
- The effect of swap restructuring, future interest-rate movements and the LIBOR-to-replacement-rate transition on earnings and accumulated other comprehensive income.
- The eventual impact of adoption of the current expected credit loss standard on regulatory capital, earnings and the allowance for loan losses.