Business Context and Reporting Period
The First Bancorp, Inc., a Maine financial holding company and parent of First National Bank, filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. Comparisons are primarily with the quarter and nine months ended September 30, 2017, and with December 31, 2017 for balance-sheet data.
Financial Performance and Position
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total interest income | $18.1 million | $15.5 million | $51.7 million | $45.0 million |
| Net interest income | $12.5 million | $12.0 million | $37.2 million | $35.1 million |
| Provision for loan losses | $0.3 million | $0.8 million | $1.3 million | $1.8 million |
| Non-interest income | $3.0 million | $3.5 million | $9.3 million | $9.3 million |
| Non-interest expense | $8.2 million | $8.0 million | $25.0 million | $23.4 million |
| Net income | $5.9 million | $5.0 million | $17.2 million | $14.5 million |
| Diluted EPS | $0.55 | $0.46 | $1.58 | $1.34 |
- Return on average equity was 12.63% for the quarter and 12.47% for the nine months; return on average tangible common equity was 15.05% and 14.90%, respectively.
- Tax-equivalent net interest margin declined to 2.83% in Q3 and 2.90% for the nine months, compared with 3.02% and 3.03% in the prior-year periods.
- At September 30, 2018, total assets were $1.982 billion, loans were $1.244 billion, investment securities were $574.4 million, deposits were $1.515 billion, and shareholders’ equity was $184.7 million.
- Cash and cash equivalents were $21.6 million, supplemented by $51.0 million of interest-bearing deposits in other banks. Management reported primary liquidity of $539.4 million and contingent liquidity of $274.2 million.
- Borrowed funds totaled $265.3 million, including $200.2 million of short-term borrowings and $65.1 million of long-term borrowings.
- Operating cash flow for the first nine months was $24.3 million. Investing activities used $146.3 million, principally from loan growth and purchases or repositioning of investments, while financing activities provided $124.5 million.
- The allowance for loan losses was $11.7 million, or 0.94% of loans. Net charge-offs were $0.4 million, or 0.04% of average loans on an annualized basis.
- The Bank and Company exceeded applicable well-capitalized thresholds. The Company’s total risk-based capital ratio was 14.84% at September 30, 2018.
Material Changes Versus Prior Comparable Period
- Nine-month net income increased 18.4%, while Q3 net income increased 19.1%. Management described Q3 as the Company’s best quarter and another record earnings quarter.
- Loan balances increased 6.8% from December 31, 2017 and 10.9% year over year, driven largely by commercial and municipal lending. Municipal loans increased 69.8% year to date.
- Total deposits increased 6.8% year to date and 12.2% year over year. Certificates of deposit increased $60.4 million year to date and $122.6 million year over year, reflecting asset-growth funding and shifts from money-market deposits.
- Net interest income increased despite margin compression because of earning-asset growth. Funding costs rose materially, with nine-month interest expense increasing 46.5% year over year.
- Non-interest expense increased 6.9% year over year, primarily from higher employee costs and investment in personnel and technology. The non-GAAP efficiency ratio worsened to 51.86% from 49.51%.
- The effective tax burden declined following the Tax Cuts and Jobs Act; nine-month income tax expense fell to $3.1 million from $4.8 million.
- Credit indicators improved overall: nonperforming loans declined to 1.14% of total loans from 1.46% year over year, nonperforming assets declined to 0.74% of total assets from 0.94%, and total past-due loans declined to 0.83% from 0.98%.
- Troubled debt restructurings increased to 71 loans totaling $25.7 million, compared with 67 loans totaling $19.8 million at September 30, 2017.
- Unrealized losses on available-for-sale securities increased to $9.1 million from $0.8 million at September 30, 2017, primarily reflecting higher market yields. Management concluded the securities were not other-than-temporarily impaired.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide formal earnings or revenue guidance. Management expects short-term interest rates may continue to rise over the next one to three quarters and considers current interest-rate risk acceptable.
- Interest-rate simulation indicated projected first-year net interest income declines of 1.03% under a 1% rate decrease and 3.40% under a 2% rate increase. These are hypothetical sensitivity analyses, not forecasts.
- Management identified risks from deposit runoff, wholesale-funding renewals, interest-rate volatility, competition, loan collectability, economic conditions, regulatory changes, market values of securities and wealth-management assets, and accounting changes.
- The Company had five interest-rate swaps with total notional amounts of $125.0 million and fair value of $2.9 million, used as cash-flow hedges against rising rates on short-term liabilities.
- Management expects ASU 2016-13, the current expected credit loss standard, may have a material impact. Implementation work was underway, including data collection and third-party modeling software implementation.
- At September 30, 2018, 12 TDRs totaling $7.7 million were on nonaccrual status; four TDRs totaling $676,000 involved bankruptcy, and four nonaccrual TDRs totaling $504,000 were in foreclosure.
- No material legal proceedings were reported, no material changes to previously disclosed risk factors were identified, and management concluded disclosure controls were effective.
Important Facts for Investors to Verify
- Whether loan growth and deposit growth can continue without further margin compression or increased reliance on higher-cost certificates of deposit and borrowings.
- The future effect of rising interest rates on funding costs, net interest margin and interest-rate swap performance.
- The adequacy of the $11.7 million allowance, particularly given the increase in TDR balances, specific reserves and the unallocated reserve component.
- Whether unrealized investment-security losses recover or require impairment as market yields, liquidity conditions or issuer credit quality change.
- The eventual financial and regulatory impact of adopting the current expected credit loss standard.
- The sustainability of the $0.29 quarterly dividend, given a reported payout ratio of approximately 53% for Q3 and the Company’s capital and liquidity requirements.