The First Bancorp, Inc. — Form 10-Q Summary
Business context and reporting period
The First Bancorp, Inc. is a Maine financial holding company whose principal subsidiary is First National Bank. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2016, with comparisons to September 30, 2015 and December 31, 2015 balance-sheet data. The interim financial statements received a review, rather than an audit, from the independent registered public accounting firm.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net interest income | $10.5 million | $10.5 million | $32.2 million | $30.3 million |
| Provision for loan losses | $375,000 | $200,000 | $1.125 million | $1.100 million |
| Non-interest income | $3.5 million | $3.0 million | $9.4 million | $9.5 million |
| Non-interest expense | $7.4 million | $7.7 million | $21.9 million | $22.0 million |
| Net income | $4.6 million | $4.2 million | $13.7 million | $12.4 million |
| Diluted EPS | $0.42 | $0.39 | $1.27 | $1.16 |
- Tax-equivalent net interest margin was 2.98% in Q3 and 3.08% for the nine months, compared with 3.11% and 3.09%, respectively, in the comparable 2015 periods.
- Return on average equity was 10.24% for Q3 and 10.48% for the nine months. Return on average tangible common equity was 12.33% and 12.67%, respectively.
- The non-GAAP efficiency ratio improved to 50.25% in Q3 and 50.19% for the nine months, compared with 53.88% and 53.76% in 2015.
- At September 30, 2016, total assets were $1.635 billion, loans were $1.029 billion, investment securities were $485.1 million, deposits were $1.174 billion, and shareholders’ equity was $176.0 million.
- Cash and cash equivalents were $23.5 million. Borrowed funds totaled $268.1 million, consisting of $138.0 million of short-term borrowings and $130.1 million of long-term borrowings.
- Operating cash flow for the nine months was $14.1 million. Investing activities used $59.0 million, primarily reflecting securities purchases and loan growth, while financing activities provided $54.1 million.
- The allowance for loan losses was $10.3 million, or 1.00% of total loans. Net charge-offs were $743,000, or 0.10% of average loans on an annualized basis.
- The Company’s total risk-based capital ratio was 16.49%, and management stated that the Bank and Company met applicable well-capitalized guidelines.
Material changes versus comparable periods
- Nine-month net income increased 10.1% and diluted EPS increased 9.5%; Q3 net income increased 8.9% and diluted EPS increased 7.7%.
- Growth in earning assets, particularly loans, drove the increase in net interest income. Total loans increased 4.1% from December 31, 2015 and 6.8% year over year. Commercial loans increased 6.0% year to date, and municipal loans increased 32.4%.
- Net interest margin declined modestly because of securities calls and higher funding costs. In Q3, interest expense increased 18.6% year over year, limiting net interest income growth to 0.2%.
- Non-interest income was essentially flat for the nine months because higher mortgage origination and servicing income largely offset lower securities gains. Mortgage origination and servicing income increased 40.3% year over year.
- Non-interest expense declined 0.5% for the nine months and 3.9% in Q3, principally because of lower other credit-related costs.
- Credit metrics generally improved: non-performing loans declined to 0.69% of loans from 0.83% a year earlier; non-performing assets declined to 0.49% of assets from 0.65%; and net charge-offs declined from $1.8 million to $743,000 for the nine months.
- Past-due loans increased to 0.95% of loans from 0.84% at December 31, 2015, but remained below 1.01% a year earlier. Troubled debt restructured loans declined to 75 loans totaling $22.0 million from 84 loans totaling $23.9 million at year-end 2015.
- Deposits increased $130.6 million, or 12.5%, from year-end 2015. Borrowed funds decreased $69.4 million, or 20.6%, as funding shifted toward deposits and certificates of deposit.
- Other real estate owned declined to $855,000 from $1.5 million at year-end 2015 and $1.9 million a year earlier.
Guidance, outlook, risks and unusual items
- No formal earnings or revenue guidance is provided. Management described the first nine months as the Company’s best performance for that period and expected short-term rates might increase within one to three quarters.
- Management reported primary liquidity of $238.1 million and additional contingent liquidity of $325.1 million, and stated that funding sources were sufficient under a broad range of scenarios.
- Interest-rate simulation indicated a projected first-year net interest income decline of 1.23% if short-term rates decreased one percentage point and an increase of 0.43% if rates increased two percentage points. Management stated that both scenarios were within its policy limits.
- The Company entered into two cash-flow-hedging interest-rate swaps with aggregate notional amounts of $50.0 million to limit exposure to rising rates on short-term LIBOR-indexed liabilities.
- Management maintained a $1.0 million pooled-reserve overlay because of increased commercial loan volume and potential weaknesses in a small number of otherwise performing credits. The allowance remains subject to judgment, economic conditions, portfolio growth, credit deterioration and regulatory review.
- At September 30, 2016, 71 securities had unrealized losses totaling $735,000. Management concluded that the securities were temporarily impaired and that no other-than-temporary impairment charge was warranted.
- Key risks include interest-rate volatility, deposit runoff, wholesale funding availability, loan demand and collectability, collateral values, competition, securities valuations, mortgage prepayment speeds, regulatory changes and general economic conditions.
- The Company disclosed no material changes to previously reported risk factors, no material legal proceedings, no defaults upon senior securities and no material changes in internal control over financial reporting.
- Recently issued accounting standards include the expected credit loss model under ASU 2016-13, effective for fiscal years beginning after December 15, 2019. Management was evaluating the potential impact.
Important facts for investors to verify
- Verify whether loan growth and deposit growth remain sustainable without further compression in net interest margin.
- Monitor commercial loan concentrations, the $1.0 million reserve overlay, allowance adequacy and future charge-offs.
- Track past-due loans, non-performing loans, TDR performance, bankruptcies and foreclosure balances.
- Assess sensitivity to rising rates, including deposit repricing, borrowing costs and the performance of the interest-rate swaps.
- Review liquidity sources, collateral availability and the $692.995 million of disclosed contractual obligations, including deposits and borrowings.
- Evaluate the effect of securities calls, unrealized losses and mortgage servicing-rights assumptions on future earnings and capital.
- Confirm dividend capacity and payout sustainability; the quarterly dividend was maintained at $0.23 per share, with a nine-month payout ratio of 53.13%.