First Bancorp, Inc. — 2016 First-Quarter Form 10-Q
Reporting period: Three months ended March 31, 2016. The First Bancorp, Inc. is a financial holding company that owns First National Bank. Interim financial statements were reviewed, not audited, by Berry Dunn McNeil & Parker, LLC.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Interest income | $13.276 million | $12.365 million | +7.4% |
| Interest expense | $2.547 million | $2.663 million | -4.4% |
| Net interest income | $10.729 million | $9.702 million | +10.6% |
| Provision for loan losses | $375,000 | $500,000 | -25.0% |
| Non-interest income | $2.964 million | $3.658 million | -19.0% |
| Non-interest expense | $7.200 million | $7.265 million | -0.9% |
| Net income | $4.503 million | $4.175 million | +7.9% |
| Diluted EPS | $0.42 | $0.39 | +7.7% |
| Tax-equivalent net interest margin | 3.13% | 3.10% | +3 basis points |
| Non-GAAP efficiency ratio | 51.45% | 56.79% | Improved |
Balance Sheet, Capital and Liquidity
- Total assets were $1.575 billion, up 0.6% from December 31, 2015 and 7.9% from March 31, 2015.
- Total loans reached $1.005 billion, increasing 1.6% year to date and 7.0% year over year. Residential term loans and commercial real estate loans were the largest categories.
- Total deposits were $1.109 billion, up 6.4% year to date and 14.8% year over year. The increase primarily reflected certificates of deposit, while lower-cost deposits declined seasonally during the quarter.
- Total borrowed funds were $276.5 million, down $60.9 million from year-end and $36.0 million from a year earlier, reflecting a shift toward certificate-of-deposit funding.
- Shareholders’ equity was $171.5 million, compared with $167.5 million at December 31, 2015 and $163.5 million at March 31, 2015. Book value per common share was $15.92 and tangible book value was $13.13.
- The Company’s total risk-based capital ratio was 16.57%; the Bank’s was 16.29%. The Bank met all well-capitalized thresholds.
- Management reported primary liquidity sources of $225.1 million and additional contingent liquidity of $314.4 million. Loan commitments and unused lines of credit totaled $156.3 million.
Cash Flow and Distributions
- Operating activities provided $3.209 million of cash, compared with $2.902 million in Q1 2015.
- Investing activities used $5.923 million, primarily due to a $16.630 million net increase in loans, partly offset by securities proceeds.
- Financing activities provided $2.948 million, driven by a $101.730 million increase in certificates of deposit and partly offset by a $70.926 million reduction in short-term borrowings.
- Cash and cash equivalents increased $234,000 to $14.533 million.
- The Company declared a quarterly cash dividend of $0.22 per share, representing a 52.38% payout ratio. It repurchased 6,936 shares for $129,000 during the quarter.
Material Changes Versus Comparable Periods
- Profitability improved primarily because of loan growth, higher net interest income and lower operating costs.
- Tax-equivalent net interest income increased $991,000, with $805,000 attributed to earning-asset growth and $186,000 to margin improvement.
- Non-interest income declined $694,000, principally because net securities gains fell to $536,000 from $1.395 million.
- Net charge-offs fell to $72,000, or 0.03% of average loans annualized, from $648,000, or 0.28%, in Q1 2015.
- Nonperforming loans declined to $6.687 million, or 0.67% of total loans, from $10.327 million, or 1.10%, a year earlier.
- Nonperforming assets were 0.53% of total assets, compared with 0.91% a year earlier and 0.57% at year-end 2015.
- Total past-due loans declined to $8.247 million, or 0.82% of total loans, from $11.958 million, or 1.27%, a year earlier.
- The allowance for loan losses was $10.219 million, or 1.02% of total loans, versus 1.09% a year earlier. The allowance increased $303,000 from year-end despite lower credit losses.
- Troubled debt restructurings declined to 82 loans totaling $23.628 million from 90 loans totaling $26.524 million a year earlier.
- Investment securities totaled $467.2 million, up 8.0% year over year but down $10.1 million from December 31, 2015. Unrealized losses declined substantially, with temporarily impaired securities at $26.2 million fair value and $389,000 of unrealized losses.
Outlook, Risks and Unusual Items
- Management characterized the quarter as the Company’s best quarter historically and emphasized loan growth, lower operating costs and improving credit quality. No formal earnings or revenue guidance was provided.
- Management expects short-term interest rates may increase within one to three quarters and considers current interest-rate risk acceptable. The modeled one-year net interest income sensitivity was negative 0.71% for a 1.0 percentage-point rate decline and negative 2.18% for a 2.0 percentage-point increase.
- Key risks include economic and regional banking conditions, interest-rate volatility, deposit competition and runoff, loan demand and collectability, credit losses, securities valuation, regulatory changes and accounting changes.
- Management stated that the allowance for loan losses was appropriate, but noted that future charge-offs could exceed the allowance and require additional provisions. The provision remains sensitive to economic conditions, loan growth and credit-quality trends.
- There were 141 impaired loans totaling $28.610 million. Twelve TDRs totaling $1.703 million were on nonaccrual status, six TDRs totaling $1.073 million involved bankruptcy, and two TDRs totaling $215,000 were in foreclosure.
- Fourteen residential mortgage loans totaling $1.399 million were in foreclosure. Other real estate owned was $1.592 million net, compared with $2.899 million a year earlier.
- Management concluded that securities with unrealized losses were not other-than-temporarily impaired and expected to receive all contractual principal and interest.
- No material legal proceedings were reported, no material changes were made to previously disclosed risk factors, and management concluded disclosure controls were effective.
Investor Verification Points
- Verify whether loan growth can continue without deterioration in commercial real estate, residential and home-equity credit quality.
- Monitor the sustainability of the 3.13% net interest margin as rates, deposit pricing and funding mix change.
- Assess reliance on certificates of deposit and wholesale funding, including the maturity of $478.9 million of deposits and $276.5 million of borrowed funds.
- Reconcile recurring securities gains and the unusually strong quarter against normalized non-interest income.
- Track nonperforming loans, TDRs, delinquencies, foreclosure balances and the adequacy of the $10.2 million allowance.
- Review interest-rate sensitivity assumptions and the effect of deposit runoff or higher funding costs on earnings and liquidity.
- Confirm capital ratios, dividend capacity and the potential dilution from 226,819 outstanding warrants with a $16.53 exercise price.