Business Context and Reporting Period
The First Bancorp, Inc. is a Maine-based financial holding company that owns The First, N.A. The unaudited Form 10-Q covers the quarter and nine months ended September 30, 2014, with comparisons to the corresponding 2013 periods. The interim financial statements were reviewed, but not audited, by Berry Dunn McNeil & Parker, LLC.
Key Financial Metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Interest income | $12.9 million | $12.7 million | $38.2 million | $37.2 million |
| Net interest income | $10.0 million | $9.5 million | $29.6 million | $27.8 million |
| Provision for loan losses | $0.35 million | $0.8 million | $0.85 million | $3.5 million |
| Non-interest income | $3.7 million | $2.6 million | $8.4 million | $9.5 million |
| Non-interest expense | $7.8 million | $7.0 million | $22.3 million | $21.8 million |
| Net income | $4.1 million | $3.4 million | $11.3 million | $9.5 million |
| Diluted EPS | $0.38 | $0.31 | $1.05 | $0.87 |
| Tax-equivalent net interest margin | 3.07% | 3.04% | 3.10% | 3.04% |
- Q3 net income increased 22.1%; nine-month net income increased 19.2%. Management described Q3 as the best quarterly income in the Company’s history.
- Return on average assets was 1.09% for Q3 and 1.02% for the first nine months. Return on average tangible common equity was 12.60% for Q3 and 12.02% for the first nine months.
- The non-GAAP efficiency ratio was 58.03% for Q3 and 56.35% for the first nine months, compared with 53.51% and 56.00%, respectively, in 2013.
- Total assets were $1.489 billion at September 30, 2014. Loans were $908.1 million, investment securities were $486.6 million, deposits were $1.055 billion, and shareholders’ equity was $159.2 million.
- Cash and cash equivalents were $17.2 million at September 30, 2014. Operating activities provided $12.8 million of cash during the first nine months, investing activities used $16.3 million, and financing activities provided $4.1 million, resulting in a $0.6 million net increase in cash.
- Borrowed funds totaled $258.6 million, including $168.5 million short-term and $90.1 million long-term. Total contractual obligations were $723.1 million, including certificates of deposit, borrowed funds, and operating leases.
- Primary liquidity sources were $316.9 million, with an additional $307.9 million of contingent liquidity. Management stated that funding sources were sufficient under a broad range of scenarios.
- Regulatory capital remained strong: the leverage ratio was 8.79%, tier one risk-based capital was 15.00%, and total risk-based capital was 16.25% at September 30, 2014, above well-capitalized standards.
Material Changes Versus Comparable Periods
- Net interest income increased 6.4% for the first nine months, driven by asset growth and lower funding costs. The tax-equivalent margin improved to 3.10% from 3.04%.
- The provision for loan losses declined 75.7% to $0.85 million. Net charge-offs fell to $0.72 million, or 0.11% of average loans, from $3.5 million, or 0.53%, in the prior-year period.
- Non-interest income declined 11.0% for the first nine months, primarily because of lower mortgage refinancing origination income. Q3 non-interest income increased 39.5%, mainly due to $1.1 million of securities gains.
- Non-interest expense increased 2.4% for the first nine months, principally from higher salaries and employee benefits. Q3 expense included a non-recurring employee benefits item.
- Loans increased 3.6% from December 31, 2013 and 5.3% from September 30, 2013. Growth included residential term loans, home equity lines, commercial construction, and consumer loans.
- Total deposits increased 3.0% year-to-date and 1.7% year-over-year. Low-cost deposits increased substantially, while certificates of deposit declined $67.3 million year-to-date and $68.7 million year-over-year.
- Borrowed funds declined 7.3% from year-end and 3.1% year-over-year.
- The allowance for loan losses was $11.6 million, or 1.28% of loans, compared with 1.45% a year earlier. Non-performing loans declined to $11.8 million, or 1.30% of loans, from $17.9 million, or 2.08%, at September 30, 2013.
- Total past-due loans declined to 1.17% of loans from 2.67% a year earlier, and non-performing assets declined to 1.10% of assets from 1.48%.
- During Q3, the Company transferred securities with an amortized cost of approximately $89.8 million from available-for-sale to held-to-maturity as part of its investment and balance-sheet strategies.
- Accumulated unrealized gains on available-for-sale securities improved to $1.2 million from a $4.2 million unrealized loss at September 30, 2013, contributing to comprehensive income of $19.1 million for the first nine months.
Guidance, Outlook, Risks and Unusual Items
- No formal earnings or financial guidance was provided. Management expects interest rates to remain stable over the next four to six quarters and considers current interest-rate risk acceptable.
- Management cited improving credit quality, loan growth, lower credit costs, and an improving margin trend as key operating positives, while noting that local and national economic conditions remain slow.
- Interest-rate simulation indicated a projected first-year net-interest-income decrease of 0.59% if rates decline by 1.0% and 2.82% if rates rise by 2.0%; both scenarios were within the Company’s policy limit.
- Management identified allowance for loan losses, goodwill, mortgage servicing rights, and other-than-temporary impairment assessments as significant accounting estimates. Actual results may differ from those estimates.
- At September 30, 2014, 96 loans totaling $27.9 million were troubled debt restructurings. Sixteen TDR loans totaling $2.7 million were on non-accrual status, nine loans totaling $1.2 million involved bankruptcy, and three loans totaling $455,000 were in foreclosure.
- Other real estate owned totaled $4.6 million across 30 properties, net of a $0.5 million allowance.
- The Company reported $180.8 million of securities with temporary unrealized losses totaling $8.0 million. Management concluded that no other-than-temporary impairment was warranted.
- The Company had no material legal proceedings, no material changes to previously disclosed risk factors, and no material off-balance-sheet risk requiring separate liability presentation. Loan commitments and unused lines of credit totaled $138.4 million.
Important Facts for Investors to Verify
- Whether the improving margin and lower credit costs are sustainable as rates, deposit pricing, loan growth, and credit conditions change.
- The adequacy of the $11.6 million allowance, including the $2.1 million unallocated component, relative to non-performing loans, TDRs, foreclosures, and local economic conditions.
- The performance and collateral values of the $27.9 million TDR portfolio and the $4.6 million OREO balance.
- The effect of reduced mortgage refinancing activity on recurring non-interest income and mortgage servicing rights.
- The duration, valuation sensitivity, and unrealized-loss exposure of the investment portfolio, particularly securities with losses outstanding for more than 12 months.
- The Company’s reliance on deposits, FHLB advances, repurchase agreements, and other wholesale funding, including the availability of stated contingent liquidity.
- Future dividend capacity, capital requirements, and the potential dilution from 225,904 Treasury warrants and outstanding stock-based awards.