First Bancorp, Inc. — Form 10-Q Summary
Business Context and Reporting Period
The First Bancorp, Inc. is a Maine-based financial holding company owning The First, N.A. The filing covers the quarter and nine months ended September 30, 2013. The interim financial statements are unaudited and were reviewed by the independent registered public accounting firm. Management stated that the 2013 interim results are not necessarily indicative of full-year results.
Key Financial Metrics
| Metric | Q3 2013 | Q3 2012 | Nine Months 2013 | Nine Months 2012 |
|---|---|---|---|---|
| Net interest income | $9.5 million | $9.7 million | $27.8 million | $29.4 million |
| Provision for loan losses | $0.8 million | $1.4 million | $3.5 million | $6.3 million |
| Non-interest income | $2.6 million | $2.5 million | $9.5 million | $8.6 million |
| Non-interest expense | $7.0 million | $6.6 million | $21.8 million | $19.5 million |
| Net income | $3.4 million | $3.2 million | $9.5 million | $9.5 million |
| Diluted EPS | $0.31 | $0.31 | $0.87 | $0.91 |
| Tax-equivalent net interest margin | 3.04% | 3.12% | 3.04% | 3.16% |
| Non-GAAP efficiency ratio | 53.51% | 50.73% | 56.00% | 50.74% |
- Total assets were $1.465 billion, up 3.5% from December 31, 2012 and 2.9% from September 30, 2012.
- Total loans were $862.1 million, down 0.8% year to date and 0.9% year over year. Investment securities were $504.1 million, up 12.2% year to date.
- Total deposits were $1.037 billion, up 8.2% from year-end and 9.8% year over year. Borrowed funds were $266.8 million, down 5.7% year to date and 12.5% year over year.
- Cash and cash equivalents were $20.1 million at September 30, 2013. Operating activities provided $17.7 million of cash, investing activities used $67.9 million, and financing activities provided $55.3 million during the first nine months.
- Shareholders’ equity was $146.7 million, compared with $156.3 million at December 31, 2012. Book value per common share was $13.75 and tangible book value was $10.88.
- The company declared a quarterly common dividend of $0.195 per share. The nine-month dividend payout ratio was 67.24%.
- Regulatory capital remained above well-capitalized thresholds: leverage capital was 8.63%, Tier 1 risk-based capital was 14.82%, and total risk-based capital was 16.08%.
Material Changes Versus Comparable Periods
- Nine-month net income was essentially unchanged at $9.463 million versus $9.459 million, but diluted EPS declined 4.4% because of the increased common share count following the March 2013 stock offering.
- Net interest income declined 5.5% for the nine months as the tax-equivalent margin fell to 3.04% from 3.16%, primarily because assets repriced downward in the low-rate environment faster than liabilities.
- Non-interest income increased 10.9%, led by mortgage origination and servicing income and other operating income. Net securities gains declined to $1.1 million from $2.0 million.
- Non-interest expense increased 11.9%, largely due to costs associated with the new Bangor branch and the Rockland branch acquired in October 2012. The efficiency ratio rose to 56.00% from 50.74%.
- The provision for loan losses fell $2.8 million, and net charge-offs declined to $3.5 million from $4.6 million. The allowance was $12.5 million, or 1.45% of loans, versus 1.69% a year earlier.
- Asset quality improved: non-performing loans were 2.08% of loans versus 2.71% a year earlier, and non-performing assets were 1.48% of assets versus 2.04%. Other real estate owned declined to $3.8 million from $5.5 million.
- Accumulated other comprehensive income worsened materially because of interest-rate-related securities losses. The net unrealized loss on available-for-sale securities was $4.2 million at September 30, 2013, compared with a $9.5 million unrealized gain a year earlier.
- The company completed the repurchase of all remaining $12.5 million of U.S. Treasury CPP preferred stock in March and May 2013, funded partly by a $11.6 million net common stock offering. Treasury warrants for 225,904 common shares at an exercise price of $16.60 remained outstanding.
Outlook, Risks, Contingencies and Unusual Items
- Management stated that margin compression appeared to have stabilized and that the third quarter produced the highest quarterly net income since the second quarter of 2009. Management expected interest rates to remain stable over the next 10 to 12 quarters.
- Management described the economic recovery as slow to moderate and maintained caution regarding employment, real estate values, interest-rate volatility, and loan portfolio quality.
- The unallocated loan-loss reserve increased to $1.5 million from $0.8 million at year-end, reflecting uncertainty related to the federal government shutdown and debt-ceiling issues, collateral-value declines, elevated watch-rated commercial loans, OREO valuation discounts, and the uncertain economic outlook.
- At September 30, 2013, 104 loans totaling $29.9 million were troubled debt restructurings. Of these, $3.8 million was on nonaccrual status, $1.8 million involved bankruptcy, and $0.7 million was in foreclosure.
- The securities portfolio had $20.1 million of unrealized losses across 297 securities, substantially higher than at year-end. Management concluded the losses were temporary and did not record other-than-temporary impairment charges.
- Primary liquidity sources totaled $288.1 million, with an additional $329.6 million of contingent liquidity. Management stated that liquidity was adequate to meet anticipated funding needs.
- Contractual obligations included $266.8 million of borrowed funds and $532.5 million of certificates of deposit. Loan commitments and unused lines of credit totaled $117.1 million.
- Interest-rate simulation indicated estimated first-year net interest income declines of 0.47% if rates fell 1 percentage point and 2.14% if rates rose 2 percentage points. These scenarios were within the company’s stated policy limit.
- Management identified risks from economic conditions, interest-rate volatility, deposit runoff, wholesale funding availability, loan collectability, securities valuations, regulatory changes, competition, and accounting estimates. No material changes to previously reported risk factors or material legal proceedings were disclosed.
Important Facts for Investors to Verify
- Whether net interest margin stabilization continues as loans and securities reprice and interest rates change.
- Whether the improvement in non-performing loans, charge-offs, OREO and TDR performance continues without requiring higher provisions.
- The potential effect of the $20.1 million unrealized securities loss on tangible capital and future earnings if securities are sold or losses become other-than-temporary.
- The sustainability of deposit growth, the mix and repricing costs of certificates of deposit, and reliance on FHLB advances and other wholesale funding.
- Whether expanded branches and related operating costs generate sufficient revenue to improve the efficiency ratio.
- The adequacy of the $12.5 million allowance for loan losses in light of collateral-value declines, commercial loan classifications, foreclosures and the $1.5 million unallocated component.
- The dilution and capital implications of the 225,904 outstanding Treasury warrants and the increased common share count.