Business Context and Reporting Period
The First Bancorp, Inc. is a Maine-based financial holding company that owns First National Bank. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2018, with comparisons to the corresponding 2017 periods. The interim financial statements received a review, not an audit, from Berry Dunn McNeil & Parker, LLC.
Financial Performance and Position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net interest income | $12.3 million | $11.7 million | $24.7 million | $23.1 million |
| Provision for loan losses | $0.5 million | $0.5 million | $1.0 million | $1.0 million |
| Non-interest income | $3.2 million | $3.0 million | $6.3 million | $5.8 million |
| Non-interest expense | $8.2 million | $7.6 million | $16.8 million | $15.3 million |
| Net income | $5.7 million | $4.9 million | $11.2 million | $9.5 million |
| Diluted EPS | $0.53 | $0.45 | $1.04 | $0.88 |
- Tax-equivalent net interest margin was 2.88% in Q2 and 2.94% for the first six months, versus 3.03% and 3.04%, respectively, in the prior-year periods.
- Return on average assets was 1.22% for Q2 and 1.21% for the six months; return on average equity was 12.51% and 12.39%, respectively.
- The non-GAAP efficiency ratio increased to 51.02% in Q2 and 52.39% for the six months, compared with 48.50% and 49.32%.
- Total assets were $1.914 billion at June 30, 2018, up from $1.843 billion at December 31, 2017 and $1.796 billion at June 30, 2017.
- Total loans were $1.224 billion, up 5.2% year to date and 9.3% year over year. Net loans were $1.213 billion after an $11.5 million allowance.
- Total deposits were $1.417 billion, essentially flat year to date and up 7.4% year over year. Certificates of deposit increased materially as lower-cost deposits declined.
- Borrowed funds totaled $297.5 million, up 30.0% from year-end 2017 and 5.4% from June 30, 2017. Short-term borrowings were $232.3 million and long-term borrowings were $65.1 million.
- Shareholders’ equity was $183.3 million; book value per common share was $16.89 and tangible book value was $14.13.
- Net cash provided by operating activities was $18.2 million. Investing activities used $77.8 million, primarily for loan growth and securities purchases, while financing activities provided $61.4 million. Cash and cash equivalents ended at $21.1 million.
- Primary liquidity sources were $437.4 million, supplemented by $378.4 million of contingent sources. Management stated that liquidity was sufficient under a broad range of scenarios.
Material Changes Versus Prior Comparable Period
- Six-month net income increased 18.1%, and Q2 net income increased 17.4%, driven by asset and loan growth, higher fee income and lower income taxes following the Tax Cuts and Jobs Act.
- Net interest income increased 6.6% for the six months and 5.2% for Q2, but higher deposit and borrowing costs compressed the net interest margin.
- Non-interest income increased 8.0% for the six months, led by First Advisors, the trust and investment management division, while non-interest expense increased 9.2%, primarily from employee and technology investments.
- Loan growth was concentrated in commercial and municipal lending. Municipal loans increased 45.9% from year-end 2017; commercial loans increased 5.8%.
- Low-cost deposits declined $37.1 million year to date, while certificates of deposit increased $98.4 million. Management attributed the shift partly to seasonal deposit flows and asset-growth funding.
- Net unrealized losses on available-for-sale securities increased to $7.2 million from $2.9 million at year-end 2017, reducing comprehensive income. Management attributed the decline primarily to interest-rate and yield-curve changes and concluded that no other-than-temporary impairment was required.
- Credit metrics improved from year-end on delinquency, but deteriorated year over year: nonperforming loans were $14.4 million, or 1.17% of loans, versus 0.66% at June 30, 2017; total past-due loans were 0.61% versus 0.87%.
Outlook, Risks, Contingencies and Unusual Items
- Management described Q2 as a record earnings quarter and cited continued earning-asset growth, fee-based revenue growth and investment in personnel and technology. No formal earnings or revenue guidance was provided.
- Management expects short-term interest rates may continue to rise over the next one to three quarters. Interest-rate swaps with total notional principal of $125.0 million were used as cash-flow hedges against rising short-term funding costs.
- The company’s one-year simulation projected no change in net interest income if rates decline 1.0% and a 3.38% decline if rates rise 2.0%. These are hypothetical sensitivities, not forecasts.
- The allowance for loan losses increased to $11.5 million, or 0.94% of loans, from $10.7 million at year-end. The unallocated component increased to $1.4 million, or 12.4% of the allowance, reflecting portfolio growth.
- Troubled debt restructurings increased to 72 loans totaling $25.6 million, compared with 62 loans totaling $17.8 million at year-end and 68 loans totaling $20.3 million a year earlier. Twelve TDRs totaling $7.8 million were on nonaccrual status.
- Four TDRs totaling $681,000 were involved in bankruptcy, and four nonaccrual TDRs totaling $504,000 were in foreclosure. Separately, 19 loans totaling $2.0 million were in the foreclosure process.
- Temporary unrealized losses affected 480 securities with fair value of $412.8 million and unrealized losses of $14.8 million. Management reported no material credit deterioration and no other-than-temporary impairment.
- Construction loans were 32.5% of capital, and construction plus non-owner-occupied commercial real estate loans were 129.9% of capital, below cited regulatory guidance limits.
- Contractual obligations totaled $955.0 million, including $657.4 million of certificates of deposit and $297.5 million of borrowed funds. Loan commitments and unused lines totaled $172.2 million.
- The company’s total risk-based capital ratio was 14.98%, above the 10.0% well-capitalized threshold for the Bank. No material changes to previously disclosed risk factors or legal proceedings were reported.
- The company adopted revenue-recognition and financial-instrument standards in 2018 without material effects. Management expects the current expected credit loss standard, effective for the company after December 15, 2019, may have a material impact and is implementing related systems and data processes.
Most Important Facts to Verify
- Whether loan growth and the shift toward higher-cost certificates of deposit and short-term borrowings continue to pressure the net interest margin.
- Trends in commercial credit quality, TDR balances, nonaccrual loans, foreclosures and the adequacy of the $11.5 million allowance.
- Whether unrealized securities losses remain market-driven or develop into credit-related impairments.
- The sustainability of fee-income growth relative to rising personnel, technology and other operating expenses.
- Liquidity and capital levels as wholesale funding increases and lower-cost deposits decline.
- The eventual balance-sheet and earnings impact of implementing the current expected credit loss standard.