Business Context and Reporting Period
The First Bancorp, Inc. is a Maine financial holding company that owns First National Bank. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017, with comparisons to September 30, 2016 and December 31, 2016 where applicable. The interim financial statements received a review, not an audit, and the independent accountants reported no material modifications were needed.
Financial Performance and Position
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Interest income | $15.5 million | $13.3 million | $45.0 million | $40.2 million |
| Net interest income | $12.0 million | $10.5 million | $35.1 million | $32.2 million |
| Provision for loan losses | $0.75 million | $0.38 million | $1.75 million | $1.13 million |
| Non-interest income | $3.5 million | $3.5 million | $9.3 million | $9.4 million |
| Non-interest expense | $8.0 million | $7.4 million | $23.4 million | $21.9 million |
| Net income | $5.0 million | $4.6 million | $14.5 million | $13.7 million |
| Diluted EPS | $0.46 | $0.42 | $1.34 | $1.27 |
- Tax-equivalent net interest margin was 3.02% in Q3 and 3.03% for the nine months, compared with 2.98% and 3.08%, respectively, in the comparable 2016 periods.
- Return on average equity was 10.91% for Q3 and 10.86% for the nine months. Return on average tangible common equity was 13.08% and 13.06%, respectively.
- The non-GAAP efficiency ratio improved to 49.88% in Q3 and 49.51% for the nine months, versus 50.25% and 50.19% in the prior-year periods.
- At September 30, 2017, total assets were $1.782 billion, loans were $1.121 billion, investment securities were $552.5 million, deposits were $1.350 billion, and shareholders' equity was $179.9 million.
- The allowance for loan losses was $11.0 million, or 0.98% of total loans. Net charge-offs for the nine months were $876,000, or 0.11% of average loans on an annualized basis.
- Cash provided by operating activities was $18.0 million, cash used in investing activities was $66.9 million, and cash provided by financing activities was $53.9 million. Cash and cash equivalents increased by $5.0 million to $22.4 million.
- Borrowed funds totaled $234.3 million at September 30, 2017, consisting of $119.2 million short term and $115.1 million long term. Total contractual obligations, including deposits, borrowed funds and operating leases, were $731.5 million.
- Primary liquidity sources were $140.6 million, supplemented by $385.8 million of contingent liquidity. Management stated that available funding was sufficient under a broad range of scenarios.
- The Company reported a total risk-based capital ratio of 15.87%, above the 10.0% well-capitalized threshold applicable to the Bank. The Bank's total risk-based capital ratio was 15.76%.
Material Changes Versus Comparable Periods
- Nine-month net income increased 5.9%, while Q3 net income increased 9.2%. Management attributed the improvement primarily to growth in earning assets and net interest income.
- Total loans increased 4.6% from December 31, 2016 and 8.9% year over year. Commercial and municipal lending were the principal growth areas, while residential term loans also increased.
- Total deposits increased 8.6% year to date and 15.0% year over year, including significant municipal deposit inflows. Borrowed funds declined 16.0% year to date as funding shifted toward certificates of deposit.
- Net interest margin declined for the nine-month comparison because deposit funding costs increased faster than asset yields, although Q3 margin improved year over year.
- Non-interest income declined slightly for the nine months, reflecting lower service-charge and mortgage-banking revenue, partly offset by higher investment-management and debit-card revenue. Q3 included $468,000 of net securities gains.
- Non-interest expense increased 6.9% for the nine months, primarily because of higher employee costs and furniture and equipment expenses supporting balance-sheet growth.
- Non-performing loans increased to $16.4 million, or 1.46% of loans, from $7.1 million, or 0.69%, a year earlier. Non-performing assets increased to 0.94% of assets from 0.49%. Management attributed the increase primarily to deterioration in two loan relationships.
- Impaired loans increased to $35.1 million from $27.6 million at December 31, 2016. Troubled debt restructurings declined to 67 loans totaling $19.8 million from 71 loans totaling $21.5 million at year-end.
- Despite increased credit provisions, total past-due loans improved to 0.98% of loans from 1.18% at December 31, 2016. Other real estate owned declined to $320,000 from $375,000 at year-end and $855,000 a year earlier.
Outlook, Risks, Contingencies and Unusual Items
- The filing provides no formal earnings or revenue guidance. Management said it expected short-term interest rates could increase within the next one to three quarters and considered current interest-rate risk acceptable.
- Interest-rate simulation indicated a projected first-year net-interest-income decline of approximately 2.99% if rates rise gradually by two percentage points, within the Company's stated policy limit of a 10.0% decline. These scenarios are not forecasts and depend on assumptions about rates, prepayments, loan balances and deposit behavior.
- The Company uses two interest-rate swaps with total notional amounts of $50.0 million and a net unrealized gain of $1.6 million to hedge exposure to rising short-term borrowing costs.
- Credit risk is the principal operating concern. Management increased provisions because of deterioration in two relationships and cautioned that future charge-offs could exceed the allowance or require additional provisions.
- At September 30, 2017, 21 loans totaling $3.5 million were in foreclosure, including 14 residential mortgage loans totaling $1.9 million. Four TDR loans totaling $826,000 were in bankruptcy, and eight TDR loans totaling $1.1 million were on non-accrual status.
- The investment portfolio contained $255.3 million of securities with unrealized losses totaling $4.8 million. Management considered the losses temporary and reported no material other-than-temporary impairment.
- The Company expects to adopt the new revenue standard on January 1, 2018 using the modified retrospective method. It is evaluating the impact on trust, asset-management, deposit-related, interchange and merchant revenues. The Company is also evaluating the future current expected credit loss standard, effective for it in 2020.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. The filing reported no material legal proceedings and no material changes to previously disclosed risk factors.
Most Important Facts to Verify
- Whether the deterioration in the two loan relationships is contained or leads to further increases in non-performing loans, impaired loans, charge-offs or provisions.
- The sustainability of loan and deposit growth, particularly the reliance on municipal deposits and higher-cost certificates of deposit.
- Future net interest margin performance as deposit costs and short-term interest rates rise.
- The adequacy of the $11.0 million allowance for loan losses relative to commercial-loan growth, collateral values and regional economic conditions.
- The impact of securities valuation changes, unrealized losses and interest-rate movements on accumulated other comprehensive income and regulatory capital.
- The Company's liquidity capacity and refinancing needs for $449.8 million of obligations due within one year, including short-term borrowings and certificates of deposit.
- The eventual effects of revenue recognition and current expected credit loss accounting changes, which the filing states were still under evaluation.