The First Bancorp, Inc. — Form 10-Q Summary
Business context and reporting period
The First Bancorp, Inc. is a Maine-based financial holding company that owns First National Bank. The unaudited filing covers the quarter and six months ended June 30, 2021, with comparative periods ended June 30, 2020. The interim financial statements were reviewed by the independent registered public accounting firm, which expressed no opinion because the procedures were substantially less extensive than an audit.
Financial performance and condition
| Metric | Six months ended June 30, 2021 | Change versus 2020 | Q2 2021 | Change versus Q2 2020 |
|---|
| Net interest income | $31.6 million | +7.4% | $15.7 million | +8.5% |
| Provision for loan losses | $1.1 million | -$1.7 million | $0.5 million | -$1.8 million |
| Non-interest income | $10.2 million | +15.7% | $4.9 million | +6.7% |
| Non-interest expense | $19.4 million | -3.0% | $9.5 million | +6.5% |
| Net income | $17.7 million | +35.6% | $8.8 million | +33.8% |
| Diluted EPS | $1.61 | +34.2% | $0.80 | +33.3% |
- Tax-equivalent net interest margin was 2.93% for the first six months, down from 2.99%, and 2.86% in Q2, unchanged from the prior-year quarter.
- Return on average equity was 15.48% for the first six months; return on average tangible common equity was 17.88%; return on average assets was 1.50%.
- The non-GAAP efficiency ratio improved to 45.14% from 52.13%. Management states that the prior-year ratio would have been 47.35% excluding 2020 interest-rate-swap restructuring charges.
- Net cash provided by operating activities was $32.3 million. Investing activities used $108.0 million, primarily from net loan growth and securities purchases, while financing activities provided $76.5 million. Cash and cash equivalents increased $0.9 million to $27.1 million.
Balance sheet, liquidity and capital
| June 30, 2021 balance | Amount | Comparison |
|---|
| Total assets | $2.45 billion | +3.8% from December 31, 2020; +8.1% year over year |
| Total loans | $1.59 billion | +7.6% from year-end; +9.4% year over year |
| Investment securities | $691.3 million | +4.1% year over year |
| Total deposits | $1.96 billion | +6.3% from year-end; +12.7% year over year |
| Borrowed funds | $228.6 million | -$33.4 million from year-end; -$50.2 million year over year |
| Shareholders’ equity | $234.2 million | +4.7% from year-end; +8.1% year over year |
- Loan growth was concentrated in commercial real estate and construction. PPP loans totaled $54.4 million at June 30, 2021, including $5.3 million of remaining PPP1 balances and $49.1 million of PPP2 balances.
- Low-cost deposits increased $114.1 million, or 10.6%, from year-end, supported partly by economic stimulus programs. Certificates of deposit declined $9.4 million.
- Management reported $948.3 million of primary liquidity and $445.9 million of contingent liquidity, which it believes is sufficient under a broad range of scenarios.
- The company’s total risk-based capital ratio was 14.55%, above the 10.0% well-capitalized threshold. Management’s stress testing indicated that the Bank would remain well capitalized under the tested scenarios.
Credit quality and material changes
- The allowance for loan losses increased to $17.0 million from $16.3 million at year-end and $14.1 million a year earlier. The allowance ratio was 1.07% of loans, compared with 1.10% and 0.97%, respectively.
- Net charge-offs were $269,000, or 0.04% of average loans, compared with $279,000 in the prior-year period. The provision declined to $1.1 million from $2.8 million.
- Nonperforming loans were $7.0 million, or 0.44% of loans, compared with 0.46% at year-end and 0.57% a year earlier. Total past-due loans were $3.4 million, or 0.22% of loans, versus 0.66% at both comparison dates.
- There were 72 troubled debt restructurings totaling $10.8 million, down from 74 loans totaling $11.5 million at year-end and 78 loans totaling $14.0 million a year earlier. Twenty-one TDR loans totaling $1.8 million were on nonaccrual status.
- COVID-19-related modifications totaling $291.7 million had been completed. Only $22.0 million, or 1.4% of the loan portfolio, remained in an original or subsequent modification at June 30, 2021.
- Commercial real estate and construction loans increased materially, while commercial “other” loans declined year over year, partly reflecting PPP forgiveness and repayment activity.
Guidance, outlook, risks and unusual items
- The filing does not provide formal earnings or revenue guidance. Management described first-half operating results as very positive, expects interest rates to increase slightly over the next year, and considers current interest-rate risk acceptable.
- Management’s interest-rate simulation indicated a projected first-year net-interest-income decline of 1.5% if rates fall 1.0% and 0.8% if rates rise 2.0%. These are hypothetical sensitivity estimates, not forecasts.
- COVID-19 remains a principal uncertainty. Maine’s economy had largely reopened, but the Delta variant could disrupt tourism, lodging, restaurants and other borrowers. The ultimate effect on loan collectability, collateral values, liquidity and operating results cannot be reasonably estimated.
- The Bank has a concentration in hotels and motels totaling $160.4 million, or 10.10% of total loans, exposing credit performance to tourism and hospitality conditions.
- Unrealized losses on investment securities increased to $5.5 million from $1.2 million at year-end. Management attributed the losses primarily to interest rates and market spreads and concluded the securities were not other-than-temporarily impaired.
- The company had nine cash-flow-hedge interest-rate swaps with $210.0 million of notional principal and a $2.1 million net-of-tax unrealized loss. LIBOR cessation creates a transition risk, particularly for seven contracts totaling $165 million with maturities beyond June 2023.
- The company expects adoption of the current expected credit loss standard to potentially have a material impact. As a smaller reporting company, adoption is deferred to fiscal years beginning after December 15, 2022; implementation work is underway.
- There were no reportable legal proceedings, defaults on senior securities, or material changes in disclosure controls. The company repurchased 9,561 shares for $240,000 and declared a second-quarter dividend of $0.32 per share.
Most important facts for investors to verify
- Whether COVID-19 and Delta-variant developments cause renewed stress in Maine’s tourism, lodging and hospitality borrowers.
- Whether rapid loan growth, particularly commercial real estate and construction exposure, leads to higher future provisions or charge-offs.
- The sustainability of deposit growth tied partly to stimulus programs and the company’s ability to maintain low funding costs.
- The effect of PPP fee recognition and forgiveness activity on future net interest income.
- The eventual balance-sheet impact of CECL adoption and the adequacy of the $17.0 million allowance.
- Progress in transitioning LIBOR-linked swaps and other contracts to replacement reference rates.
- The sensitivity of securities’ accumulated other comprehensive income and tangible capital to further interest-rate changes.
