Business Context and Reporting Period
The First Bancorp, Inc., a Maine financial holding company whose principal subsidiary is First National Bank, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2017. The company provides commercial, residential, municipal and consumer lending, deposit services, investment management and mortgage banking services. Interim financial statements were reviewed, not audited, by the independent registered public accounting firm.
Financial Performance and Condition
| Metric | Six months ended June 30, 2017 | Comparable 2016 period |
|---|---|---|
| Interest income | $29.5 million | $26.9 million |
| Interest expense | $6.4 million | $5.2 million |
| Net interest income | $23.1 million | $21.7 million |
| Provision for loan losses | $1.0 million | $0.75 million |
| Non-interest income | $5.8 million | $6.0 million |
| Non-interest expense | $15.3 million | $14.4 million |
| Net income | $9.5 million | $9.1 million |
| Diluted EPS | $0.88 | $0.84 |
| Tax-equivalent net interest margin | 3.04% | 3.14% |
| Return on average equity | 10.84% | 10.61% |
| Non-GAAP efficiency ratio | 49.32% | 50.15% |
- For the second quarter, net income was $4.9 million, compared with $4.6 million in the prior-year quarter; diluted EPS was $0.45 versus $0.43.
- Total assets were $1.80 billion at June 30, 2017, up from $1.71 billion at December 31, 2016 and $1.62 billion at June 30, 2016.
- Total loans were $1.12 billion, up 4.6% year to date and 7.9% year over year. Commercial loans and residential term loans were the principal contributors to growth.
- Total investment securities were $564.6 million, compared with $539.2 million at December 31, 2016 and $472.0 million at June 30, 2016.
- Total deposits were $1.32 billion, up 6.1% year to date and 15.1% year over year. Certificates of deposit increased $50.9 million year to date.
- Borrowed funds totaled $282.3 million, consisting of $157.2 million of short-term borrowings and $125.1 million of long-term borrowings.
- Shareholders’ equity was $177.5 million; book value per common share was $16.41 and tangible book value per common share was $13.63.
- Operating cash flow was $9.2 million for the first six months. Investing activities used $79.8 million, primarily for loan growth and securities purchases, while financing activities provided $73.5 million. Cash and cash equivalents ended at $20.2 million.
- The quarterly dividend increased by one cent to $0.24 per share. Six-month dividends declared were $0.47 per share.
Material Changes Versus Comparable Periods
- Net interest income increased 6.7% for the six months and 6.5% for the second quarter, driven primarily by earning-asset growth. Higher deposit funding costs reduced the net interest margin from 3.14% to 3.04% for the six-month period.
- Interest expense increased 22.2% for the six months, principally because of higher deposit costs, partially offset by lower interest expense on borrowed funds.
- Non-interest income declined 2.1% for the six months because of lower securities gains; other operating income and investment management income partly offset the decline.
- Non-interest expense increased 6.2%, primarily from higher employee costs, furniture and equipment expense, and FDIC insurance premiums. Despite the increase, the non-GAAP efficiency ratio improved.
- The allowance for loan losses increased to $10.6 million from $10.1 million at year-end 2016, while the allowance ratio remained 0.95% of loans versus 0.98% at June 30, 2016.
- Credit metrics improved overall: total past-due loans declined to $9.8 million, or 0.87% of loans, from 1.18% at year-end 2016 and 1.04% a year earlier. Nonperforming loans were $7.4 million, or 0.66% of loans.
- Impaired loans declined to $26.6 million from $27.6 million at December 31, 2016 and $28.2 million at June 30, 2016. Troubled debt restructurings declined to 68 loans totaling $20.3 million.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide formal earnings or financial guidance. It described continued balance-sheet and earning-asset growth as the primary earnings driver.
- Management expects short-term interest rates may increase within the next one to three quarters and considers the company’s current interest-rate risk acceptable. Two interest-rate swaps with total notional amounts of $50.0 million were used as cash-flow hedges.
- Liquidity was reported as adequate, with $175.1 million of primary liquidity and an additional $404.6 million of contingent liquidity. Management stated that funding sources should meet anticipated needs.
- The company was well capitalized at June 30, 2017. The consolidated total risk-based capital ratio was 15.33%, compared with the 10.00% well-capitalized threshold applicable to the bank.
- Management identified credit quality, loan collectability, deposit runoff, wholesale funding availability, interest-rate volatility, securities valuations, mortgage servicing rights, economic conditions, competition, regulation and accounting changes as material risk factors.
- At June 30, 2017, 235 securities were in an unrealized-loss position with aggregate unrealized losses of $5.1 million. Management concluded that the losses were temporary and recorded no other-than-temporary impairment.
- The company had $179.9 million of loan commitments and unused lines of credit. Contractual obligations totaled $810.1 million, including borrowed funds and certificates of deposit.
- The company adopted share-based payment guidance without a material effect and was evaluating upcoming revenue-recognition, lease and credit-loss standards. Adoption of the current expected credit loss standard is expected after 2019, subject to applicable effective dates.
- No material legal proceedings, defaults or changes to previously reported risk factors were disclosed. Management concluded that disclosure controls were effective and that no material change occurred in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether loan growth, particularly in commercial construction and other commercial lending, results in higher criticized loans, charge-offs or future allowance requirements.
- Whether deposit pricing and the mix of certificates of deposit continue to pressure the net interest margin as rates change.
- The sustainability of earnings growth after excluding balance-sheet growth and the effect of tax-exempt income.
- The valuation sensitivity of investment securities and mortgage servicing rights to interest rates, spreads and prepayment speeds.
- The availability and cost of the company’s primary and contingent liquidity sources, including FHLB and Federal Reserve borrowing capacity.
- The eventual effect of the current expected credit loss standard and other pending accounting standards on capital, earnings and reserves.
- The filing text does not provide a clear full-year earnings forecast or a quantified expected impact from pending accounting standards.