First Bancorp, Inc. 10-Q Summary
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 six months ended June 30, 2016, with comparisons to June 30, 2015 and, for balance-sheet items, December 31, 2015. Interim financial statements were reviewed by the independent registered public accounting firm and received an unqualified review conclusion. The company had 10,785,666 common shares outstanding as of August 1, 2016.
Key financial metrics
| Metric | Six months ended June 30, 2016 | Six months ended June 30, 2015 | Change |
|---|---|---|---|
| Interest income | $26.9 million | $24.9 million | +7.8% |
| Interest expense | $5.2 million | $5.2 million | Approximately flat |
| Net interest income | $21.7 million | $19.8 million | +9.6% |
| Provision for loan losses | $750,000 | $900,000 | -16.7% |
| Non-interest income | $6.0 million | $6.5 million | -8.0% |
| Non-interest expense | $14.4 million | $14.2 million | +1.4% |
| Net income | $9.1 million | $8.2 million | +10.6% |
| Diluted EPS | $0.84 | $0.77 | +9.1% |
| Tax-equivalent net interest margin | 3.14% | 3.08% | +6 basis points |
| Non-GAAP efficiency ratio | 50.15% | 53.71% | Improved |
For the second quarter, net income was $4.6 million, or $0.43 diluted EPS, compared with $4.1 million, or $0.38 diluted EPS, in the prior-year quarter. Management described the quarter as the company’s highest recorded quarterly net income.
- Total assets were $1.62 billion, compared with $1.56 billion at December 31, 2015 and $1.55 billion at June 30, 2015.
- Total loans were $1.04 billion, up 5.0% year to date and 7.8% year over year. Commercial loans were the primary growth driver.
- Total deposits were $1.15 billion, up 9.8% year to date and 4.5% year over year. Certificates of deposit increased $108.6 million year to date.
- Cash and cash equivalents were $20.8 million. Primary liquidity sources totaled $184.8 million, with an additional $344.0 million of contingent liquidity reported by management.
- Borrowed funds totaled $283.1 million, down $54.4 million from December 31, 2015 and up $5.1 million year over year.
- Shareholders’ equity was $174.8 million, versus $167.5 million at December 31, 2015. Book value per common share was $16.21 and tangible book value per share was $13.42.
- The company declared a quarterly cash dividend of $0.23 per share, one cent higher than the prior four quarters.
- The company reported a total risk-based capital ratio of 16.36% at the holding-company level; the Bank’s ratio was 16.08%. The Bank met all well-capitalized regulatory thresholds.
Material changes versus comparable periods
- Earnings growth was driven principally by higher net interest income from loan and other earning-asset growth, together with a modestly higher margin and lower funding costs.
- Non-interest income declined because securities gains were $531,000 in the first six months of 2016 versus $1.395 million in the prior-year period. Second-quarter non-interest income nevertheless increased 6.1% year over year, primarily from higher other operating income.
- Non-interest expense increased $200,000, primarily reflecting marketing costs associated with the Bank’s rebranding campaign.
- Net loan charge-offs declined to $468,000, or 0.09% of average loans annualized, from $1.336 million, or 0.29%, in the prior-year period.
- Nonperforming loans declined to $6.5 million, or 0.62% of total loans, from $8.9 million, or 0.93%, at June 30, 2015. Nonperforming assets declined to 0.47% of total assets from 0.72%.
- Total past-due loans improved year over year to 1.04% of total loans from 1.14%, but increased from 0.84% at December 31, 2015.
- Troubled debt restructurings declined to 78 loans totaling $22.6 million, compared with 88 loans totaling $25.8 million at June 30, 2015.
- The allowance for loan losses increased to $10.2 million but declined as a percentage of loans to 0.98%, from 1.03% a year earlier. Management maintained a $1.0 million qualitative overlay related to commercial loan growth and potential weaknesses in a small number of performing credits.
- Investment securities totaled $472.0 million, down modestly from $477.0 million at June 30, 2015. Unrealized losses declined substantially, and management concluded that no other-than-temporary impairment was required.
Outlook, risks, contingencies, and unusual items
- 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. Simulation analysis indicated first-year net interest income declines of approximately 0.79% under a gradual 1.0% rate decrease and 0.77% under a gradual 2.0% increase; these scenarios were within the company’s policy limit.
- The company entered into two interest-rate swaps with total notional amounts of $50.0 million to hedge exposure to rising short-term rates. Their aggregate fair-value loss was $208,000 at June 30, 2016 and was recorded in other comprehensive income.
- Contractual obligations included $283.1 million of borrowed funds, $479.5 million of certificates of deposit, and $138.3 million of loan commitments and unused lines of credit.
- At June 30, 2016, six TDR loans totaling approximately $1.1 million were in bankruptcy, eight loans totaling $879,000 were on nonaccrual status, and two loans totaling $117,000 were in foreclosure.
- There were 20 loans totaling $2.9 million in the foreclosure process and ten properties with net other real estate owned of $1.1 million.
- Management states that liquidity is sufficient under a broad range of scenarios, but identifies deposit runoff and inability to renew wholesale funding as principal liquidity risks.
- Forward-looking results remain subject to economic and regional banking conditions, interest-rate volatility, loan demand and collectability, securities valuations, competition, regulation, accounting changes, and assumptions used in allowance and mortgage-servicing-rights valuations.
- Recently issued standards include the current expected credit loss model, effective for fiscal years beginning after December 15, 2019. Management was evaluating its potential impact.
- No material changes were reported to the risk factors in the 2015 Form 10-K, no material legal proceedings were disclosed, and management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether continued commercial and municipal loan growth produces higher credit losses or requires additional allowance provisions, particularly given the $1.0 million qualitative overlay.
- The sustainability of margin expansion and earnings growth if funding costs rise or deposit mix shifts toward higher-cost certificates of deposit.
- The concentration and maturity profile of borrowed funds and certificates of deposit, including $456.8 million of obligations due within one year.
- The performance of TDRs, nonaccrual loans, past-due loans, foreclosure loans, and other real estate owned.
- The potential effect of interest-rate changes on net interest income, including the effectiveness and counterparty exposure of the $50.0 million in interest-rate swaps.
- The future impact of the current expected credit loss accounting standard and other recently issued accounting guidance.
- The assumptions supporting securities impairment conclusions, mortgage servicing rights valuation, goodwill, and the allowance for loan losses.