The First Bancorp, Inc. — 2019 Third-Quarter Form 10-Q Summary
Business context and reporting period
The First Bancorp, Inc. is a financial holding company whose principal subsidiary is First National Bank, serving primarily Maine markets. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, with comparisons to the corresponding 2018 periods. The interim financial statements were reviewed, but not audited, by the independent registered public accounting firm.
Financial performance and key metrics
| Metric | Nine months 2019 | Nine months 2018 | Quarter 2019 | Quarter 2018 |
|---|
| Interest income | $59.0 million | $51.7 million | $19.9 million | $18.1 million |
| Interest expense | $19.9 million | $14.5 million | $6.7 million | $5.6 million |
| Net interest income | $39.1 million | $37.2 million | $13.2 million | $12.5 million |
| Provision for loan losses | $875,000 | $1.3 million | $250,000 | $333,000 |
| Non-interest income | $10.3 million | $9.3 million | $3.5 million | $3.0 million |
| Non-interest expense | $26.2 million | $25.0 million | $9.0 million | $8.2 million |
| Net income | $18.8 million | $17.2 million | $6.3 million | $5.9 million |
| Diluted EPS | $1.73 | $1.58 | $0.58 | $0.55 |
- Tax-equivalent net interest margin was 2.90% for the first nine months and 2.88% for the third quarter, compared with 2.90% and 2.83%, respectively, in the prior-year periods.
- Return on average assets was 1.26% for the first nine months; return on average equity was 12.49%; return on average tangible common equity was 14.67%.
- The non-GAAP efficiency ratio improved to 51.12% for the first nine months from 51.86% in 2018, but increased to 52.08% in the third quarter from 50.82%.
- Cash dividends declared were $0.89 per share for the first nine months, including $0.30 per share declared in the third quarter. The nine-month payout ratio was 51.15%.
Balance sheet, cash flow, debt and liquidity
| Balance-sheet item | September 30, 2019 | December 31, 2018 | September 30, 2018 |
|---|
| Total assets | $2.033 billion | $1.945 billion | $1.982 billion |
| Total loans | $1.263 billion | $1.238 billion | $1.244 billion |
| Investment securities | $634.6 million | $584.7 million | $571.2 million |
| Total deposits | $1.623 billion | $1.527 billion | $1.515 billion |
| Borrowed funds | $181.4 million | $210.3 million | $265.3 million |
| Shareholders’ equity | $208.5 million | $191.5 million | $184.7 million |
| Cash and cash equivalents | $21.4 million | $19.1 million | $21.6 million |
- Net cash provided by operating activities was $14.4 million; investing activities used $70.3 million, primarily due to securities purchases and loan growth; financing activities provided $58.1 million. Cash increased $2.3 million during the nine months.
- Deposits increased $96.2 million, or 6.3%, from year-end. Certificates of deposit increased $70.4 million, while low-cost deposits increased $29.2 million.
- Borrowed funds decreased $28.9 million from year-end, partly replaced by wholesale certificates of deposit.
- Management reported $710.4 million of primary liquidity and $365.2 million of contingent liquidity and stated that available sources were sufficient for anticipated needs.
- The Company’s total risk-based capital ratio was 15.44%, above the 10.00% well-capitalized threshold applicable to the Bank. The Company’s leverage ratio was 8.82%.
Material changes versus prior comparable periods
- Nine-month net income increased 9.7%, while third-quarter net income increased 6.0%. Diluted EPS increased 9.5% for the nine months and 5.5% for the quarter.
- Net interest income increased 5.0% for the nine months and 5.5% for the quarter, primarily from growth in earning assets. Interest expense rose substantially, especially on deposits, partially offsetting interest-income growth.
- Non-interest income increased 10.0% for the nine months and 16.4% for the quarter, led by mortgage banking and wealth-management income.
- Non-interest expense increased 4.8% for the nine months and 10.0% for the quarter. Higher employee, occupancy, equipment and other operating costs were partly offset by lower FDIC insurance premiums.
- Loans increased 2.0% from year-end and 1.6% year over year. Commercial loans increased 5.3% from year-end, residential term loans increased $16.3 million, and municipal loans declined 28.6% due to expected payoffs.
- Investment securities increased $49.9 million from year-end and $63.4 million year over year.
- Credit quality was mixed: total past-due loans improved to 0.78% of loans from 1.08% at year-end, but nonperforming loans increased to 1.33% from 1.19% at year-end and 1.14% year over year. Nonperforming assets increased to 0.84% of assets from 0.79% at year-end.
- The allowance for loan losses increased to $11.8 million from $11.2 million at year-end, while the allowance ratio was 0.93%, compared with 0.91% at year-end and 0.94% a year earlier.
Outlook, management commentary, risks and unusual items
- Management described 2019 performance as strong, citing continued earning-asset growth, stable margins, increased fee income, controlled operating expenses and solid credit quality.
- Management expected short-term interest rates to decline over the next one to three quarters and considered the Company’s interest-rate risk acceptable. The model projected first-year net interest income changes of negative 0.1% for a 1% rate decline and negative 4.2% for a 2% rate increase.
- The Company had $175.0 million of interest-rate swaps designated as cash-flow hedges and $25.8 million of customer loan swap notional exposure. LIBOR may cease publication after December 31, 2021; management is evaluating replacement indices and contract language.
- There were 82 troubled debt restructurings totaling $24.3 million. Of these, $8.9 million was on nonaccrual status, and nine TDR loans totaling $1.0 million involved bankruptcy. Eighteen loans totaling $2.2 million were in foreclosure, including 15 residential mortgage loans totaling $1.6 million.
- Management increased the unallocated allowance component to $1.7 million, or 14.5% of the total allowance, reflecting portfolio growth, economic conditions and potential risks not yet identified in specific loan metrics.
- Investment securities with unrealized losses had an aggregate fair value of $58.2 million and unrealized losses of $754,000. Management concluded the losses were temporary and reported no other-than-temporary impairment charge.
- The Company anticipates that adoption of the current expected credit loss standard, ASU 2016-13, may materially affect the financial statements. As a smaller reporting company, the implementation date was expected to be deferred to fiscal years beginning after December 15, 2022; the Bank was implementing modeling software and planned parallel incurred-loss and expected-loss calculations.
- On November 8, 2019, after the reporting date, the Bank amended restricted-stock agreements for President and CEO Tony C. McKim, accelerating vesting of certain 2015–2017 awards and shortening the vesting period for 2018 awards.
- No material changes to previously reported risk factors were disclosed, and no material legal proceedings requiring disclosure were reported. Disclosure controls and procedures were deemed effective.
Important facts for investors to verify
- Whether deposit-cost increases, wholesale CD reliance and future rate movements pressure net interest margin and earnings.
- The migration of nonperforming loans, TDRs, impaired residential loans and foreclosure balances, particularly as the loan portfolio grows.
- Whether the allowance for loan losses, including the larger unallocated component, remains adequate under changing economic conditions and after CECL adoption.
- The effect of ASU 2016-13 implementation on retained earnings, capital ratios and reported credit-loss expense.
- Exposure to LIBOR transition, interest-rate swaps, collateral requirements and related hedge-accounting effects.
- The sustainability of mortgage banking, wealth-management and other non-interest income, along with the pace of operating-expense growth.
- Liquidity under deposit runoff or reduced wholesale-funding availability, despite management’s reported $710.4 million of primary liquidity and $365.2 million of contingent liquidity.
