Business Context and Reporting Period
The First Bancorp, Inc., a Maine financial holding company and parent of The First, N.A., filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2014. Interim financial statements were reviewed by Berry Dunn McNeil & Parker, LLC, which reported no material modifications needed for GAAP conformity; the filing was not audited.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net interest income | $9.8 million vs. $9.1 million | $19.5 million vs. $18.3 million |
| Provision for loan losses | $0.1 million vs. $1.2 million | $0.5 million vs. $2.7 million |
| Non-interest income | $2.5 million vs. $3.6 million | $4.8 million vs. $6.9 million |
| Non-interest expense | $7.3 million vs. $7.4 million | $14.5 million vs. $14.8 million |
| Net income | $3.7 million vs. $3.2 million | $7.2 million vs. $6.1 million |
| Diluted EPS | $0.35 vs. $0.29 | $0.67 vs. $0.56 |
| Tax-equivalent net interest margin | 3.10% vs. 3.02% | 3.11% vs. 3.04% |
| Return on average tangible common equity | 11.90% vs. 9.93% | 11.71% vs. 9.70% |
At June 30, 2014, total assets were $1.504 billion, loans were $891.9 million, investment securities were $515.9 million, deposits were $1.033 billion, and shareholders’ equity was $157.4 million. Book value per common share was $14.70 and tangible book value per common share was $11.87.
Net cash provided by operating activities for the first six months was $7.3 million, compared with $11.3 million in the prior-year period. Investing activities used $27.7 million, primarily reflecting loan growth and purchases of held-to-maturity securities, while financing activities provided $24.3 million. Cash and cash equivalents increased to $20.4 million from $16.6 million at December 31, 2013.
Borrowed funds totaled $298.5 million at June 30, 2014, including $183.4 million due within one year. Primary liquidity sources were $278.2 million, with an additional $316.6 million of contingent sources. Loan commitments and unused lines of credit totaled $133.7 million.
Material Changes Versus Comparable Periods
- Six-month net income increased 17.7%, and second-quarter net income increased 15.6% year over year. Management attributed the improvement to lower credit costs, asset growth, and improved margin performance.
- Net interest income increased 7.0% for the six months and 7.9% for the quarter. Tax-equivalent net interest income increased 6.9% for the six months and 7.5% for the quarter.
- Provision expense fell 81.5% for the first six months, while net charge-offs declined to $370,000, or 0.09% of average loans, from $2.5 million, or 0.59%, in the prior-year period.
- Non-interest income declined 30.2% for the six months, primarily because of lower mortgage refinancing income and securities gains. Net securities gains were $40,000 versus $1.1 million in the prior-year period.
- Total assets increased $40.1 million, or 2.7%, from year-end 2013 and exceeded $1.5 billion for the first time. Loans increased $15.5 million, or 1.8%, and investment securities increased $26.9 million, or 5.5%.
- Low-cost deposits increased $20.9 million, or 5.2%, from year-end, while certificates of deposit declined $17.2 million. Borrowed funds increased $19.4 million, or 6.9%, from year-end.
- Non-performing loans declined to $12.6 million, or 1.42% of total loans, from $16.3 million, or 1.86%, at December 31, 2013, and $19.5 million, or 2.25%, a year earlier. Non-performing assets declined to 1.16% of total assets.
- Total past-due loans declined to 1.26% of loans from 1.82% at year-end and 2.80% a year earlier. Troubled debt restructurings declined to 97 loans totaling $28.3 million from 105 loans totaling $30.9 million a year earlier.
- The allowance for loan losses was $11.6 million, or 1.31% of loans, compared with 1.46% a year earlier. Specific reserves increased to $3.1 million from $2.5 million at year-end, while qualitative and unallocated reserves also increased.
- Accumulated unrealized gains on available-for-sale securities improved to $1.5 million from a $6.6 million loss at December 31, 2013, contributing to the increase in shareholders’ equity.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management stated that credit quality continued to improve and considered the allowance for loan losses appropriate, but cautioned that future charge-offs could exceed the allowance and require additional provisions.
- Management expected interest rates to remain stable over the next four to six quarters and considered current interest-rate risk acceptable. The filing provides no formal earnings or revenue guidance.
- Interest-rate modeling projected first-year net interest income declines of 0.62% if rates fall one percentage point and 3.35% if rates rise two percentage points. These are hypothetical sensitivity estimates, not forecasts.
- The cumulative one-year repricing gap was negative 4.40% of total assets, compared with positive 0.98% at December 31, 2013. The Company used no interest-rate derivatives.
- The securities portfolio included 197 securities with unrealized losses totaling $11.0 million, including $10.2 million associated with securities impaired for 12 months or more. Management concluded that no other-than-temporary impairment charge was warranted.
- There were 33 other real estate owned properties with a net balance of $4.9 million. Forty-one loans totaling $4.4 million were in foreclosure, and six TDRs totaling $791,000 were in the foreclosure process.
- Ten TDR loans totaling $1.4 million were involved in bankruptcy, and 16 TDR loans totaling $2.7 million were on non-accrual status.
- The Company remained well capitalized. At June 30, 2014, the leverage ratio was 8.67%, the Tier 1 risk-based capital ratio was 14.87%, and the total risk-based capital ratio was 16.12%.
- The Board increased the quarterly dividend to $0.21 per share from $0.20. Future dividends remain subject to capital requirements, earnings retention, and the Bank’s ability to pay dividends to the holding company.
- Management identified economic conditions, loan demand and collectability, interest-rate volatility, securities values, competition, regulation, accounting changes, and financial-market disruption as principal forward-looking risks. No material changes were reported to the risk factors in the 2013 Form 10-K.
- No material legal proceedings, senior-security defaults, or material changes in internal control over financial reporting were reported.
Investor Verification Checklist
- Verify whether the improvement in earnings is sustainable after normalizing for the sharp decline in loan-loss provisions and the prior-year securities gains.
- Monitor non-performing loans, TDRs, foreclosure balances, impaired loans, OREO, charge-offs, and the composition of the allowance for loan losses.
- Assess exposure to interest-rate movements, including the negative repricing gap and the large volume of securities and long-term loans.
- Review liquidity coverage against $298.5 million of borrowed funds, $513.9 million of certificates of deposit, and $133.7 million of loan commitments.
- Evaluate unrealized securities losses and Management’s conclusion that no other-than-temporary impairment exists, particularly for securities impaired for more than 12 months.
- Confirm capital ratios, dividend capacity, and the effect of the outstanding Treasury warrants covering 225,904 common shares at a $16.60 exercise price.
- Review the impact of upcoming accounting standards, including the revenue recognition standard under ASU 2014-09, which the Company was still evaluating.