Business Context and Reporting Period
The First Bancorp, Inc. is a Maine-based financial holding company whose principal subsidiary, First National Bank, operates 16 full-service offices in coastal and eastern Maine. The Bank provides deposit, commercial, residential mortgage, consumer, wealth management and trust services, with a focus on individuals and small and medium-sized businesses.
This Form 10-K covers the fiscal year ended December 31, 2018. The filing also presents unaudited quarterly information, including fourth-quarter 2018 results. The company operates as one reportable banking segment.
Key Financial Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Interest income | $70.5 million | $60.8 million | +15.9% |
| Net interest income | $50.2 million | $47.3 million | +6.1% |
| Tax-equivalent net interest income | $52.4 million | $51.2 million | +2.2% |
| Net interest margin | 2.91% | 3.04% | Down 13 bps |
| Provision for loan losses | $1.5 million | $2.0 million | Down 25.0% |
| Non-interest income | $12.6 million | $12.5 million | +0.4% |
| Non-interest expense | $33.5 million | $31.7 million | +5.7% |
| Net income | $23.5 million | $19.6 million | +20.2% |
| Diluted EPS | $2.17 | $1.81 | +19.9% |
| Return on average assets | 1.23% | 1.10% | Up 13 bps |
| Return on average equity | 12.72% | 10.91% | Up 181 bps |
| Non-GAAP efficiency ratio | 51.50% | 49.72% | Higher by 178 bps |
Balance Sheet, Credit and Capital
- Total assets were $1.945 billion, up 5.5% from 2017.
- Total loans were $1.238 billion, up 6.4%; commercial, commercial real estate and commercial construction loans totaled $576.9 million, or 46.6% of total loans.
- Total deposits were $1.527 billion, up 7.6%. Low-cost deposits increased 12.6% to $783.6 million, while certificates of deposit increased 5.8% to $591.4 million.
- Total borrowed funds were $210.3 million, down from $228.8 million. FHLB advances were $170.1 million at a weighted-average rate of 2.21%.
- Shareholders’ equity was $191.5 million. Book value per share was $17.63 and tangible book value per share was $14.87.
- Nonperforming loans were $14.7 million, or 1.19% of total loans, compared with 1.27% in 2017. Nonperforming assets were 0.79% of total assets versus 0.86%.
- The allowance for loan losses was $11.2 million, or 0.91% of total loans, compared with 0.92% in 2017. Net charge-offs declined to $1.0 million, or 0.08% of average loans.
- Troubled debt restructurings increased to 76 loans totaling $25.2 million from 62 loans totaling $17.8 million. Of the 2018 balance, $8.2 million was on nonaccrual status.
- Consolidated regulatory capital ratios remained well above minimums: total risk-based capital 15.19%, Tier 1 risk-based capital 14.22%, and leverage capital 8.60%.
Cash Flow and Liquidity
- Cash provided by operating activities was $33.8 million, compared with $22.3 million in 2017.
- Cash used in investing activities was $112.1 million, primarily reflecting $75.8 million of net loan growth and securities purchases.
- Cash provided by financing activities was $78.2 million, principally from deposit growth and increased short-term borrowings, partly offset by debt repayments and dividends.
- Cash and cash equivalents ended the year at $19.1 million.
- Management reported primary liquidity of $584.0 million, or 30.4% of total assets. Including additional borrowing capacity, correspondent lines and unencumbered securities, available liquidity was estimated at $869.2 million, or 45.3% of total assets.
- Certificates of deposit totaling $411.8 million, or 69.6% of all certificates, mature by December 31, 2019.
Material Changes Versus the Prior Comparable Period
- Net income increased by $3.9 million, driven primarily by higher net interest income and the benefit of the Tax Cuts and Jobs Act, which reduced 2018 income tax expense by approximately $2.3 million.
- Interest income rose substantially as loans and other earning assets grew, but interest expense increased 50.3% because of higher deposit and borrowing costs. The resulting net interest margin declined from 3.04% to 2.91%.
- Loans grew $74.1 million, while deposits grew $108.2 million. Wholesale certificates of deposit increased by approximately $29.0 million.
- Non-interest income was broadly stable. Wealth management revenue increased, while mortgage banking income and securities gains declined.
- Non-interest expense increased $1.8 million, mainly because of additional employee costs supporting growth. The efficiency ratio therefore worsened despite strong earnings growth.
- Credit indicators generally improved: nonperforming loans, past-due loans, net charge-offs and other real estate owned declined. However, TDR balances and the unallocated portion of the allowance increased.
- Available-for-sale securities had $13.1 million of unrealized losses at year-end, compared with $5.9 million in 2017. Management considered the losses temporary and did not record an other-than-temporary impairment charge.
- The company paid $1.11 per common share in declared cash dividends, compared with $0.95 in 2017, and repurchased 5,725 shares for $168,000.
Guidance, Outlook, Risks and Unusual Items
- Management expected interest rates to increase slightly in 2019 and considered the company’s interest-rate risk acceptable. Simulation analysis estimated that a gradual 2.0% rate increase would reduce first-year net interest income by approximately 3.93%, within the company’s 10% policy limit.
- Interest-rate swaps with aggregate notional amounts of $125.0 million were used as cash-flow hedges against rising rates on short-term liabilities.
- The company expects continued competition from larger banks, credit unions, online providers, mortgage companies, brokerages and insurers. Its market is concentrated in Mid-Coast and Down East Maine, increasing sensitivity to local economic and real estate conditions.
- Key risks include commercial real estate and commercial credit concentration, interest-rate-driven margin compression, deposit runoff and wholesale funding availability, securities-market losses, cybersecurity incidents, regulatory changes, litigation and employee retention.
- Certificates of deposit and borrowings create material near-term refinancing obligations. The filing states that management believes available funding sources will meet anticipated needs.
- Current expected credit loss accounting was scheduled to become effective January 1, 2020. Management anticipated that adoption could materially increase the allowance for credit losses, although the filing had not quantified the expected adjustment.
- No material pending legal proceedings were reported, and the independent auditor concluded that the financial statements and internal control over financial reporting were fairly presented and effective as of December 31, 2018.
Important Facts for Investors to Verify
- Whether the lower net interest margin persists as deposit and wholesale funding costs rise.
- The composition, performance and collateral coverage of the $25.2 million TDR portfolio, including $8.2 million on nonaccrual status.
- Whether the $11.2 million allowance for loan losses remains adequate as the loan portfolio grows and CECL implementation approaches.
- The maturity and renewal risk associated with $411.8 million of certificates of deposit due in 2019 and $210.3 million of total borrowed funds.
- Whether the $13.1 million of unrealized securities losses remain temporary and whether changes in rates or liquidity could require impairment charges.
- The sustainability of earnings growth after the 2018 tax benefit and the effect of higher employee, deposit and compliance costs.
- The company’s ability to maintain well-capitalized status while funding growth, paying dividends and managing credit, liquidity and interest-rate risks.