The First Bancorp, Inc. — FY2013 Form 10-K Summary
Business Context and Reporting Period
The filing reports fiscal-year results for the year ended December 31, 2013, with quarterly information for the fourth quarter. The First Bancorp is a Maine bank holding company whose principal subsidiary, The First, N.A., operates 16 full-service banking offices in coastal and eastern Maine. The Bank provides commercial, residential and consumer lending, deposit services, and investment management through First Advisors.
2013 included the opening of a Bangor branch, continued operation of the Rockland branch acquired in 2012, a public common-stock offering, and the complete repurchase of the U.S. Treasury's remaining Capital Purchase Program preferred stock.
Financial Performance and Key Metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net income | $13.0 million | $12.7 million | Up 2.2% |
| Diluted EPS | $1.20 | $1.22 | Down 1.6% |
| Net interest income | $37.4 million | $38.9 million | Down $1.4 million |
| Tax-equivalent net interest income | $41.0 million | $42.0 million | Down 2.4% |
| Tax-equivalent net interest margin | 3.05% | 3.14% | Down 9 basis points |
| Provision for loan losses | $4.2 million | $7.8 million | Down $3.6 million |
| Non-interest income | $12.1 million | $11.3 million | Up 7.2% |
| Non-interest expense | $28.9 million | $26.3 million | Up 10.1% |
| Return on average assets | 0.90% | 0.89% | Improved |
| Return on average tangible common equity | 10.66% | 10.40% | Improved |
Total assets increased 3.5% to $1.464 billion. Loans increased 0.8% to $876.4 million, investment securities increased 8.8% to $489.0 million, and deposits increased 6.8% to $1.024 billion. Total borrowings were $279.1 million, compared with $282.9 million at year-end 2012.
Net cash provided by operating activities was $25.0 million. Investing activities used $76.0 million, primarily reflecting purchases of investment securities and net loan growth. Financing activities provided $52.6 million, including deposit growth and common-stock proceeds, partially offset by the $12.5 million preferred-stock repurchase and $8.7 million of dividends paid. Cash and cash equivalents ended at $16.6 million.
Primary liquidity sources totaled $276.8 million, or 18.9% of assets. Including additional Federal Reserve borrowing capacity, correspondent-bank credit lines and unencumbered securities, available liquidity was estimated at $595.6 million, or 40.7% of assets. Management stated that funding sources were sufficient for anticipated needs.
Material Changes Versus the Prior Comparable Period
- Net income rose modestly, but diluted EPS declined because the March 2013 stock offering increased the share count by 760,771 shares.
- Net interest income declined because of margin compression and lower loan yields; management reported that margin compression stabilized in the second half of the year.
- Non-interest income increased, primarily from mortgage origination and secondary-market sales activity and higher other operating income.
- Non-interest expense increased because of costs associated with the new Bangor office and the Rockland branch.
- Credit quality improved: non-performing loans declined to 1.86% of total loans from 2.20%, non-performing assets declined to 1.44% of total assets from 1.89%, and net charge-offs declined to $5.2 million from $8.3 million.
- The allowance for loan losses declined to $11.5 million, or 1.31% of loans, from $12.5 million, or 1.44%. The unallocated allowance increased to $1.7 million from $0.8 million because of economic, foreclosure, valuation and estimate uncertainty.
- Shareholders' equity declined to $146.1 million from $156.3 million, primarily because of the $14.5 million after-tax decline in unrealized gains on available-for-sale securities.
- The Company repurchased the remaining $12.5 million of Treasury-held preferred stock and retained warrants for 225,904 common shares exercisable at $16.60 per share.
- The quarterly dividend increased from $0.195 to $0.20 per share in the fourth quarter; total 2013 dividends declared were $0.785 per share.
Credit, Debt, Capital and Unusual Items
Commercial, commercial real estate and commercial construction loans totaled $361.6 million, or 41.4% of total loans. Troubled debt restructurings totaled $29.1 million across 99 loans; 83.2% of the balance was performing under modified terms, while $3.1 million was on nonaccrual status. Other real estate owned declined to $4.8 million from $7.6 million.
At December 31, 2013, consolidated total risk-based capital was 16.03%, Tier 1 risk-based capital was 14.78%, and the leverage ratio was 8.67%. The Bank's corresponding ratios were 15.90%, 14.65% and 8.45%. The Bank was classified as well-capitalized.
The securities portfolio had $27.3 million of unrealized losses at year-end, compared with $0.7 million in 2012, principally because of higher interest rates. Management concluded that the securities were not other-than-temporarily impaired and expected to recover contractual principal and interest.
Contractual obligations included $279.1 million of borrowed funds and $531.1 million of certificates of deposit. Approximately $360.7 million of certificates of deposit matured by December 31, 2014. Off-balance-sheet commitments totaled $118.2 million, including unused lines, standby letters of credit and commitments to extend credit.
Guidance, Outlook, Management Commentary and Risks
The filing does not provide formal earnings or revenue guidance. Management expected interest rates to remain stable over the next two years and considered the Company's interest-rate exposure acceptable. Its modeled one-year net interest income sensitivity was a 0.79% decline under a gradual 1.0% rate decrease and a 2.47% decline under a gradual 2.0% rate increase; management cautioned that these are hypothetical scenarios, not forecasts.
- Key risks include credit losses, commercial real estate and geographic concentration in Maine, lengthy Maine foreclosure proceedings, elevated TDRs and reliance on collateral valuations.
- Margin compression, reduced loan demand, deposit competition and changes in monetary policy could reduce earnings.
- Liquidity depends primarily on deposits, with additional reliance on FHLB advances, repurchase agreements, brokered deposits and other wholesale funding.
- Interest-rate increases could reduce the fair value of securities and create unrealized losses; rate changes could also affect mortgage prepayments and mortgage-servicing-right valuations.
- Regulatory changes under Dodd-Frank and Basel III could increase compliance costs, capital requirements and restrictions on dividends or repurchases.
- Competition from larger banks, credit unions and nonbank financial providers could pressure pricing and growth.
- Management stated that no material pending legal proceedings were expected to affect financial condition, and the independent auditor reported that the financial statements and internal controls were fairly presented and effective.
Most Important Facts for an Investor to Verify
- Whether net interest margin and loan demand improve after the 2013 compression.
- Whether non-performing loans, TDRs, charge-offs and OREO continue to decline without requiring higher provisions.
- Whether the $27.3 million unrealized securities loss remains temporary and does not become an impairment charge.
- How the $360.7 million of certificates of deposit maturing in 2014 is renewed or replaced, and at what funding cost.
- Whether the Bangor and Rockland locations generate sufficient deposits, loans and fee income to offset higher operating expenses.
- Whether the Company can sustain its dividend while maintaining well-capitalized status and complying with regulatory dividend restrictions.
- The potential dilution from 225,904 Treasury warrants and 42,000 outstanding stock options.