Business Context and Reporting Period
The First Bancorp, Inc. is a Maine bank holding company whose principal asset is First National Bank, serving individuals and small and medium-sized businesses through 16 offices in coastal and eastern Maine. First Advisors provides investment management, private banking, financial planning and trust services.
This Form 10-K covers the fiscal year ended December 31, 2016, with quarterly information provided for the fourth quarter of 2016. The Bank changed its name from The First, N.A. to First National Bank on January 28, 2016.
Key Financial Metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net income | $18.0 million | $16.2 million | +11.1% |
| Diluted EPS | $1.66 | $1.51 | +$0.15 |
| Net interest income | $42.9 million | $40.9 million | +4.9% |
| Tax-equivalent net interest income | $46.1 million | $44.0 million | +4.7% |
| Net interest margin | 3.05% | 3.10% | Down 5 bps |
| Non-interest income | $12.5 million | $12.2 million | +2.2% |
| Non-interest expense | $29.4 million | $29.9 million | Down 1.7% |
| Return on average assets | 1.12% | 1.07% | Up 5 bps |
| Return on average tangible equity | 12.42% | 11.90% | Up 52 bps |
| Efficiency ratio | 50.43% | 54.26% | Improved |
| Total assets at year-end | $1.713 billion | $1.565 billion | +9.5% |
| Total loans | $1.072 billion | $988.6 million | +8.4% |
| Total deposits | $1.243 billion | $1.043 billion | +19.2% |
| Total borrowed funds | $278.9 million | $337.5 million | Down $58.6 million |
| Shareholders’ equity | $172.5 million | $167.5 million | +3.0% |
Cash flow from operating activities was $21.6 million, compared with $20.7 million in 2015. Investing activities used $148.6 million, primarily reflecting an $84.9 million increase in loans and net purchases of investment securities. Financing activities provided $130.1 million, principally from deposit growth. Cash and cash equivalents increased $3.1 million to $17.4 million.
Primary liquidity sources totaled $139.7 million, or 8.3% of assets. Including additional Federal Reserve borrowing capacity, correspondent-bank lines and unencumbered securities, available liquidity totaled approximately $514.2 million, or 30.5% of assets.
Material Changes Versus the Prior Comparable Period
- Management described 2016 as the Company’s best annual performance, surpassing 2015.
- Loan growth was led by commercial lending: commercial loans increased $56.0 million, or 13.2%, while total loans increased $82.9 million.
- The investment portfolio increased $61.9 million, or 13.0%, to $539.2 million.
- Deposits increased $199.8 million. Low-cost deposits rose 10.6%, money-market deposits rose 35.0%, and certificates of deposit rose 28.5%, including a $96.7 million increase in wholesale CDs.
- Interest expense increased 9.5% as funding balances and rates increased, contributing to the decline in net interest margin despite higher earning assets.
- Credit performance generally improved. Net charge-offs declined to $1.4 million, or 0.13% of average loans, from $2.0 million, or 0.21%. Non-performing assets declined to 0.48% of assets from 0.57%, although total past-due loans increased to 1.18% of loans from 0.84%.
- Non-interest expense declined primarily because of lower credit-related collection, foreclosure and foreclosed-property costs. Mortgage origination and servicing income increased $634,000, and First Advisors income increased $153,000.
- First Advisors’ assets under management increased to $851.0 million from $762.0 million, while the number of accounts declined to 1,031 from 1,041.
Credit, Debt, Capital and Unusual Items
The allowance for loan losses was $10.1 million, or 0.95% of loans, compared with $9.9 million, or 1.00%, at year-end 2015. Non-performing loans were $7.8 million, or 0.73% of loans. Troubled debt restructurings totaled $21.5 million across 71 loans, down from $23.9 million across 84 loans; 8.0% of TDR balances were on nonaccrual status.
Borrowed funds totaled $278.9 million, including $194.7 million of Federal Home Loan Bank advances and $84.2 million of repurchase agreements. The Company’s consolidated total risk-based, Tier 1 risk-based and leverage ratios were 15.69%, 14.64% and 8.71%, respectively. The Bank’s corresponding ratios were 15.55%, 14.50% and 8.63%; the Bank remained classified as well-capitalized.
The Company increased its quarterly dividend to $0.23 per share beginning in the second quarter and declared a $0.12 per-share special dividend in the fourth quarter. Total dividends declared were $1.03 per share, with a 61.31% payout ratio. The Company repurchased 7,156 common shares for $129,000 and repurchased all outstanding CPP-related warrants for $1.75 million in November 2016.
Investment securities had $7.6 million of unrealized losses at year-end, compared with $3.5 million in 2015. Management concluded these securities were not other-than-temporarily impaired. The Company also entered into two interest-rate swaps with aggregate notional amounts of $50.0 million to hedge rising-rate exposure; their fair value was a $1.8 million asset.
Guidance, Outlook, Risks and Contingencies
The filing provides no formal earnings or revenue guidance. Management expected interest rates to remain relatively stable in the following year and considered current interest-rate risk acceptable. Simulation analysis estimated first-year net interest income changes of negative 0.38% if rates declined 1 percentage point and negative 3.06% if rates increased 2 percentage points, within the Company’s policy limit.
Key risks include concentration in Mid-Coast and Down East Maine; commercial real estate and commercial lending exposure; possible deterioration in local real estate or economic conditions; interest-rate-driven margin compression; deposit runoff and wholesale-funding renewal risk; securities valuation changes; cybersecurity and operational risks; regulatory and compliance costs; and potential increases in the allowance for loan losses.
The Company had $149.3 million of off-balance-sheet credit commitments, including unused lines, standby letters of credit and commitments to extend credit. Contractual obligations totaled $755.9 million, including $476.6 million of certificates of deposit and $278.9 million of borrowings. Management reported no material pending legal proceedings beyond routine litigation.
Management expects the adoption of the current expected credit loss standard, effective for the Company after December 15, 2019, may have a material impact on the financial statements. The filing states that goodwill was not impaired, internal controls were effective, and the independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important Facts for Investors to Verify
- Whether strong loan and deposit growth can continue without materially increasing funding costs or credit losses.
- The composition and performance of the expanded commercial loan portfolio, including commercial real estate concentrations and risk-rated loans.
- Trends in past-due loans, nonaccrual loans, TDRs and the adequacy of the $10.1 million allowance.
- The effect of higher interest rates on deposit pricing, net interest margin, securities valuations and swap hedges.
- The liquidity implications of the $321.5 million of certificates of deposit scheduled to mature by December 31, 2017.
- Whether the $7.6 million of unrealized securities losses remain temporary and whether additional impairment could affect capital.
- The eventual effect of the current expected credit loss standard on reserves, earnings and regulatory capital.
- The sustainability of the $1.03 per-share dividend, including the Company’s dependence on dividends from the Bank and applicable regulatory restrictions.