The First Bancorp, Inc. — Fiscal 2020 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2020, with quarterly data for the fourth quarter ended December 31, 2020. The First Bancorp is a Maine financial holding company whose principal asset is First National Bank. The Bank operates 17 full-service offices in coastal and eastern Maine, serving individuals and small and medium-sized businesses through lending, deposits, mortgage banking, wealth management, private banking and trust services.
On December 11, 2020, the Bank acquired a Belfast, Maine branch from Bangor Savings Bank, including approximately $23.1 million of loans and $19.3 million of deposits. The transaction generated $841,000 of goodwill and $262,000 of core deposit intangible assets.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net income | $27.1 million | $25.5 million | Up 6.3% |
| Diluted EPS | $2.48 | $2.34 | Up 6.0% |
| Total assets | $2.361 billion | $2.069 billion | Up 14.1% |
| Total loans | $1.477 billion | $1.297 billion | Up 13.9% |
| Total deposits | $1.845 billion | $1.650 billion | Up 11.8% |
| Shareholders’ equity | $223.7 million | $212.5 million | Up 5.3% |
| Net interest income | $59.8 million | $52.5 million | Up 14.0% |
| Tax-equivalent net interest income | $62.2 million | $54.8 million | Up 13.5% |
| Net interest margin | 2.94% | 2.89% | Up 5 basis points |
| Non-interest income | $18.1 million | $14.2 million | Up 27.7% |
| Non-interest expense | $39.7 million | $35.2 million | Up 12.7% |
| Provision for loan losses | $6.1 million | $1.3 million | Up $4.8 million |
Management reported record annual earnings despite the COVID-19 pandemic. Growth was driven by higher earning assets, lower deposit funding costs, mortgage banking activity and wealth management income. Mortgage origination and servicing income increased to $5.1 million from $1.9 million, while fiduciary and investment management income increased to $3.7 million from $3.3 million. Net securities gains were $1.2 million versus $224,000 in 2019.
Return on average assets was 1.21%, compared with 1.27% in 2019. Return on average tangible common equity was 14.29%, compared with 14.66%. The non-GAAP efficiency ratio improved to 50.00% from 51.04%; excluding $1.756 million of swap restructuring expense, management calculated the 2020 ratio at 47.70%.
Balance sheet, credit quality and capital
- Commercial real estate, commercial construction and other commercial loans totaled $783.7 million, or 53.0% of total loans, compared with 48.6% in 2019. Commercial loans were a key source of portfolio growth and concentration risk.
- The allowance for loan losses increased to $16.3 million, or 1.10% of loans, from $11.6 million, or 0.90%, primarily because of COVID-19-related qualitative reserves.
- Net charge-offs increased to $1.4 million, or 0.10% of average loans, from $843,000, or 0.07%.
- Nonperforming loans declined to $6.7 million, or 0.46% of loans, from $16.6 million, or 1.28%. Total past-due loans declined to 0.66% of loans from 1.16%.
- There were 74 troubled debt restructured loans totaling $11.5 million at year-end, including $2.2 million on nonaccrual status. COVID-related modifications qualifying under regulatory and CARES Act relief generally were excluded from TDR reporting.
- The Bank completed 1,031 COVID-related loan modifications covering $291.1 million, or approximately 19.6% of the loan portfolio. At year-end, $62.2 million remained in an original or subsequent modification.
- The Bank processed 1,718 PPP loans totaling $97.6 million and had received approximately $37.0 million of SBA forgiveness payments by year-end.
- Consolidated regulatory capital remained strong: total risk-based capital was 14.82%, Tier 1 risk-based capital was 13.66% and the leverage ratio was 8.49%. The Bank was classified as well capitalized.
Cash flow, funding and liquidity
| Item | 2020 | 2019 |
|---|---|---|
| Cash provided by operating activities | $22.7 million | $26.1 million |
| Cash used in investing activities | $(250.1) million | $(116.3) million |
| Cash provided by financing activities | $239.2 million | $85.5 million |
| Ending cash and cash equivalents | $26.2 million | $14.4 million |
| Borrowed funds at year-end | $262.0 million | $185.0 million |
Deposit growth, particularly in demand, NOW and savings accounts, funded much of the balance-sheet expansion. Low-cost deposits increased 34.5% to approximately $1.08 billion, while certificates of deposit declined 12.2% to $605.6 million. Approximately $500.3 million, or 82.6% of certificates of deposit, matured by December 31, 2021.
Management identified primary liquidity sources of $895.9 million, supplemented by $95.0 million of Federal Reserve borrowing capacity, $51.0 million of correspondent-bank credit lines and $286.4 million of unencumbered securities. Total stated liquidity resources were approximately $1.328 billion, or 56.9% of assets. Management believed funding was sufficient for anticipated needs.
Outlook, commentary, risks and unusual items
- Management expected interest rates to increase slightly in 2021 and considered the Company’s interest-rate risk acceptable. Modeling indicated first-year net interest income changes of negative 1.4% under a 1% rate decline and negative 0.3% under a 2% rate increase.
- COVID-19 remained the principal uncertainty. Management highlighted risks to tourism, hospitality, restaurants, municipal borrowers, collateral values, loan demand, credit quality and future loan-loss provisions. Approximately 10.1% of the loan portfolio involved hospitality or restaurant borrowers.
- Management stated that additional allowance provisions may be required as more information becomes available. The Company deferred adoption of the CECL credit-loss standard until January 1, 2023 because it qualifies as a smaller reporting company and anticipated that adoption could materially affect the allowance.
- The Company restructured interest-rate swaps in the first quarter, recording $1.756 million of one-time expense. At year-end, cash-flow hedge swaps had $260.0 million of notional principal and a $4.9 million after-tax unrealized loss in accumulated other comprehensive income.
- The Company had $313.4 million of available-for-sale securities and $365.6 million of held-to-maturity securities. Unrealized losses totaled approximately $1.2 million and were considered temporary.
- LIBOR transition risk remains relevant because interest-rate swaps and customer loan swaps reference USD LIBOR, including contracts maturing after expected LIBOR cessation dates. Management formed a working group to address the transition.
- CECL, commercial real estate concentration, Maine’s lengthy foreclosure process, deposit runoff, wholesale funding access, cybersecurity, regulatory changes and competition were identified as material risks.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. The allowance for loan losses was identified as the critical audit matter.
Most important facts for investors to verify
- Whether COVID-related loan modifications and the 10.1% hospitality and restaurant exposure lead to higher delinquencies, nonaccrual loans or future provisions.
- The adequacy of the $16.3 million allowance relative to commercial real estate and commercial loan growth and the eventual impact of CECL adoption in 2023.
- The renewal and pricing of the $500.3 million of certificates of deposit maturing in 2021 and the resulting effect on funding costs and net interest margin.
- The performance and integration of the Belfast branch acquisition, including acquired loan quality, deposit retention and realization of expected benefits.
- The Company’s transition plan for LIBOR-linked swaps and customer contracts, particularly those maturing after June 30, 2023.
- The sustainability of 2020 mortgage banking gains, securities gains and unusually low deposit costs.
- Future dividend capacity, given that the parent relies substantially on dividends from the Bank and that regulatory capital requirements constrain distributions.