The First Bancorp, Inc. — 2017 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2017, with quarterly information including fourth-quarter 2017. The Company is a Maine bank holding company whose principal asset is First National Bank, operating 16 full-service offices in coastal and eastern Maine. The Bank serves individuals and small and medium-sized businesses and provides lending, deposit, mortgage, private banking, trust, and investment-management services through First Advisors.
The Company had 10,829,918 common shares outstanding at year-end and 235 employees, or 231 on a full-time-equivalent basis. Operations are reported as one banking segment.
Financial performance and key metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total assets | $1.843 billion | $1.713 billion | +7.6% |
| Total loans | $1.164 billion | $1.072 billion | +8.6% |
| Total deposits | $1.419 billion | $1.243 billion | +14.1% |
| Total borrowed funds | $228.8 million | $278.9 million | −18.0% |
| Net interest income | $47.3 million | $42.9 million | +10.1% |
| Tax-equivalent net interest income | $51.2 million | $46.1 million | +11.2% |
| Net interest margin | 3.04% | 3.05% | −1 basis point |
| Provision for loan losses | $2.0 million | $1.6 million | +25.0% |
| Non-interest income | $12.5 million | $12.5 million | Approximately flat |
| Non-interest expense | $31.7 million | $29.4 million | +7.7% |
| Net income | $19.6 million | $18.0 million | +8.8% |
| Diluted EPS | $1.81 | $1.66 | +9.0% |
Fourth-quarter 2017 net income was $5.1 million, compared with $4.3 million in fourth-quarter 2016. Fourth-quarter diluted EPS was $0.47. Fourth-quarter net interest income was $12.2 million, provision expense was $250,000, non-interest income was $3.2 million, and non-interest expense was $8.3 million.
- Return on average assets was 1.10%; return on average equity was 10.91%; and return on average tangible common equity was 13.11%.
- The non-GAAP efficiency ratio improved to 49.72% from 50.43%; the GAAP efficiency ratio was 52.88%.
- Book value per share was $16.74 and tangible book value per share was $13.97 at year-end.
- First Advisors had $934.7 million of assets under management or custody at year-end, up from $851.0 million.
Cash flow, liquidity, debt, and capital
- Net cash provided by operating activities was $22.5 million. Investing activities used $130.3 million, primarily reflecting a $95.2 million increase in loans and net purchases of investment securities. Financing activities provided $109.6 million, principally from deposit growth.
- Cash and cash equivalents increased to $19.2 million from $17.4 million.
- Borrowed funds totaled $228.8 million, including $158.2 million of Federal Home Loan Bank advances and $70.6 million of repurchase agreements.
- Management reported primary liquidity of $149.0 million, with additional borrowing capacity and unencumbered securities bringing total stated liquidity sources to approximately $541.6 million, or 29.9% of assets.
- Company regulatory capital ratios were 8.57% leverage, 14.23% Tier 1 risk-based, 14.23% common equity Tier 1, and 15.24% total risk-based. The Bank was classified as well capitalized.
- The Company declared $0.95 per common share of dividends during 2017 and repurchased 5,562 shares for $154,000. Dividend capacity depends primarily on dividends received from the Bank and remains subject to regulatory restrictions.
Material changes versus the prior comparable period
- Loan growth was led by commercial loans, which increased $64.7 million, or 13.5%; residential term loans increased $21.2 million.
- Deposit growth of $175.9 million included an $82.4 million increase in certificates of deposit and a $55.2 million increase in low-cost deposits. Approximately $393.3 million, or 67.5%, of certificates of deposit mature by December 31, 2018.
- Interest income increased $7.1 million, while interest expense increased $2.7 million as deposit costs rose and interest rates increased.
- Non-interest expense increased because of investments in personnel and technology and higher FDIC insurance expense.
- Non-performing loans increased to $14.7 million, or 1.27% of total loans, from $7.8 million, or 0.73%. Management attributed the increase primarily to deterioration in two commercial relationships with combined balances of approximately $8.5 million.
- Net charge-offs were $1.4 million, or 0.13% of average loans, approximately unchanged. The allowance for loan losses increased to $10.7 million but declined to 0.92% of loans from 0.95%.
- Other real estate owned increased to $1.0 million net from $375,000. Troubled debt restructurings declined to 62 loans totaling $17.8 million from 71 loans totaling $21.5 million.
- Available-for-sale securities had a $2.9 million net unrealized loss at year-end, and total securities with temporary unrealized losses had fair value of $293.0 million and unrealized losses of $5.9 million. Management concluded no other-than-temporary impairment was required.
Guidance, outlook, commentary, risks, and unusual items
- Management described 2017 as the Company’s best year for total revenue and net income and expects interest rates to increase slightly in the next year. Management considers the current interest-rate risk position acceptable.
- Interest-rate simulations indicated that a gradual 2.0 percentage-point increase could reduce first-year net interest income by approximately 5.10% and second-year net interest income by approximately 7.09%, within the Company’s stated policy limit of a 10% decline.
- The Tax Cuts and Jobs Act reduced the federal corporate tax rate from 35% to 21%. The Company recorded a $134,000 fourth-quarter charge to remeasure deferred tax assets and expects to benefit from the lower rate prospectively. A $297,000 tax-effect reclassification was made from accumulated other comprehensive income to retained earnings.
- The current expected credit loss standard, or CECL, is effective for the Company on January 1, 2020. Management had not calculated a formal impact estimate but stated that an increase in the allowance may be necessary and could materially affect capital, earnings, and cash flows.
- Primary risks include commercial and commercial-real-estate credit exposure, concentration in Mid-Coast and Down East Maine, rising funding costs, deposit runoff, wholesale funding availability, securities-market volatility, technology and cybersecurity events, regulatory changes, competition, and dependence on dividends from the Bank.
- The Company had $151.9 million of unused lines, commitments, and standby letters of credit. Two interest-rate swaps had aggregate notional amounts of $50.0 million and a year-end fair value of $2.0 million; counterparty credit ratings were stated as “A.”
- Management reported no material pending legal proceedings, no unresolved SEC staff comments, effective disclosure controls, and no material weaknesses in internal control over financial reporting. The independent auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether the deterioration in the two commercial relationships leads to additional non-performing loans, charge-offs, provisions, or allowance increases.
- The renewal and pricing of the $393.3 million of certificates of deposit maturing in 2018 and the resulting effect on deposit costs and net interest margin.
- The eventual CECL allowance adjustment and its effect on retained earnings and regulatory capital.
- Whether temporary securities losses remain temporary if interest rates rise or liquidity conditions deteriorate.
- The sustainability of loan and deposit growth without weakening underwriting standards or increasing credit concentrations.
- The Company’s ability to maintain dividend payments given regulatory capital requirements and the Bank’s capacity to upstream dividends.