The First Bancorp, Inc. 2015 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2015, with quarterly information included for the fourth quarter. The First Bancorp is a Maine bank holding company whose principal subsidiary, operating under the name The First, N.A. during 2015, provided commercial, residential and consumer banking services through 16 Maine offices. First Advisors provided investment management, private banking, financial planning and trust services. The Bank was renamed First National Bank on January 28, 2016.
Key financial metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net income | $16.2 million | $14.7 million | +10.2% |
| Diluted EPS | $1.51 | $1.37 | +$0.14 |
| Net interest income | $40.9 million | $39.6 million | +3.4% |
| Tax-equivalent net interest income | $44.0 million | $43.1 million | +2.2% |
| Net interest margin | 3.10% | 3.10% | Stable |
| Non-interest income | $12.2 million | $11.0 million | +10.7% |
| Non-interest expense | $29.9 million | $30.2 million | -1.1% |
| Total assets | $1.565 billion | $1.482 billion | +5.6% |
| Total loans | $988.6 million | $917.6 million | +7.7% |
| Total deposits | $1.043 billion | $1.025 billion | +1.8% |
| Total borrowings | $337.5 million | $279.9 million | +20.6% |
| Shareholders’ equity | $167.5 million | $161.6 million | +3.7% |
Return on average assets was 1.07%, return on average equity was 9.74%, return on average tangible common equity was 11.90%, and the non-GAAP efficiency ratio improved to 54.26% from 56.86%. Cash flow from operating activities was $20.7 million; investing activities used $86.3 million, primarily reflecting loan growth and securities purchases; and financing activities provided $66.8 million. Cash and cash equivalents ended at $14.3 million.
Credit metrics improved: non-performing loans declined to 0.75% of total loans from 1.15%, non-performing assets declined to 0.57% of total assets from 0.97%, and past-due loans declined to 0.84% from 1.29%. Net charge-offs were $2.0 million, or 0.21% of average loans. The allowance for loan losses was $9.9 million, equal to 1.00% of loans, versus $10.3 million and 1.13% in 2014.
The Company remained well capitalized. At December 31, 2015, consolidated total risk-based capital was 15.78%, Tier 1 risk-based capital was 14.70%, and the leverage ratio was 8.81%. The Bank’s corresponding ratios were 15.53%, 14.45% and 8.82%.
Material changes versus the prior comparable period
- Management characterized 2015 as the Company’s best year, driven by loan growth, lower funding costs, reduced operating expenses and improved credit quality.
- Loan balances increased $71.1 million, including a $44.9 million increase in commercial loans and a $19.0 million increase in residential term loans.
- Low-cost deposits increased $100.5 million, while certificates of deposit declined $76.5 million. Borrowings increased $57.5 million to support funding needs.
- Tax-equivalent net interest income increased because higher loan income and lower funding costs more than offset lower investment income. The margin remained unchanged at 3.10%.
- Non-interest income increased primarily from higher securities gains and mortgage origination and servicing income. Net securities gains were $1.4 million.
- Provision for loan losses increased to $1.55 million from $1.15 million despite improving credit metrics, reflecting loan growth and management’s reserve methodology.
- Other real estate owned declined to $1.5 million from $3.8 million, and the number of owned properties declined from 28 to 14.
- Troubled debt restructurings declined to 84 loans totaling $23.9 million from 94 loans totaling $27.2 million. Management did not expect a material increase in TDRs during 2016.
- The Company paid $0.87 per share in dividends, compared with $0.83 in 2014, and repurchased 10,138 common shares for $180,000.
- The U.S. Treasury sold its CPP-related warrants to private parties in May 2015. The adjusted warrants cover 226,819 shares at an exercise price of $16.53 per share.
Guidance, outlook, risks and unusual items
No formal earnings or revenue guidance was provided. Management expected interest rates to remain relatively stable in the following year and considered the Company’s interest-rate risk acceptable. Simulation estimates indicated that one-year net interest income would decline approximately 0.97% if rates fell 1.0% and 1.94% if rates rose 2.0%; these scenarios were within the Company’s policy limits. The filing states that these simulations are not forecasts.
Liquidity was supported by $244.6 million of primary liquidity, plus $140.6 million of Federal Reserve borrowing capacity, $48.0 million of correspondent-bank credit lines and $130.3 million of unencumbered securities. Management believed funding sources were adequate for anticipated needs. However, $237.5 million, or 64.02%, of certificates of deposit were scheduled to mature by December 31, 2016.
Principal risks include concentration in Maine markets; commercial real estate and commercial lending risk; interest-rate and margin compression risk; deposit runoff and wholesale-funding risk; potential additional loan-loss provisions; foreclosure delays in Maine; securities-market volatility; regulatory and compliance costs; cybersecurity and technology failures; litigation and reputational damage; competition from larger banks, credit unions and nonbank providers; and restrictions on the Bank’s ability to upstream dividends to the holding company.
The filing reported $3.5 million of unrealized losses on temporarily impaired securities but concluded that no other-than-temporary impairment was required. The Company also had $133.5 million of off-balance-sheet loan commitments, unused lines and standby letters of credit. No material pending legal proceedings were reported, and management and the independent auditor concluded that internal control over financial reporting was effective with no material weaknesses.
Important facts for investors to verify
- Confirm whether loan growth and commercial real estate exposure remain consistent with the Bank’s underwriting, concentration and capital-risk limits.
- Monitor whether non-performing loans, TDRs, charge-offs and the allowance for loan losses continue to improve as the portfolio expands.
- Assess the refinancing and pricing risk associated with certificates of deposit and increased borrowed funds, particularly in a rising-rate environment.
- Review the composition, duration, unrealized losses and liquidity of the investment securities portfolio.
- Verify the sustainability of the $0.87 annual dividend against Bank earnings, retained earnings and regulatory capital requirements.
- Evaluate the effect of future regulatory changes, including Basel III capital buffers, CFPB requirements and evolving accounting standards.
- Consider dilution from the 226,819 outstanding warrants and future equity issuances.
- Review the assumptions underlying the allowance for loan losses, mortgage servicing rights, goodwill and securities impairment assessments.