The First Bancorp, Inc. — Fiscal 2014 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2014, including fourth-quarter results. The Company is a Maine financial holding company whose principal asset is The First, N.A., a community bank operating 16 full-service offices in coastal and eastern Maine. The Bank serves individuals and small and medium-sized businesses through deposits, commercial, residential and consumer lending, and investment management and trust services through First Advisors.
Management described 2014 as the Company’s best earnings year, supported by loan growth, lower credit costs, improved funding costs and a modest recovery in net interest margin.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total assets | $1.482 billion | $1.464 billion | +1.2% |
| Total loans | $917.6 million | $876.4 million | +4.7% |
| Total deposits | $1.025 billion | $1.024 billion | Approximately flat |
| Borrowed funds | $279.9 million | $279.1 million | Approximately flat |
| Net interest income | $39.6 million | $37.4 million | +5.8% |
| Tax-equivalent net interest income | $43.1 million | $41.0 million | +5.0% |
| Net interest margin, tax-equivalent | 3.10% | 3.05% | +5 basis points |
| Provision for loan losses | $1.15 million | $4.20 million | -72.6% |
| Non-interest income | $11.0 million | $12.1 million | -8.6% |
| Non-interest expense | $30.2 million | $28.9 million | +4.4% |
| Net income | $14.7 million | $13.0 million | +13.5% |
| Diluted EPS | $1.37 | $1.20 | +14.2% |
| Return on average assets | 0.99% | 0.90% | +9 basis points |
| Return on average tangible common equity | 11.57% | 10.66% | +91 basis points |
| Efficiency ratio | 56.86% | 55.44% | Worsened 142 basis points |
Fourth-quarter 2014 net income was $3.426 million, or $0.32 diluted EPS, compared with $3.502 million, or $0.33 diluted EPS, in fourth-quarter 2013. Fourth-quarter net interest income increased to $10.047 million from $9.661 million, while the provision for loan losses declined to $300,000 from $700,000. Non-interest income decreased to $2.602 million from $2.599 million, and non-interest expense increased to $7.875 million from $7.119 million.
Cash flow, liquidity, debt and capital
- Net cash provided by operating activities was $20.5 million, compared with $25.0 million in 2013.
- Investing activities used $16.8 million, primarily reflecting a $45.8 million increase in loans, partially offset by securities maturities, sales and other investment cash flows.
- Financing activities used $7.2 million, including $8.9 million of dividends paid, repayment of $30.0 million of long-term borrowings, a $30.8 million increase in short-term borrowings and an $83.6 million reduction in certificates of deposit.
- Cash and cash equivalents declined to $13.1 million from $16.6 million at year-end 2013.
- Management reported primary liquidity of $259.7 million, or 17.5% of assets. Including additional Federal Reserve borrowing capacity, correspondent-bank lines and unencumbered securities, total identified liquidity sources were $543.3 million, or 36.7% of assets.
- Total borrowed funds were $279.9 million, including $205.2 million of Federal Home Loan Bank advances and $74.7 million of repurchase agreements. FHLB borrowing capacity was $232.0 million, with $26.8 million unused.
- Shareholders’ equity increased to $161.6 million from $146.1 million. The Company’s consolidated total risk-based capital ratio was 16.27%, Tier 1 risk-based capital was 15.06% and leverage capital was 8.88%; the Company was considered well capitalized.
- The Bank’s regulatory ratios were also well above minimums: total risk-based capital of 16.09%, Tier 1 risk-based capital of 14.87% and Tier 1 leverage of 8.77%.
- Cash dividends declared were $0.83 per share, representing a 60.14% payout ratio. The Company repurchased no common stock during 2014.
Asset quality and material changes
- Nonperforming loans declined to $10.5 million, or 1.15% of total loans, from $16.3 million, or 1.86%, at year-end 2013. Nonperforming assets declined to 0.97% of total assets from 1.44%.
- Net charge-offs declined to $2.3 million, or 0.26% of average loans, from $5.2 million, or 0.60%.
- The allowance for loan losses declined to $10.3 million, or 1.13% of loans, from $11.5 million, or 1.31%.
- Restructured loans declined to 94 loans totaling $27.2 million from 99 loans totaling $29.1 million. However, 16 TDR loans totaling $2.5 million were on nonaccrual status, and nine TDR loans totaling $1.2 million were in bankruptcy.
- Other real estate owned declined to a net $3.8 million across 28 properties from $4.8 million across 32 properties, although the related allowance increased to $654,000 from $330,000.
- Loan growth was concentrated in commercial loans and home equity lines, while residential term loans remained the largest portfolio category at 41.9% of total loans. Commercial, commercial real estate and commercial construction loans represented 41.2% of total loans.
- Low-cost deposits increased by $72.2 million, while certificates of deposit declined by $83.6 million. Approximately $340.4 million, or 76.1% of certificates of deposit, matured by December 31, 2015.
- The investment portfolio declined to $475.1 million from $489.0 million. During the third quarter, the Company transferred securities with an amortized cost of $89.8 million from available-for-sale to held-to-maturity.
- Unrealized securities losses declined substantially to $2.9 million from $27.3 million. Management concluded that temporarily impaired securities were not other-than-temporarily impaired.
- First Advisors’ assets under management increased to $733.0 million across 1,006 accounts from $700.8 million across 845 accounts.
Outlook, risks, contingencies and unusual items
Management expected interest rates to remain relatively stable in the next year and considered the Company’s interest-rate risk acceptable. The Company’s simulation indicated that one-year net interest income could decline approximately 1.47% if short-term rates fell 1 percentage point and approximately 2.95% if rates rose 2 percentage points. These scenarios were within the Company’s stated risk limit.
Key risks include credit losses in commercial and commercial real estate lending, weakness in the concentrated Mid-Coast and Down East Maine markets, interest-rate and mortgage prepayment risk, deposit runoff and wholesale funding availability, securities-market volatility, regulatory and compliance costs, competition, cybersecurity and technology failures, legal claims, and limitations on dividends from the Bank to the holding company.
The filing identifies no material pending legal proceedings and no material off-balance-sheet risk requiring separate liability presentation. Off-balance-sheet commitments totaled $132.9 million, including unused lines, standby letters of credit and commitments to extend credit.
The Company had no preferred stock outstanding at year-end following completion of the 2013 Treasury CPP repurchase, but Treasury warrants to purchase up to 225,904 common shares at $16.60 per share remained outstanding. A February 2015 settlement concerning improperly deposited checks for United Mid-Coast Charities released the Company and Bank from related claims and had no material financial impact.
Management and the independent auditor concluded that internal control over financial reporting was effective, with no material weaknesses. The Company stated that several newly issued accounting standards were not expected to have a material effect, while the impact of the new revenue-recognition standard remained under evaluation.
Most important facts for investors to verify
- Whether credit quality improvements persist as the loan portfolio grows, particularly in commercial real estate, commercial lending and home equity lines.
- The adequacy of the $10.3 million allowance relative to $35.9 million of impaired loans, $27.2 million of TDRs and regional real estate conditions.
- Whether the $340.4 million of certificates of deposit maturing in 2015 can be replaced without materially increasing funding costs.
- The sustainability of the 3.10% net interest margin amid potential Federal Reserve rate changes, deposit repricing and mortgage prepayments.
- The effect of higher operating expenses and lower mortgage origination income on future efficiency and earnings.
- The composition, duration and unrealized gains or losses of the securities portfolio, including the securities transferred to held-to-maturity classification.
- Future dividend capacity, which depends primarily on dividends from the Bank and applicable regulatory capital restrictions.
- The potential dilution from 225,904 Treasury warrants and 42,000 outstanding employee stock options.
- Liquidity coverage, collateral availability and reliance on FHLB advances, repurchase agreements and other wholesale funding sources.