The First Bancorp, Inc. — 2011 Form 10-K Summary
Business Context and Reporting Period
The Company is a Maine-based bank holding company whose principal subsidiary, The First, N.A., operates 14 full-service banking offices in coastal 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.
The filing covers the fiscal year ended December 31, 2011. Fourth-quarter figures are unaudited; consolidated annual financial statements were audited by Berry Dunn, which issued an unqualified opinion and found effective internal control over financial reporting.
Key Financial Metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net income | $12.364 million | $12.116 million | +2.0% |
| Diluted EPS | $1.14 | $1.10 | +$0.04 |
| Net interest income | $40.993 million | $40.589 million | +1.0% |
| Tax-equivalent net interest income | $43.703 million | $42.870 million | +1.9% |
| Net interest margin | 3.27% | 3.38% | Down 11 bps |
| Provision for loan losses | $10.550 million | $8.400 million | +$2.150 million |
| Non-interest income | $11.750 million | $9.135 million | +28.6% |
| Non-interest expense | $26.038 million | $25.130 million | +3.6% |
| Return on average assets | 0.87% | 0.89% | Down 2 bps |
| Return on average tangible common equity | 10.70% | 10.83% | Down 13 bps |
| Efficiency ratio | 49.75% | 48.15% | Higher costs |
Fourth-quarter 2011 net income was $3.022 million, or $0.29 diluted EPS, compared with $3.077 million and $0.28 diluted EPS in fourth-quarter 2010. Fourth-quarter net interest income was $10.037 million, the loan-loss provision was $4.950 million, non-interest income was $5.159 million and non-interest expense was $6.366 million.
Balance Sheet, Cash Flow, Debt and Liquidity
- Total assets declined 1.5% to $1.373 billion at year-end, while average assets increased $64.8 million during 2011.
- Total loans decreased 2.5% to $865.0 million. Investment securities increased 2.0% to $424.3 million.
- Total deposits declined 3.4% to $941.3 million. Low-cost deposits increased $18.4 million, while certificates of deposit decreased $59.0 million.
- Total borrowings increased to $265.7 million from $257.3 million. FHLB advances were $175.1 million, and repurchase agreements were $90.5 million.
- Shareholders’ equity increased to $150.9 million from $149.8 million. Cash and cash equivalents were $14.1 million.
- Operating activities provided $29.7 million of cash, investing activities provided $16.2 million, and financing activities used $45.6 million. Cash increased $277,000 during the year.
- Management reported primary liquidity sources of $229.1 million, or 17.0% of assets. Including additional Federal Reserve borrowing capacity, correspondent-bank lines and unencumbered securities, total available liquidity was reported at $485.2 million, or 36.1% of assets.
- Contractual obligations totaled $815.4 million, including $265.7 million of borrowings, $549.2 million of certificates of deposit and $604,000 of operating leases. Loan commitments and unused lines totaled $113.5 million.
Material Changes Versus the Prior Comparable Period
- Net income increased modestly despite a lower net interest margin and higher credit costs. Lower funding costs reduced interest expense by $2.0 million and offset lower interest income.
- Average earning assets increased $68.0 million, adding approximately $2.2 million to net interest income; margin compression reduced net interest income by approximately $1.4 million.
- Non-interest income benefited from a $3.3 million gain on the sale of $140.4 million of securities. Mortgage origination income declined $658,000.
- Asset quality deteriorated: nonperforming loans increased to 3.21% of total loans from 2.39%; nonperforming assets increased to 2.32% of total assets from 1.87%; and net charge-offs rose to $10.9 million, or 1.23% of average loans, from $8.7 million, or 0.94%.
- Impaired loans increased to $42.1 million from $25.3 million, and troubled debt restructurings increased to 59 loans totaling $22.9 million from 32 loans totaling $5.5 million.
- The allowance for loan losses decreased slightly to $13.0 million, remaining 1.50% of total loans, despite a higher provision and higher charge-offs.
- On August 24, 2011, the Company repurchased $12.5 million of Treasury CPP preferred stock. The remaining CPP preferred stock was $12.5 million at year-end, with related warrants for 225,904 common shares exercisable at $16.60 per share.
- Available-for-sale securities generated a $9.5 million after-tax increase in accumulated other comprehensive income, and the Company reported a $7.4 million unrealized gain balance at year-end compared with a $2.1 million unrealized loss at year-end 2010.
Guidance, Outlook, Management Commentary, Risks and Unusual Items
Management did not provide specific earnings or balance-sheet guidance. It expected interest rates to remain stable over the next two to four quarters and considered the Company’s interest-rate risk acceptable. The filing cautions that economic weakness, limited loan demand, reduced real estate values and elevated unemployment may continue to pressure credit quality and loan growth.
- Management expects continued provisioning may be prudent because of economic uncertainty, high unemployment and elevated nonperforming loans. Future charge-offs could exceed the allowance and require additional provisions.
- The Company’s loan portfolio is concentrated geographically in Mid-Coast and Down East Maine and is substantially secured by real estate, exposing results to local economic and property-value declines.
- Liquidity depends primarily on customer deposits, brokered-deposit renewals, FHLB advances, repurchase agreements and other borrowings. A loss of well-capitalized status could restrict brokered deposits and increase funding costs.
- Interest-rate changes, deposit competition, prepayments, extension risk and lower loan demand could reduce net interest income. Management’s simulation projected first-year net interest income decreases of 0.8% under a gradual 1% rate decline and 0.4% under a gradual 2% rate increase.
- The Company held $286.2 million of available-for-sale securities and $122.7 million of held-to-maturity securities. Temporary unrealized losses totaled $796,000; management concluded no other-than-temporary impairment was required.
- Dodd-Frank implementation, FDIC assessment changes, consumer-protection requirements, cybersecurity, operational disruptions, competition and broader financial-market volatility remain material risks.
- No material pending litigation, unresolved SEC staff comments or material off-balance-sheet liabilities were reported. Goodwill was tested and no impairment was identified.
Capital and Shareholder Returns
- The Company remained well capitalized. Consolidated total risk-based capital was 15.66%, Tier 1 risk-based capital was 14.40% and the leverage ratio was 8.32% at December 31, 2011.
- The Bank’s corresponding ratios were 15.37%, 14.11% and 8.33%, respectively, and the OCC classified the Bank as well capitalized.
- Cash dividends were maintained at $0.195 per share quarterly, or $0.78 per share for the year. The dividend payout ratio was 68.42%.
- The Company repurchased no common stock in 2011 because CPP-related restrictions limited repurchases while Treasury securities remained outstanding.
Most Important Facts for Investors to Verify
- Whether the increase in nonperforming loans, impaired loans, TDRs and charge-offs stabilizes or requires materially higher provisions.
- Whether the $13.0 million allowance remains adequate relative to $42.1 million of impaired loans and local real estate conditions.
- The sustainability of 2011 earnings excluding the $3.3 million securities gain and considering the lower net interest margin.
- Deposit retention and the refinancing or renewal of certificates of deposit and wholesale borrowings, particularly the $320.4 million of certificates maturing by December 31, 2012.
- Progress toward redeeming the remaining $12.5 million of CPP preferred stock before the dividend rate increases from 5.0% to 9.0% after the initial five-year period.
- The effect of continued weak loan demand, local economic conditions, interest-rate movements and regulatory changes on future net interest income, liquidity and capital.