The First Bancorp, Inc. — Form 10-Q Summary
Business Context and Reporting Period
The First Bancorp, Inc. is a Maine-based financial holding company whose principal subsidiary is The First, N.A. The filing covers the quarter and six months ended June 30, 2012. Interim financial statements are unaudited and were reviewed by the independent registered public accounting firm, which reported no material modifications were necessary for conformity with U.S. GAAP.
Financial Performance and Position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net income | $3.323 million | $3.193 million | $6.236 million | $6.336 million |
| Diluted EPS | $0.32 | $0.29 | $0.60 | $0.58 |
| Net interest income | $9.918 million | $10.223 million | $19.724 million | $20.728 million |
| Provision for loan losses | $2.800 million | $2.000 million | $4.900 million | $4.100 million |
| Non-interest income | $3.896 million | $2.234 million | $6.064 million | $4.511 million |
| Non-interest expense | $6.730 million | $6.250 million | $12.908 million | $12.738 million |
| Tax-equivalent net interest margin | 3.16% | 3.22% | 3.19% | 3.31% |
- Net income increased 4.1% year over year in Q2, while six-month net income decreased 1.6%. Management described Q2 earnings as the strongest quarterly result in three years.
- Net interest income declined because low interest rates caused asset yields to reprice downward faster than liabilities. Tax-equivalent net interest income decreased 1.9% in Q2 and 3.4% for the six-month period.
- Non-interest income increased materially, primarily because of net securities gains of $1.444 million in Q2 and $1.967 million for the six months, compared with $229,000 in each 2011 comparison period. Q2 also benefited from mortgage origination and servicing income and investment management income.
- Six-month net charge-offs were $3.516 million, compared with $2.382 million in the prior-year period. The allowance for loan losses rose to $14.384 million, or 1.63% of loans, from $13.000 million at December 31, 2011 and $15.034 million at June 30, 2011.
- At June 30, 2012, total assets were $1.425 billion, loans were $881.814 million, investment securities were $457.570 million, deposits were $1.005 billion, and shareholders’ equity was $153.405 million.
- Loan growth from year-end was driven primarily by a $27.6 million increase in residential term loans. Total loans were $5.1 million below the June 30, 2011 balance.
- Cash and cash equivalents were $14.192 million. Management reported primary liquidity sources of $250.9 million and contingent liquidity sources of $237.4 million and considered liquidity adequate.
- Borrowed funds totaled $248.926 million, including $118.767 million of short-term borrowings and $130.159 million of long-term borrowings.
- Regulatory capital remained strong: leverage capital was 8.31%, Tier 1 risk-based capital was 14.58%, and total risk-based capital was 15.84%, above applicable well-capitalized thresholds.
- Book value per common share was $14.32 and tangible book value per common share was $11.51 at June 30, 2012. The quarterly cash dividend was $0.195 per share.
Material Changes Versus Comparable Periods
- Q2 net income increased $130,000, or 4.1%, and diluted EPS increased from $0.29 to $0.32. Six-month net income fell $100,000, although diluted EPS increased from $0.58 to $0.60 because of lower preferred-stock dividend requirements following the 2011 repurchase of $12.5 million of Treasury preferred stock.
- Q2 net interest income declined $305,000, or 3.0%; six-month net interest income declined $1.004 million, or 4.8%.
- Q2 non-interest income rose $1.662 million, or 74.4%, and six-month non-interest income rose $1.553 million, or 34.4%. The increase was substantially related to securities gains and may not represent recurring operating performance.
- Non-interest expense increased 7.7% in Q2 and 1.3% for the six months, reflecting higher collection, other real estate owned, health insurance, and compensation-related costs.
- Nonperforming loans were $21.958 million, or 2.49% of total loans, versus $27.806 million and 3.21% at December 31, 2011. Total past-due loans fell to $20.040 million, or 2.27% of loans, from $26.597 million and 3.07% at year-end.
- Despite improved delinquency and nonperforming-loan ratios, troubled debt restructurings increased to 82 loans totaling $24.980 million, versus 59 loans totaling $22.858 million at year-end and 36 loans totaling $6.663 million a year earlier.
- Other real estate owned increased to $5.188 million from $4.094 million at year-end, but remained below $7.723 million at June 30, 2011.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- No formal earnings or financial guidance was provided. Management expected interest rates to remain stable over the next six to eight quarters and considered current interest-rate risk acceptable.
- Management cited continued economic weakness, elevated unemployment, housing-market conditions, low interest rates, margin compression, reduced loan yields, and potential credit losses as principal concerns.
- Interest-rate sensitivity modeling indicated estimated first-year net interest income declines of 1.12% if short-term rates fall 1 percentage point and 0.96% if rates rise 2 percentage points. These are hypothetical risk-management scenarios, not forecasts.
- Management stated that the allowance for loan losses was appropriate but cautioned that future charge-offs, economic conditions, loan growth, or regulatory reviews could require additional provisions.
- At June 30, 2012, 24 TDR loans totaling $3.562 million were on non-accrual status; five TDR loans totaling $1.194 million were involved in bankruptcy, and three TDR loans totaling $413,000 were in foreclosure. The Bank had 43 loans totaling $7.4 million in the foreclosure process.
- The securities portfolio included 30 securities with temporary unrealized losses totaling $477,000. Management concluded that no other-than-temporary impairment was warranted.
- On July 2, 2012, the company announced agreements to acquire a Rockland, Maine branch and approximately $45 million of deposits, plus a Bangor, Maine bank building. The estimated transaction value is $7.7 million; the Rockland transaction is subject to regulatory approval and was expected to close in the fourth quarter of 2012, with the Bangor branch expected to open in the first quarter of 2013.
- The company had $104.483 million of loan commitments and unused lines of credit. Contractual obligations included $248.926 million of borrowed funds and $613.878 million of certificates of deposit.
- No material legal proceedings, material changes to previously disclosed risk factors, defaults upon senior securities, or material changes in internal control were reported.
Important Facts for Investors to Verify
- Whether the improvement in quarterly earnings is sustainable after excluding the $1.444 million securities gain.
- Future net interest margin performance in the continuing low-rate environment and the effect of asset repricing.
- Trends in charge-offs, nonperforming loans, impaired loans, TDRs, foreclosure activity, and the adequacy of the $14.384 million allowance.
- The funding mix, including the $613.878 million certificate-of-deposit balance and reliance on wholesale borrowings.
- Regulatory approval, final consideration, deposit retention, and integration economics for the Rockland and Bangor expansion.
- The terms and future cost of the remaining $12.5 million of Treasury CPP preferred stock and the potential dilution from 225,904 outstanding warrants.
- Changes in the value of mortgage servicing rights, other real estate owned, and securities exposed to interest-rate or valuation changes.