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. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2012, with comparisons to the corresponding 2011 periods and December 31, 2011 balances. The interim financial statements were reviewed by the independent registered public accounting firm, which reported no material modifications were needed for conformity with U.S. GAAP.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total interest income | $12.9 million | $13.9 million | $39.1 million | $42.1 million |
| Net interest income | $9.7 million | $10.2 million | $29.4 million | $31.0 million |
| Provision for loan losses | $1.4 million | $1.5 million | $6.3 million | $5.6 million |
| Non-interest income | $2.5 million | $2.1 million | $8.6 million | $6.6 million |
| Non-interest expense | $6.6 million | $6.9 million | $19.5 million | $19.7 million |
| Net income | $3.2 million | $3.0 million | $9.5 million | $9.3 million |
| Diluted EPS | $0.31 | $0.27 | $0.91 | $0.85 |
| Tax-equivalent net interest margin | 3.12% | 3.24% | 3.16% | 3.29% |
At September 30, 2012, total assets were $1.423 billion, total loans were $869.9 million, investment securities were $468.6 million, deposits were $944.5 million, borrowed funds were $304.7 million, and shareholders’ equity was $156.6 million. Book value per common share was $14.64 and tangible book value per common share was $11.83.
Return on average assets was 0.90% for the third quarter and 0.89% for the nine-month period. Return on average equity was 8.90% and 8.86%, respectively. The non-GAAP efficiency ratio was 50.73% for the quarter and 50.74% for the nine months.
Cash and cash equivalents were $14.9 million at September 30, 2012. Nine-month operating cash flow was $18.0 million, investing cash flow was $(53.8) million, financing cash flow was $36.5 million, and cash increased by $0.8 million from year-end 2011.
Material changes versus comparable periods
- Third-quarter net income increased 7.2% year over year, while nine-month net income increased 1.3%. Diluted EPS increased 14.8% in the quarter and 7.1% year to date, partly reflecting lower preferred-stock dividends and amortization.
- Net interest income declined 5.5% in the quarter and 5.0% for the nine months. Management attributed the decline primarily to a prolonged low-interest-rate environment, downward repricing of assets, and margin compression.
- Non-interest income increased 19.8% in the quarter and 29.8% year to date. The nine-month increase was driven primarily by $1.967 million of net securities gains versus $0.237 million in 2011; quarterly growth also reflected stronger mortgage origination and investment-management income.
- Non-interest expense declined 4.9% in the quarter and 0.8% year to date, primarily due to lower other-real-estate-owned costs.
- Total loans increased 0.6% from December 31, 2011 and 0.1% from September 30, 2011. Residential term loans increased 8.4% year to date, while commercial loans declined 3.4%.
- Low-cost deposits increased $43.2 million, or 13.8%, year to date, while certificates of deposit declined $35.8 million, or 6.5%. Borrowed funds increased $39.1 million, or 14.7%, from year-end.
- The allowance for loan losses increased to $14.7 million from $13.0 million at year-end, while declining from $15.3 million a year earlier. The allowance-to-loans ratio was 1.69% versus 1.50% at year-end and 1.76% a year earlier.
Credit quality, liquidity, debt and capital
Nonperforming loans were $23.6 million, or 2.71% of total loans, compared with 3.21% at December 31, 2011 and 2.42% at September 30, 2011. Total past-due loans were $19.7 million, or 2.27% of loans, versus 3.07% at year-end. Impaired loans increased to $48.6 million from $42.1 million at year-end, and troubled debt restructurings increased to 91 loans totaling $29.3 million from 59 loans totaling $22.9 million at year-end.
Management recorded $6.3 million of loan-loss provision and $4.6 million of net charge-offs for the first nine months. Management stated that the allowance was appropriate, but acknowledged that additional provisions could be required if credit quality, economic conditions, loan growth, or regulatory assessments deteriorate.
Management reported $281.9 million of primary liquidity and $297.4 million of contingent liquidity sources, which it considered adequate for anticipated needs. Contractual obligations included $304.7 million of borrowed funds and $513.4 million of certificates of deposit. Total loan commitments and unused lines of credit were $109.2 million.
The Company remained well capitalized. At September 30, 2012, the leverage capital ratio was 8.60%, the Tier 1 risk-based capital ratio was 15.00%, and the total risk-based capital ratio was 16.25%. The Company had $12.5 million of U.S. Treasury Capital Purchase Program preferred stock outstanding and related warrants for 225,904 common shares at an exercise price of $16.60 per share.
Guidance, outlook, risks and unusual items
- No formal earnings or financial guidance was provided. Management expected interest rates to remain stable over the next 10 to 12 quarters and considered current interest-rate risk acceptable.
- Management described the economy as sluggish, with low interest rates, unemployment, and housing conditions affecting margins and credit quality. It expects continued pressure on net interest income and potential credit losses.
- Interest-rate simulation indicated a projected first-year net-interest-income decline of 1.09% if short-term rates fell 1 percentage point and an increase of 1.05% if rates rose 2 percentage points. Management cautioned that these are hypothetical risk scenarios, not forecasts.
- At September 30, 2012, securities with $18.6 million of fair value had $0.3 million of unrealized losses. Management concluded the losses were temporary and recorded no other-than-temporary impairment charge.
- Other real estate owned increased to $5.5 million across 27 properties from $4.1 million across 16 properties at year-end.
- On October 26, 2012, the Bank acquired a Rockland, Maine branch and approximately $32.3 million of deposits, and purchased a Bangor bank building. The total transaction value was estimated at $6.7 million; the Bangor branch was expected to open in the first quarter of 2013.
- Management disclosed no material changes to previously reported risk factors, no material legal proceedings, and effective disclosure controls as of September 30, 2012.
Important facts for investors to verify
- Whether margin compression continues as loans and securities reprice in the low-rate environment.
- Whether the increase in impaired loans, TDRs, OREO, and specific reserves leads to higher future charge-offs or provisions.
- The stability and cost of funding as certificates of deposit decline and borrowed funds increase.
- The earnings contribution and integration costs associated with the Rockland deposit acquisition and planned Bangor branch.
- The amount, timing, and regulatory approval requirements for any future redemption of the remaining Treasury preferred stock.
- The filing’s non-GAAP measures, including tax-equivalent net interest income and efficiency ratios, should be reconciled to GAAP results when comparing with other banks.