Business Context and Reporting Period
The First Bancorp, Inc. is a Maine-based financial holding company that owns The First, N.A. This Form 10-Q covers the three months ended March 31, 2012; interim financial statements are unaudited and were reviewed, but not audited, by the independent registered public accounting firm.
Key Financial Metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total interest income | $13.1 million | $14.3 million | Down 8.1% |
| Net interest income | $9.8 million | $10.5 million | Down 6.7% |
| Provision for loan losses | $2.1 million | $2.1 million | Unchanged |
| Non-interest income | $2.2 million | $2.3 million | Down 4.8% |
| Non-interest expense | $6.2 million | $6.5 million | Down 4.8% |
| Net income | $2.9 million | $3.1 million | Down 7.3% |
| Diluted EPS | $0.28 | $0.29 | Down $0.01 |
| Tax-equivalent net interest margin | 3.22% | 3.40% | Down 18 basis points |
| Net cash provided by operating activities | $6.7 million | $9.0 million | Down $2.3 million |
- Total assets were $1.424 billion at March 31, 2012, compared with $1.431 billion a year earlier and $1.373 billion at December 31, 2011.
- Total loans were $870.9 million, up 0.7% from year-end but down 2.7% year over year. Residential term loans increased $17.1 million year to date, while commercial loans declined $4.0 million.
- Investment securities totaled $469.5 million, up 10.7% from December 31, 2011 and 4.2% year over year.
- Total deposits were $1.016 billion, up $74.5 million, or 7.9%, from year-end but down 3.3% year over year. The year-to-date increase was concentrated in certificates of deposit, which rose $81.6 million.
- Borrowed funds totaled $240.2 million, down $25.5 million from year-end and up $22.6 million year over year.
- Shareholders’ equity was $151.6 million. Book value per common share was $14.15 and tangible book value per common share was $11.34.
- The company declared a quarterly cash dividend of $0.195 per share, unchanged from the prior comparable period.
Material Changes Versus Prior Comparable Period
- Net interest income declined primarily because loan and investment yields repriced downward in the low-interest-rate environment. Interest expense fell, but not enough to offset the decline in interest income.
- Non-interest income declined despite a $523,000 net securities gain. Mortgage origination and servicing income fell to a loss of $156,000, including a $239,000 impairment charge related to mortgage-servicing rights.
- Non-interest expense decreased by $310,000, reflecting lower FDIC insurance premiums and lower collection and other-real-estate-owned costs. The non-GAAP efficiency ratio nevertheless increased to 50.40% from 48.28%.
- Net loan charge-offs increased to $2.1 million, or 0.99% of average loans on an annualized basis, from $1.4 million, or 0.64%, in Q1 2011. The allowance for loan losses declined to $13.0 million from $14.0 million a year earlier.
- Nonperforming loans were 2.81% of total loans, compared with 2.51% a year earlier. Total nonperforming assets were 2.01% of total assets, compared with 1.89% a year earlier.
- Troubled debt restructurings increased materially to 71 loans with a $20.6 million balance, compared with 36 loans totaling $6.0 million a year earlier.
- Other real estate owned declined to $4.2 million from $4.6 million a year earlier. Mortgage servicing rights declined in fair value to $994,000 from $2.2 million.
- Other comprehensive income was a loss of $308,000, compared with income of $673,000 in Q1 2011, primarily due to changes in unrealized securities gains and losses.
Liquidity, Capital, Outlook, and Risks
- Management reported $267.2 million of primary liquidity and an additional $266.6 million of contingent liquidity, and believes available funding is adequate for anticipated needs.
- Contractual obligations included $240.2 million of borrowed funds and $630.8 million of certificates of deposit. Of these obligations, $514.1 million was scheduled to mature within one year. Total loan commitments and unused lines of credit were $114.4 million.
- The company reported regulatory leverage capital of 8.51%, Tier 1 risk-based capital of 14.41%, and total risk-based capital of 15.66%, all above applicable well-capitalized thresholds.
- The company had $12.5 million of U.S. Treasury Capital Purchase Program preferred stock outstanding. Related warrants covering 225,904 common shares at an exercise price of $16.60 per share remained outstanding.
- Management stated that the weak global economy, unemployment, housing conditions, higher credit losses, and exceptionally low interest rates could continue to pressure earnings and asset quality.
- Management expected interest rates to remain stable over the next eight to ten quarters and considered the company’s interest-rate risk acceptable. This is management commentary, not formal earnings guidance.
- The company used no interest-rate derivatives at March 31, 2012. Its interest-rate simulation indicated that a gradual 2% rate increase could reduce first-year net interest income by approximately 1.49%, while a gradual 1% decline could reduce it by approximately 0.99%.
- Management concluded that temporarily impaired securities did not require other-than-temporary impairment charges. The portfolio had $80.5 million of securities with $1.1 million of unrealized losses, including $6.9 million that had been impaired for more than 12 months.
- Management identified no material changes to previously disclosed risk factors, no material legal proceedings, and no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether net interest margin continues to contract as loans and securities reprice in a low-rate environment.
- Trends in nonperforming loans, charge-offs, TDRs, impaired loans, foreclosure activity, and the adequacy of the $13.0 million allowance.
- The sustainability and cost of the $1.016 billion deposit base, particularly the increased reliance on certificates of deposit and wholesale funding.
- Whether mortgage-servicing-rights valuations and mortgage refinancing activity produce additional impairment or reduce non-interest income.
- The carrying value and credit performance of the investment portfolio, including securities with unrealized losses and substantial maturities beyond ten years.
- The company’s ability to maintain well-capitalized ratios while continuing the $0.195 quarterly dividend and servicing the remaining CPP preferred stock.
- Management’s liquidity estimates, including the availability of contingent borrowing capacity and the timing of $514.1 million of obligations due within one year.