Business Context and Reporting Period
The First Bancorp, Inc., a Maine financial holding company, owns The First, N.A. The unaudited Form 10-Q covers the quarter and nine months ended September 30, 2011, with comparisons to September 30, 2010 and December 31, 2010. Interim financial statements were reviewed by the independent registered public accounting firm, not audited.
Financial Performance and Condition
| Metric | Nine months ended September 30, 2011 | Comparable period |
|---|---|---|
| Net interest income | $31.0 million | $30.2 million |
| Provision for loan losses | $5.6 million | $6.3 million |
| Non-interest income | $6.6 million | $6.5 million |
| Non-interest expense | $19.7 million | $18.4 million |
| Net income | $9.3 million | $9.0 million |
| Diluted EPS | $0.85 | $0.82 |
| Tax-equivalent net interest margin | 3.29% | 3.39% |
| Return on average assets | 0.87% | 0.90% |
| Non-GAAP efficiency ratio | 49.30% | 47.68% |
Third-quarter net income was $3.0 million, or $0.27 diluted EPS, versus $3.2 million, or $0.29 diluted EPS, in the third quarter of 2010. Tax-equivalent net interest income was $32.9 million for the first nine months, up 3.1% year over year, but margin declined as asset yields repriced downward faster than funding costs.
- Total assets were $1.427 billion at September 30, 2011, up from $1.394 billion at year-end 2010 and $1.375 billion a year earlier.
- Total loans were $868.6 million, down 2.1% from year-end and 5.4% from September 30, 2010.
- Total investment securities were $471.9 million, up 13.4% from year-end and 27.9% year over year.
- Total deposits were $1.005 billion, up 3.1% from year-end and 1.8% year over year. Low-cost deposits increased while certificates of deposit declined.
- Borrowed funds totaled $255.6 million, compared with $257.3 million at year-end and $222.7 million a year earlier.
- Cash and cash equivalents were $16.6 million. Management reported $327.7 million of primary liquidity and $232.7 million of contingent liquidity.
- Net cash provided by operating activities was $23.4 million. Investing activities used $30.5 million, while financing activities provided $9.8 million, producing a $2.7 million increase in cash during the nine months.
- Shareholders’ equity was $150.5 million; book value per common share was $14.11 and tangible book value was $11.28.
- The allowance for loan losses was $15.3 million, or 1.76% of loans, versus 1.50% at year-end and 1.55% a year earlier. Net charge-offs were $3.6 million, compared with $5.7 million in the prior-year period.
- Regulatory capital remained above well-capitalized thresholds: leverage capital was 8.10%, Tier 1 risk-based capital was 13.98%, and total risk-based capital was 15.24%.
Material Changes Versus Comparable Periods
- Nine-month net income increased 3.3%, while third-quarter net income decreased 5.9%.
- Interest income declined 1.8%, but interest expense declined 11.8%, allowing net interest income to increase 2.4% for the nine months.
- Non-interest expense increased 6.9% for the nine months and 11.3% in the third quarter, primarily due to salaries, other real estate owned, and foreclosure costs.
- Loan balances contracted as commercial, municipal, residential term, and construction lending declined; home equity lines increased modestly.
- Investment securities increased substantially, primarily through purchases of GNMA mortgage-backed securities and other government-related securities.
- Nonperforming loans were $21.0 million, or 2.42% of total loans, versus 2.39% at year-end and 2.36% a year earlier. Total past-due loans improved to 2.20% of loans from 3.15% at year-end.
- Impaired loans increased to $28.3 million from $25.3 million at year-end. Troubled debt restructurings increased to 45 loans totaling $10.5 million, compared with 32 loans totaling $5.1 million a year earlier.
- Other real estate owned increased to $6.3 million from $4.9 million at year-end, with 21 properties owned at September 30, 2011.
- On August 24, 2011, the Company repurchased $12.5 million of U.S. Treasury Capital Purchase Program preferred stock. The remaining CPP preferred stock balance was $12.5 million.
Outlook, Commentary, Risks, and Unusual Items
Management stated that credit deterioration appeared relatively stable over several quarters despite the continuing housing-market slump, elevated unemployment, and recessionary conditions. Management believes the allowance is appropriate, but cautions that additional provisions could be required if nonperforming loans, economic conditions, loan growth, or charge-offs worsen.
Management expected interest rates to remain stable over the next six to eight quarters and considered the Company’s interest-rate risk acceptable. The filing does not provide formal earnings or revenue guidance. Interest-rate simulations indicated a projected first-year net interest income decline of approximately 0.99% if rates gradually fall 1.0%, and 0.03% if rates gradually rise 2.0%; these are hypothetical scenarios, not forecasts.
- Investment securities with $22.9 million of fair value had $1.1 million of unrealized losses. Management concluded that no other-than-temporary impairment charge was warranted.
- The Company had no interest-rate derivatives at September 30, 2011.
- Borrowed funds and certificates of deposit represented $850.3 million of contractual obligations, including $501.8 million due within one year.
- Loan commitments and unused lines of credit totaled $114.4 million.
- Five TDRs totaling $749,000 were in bankruptcy, and 18 TDRs totaling $3.2 million were on non-accrual status.
- Management identified no material legal proceedings, no material changes to previously disclosed risk factors, and no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the rise in impaired loans, TDRs, foreclosures, and other real estate owned leads to higher future provisions or charge-offs.
- Whether the allowance of 1.76% of loans remains adequate under changing Maine and national economic conditions.
- Whether loan contraction and lower asset yields continue to pressure net interest margin and earnings.
- The liquidity and refinancing profile of $255.6 million of borrowed funds and the $366.3 million of certificates of deposit maturing within one year.
- The effect of the remaining $12.5 million of CPP preferred stock, its 5.0% dividend rate through the first five years, related restrictions, and the outstanding 225,904 Treasury warrants.
- The valuation sensitivity of investment securities, mortgage servicing rights, goodwill, and collateral-dependent impaired loans.