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 unaudited Form 10-Q covers the three months ended March 31, 2011, with comparisons to the three months ended March 31, 2010 and December 31, 2010. Interim financial statements were reviewed, not audited, by Berry Dunn McNeil & Parker, LLC.
Key Financial Metrics
| Metric | Q1 2011 | Comparable period / date |
|---|---|---|
| Interest income | $14.3 million | $14.1 million in Q1 2010 |
| Interest expense | $3.7 million | $4.1 million in Q1 2010 |
| Net interest income | $10.5 million | $10.0 million in Q1 2010 |
| Tax-equivalent net interest margin | 3.40% | 3.51% in Q1 2010 |
| Provision for loan losses | $2.1 million | $2.4 million in Q1 2010 |
| Non-interest income | $2.3 million | $2.2 million in Q1 2010 |
| Non-interest expense | $6.5 million | $6.3 million in Q1 2010 |
| Net income | $3.1 million | $2.7 million in Q1 2010 |
| Diluted EPS | $0.29 | $0.24 in Q1 2010 |
| Net cash from operating activities | $9.0 million | $4.4 million in Q1 2010 |
| Total assets at period end | $1.431 billion | $1.337 billion at March 31, 2010 |
| Total loans at period end | $894.7 million | $935.0 million at March 31, 2010 |
| Total investment securities | $450.8 million | $311.9 million at March 31, 2010 |
| Total deposits | $1.050 billion | $939.2 million at March 31, 2010 |
| Borrowed funds | $217.5 million | $236.9 million at March 31, 2010 |
| Shareholders’ equity | $151.5 million | $148.5 million at March 31, 2010 |
Material Changes Versus Prior Comparable Period
- Net income increased 17.1% and diluted EPS increased 20.8%, primarily reflecting higher net interest income and a lower loan-loss provision.
- Net interest income increased 4.8%, although the tax-equivalent net interest margin declined 11 basis points to 3.40%. Asset yields fell 32 basis points, partly offset by a 22-basis-point reduction in funding costs.
- Investment securities increased 44.5% year over year to $450.8 million, while total loans declined 4.3%.
- Deposits increased 11.8% year over year, including a significant increase in certificates of deposit. Management noted that much of the certificate growth came from wholesale and brokered sources and replaced borrowed funding.
- Borrowed funds declined $19.4 million year over year and $39.8 million from December 31, 2010.
- Non-performing loans were 2.51% of total loans, compared with 2.46% a year earlier and 2.39% at December 31, 2010. Nonaccrual loans were $22.5 million.
- Net charge-offs declined to $1.4 million from $1.8 million in Q1 2010, while the allowance for loan losses increased to $14.0 million, or 1.56% of total loans, from 1.53% a year earlier.
- Troubled debt restructurings increased to 36 loans totaling $6.0 million from 28 loans totaling $4.4 million a year earlier.
- Other real estate owned declined to $4.6 million from $6.4 million a year earlier, and the number of properties declined to 16 from 24.
Liquidity, Capital, Outlook, and Risks
- Management reported $303.8 million of primary liquidity and an additional $209.0 million of contingent liquidity, and believes available funding is adequate for anticipated needs.
- At March 31, 2011, regulatory leverage capital was 9.06%, the Tier 1 risk-based capital ratio was 15.15%, and total risk-based capital was 16.40%; management stated that the Company remained well capitalized.
- The Company paid or declared a common dividend of $0.195 per share. The U.S. Treasury Capital Purchase Program preferred stock remained outstanding, carrying a 5% dividend rate for the first five years and restricting certain dividend increases and share repurchases.
- Management provided no quantitative earnings or revenue guidance. It expected interest rates to remain stable over the next two to four quarters and considered current interest-rate risk acceptable. The filing states that modeled interest-rate scenarios were not forecasts.
- Management believes the allowance for loan losses is adequate, but notes that future additions may be required if non-performing loans, charge-offs, economic conditions, loan growth, or regulatory assessments deteriorate.
- The investment portfolio included $228.9 million of securities with unrealized losses totaling $5.3 million. Management concluded that no other-than-temporary impairment was warranted, but the conclusion depends on credit performance, market yields, prepayments, collateral values, and the Company’s ability and intent to hold the securities.
- Principal risks include economic and regional banking conditions, unemployment and housing weakness, loan collectability and collateral values, deposit runoff, wholesale funding availability, interest-rate volatility, securities valuation, regulatory changes, and assumptions used in goodwill, mortgage servicing rights, and credit-loss estimates.
- No material legal proceedings, defaults upon senior securities, material changes to previously disclosed risk factors, or material off-balance-sheet risks requiring liability recognition were reported. Disclosure controls were deemed effective.
Facts an Investor Should Verify
- Whether the increase in deposits, particularly wholesale and brokered certificates of deposit, remains stable and does not increase funding costs or liquidity risk.
- Trends in non-performing loans, impaired loans, TDRs, delinquencies, foreclosure inventory, charge-offs, and the adequacy of the $14.0 million allowance.
- Whether the lower net interest margin persists as loan balances decline and the securities portfolio expands.
- The credit performance and valuation sensitivity of the $450.8 million investment portfolio, including securities with unrealized losses and the FHLB stock investment.
- The terms, redemption timing, dividend restrictions, and potential dilution associated with the $25 million Treasury preferred investment and 225,904 Treasury warrants.
- Actual liquidity availability versus the reported $303.8 million of primary and $209.0 million of contingent sources, including collateral and borrowing-capacity requirements.
- Whether management’s assumptions regarding stable interest rates, mortgage prepayments, collateral values, goodwill, and mortgage servicing rights remain reasonable.