First Bancorp, Inc quarterly report, Q2 FY2011

Business Context and Reporting Period

The First Bancorp, Inc. is a Maine financial holding company whose principal subsidiary is The First, N.A. The Form 10-Q covers the quarter and six months ended June 30, 2011, with comparisons to June 30, 2010 and December 31, 2010. The interim financial statements are unaudited but were reviewed by the independent registered public accounting firm, which reported no material modifications were necessary.

Financial Performance and Position

Metric	Six months ended June 30, 2011	Comparable period	Change
Interest income	$28.3 million	$28.3 million	Essentially flat
Interest expense	$7.5 million	$8.4 million	Down 10.1%
Net interest income	$20.7 million	$20.0 million	Up 3.8%
Provision for loan losses	$4.1 million	$4.5 million	Down $0.4 million
Non-interest income	$4.5 million	$4.5 million	Up $0.1 million
Non-interest expense	$12.7 million	$12.2 million	Up 4.6%
Net income	$6.3 million	$5.8 million	Up 8.4%
Diluted EPS	$0.58	$0.53	Up $0.05

For the second quarter alone, net income was $3.2 million versus $3.2 million in the prior-year quarter, and diluted EPS was $0.29 in both periods. Net interest income increased to $10.2 million from $10.0 million, while non-interest expense increased to $6.3 million from $5.9 million.

Tax-equivalent net interest margin was 3.31% for the first six months and 3.22% for the second quarter, versus 3.41% and 3.35%, respectively, in the comparable periods.
Return on average assets was 0.90% for the first six months, compared with 0.88% in the prior year. Return on average equity was 9.90%, versus 9.38%.
Non-GAAP efficiency ratio was 47.47%, essentially unchanged from 47.46%; the GAAP efficiency ratio was 50.47% versus 49.83%.
Total assets were $1.418 billion at June 30, 2011, up 1.7% from year-end 2010 and 6.9% from June 30, 2010.
Total loans were $886.9 million, essentially unchanged from year-end but down $45.1 million, or 4.8%, from the prior-year period.
Total investment securities were $442.7 million, up 6.4% from year-end and 50.3% year over year.
Total deposits were $998.8 million, up 2.5% from year-end and 5.2% year over year. Certificates of deposit increased to $633.3 million.
Borrowed funds totaled $249.3 million, consisting of $119.2 million of short-term borrowings and $130.2 million of long-term borrowings.
Shareholders’ equity was $156.2 million. Book value per common share was $13.42 and tangible book value per common share was $10.60.
Cash and cash equivalents were $14.3 million at quarter-end. Six-month operating cash flow was $15.0 million, investing cash flow was negative $26.7 million, financing cash flow was $12.1 million, and cash increased $0.5 million.
Regulatory capital remained strong: the reported Tier 1 risk-based capital ratio was 15.14%, total risk-based capital was 16.40%, and the leverage ratio was 8.88%, all above applicable well-capitalized thresholds.

Material Changes Versus Comparable Periods

Net interest income benefited from greater earning-asset volume and lower funding costs, but the net interest margin contracted as asset yields declined faster than funding costs.
Investment securities increased materially, primarily through purchases of GNMA mortgage-backed securities and other securities. Securities available for sale increased to $304.3 million from $149.2 million a year earlier.
Loan balances declined year over year, particularly residential term and construction loans, while commercial real estate and home equity balances were comparatively stronger.
The allowance for loan losses increased to $15.0 million from $13.3 million at year-end and $14.2 million a year earlier, representing 1.70% of loans versus 1.50% and 1.52%, respectively.
Net charge-offs declined to $2.4 million from $4.0 million in the first six months of 2010; the annualized ratio of net charge-offs to average loans was 0.54% versus 0.86%.
Nonperforming loans were $22.0 million, or 2.49% of total loans, compared with 2.39% at year-end and 2.53% a year earlier. Total past-due loans improved to 2.95% of loans from 3.15% at year-end.
Impaired loans increased to $27.0 million from $25.3 million at year-end. Troubled debt restructurings increased to 36 loans with an aggregate value reported as approximately $6.6 million to $6.7 million, versus 31 loans totaling $4.8 million a year earlier.
Other real estate owned increased to $7.7 million across 23 properties from $4.9 million across 18 properties at year-end.
Accumulated unrealized gains on securities available for sale improved from a $2.1 million loss at year-end to a $2.2 million gain, primarily due to lower interest rates.

Guidance, Outlook, Risks and Unusual Items

Management stated that credit-quality deterioration had been relatively stable for several quarters, but continued to cite the weak housing market, elevated unemployment, reduced incomes, economic conditions, and the possibility of continued recession as risks.
Management believes the allowance for loan losses is adequate, while acknowledging that future additions could be required if nonperforming loans, charge-offs, economic conditions, portfolio growth, or regulatory assessments worsen.
Management reported primary liquidity sources of $284.3 million and contingent liquidity sources of $215.0 million, and believed funding capacity was adequate for anticipated needs. Key liquidity risks are deposit runoff and inability to renew wholesale funding.
The securities portfolio included $102.4 million of temporarily impaired securities with $2.1 million of unrealized losses. Management concluded that no other-than-temporary impairment charge was warranted because issuers remained current and the Company intended and expected to hold the securities for recovery or maturity.
The Company recorded a $229,000 net securities gain during the first six months, including gains and losses associated with portfolio realignment and the conversion of a General Motors bond into equity securities.
The U.S. Treasury Capital Purchase Program preferred stock remained outstanding at approximately $24.8 million of carrying value. It bears cumulative dividends of 5.0% for the first five years and 9.0% thereafter, and restricts certain common-stock repurchases and dividend increases while outstanding.
Management expected interest rates to remain stable over the next two to four quarters and considered current interest-rate risk acceptable. Simulation results indicated modest first-year sensitivity to rate changes, but greater second-year exposure in a falling-rate scenario.
Forward-looking results remain subject to economic and market conditions, interest-rate volatility, loan demand and collectability, competition, regulation, accounting changes, securities valuations, and other factors identified in the filing. No material changes were reported to previously disclosed risk factors, and no material legal proceedings were disclosed.

Important Facts for Investors to Verify

Whether the increase in impaired loans, troubled restructurings, foreclosures, and other real estate owned leads to higher charge-offs or additional provision expense.
Whether the 1.70% allowance-to-loans ratio remains adequate as economic and housing conditions evolve.
The sustainability of the 3.31% tax-equivalent net interest margin amid low rates, loan repricing, deposit pricing, and the expanded securities portfolio.
Concentration, duration, prepayment, and valuation risks in the $442.7 million securities portfolio, including temporarily impaired securities.
Reliance on certificates of deposit and wholesale funding, including the maturity of $410.5 million of certificates of deposit and $119.2 million of short-term borrowings within one year.
The effect of the $7.7 million OREO balance and related property valuations on future earnings and capital.
The terms, dividend cost, redemption prospects, and common-stock restrictions associated with the Treasury CPP preferred stock and warrants.
The filing’s inconsistent TDR references, which report the June 30, 2011 aggregate balance as approximately $6.6 million in one MD&A passage and $6.7 million in the notes.