FIRST BANCORP, INC /ME/
10-Ks and 10-Qs
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UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
[X]
Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of
1934
For
the Fiscal Year ended December 31, 2009
Commission
File Number 0-26589
THE
FIRST BANCORP, INC.
(Exact
name of Registrant as specified in its charter)
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MAINE
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01-0404322
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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MAIN
STREET, DAMARISCOTTA, MAINE
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04543
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(Address
of principal executive offices)
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(Zip
code)
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(207)
563-3195
Registrant’s
telephone number, including area code
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes
[_] No [X]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes
[_] No [X]
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes
[X] No[_]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
[_]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer
[_]
Accelerated
filer
[X]
Non-accelerated
filer
[_]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes
[_] No [X]
State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter.
Common
Stock: $170,925,000
Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock as of March 12, 2010
Common
Stock: 9,751,475 shares
Table of
Contents
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78
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The First
Bancorp, Inc. (the “Company”) was incorporated under the laws of the State of
Maine on January 15, 1985, for the purpose of becoming the parent holding
company of The First National Bank of Damariscotta, which was chartered as a
national bank under the laws of the United States on May 30, 1864. At the
Company’s Annual Meeting of Shareholders on April 30, 2008, the Company’s name
was changed from First National Lincoln Corporation to The First Bancorp, Inc.
On January 14, 2005, the acquisition of FNB Bankshares (“FNB”) of Bar Harbor,
Maine, was completed, adding seven banking offices and one investment management
office in Hancock and Washington counties of Maine. FNB’s subsidiary, The First
National Bank of Bar Harbor, was merged into The First National Bank of
Damariscotta at closing, and since January 31, 2005, the combined banks have
operated under a new name: The First, N.A. (the “Bank”).
As of
December 31, 2009, the Company’s securities consisted of one class of common
stock, one class of preferred stock, and stock warrants. At that date, there
were 9,744,170 shares of common stock outstanding. In addition, there were
25,000 shares of cumulative perpetual preferred stock outstanding with a
preference value of $1,000 per share, all of which were issued to the U.S.
Treasury under its Capital Purchase Program (the “CPP Shares”). Incident to the
issuance of the CPP Shares, the Company has issued to the U.S. Treasury warrants
to purchase up to 225,904 shares of the Company’s common stock at a price per
share of $16.60 (the “Warrants”). The CPP Shares and the Warrants (and any
shares of common stock issuable pursuant to the Warrants) are freely
transferable by the U.S. Treasury to third parties and the Company has filed a
registration statement with the Securities and Exchange Commission to allow for
possible resale of such securities.
The
common stock and preferred stock of the Bank are the principal assets of the
Company, which has no other subsidiaries. The Bank’s capital stock consists of
one class of common stock of which 120,000 shares, par value $2.50 per share,
are authorized and outstanding, and one class of non-cumulative perpetual
preferred stock, $1,000 preference value, of which 25,000 shares are authorized
and outstanding. All of the Bank’s common stock and preferred stock is owned by
the Company.
The Bank
emphasizes personal service, and customers are primarily small businesses and
individuals for whom the Bank offers a wide variety of services, including
deposit accounts, consumer and commercial and mortgage loans. The Bank has not
made any material changes in its mode of conducting business during the past
five years. The banking business in the Bank’s market area is seasonal with
lower deposits in the winter and spring and higher deposits in the summer and
fall. This swing is predictable and has not had a materially adverse effect on
the Bank.
In
addition to traditional banking services, the Company provides investment
management and private banking services through First Advisors, which is an
operating division of the Bank. First Advisors is focused on taking advantage of
opportunities created as the larger banks have altered their personal service
commitment to clients not meeting established account criteria. First Advisors
is able to offer a comprehensive array of private banking, financial planning,
investment management and trust services to individuals, businesses, non-profit
organizations and municipalities of varying asset size, and to provide the
highest level of personal service. The staff includes investment and trust
professionals with extensive experience.
The
financial services landscape has changed considerably over the past five years
in the Bank’s primary market area. Two large out-of-state banks have continued
to experience local change as a result of mergers and acquisitions at the
regional and national level. Credit unions have continued to expand their
membership and the scope of banking services offered. Non-banking entities such
as brokerage houses, mortgage companies and insurance companies are offering
very competitive products. Many of these entities and institutions have
resources substantially greater than those available to the Bank and are not
subject to the same regulatory restrictions as the Company and the
Bank.
In
November of 1999, Congress adopted the Gramm-Leach-Bliley Financial
Modernization Act (“GLBA”). This legislation breaks down the firewalls
separating related businesses in order to create more competition and a level
playing field in the financial services sector. GLBA eliminated depression-era
restrictions which separate the business of banking from the businesses of
insurance and securities underwriting, and also resulted in modifications to
protect consumers and streamline regulation. While the Company views this
legislation as an opportunity to offer a more comprehensive range of financial
products and services, at the same time it has provided additional competition
in the marketplace.
The
Company believes that there will continue to be a need for a bank in the Bank’s
primary market area with local management having decision-making power and
emphasizing loans to small and medium-sized businesses and to individuals. The
Bank has concentrated on extending business loans to such customers in the
Bank’s primary market area and to extending investment and trust services to
clients with accounts of all sizes. The Bank’s Management also makes decisions
based upon, among other things, the knowledge of the Bank’s employees regarding
the communities and customers in the Bank’s primary market area. The individuals
employed by the Bank, to a large extent, reside near
The First
Bancorp 2009 Form 10-k
Page
1
the
branch offices and thus are generally familiar with their communities and
customers. This is important in local decision-making and allows the Bank to
respond to customer questions and concerns on a timely basis and fosters quality
customer service.
The Bank
has worked and will continue to work to position itself to be competitive in its
market area. The Bank’s ability to make decisions close to the marketplace,
Management’s commitment to providing quality banking products, the caliber of
the professional staff, and the community involvement of the Bank’s employees
are all factors affecting the Bank’s ability to be competitive.
Supervision and
Regulation
The
Company is a financial holding company within the meaning of the Bank Holding
Company Act of 1956, as amended (the “Act”), and section 225.82 of Regulation Y
issued by the Board of Governors of the Federal Reserve System (the “Federal
Reserve Board”), and is required to file with the Federal Reserve Board an
annual report and other information required pursuant to the Act. The Company is
subject to examination by the Federal Reserve Board.
The Act
requires the prior approval of the Federal Reserve Board for a financial holding
company to acquire or hold more than a 5% voting interest in any bank, and
controls interstate banking activities. The Act restricts The First Bancorp’s
non-banking activities to those which are determined by the Federal Reserve
Board to be closely related to banking. The Act does not place territorial
restrictions on the activities of non-bank subsidiaries of financial holding
companies. Virtually all of the Company’s cash revenues are generally derived
from dividends paid to the Company by the Bank. These dividends are subject to
various legal and regulatory restrictions which are summarized in Note 19 to the
accompanying financial statements. The Bank is regulated by the Office of the
Comptroller of the Currency (“OCC”) and is subject to the provisions of the
National Bank Act. As a result, it must meet certain liquidity and capital
requirements, which are discussed in the following sections.
Customer
Information Security
The
Federal Deposit Insurance Corporation (“FDIC”), the OCC and other bank
regulatory agencies have published guidelines establishing standards for
safeguarding nonpublic personal information about customers that implement
provisions of the GLBA (the “Guidelines”). Among other things, the Guidelines
require each financial institution, under the supervision and ongoing oversight
of its Board of Directors or an appropriate committee thereof, to develop,
implement and maintain a comprehensive written information security program
designed to ensure the security and confidentiality of customer information, to
protect against any anticipated threats or hazards to the security or integrity
of such information, and to protect against unauthorized access to or use of
such information that could result in substantial harm or inconvenience to any
customer.
Privacy
The FDIC,
the OCC and other regulatory agencies have published privacy rules pursuant to
provisions of the GLBA (“Privacy Rules”). The Privacy Rules, which govern the
treatment of nonpublic personal information about consumers by financial
institutions, require a financial institution to provide notice to customers
(and other consumers in some circumstances) about its privacy policies and
practices, describe the conditions under which a financial institution may
disclose nonpublic personal information to nonaffiliated third parties, and
provide a method for consumers to prevent a financial institution from
disclosing that information to most nonaffiliated third parties by “opting-out”
of that disclosure, subject to certain exceptions.
USA
Patriot Act
The USA
Patriot Act of 2001, designed to deny terrorists and others the ability to
obtain anonymous access to the U.S. financial system, has significant
implications for depository institutions, broker-dealers and other businesses
involved in the transfer of money. The USA Patriot Act, together with the
implementing regulations of various federal regulatory agencies, have caused
financial institutions, including the Bank, to adopt and implement additional or
amend existing policies and procedures with respect to, among other things,
anti-money laundering compliance, suspicious activity and currency transaction
reporting, customer identity verification and customer risk analysis. The
statute and its underlying regulations also permit information sharing for
counter-terrorist purposes between federal law enforcement agencies and
financial institutions, as well as among financial institutions, subject to
certain conditions, and require the Federal Reserve Board (and other federal
banking agencies) to evaluate the effectiveness of an applicant in combating
money laundering activities when considering applications filed under Section 3
of the Act or under the Bank Merger Act.
The First
Bancorp 2009 Form 10-k
Page
2
The
Sarbanes-Oxley Act
The
Sarbanes-Oxley Act of 2002 (“SOX”) implements a broad range of corporate
governance and accounting measures for public companies (including publicly-held
bank holding companies such as the Company) designed to promote honesty and
transparency in corporate America and better protect investors from the type of
corporate wrongdoings that occurred at Enron and WorldCom, among other
companies. SOX’s principal provisions, many of which have been implemented
through regulations released and policies and rules adopted by the securities
exchanges in 2003 and 2004, provide for and include, among other
things:
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The
creation of an independent accounting oversight
board;
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Auditor
independence provisions which restrict non-audit services that accountants
may provide to clients;
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Additional
corporate governance and responsibility measures, including the
requirement that the chief executive officer and chief financial officer
of a public company certify financial
statements;
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The
forfeiture of bonuses or other incentive-based compensation and profits
from the sale of an issuer’s securities by directors and senior officers
in the twelve-month period following initial publication of any financial
statements that later require
restatement;
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An
increase in the oversight of, and enhancement of certain requirements
relating to, audit committees of public companies and how they interact
with the public company’s independent
auditors;
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Requirements
that audit committee members must be independent and are barred from
accepting consulting, advisory or other compensatory fees from the
issuer;
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Requirements
that companies disclose whether at least one member of the audit committee
is a ‘financial expert’ (as such term is defined by the Securities and
Exchange Commission (“SEC”) ) and if not, why
not;
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Expanded
disclosure requirements for corporate insiders, including accelerated
reporting of stock transactions by insiders and a prohibition on insider
trading during pension blackout
periods;
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A
prohibition on personal loans to directors and officers, except certain
loans made by insured financial institutions, such as the Bank, on
nonpreferential terms and in compliance with bank regulatory
requirements;
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Disclosure
of a code of ethics and filing a Form 8-K in the event of a change or
waiver of such code; and
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A
range of enhanced penalties for fraud and other
violations.
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The
Company complies with the provisions of SOX and its underlying regulations.
Management believes that such compliance efforts have strengthened the Company’s
overall corporate governance structure and does not expect that such compliance
has to date had, or will in the future have, a material impact on the Company’s
results of operations or financial condition.
Capital
Requirements and FDICIA
The OCC
has established guidelines with respect to the maintenance of appropriate levels
of capital by FDIC-insured banks. The Federal Reserve Board has established
substantially identical guidelines with respect to the maintenance of
appropriate levels of capital, on a consolidated basis, by bank holding
companies. If a banking organization’s capital levels fall below the minimum
requirements established by such guidelines, a bank or bank holding company will
be expected to develop and implement a plan acceptable to the FDIC or the
Federal Reserve Board, respectively, to achieve adequate levels of capital
within a reasonable period, and may be denied approval to acquire or establish
additional banks or non-bank businesses, merge with other institutions or open
branch facilities until such capital levels are achieved. Federal regulations
require federal bank regulators to take “prompt corrective action” with respect
to insured depository institutions that fail to satisfy minimum capital
requirements and imposes significant restrictions on such institutions. See
“Prompt Corrective Action” below.
Leverage
Capital Ratio
The
regulations of the OCC require national banks to maintain a minimum “Leverage
Capital Ratio” or “Tier 1 Capital” (as defined in the Risk-Based Capital
Guidelines discussed in the following paragraphs) to Total Assets of 4.0%. Any
bank experiencing or anticipating significant growth is expected to maintain
capital well above the minimum levels. The Federal Reserve Board’s guidelines
impose substantially similar leverage capital requirements on bank holding
companies on a consolidated basis. It is possible that banking regulators may
increase minimum capital requirements for banks should the current economic
situation persist or worsen.
Risk-Based
Capital Requirements
OCC
regulations also require national banks to maintain minimum capital levels as a
percentage of a bank’s risk-adjusted assets. A bank’s qualifying total capital
(“Total Capital”) for this purpose may include two components: “Core” (Tier 1)
Capital and “Supplementary” (Tier 2) Capital. Core Capital consists primarily of
common stockholders’ equity, which generally includes common stock, related
surplus and retained earnings, certain non-cumulative perpetual preferred stock
and related surplus, and minority interests in the equity accounts of
consolidated subsidiaries, and
The First
Bancorp 2009 Form 10-k
Page
3
(subject
to certain limitations) mortgage servicing rights and purchased credit card
relationships, less all other intangible assets (primarily goodwill).
Supplementary Capital elements include, subject to certain limitations, a
portion of the allowance for loan losses, perpetual preferred stock that does
not qualify for inclusion in Tier 1 capital, long-term preferred stock with an
original maturity of at least 20 years and related surplus, certain forms of
perpetual debt and mandatory convertible securities, and certain forms of
subordinated debt and intermediate-term preferred stock.
The
risk-based capital rules assign a bank’s balance sheet assets and the credit
equivalent amounts of the bank’s off-balance sheet obligations to one of four
risk categories, weighted at 0%, 20%, 50% or 100%, as applicable. Applying these
risk-weights to each category of the bank’s balance sheet assets and to the
credit equivalent amounts of the bank’s off-balance sheet obligations and
summing the totals results in the amount of the bank’s total Risk-Adjusted
Assets for purposes of the risk-based capital requirements. Risk-Adjusted Assets
can either exceed or be less than reported balance sheet assets, depending on
the risk profile of the banking organization. Risk-Adjusted Assets for
institutions such as the Bank will generally be less than reported balance sheet
assets because its retail banking activities include proportionally more
residential mortgage loans, many of its investment securities have a low risk
weighting and there is a relatively small volume of off-balance sheet
obligations.
The
risk-based capital regulations require all banks to maintain a minimum ratio of
Total Capital to Risk-Adjusted Assets of 8.0%, of which at least one-half (4.0%)
must be Core (Tier 1) Capital. For the purpose of calculating these ratios: (i)
a banking organization’s Supplementary Capital eligible for inclusion in Total
Capital is limited to no more than 100% of Core Capital; and (ii) the aggregate
amount of certain types of Supplementary Capital eligible for inclusion in Total
Capital is further limited. For example, the regulations limit the portion of
the allowance for loan losses eligible for inclusion in Total Capital to 1.25%
of Risk-Adjusted Assets. The Federal Reserve Board has established substantially
identical risk-based capital requirements, which are applied to bank holding
companies on a consolidated basis. The risk-based capital regulations explicitly
provide for the consideration of interest rate risk in the overall evaluation of
a bank’s capital adequacy to ensure that banks effectively measure and monitor
their interest rate risk, and that they maintain capital adequate for that risk.
A bank deemed by its federal banking regulator to have excessive interest rate
risk exposure may be required to maintain additional capital (that is, capital
in excess of the minimum ratios discussed above). The Bank believes, based on
its level of interest rate risk exposure, that this provision will not have a
material adverse effect on it.
On
January 9, 2009, the Company received $25 million from a preferred stock
issuance of 25,000 shares under the U.S. Treasury Capital Purchase Program (the
“CPP Shares”) at a purchase price of $1,000 per share. The CPP Shares call for
cumulative dividends at a rate of 5.0% per year for the first five years, and at
a rate of 9.0% per year in following years, payable quarterly in arrears on
February 15, May 15, August 15 and November 15 of each year. Incident to
such issuance, the Company issued to the U.S. Treasury warrants (the “Warrants”)
to purchase up to 225,904 shares of the Company’s common stock at a price per
share of $16.60 (subject to adjustment). The CPP Shares and the related Warrants
(and any shares of common stock issuable pursuant to the Warrants) are freely
transferable by the U.S. Treasury to third parties and the Company has filed a
registration statement with the SEC to allow for possible resale of such
securities. The CPP Shares qualify as Tier 1 capital on the Company’s books for
regulatory purposes and rank senior to the Company’s common stock and senior or
at an equal level in the Company’s capital structure to any other shares of
preferred stock the Company may issue in the future. The Company may redeem the
CPP Shares at any time using any funds available to the Company, and any
redemption would be subject to the prior approval of the Federal Reserve Bank of
Boston. The minimum amount that may be redeemed is 25% of the original CPP
investment. The CPP Shares are “perpetual” preferred stock, which means that
neither the U.S. Treasury nor any subsequent holder would have a right to
require that the Company redeem any of the shares.
On
December 31, 2009, the Company’s consolidated Total and Tier 1 Risk-Based
Capital Ratios were 14.96% and 13.70%, respectively, and its Leverage Capital
Ratio was 9.44%. Based on the above figures and accompanying discussion, the
Company exceeds all regulatory capital requirements and is considered well
capitalized.
Prompt
Corrective Action
The
Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”)
requires, among other things, that the federal banking regulators take “prompt
corrective action” with respect to, and imposes significant restrictions on, any
bank that fails to satisfy its applicable minimum capital requirements. FDICIA
establishes five capital categories consisting of “well capitalized,”
“adequately capitalized,” “undercapitalized,” “significantly undercapitalized”
and “critically undercapitalized.” Under applicable regulations, a bank that has
a Total Risk-Based Capital Ratio of 10.0% or greater, a Tier 1 Risk-Based
Capital Ratio of 6.0% or greater and a Leverage Capital Ratio of 5.0% or
greater, and is not subject to any written agreement, order, capital directive
or prompt corrective action directive to meet and maintain a specific capital
level for any capital measure is deemed to be “well capitalized.” A bank that
has a Total Risk-Based Capital Ratio of 8.0% or greater, a Tier 1 Risk-Based
Capital Ratio of 4.0% or greater and a Leverage Capital Ratio of 4.0% (or 3% for
banks with the highest regulatory examination rating that are not experiencing
or anticipating
The First
Bancorp 2009 Form 10-k
Page
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significant
growth or expansion) or greater and does not meet the definition of a well
capitalized bank is considered to
be
“adequately capitalized.” A bank that has a Total Risk-Based Capital Ratio of
less than 8.0% or has a Tier 1 Risk-Based Capital Ratio that is less than 4.0%,
except as noted above, a Leverage Capital Ratio of less than 4.0% is considered
“undercapitalized.” A bank that has a Total Risk-Based Capital Ratio of less
than 6.0%, or a Tier 1 Risk-Based Capital Ratio that is less than 3.0% or a
Leverage Capital Ratio that is less than 3.0% is considered to be “significantly
undercapitalized,” and a bank that has a ratio of tangible equity to total
assets equal to or less than 2% is deemed to be “critically undercapitalized.” A
bank may be deemed to be in a capital category lower than is indicated by its
actual capital position if it is determined to be in an unsafe or unsound
condition or receives an unsatisfactory examination rating. FDICIA generally
prohibits a bank from making capital distributions (including payment of
dividends) or paying management fees to controlling stockholders or their
affiliates if, after such payment, the bank would be
undercapitalized.
Under
FDICIA and the applicable implementing regulations, an undercapitalized bank
will be (i) subject to increased monitoring by its primary federal banking
regulator; (ii) required to submit to its primary federal banking regulator an
acceptable capital restoration plan (guaranteed, subject to certain limits, by
the bank’s holding company) within 45 days of being classified as
undercapitalized; (iii) subject to strict asset growth limitations; and (iv)
required to obtain prior regulatory approval for certain acquisitions,
transactions not in the ordinary course of business, and entries into new lines
of business. In addition to the foregoing, the primary federal banking regulator
may issue a “prompt corrective action directive” to any undercapitalized
institution. Such a directive may (i) require sale or re-capitalization of the
bank, (ii) impose additional restrictions on transactions between the bank and
its affiliates, (iii) limit interest rates paid by the bank on deposits, (iv)
limit asset growth and other activities, (v) require divestiture of
subsidiaries, (vi) require replacement of directors and officers, and (vii)
restrict capital distributions by the bank’s parent holding company. In addition
to the foregoing, a significantly undercapitalized institution may not award
bonuses or increases in compensation to its senior executive officers until it
has submitted an acceptable capital restoration plan and received approval from
its primary federal banking regulator.
Not later
than 90 days after an institution becomes critically undercapitalized, the
primary federal banking regulator for the institution must appoint a receiver
or, with the concurrence of the FDIC, a conservator, unless the agency, with the
concurrence of the FDIC, determines that the purpose of the prompt corrective
action provisions would be better served by another course of action. FDICIA
requires that any alternative determination be “documented” and reassessed on a
periodic basis. Notwithstanding the foregoing, a receiver must be appointed
after 270 days unless the appropriate federal banking agency and the FDIC
certify that the institution is viable and not expected to fail.
Deposit
Insurance Assessments
The
Bank’s deposits are insured by the Bank Insurance Fund of the FDIC to the
current legal maximum of $250,000 generally for each insured depositor.
Non-interest bearing checking accounts have unlimited coverage. The Federal
Deposit Insurance Act, as amended by the Federal Deposit Insurance Reform Act of
2005, provides that the FDIC shall set deposit insurance assessment rates. In
2006, the former Bank Insurance Fund merged with the Savings Association
Insurance Fund to create the Deposit Insurance Fund, or DIF. The Act eliminated
the requirement that the FDIC set deposit insurance assessment rates on a
semi-annual basis at a level sufficient to increase the ratio of BIF reserves to
BIF-insured deposits to at least 1.25%. Under the Act, the FDIC annually sets
the designated reserve ratio (DRR) of DIF reserves to DIF-insured deposits
between 1.15% and 1.50%, subject to public comment, based on appropriate
considerations including risk of losses and economic conditions such that the
ratio would increase during favorable economic conditions and decrease during
less favorable conditions, thus avoiding sharp swings in assessment
rates.
Past bank
failures and reserves against future failures lowered the FDIC insurance fund to
0.22% of insured deposits as of June 30, 2009 from 0.40% and 1.22% at December
31, 2008 and 2007, respectively. To keep the fund from falling to a level that
could undermine public confidence, there was a one-time special insurance
premium charged to all FDIC-insured banks of 0.05% on each insured depository
institution’s total assets minus Tier 1 capital as of June 30, 2009. To ensure
that the reserve ratio returns to 1.15% within the statutorily mandated period
of time, in 2009 the FDIC Board took the following steps:
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Impose
no further special assessments under the final rule adopted in May
2009.
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Maintain
assessment rates at their current levels through the end of 2010 and
thereafter adopt a uniform 3 basis point increase in assessment rates
effective January 1, 2011.
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Extend
to eight years the Amended Restoration Plan to raise the Deposit Insurance
Fund reserve ratio to 1.15 percent.
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Require
all institutions to prepay, on December 30, 2009, their estimated
risk-based assessments for the fourth quarter of 2009 and for all of 2010,
2011, and 2012, at the same time that institutions pay their regular
quarterly deposit insurance assessments for the third quarter of 2009. An
institution would initially account for the prepaid assessments as a
prepaid expense and amortize this amount over a three-year
period.
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The First
Bancorp 2009 Form 10-k
Page
5
Brokered
Deposits and Pass-Through Deposit Insurance Limitations
Under
FDICIA, a bank cannot accept brokered deposits unless it either (i) is “Well
Capitalized” or (ii) is “Adequately Capitalized” and has received a written
waiver from its primary federal banking regulator. For this purpose, “Well
Capitalized” and “Adequately Capitalized” have the same definitions as in the
Prompt Corrective Action regulations. See “Prompt Corrective Action” above.
Banks that are not in the “Well Capitalized” category are subject to certain
limits on the rates of interest they may offer on any deposits (whether or not
obtained through a third-party deposit broker). Pass-through insurance coverage
is not available in banks that do not satisfy the requirements for acceptance of
brokered deposits for deposits of certain employee benefit plans, except that
pass-through insurance coverage will be provided for employee benefit plan
deposits in institutions which at the time of acceptance of the deposit meet all
applicable regulatory capital requirements and send written notice to their
depositors that their funds are eligible for pass-through deposit insurance. The
Bank currently accepts brokered deposits.
Real
Estate Lending Standards
FDICIA
requires the federal bank regulatory agencies to adopt uniform real estate
lending standards. The FDIC and the OCC have adopted regulations which establish
supervisory limitations on Loan-to-Value (“LTV”) ratios in real estate loans by
FDIC-insured banks, including national banks. The regulations require banks to
establish LTV ratio limitations within or below the prescribed uniform range of
supervisory limits.
Standards
for Safety and Soundness
Pursuant
to FDICIA the federal bank regulatory agencies have prescribed, by regulation,
standards and guidelines for all insured depository institutions and depository
institution holding companies relating to: (i) internal controls, information
systems and internal audit systems; (ii) loan documentation; (iii) credit
underwriting; (iv) interest rate risk exposure; (v) asset growth; and (vi)
compensation, fees and benefits. The compensation standards prohibit employment
contracts, compensation or benefit arrangements, stock option plans, fee
arrangements or other compensatory arrangements that would provide “excessive”
compensation, fees or benefits, or that could lead to material financial loss.
In addition, the federal bank regulatory agencies are required by FDICIA to
prescribe standards specifying: (i) maximum classified assets to capital ratios;
(ii) minimum earnings sufficient to absorb losses without impairing capital; and
(iii) to the extent feasible, a minimum ratio of market value to book value for
publicly-traded shares of depository institutions and depository institution
holding companies.
Consumer
Protection Provisions
FDICIA
also includes provisions requiring advance notice to regulators and customers
for any proposed branch closing and authorizing (subject to future appropriation
of the necessary funds) reduced insurance assessments for institutions offering
“lifeline” banking accounts or engaged in lending in distressed communities.
FDICIA also includes provisions requiring depository institutions to make
additional and uniform disclosures to depositors with respect to the rates of
interest, fees and other terms applicable to consumer deposit
accounts.
FDIC
Waiver of Certain Regulatory Requirements
The FDIC
issued a rule, effective on September 22, 2003, that includes a waiver provision
which grants the FDIC Board of Directors extremely broad discretionary authority
to waive FDIC regulatory provisions that are not specifically mandated by
statute or by a separate regulation.
Impact
of Monetary Policy
The
monetary policies of regulatory authorities, including the Federal Reserve
Board, have a significant effect on the operating results of banks and bank
holding companies. Through open market securities transactions and changes in
its discount rate and reserve requirements, the Board of Governors exerts
considerable influence over the cost and availability of funds for lending and
investment. The nature of future monetary policies and the effect of such
policies on the future business and earnings of the Company and the Bank cannot
be predicted. See Item 7 - Management’s Discussion and Analysis of Financial
Condition and Results of Operations, regarding the Bank’s net interest margin
and the effect of interest-rate volatility on future earnings.
Employees
At
December 31, 2009, the Company had 212 employees and full-time equivalency of
206 employees. The Company enjoys good relations with its employees. A variety
of employee benefits, including health, group life and disability income, a
defined contribution retirement plan, and an incentive bonus plan, are available
to qualifying officers and employees.
The First
Bancorp 2009 Form 10-k
Page
6
Company
Website
The
Company maintains a website at www.thefirstbancorp.com where it makes available,
free of charge, its annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended, as well as all Section 16 reports on Forms 3, 4, and 5, as soon as
reasonably practicable after such reports are electronically filed with, or
furnished to, the SEC. The Company’s reports filed with, or furnished to, the
SEC are also available at the SEC’s website at www.sec.gov. Information
contained on the Company’s website does not constitute a part of this
report.
The First
Bancorp 2009 Form 10-k
Page
7
The risks
and uncertainties described below are not the only ones the Company faces.
Additional risks and uncertainties that we are unaware of, or that we currently
deem immaterial, also may become important factors that affect us and our
business. If any of these risks were to occur, our business, financial condition
or results of operations could be materially and adversely
affected.
Recent
negative developments in the financial services industry and U.S. and global
credit markets may adversely impact our operations and results.
Negative
developments in 2007, 2008 and 2009 in the capital markets have resulted in
uncertainty in the financial markets in general with the expectation of the
general economic downturn continuing in 2010 and perhaps beyond 2010. The impact
of this situation, together with concerns regarding the financial strength of
financial institutions, has led to distress in credit markets and issues
relating to liquidity among financial institutions. Some financial institutions
around the world and the United States have failed; others have been forced to
seek acquisition partners. Loan portfolio value has deteriorated at many
institutions resulting from, amongst other factors, a weak economy and a decline
in the value of the collateral supporting their loans. The competition for our
deposits has increased significantly due to liquidity concerns at many of these
same institutions. Stock prices of bank holding companies, like ours, have been
negatively affected by the current condition of the financial markets, as has
our ability, if needed, to raise capital or borrow in the debt markets compared
to recent years. The United States and other governments have taken
unprecedented steps to try to stabilize the financial system, including
investing in financial institutions. Our business and our financial condition
and results of operations could be adversely affected by (1) continued or
accelerated disruption and volatility in financial markets, (2) continued
capital and liquidity concerns regarding financial institutions generally and
our counterparties specifically, (3) recessionary conditions that are deeper or
last longer than currently anticipated, or (4) new federal or state laws and
regulations regarding lending and funding practices and liquidity standards, and
the likelihood that financial institution regulatory agencies will be very
aggressive in responding to concerns and trends identified in examinations,
including the expected issuance of formal enforcement actions. Negative
developments in the financial services industry and the impact of new
legislation in response to those developments could negatively impact our
operations by restricting our business operations, including our ability to
originate or sell loans, and adversely impact our financial
performance.
Recent
legislative and regulatory initiatives to address difficult market and economic
conditions may not stabilize the U.S. banking system.
The
recently enacted Emergency Economic Stabilization Act of 2008, or EESA,
authorizes the U.S. Treasury to purchase from financial institutions and their
holding companies up to $700 billion in mortgage loans, mortgage-related
securities and certain other financial instruments, including debt and equity
securities issued by financial institutions and their holding companies, under
the troubled asset relief program, or TARP. The purpose of TARP is to restore
confidence and stability to the U.S. banking system and to encourage financial
institutions to increase their lending to customers and to each other. The
Treasury has allocated $250 billion towards the TARP Capital Purchase Program.
Under the TARP Capital Purchase Program, Treasury has purchased equity
securities from participating institutions. The EESA also increased federal
deposit insurance on most deposit accounts from $100,000 to $250,000. This
increase is in place until the end of 2013. The EESA followed numerous actions
by the Federal Reserve Board, the U.S. Congress, Treasury, the Federal Deposit
Insurance Corporation, the SEC and others to address the current liquidity and
credit crisis that has followed the sub-prime meltdown that commenced in 2007.
These measures include homeowner relief that encourage loan restructuring and
modification; the establishment of significant liquidity and credit facilities
for financial institutions and investment banks; the lowering of the federal
funds rate; emergency action against short selling practices; a temporary
guaranty program for money market funds; the establishment of a commercial paper
funding facility to provide back-stop liquidity to commercial paper issuers; and
coordinated international efforts to address illiquidity and other weaknesses in
the banking sector.
There
can be no assurance that the Emergency Economic Stabilization Act (“EESA”), the
American Recovery and Reinvestment Act of 2009, and other initiatives undertaken
by the United States government to restore liquidity and stability to the U.S.
financial system will help stabilize and stimulate the U.S. financial
system.
The
purpose of these legislative and regulatory actions is to stabilize the U.S.
banking system. The EESA and the other regulatory initiatives described above
may not have their desired effects. If the volatility in the markets continues
and economic conditions fail to improve or worsen, our business, financial
condition and results of operations could be materially and adversely affected.
There can be no assurance regarding the actual impact that the EESA or the
American Recovery and Reinvestment Act of 2009, or other programs and other
initiatives undertaken by the U.S. government, will have on the financial
markets; the extreme levels of volatility and limited credit availability
currently being
The First
Bancorp 2009 Form 10-k
Page
8
experienced
may persist. The failure of the EESA or other government programs to help
stabilize the financial markets and a continuation or worsening of current
financial market conditions could have a material adverse effect on the Company.
In the event turmoil in the financial markets continues, we may experience a
material adverse effect from (1) continued or accelerated disruption and
volatility in financial markets, (2) continued capital and liquidity concerns
regarding financial institutions generally and our transaction counterparties
specifically, (3) limitations resulting from further governmental action to
stabilize or provide additional regulation of the financial system, or (4)
recessionary conditions that are deeper or last longer than currently
anticipated.
The
soundness of other financial services institutions may adversely affect our
credit risk.
We rely
on other financial services institutions through trading, clearing,
counterparty, and other relationships. We maintain limits and monitor
concentration levels of our counterparties as specified in our internal
policies. Our reliance on other financial services institutions exposes us to
credit risk in the event of default by these institutions or counterparties.
These losses could adversely affect our results of operations and financial
condition.
Declines
in value may adversely impact the investment portfolio.
As of
December 31, 2009, we had $81.8 million and $190.5 million in available for sale
and held to maturity investment securities, respectively. We may be required to
record impairment charges on our investment securities if they suffer a decline
in value that is considered other-than-temporary. Numerous factors, including
lack of liquidity for re-sales of certain investment securities, absence of
reliable pricing information for investment securities, adverse changes in
business climate, adverse actions by regulators, or unanticipated changes in the
competitive environment could have a negative effect on our investment portfolio
in future periods. If an impairment charge is significant enough it could affect
the ability of the Bank to renew funding. This could have a material adverse
effect on our liquidity and our ability to upstream dividends to the Company to
then pay dividends to Shareholders. It could also negatively impact our
regulatory capital ratios and result in not being classified as
“well-capitalized” for regulatory purposes.
Changes
in interest rates can have an adverse effect on profitability.
Our
earnings and cash flows are largely dependent upon the Bank’s net interest
income. Net interest income is the difference between interest income earned on
interest-earning assets, such as loans and investment securities, and interest
expense paid on interest-bearing liabilities, such as deposits and borrowed
funds. Interest rates are sensitive to many factors that are beyond our control,
including general economic conditions, competition, and policies of various
governmental and regulatory agencies and, in particular, the policies of the
Federal Reserve Board. Changes in monetary policy, including changes in interest
rates, could influence not only the interest the Bank receives on loans and
investment securities and the amount of interest it pays on deposits and
borrowings, but such changes could also affect (i) the Bank’s ability to
originate loans and obtain deposits, (ii) the fair value of the Bank’s
financial assets and liabilities, including the held to maturity, available for
sale, and trading securities portfolios, and (iii) the average duration of
the Bank’s interest-earning assets. This also includes the risk that
interest-earning assets may be more responsive to changes in interest rates than
interest-bearing liabilities, or vice versa (repricing risk), the risk that the
individual interest rates or rate indices underlying various interest-earning
assets and interest-bearing liabilities may not change in the same degree over a
given time period (basis risk), and the risk of changing interest rate
relationships across the spectrum of interest-earning asset and interest-bearing
liability maturities (yield curve risk), including a prolonged flat or inverted
yield curve environment. Although Management believes it has implemented
effective asset and liability management strategies to reduce the potential
effects of changes in interest rates on our results of operations, any
substantial, unexpected, or prolonged change in market interest rates could have
a material adverse effect on our financial condition and results of
operations.
Regulation.
Bank
holding companies and nationally chartered banks operate in a highly regulated
environment and are subject to supervision and examination by various regulatory
agencies. The Company is subject to the Bank Holding Company Act of 1956, as
amended, and to regulation and supervision by the Federal Reserve Board. The
Bank is subject to regulation and supervision by the Office of the Comptroller
of the Currency, or the OCC. The cost of compliance with regulatory requirements
may adversely affect our results of operations or financial condition. Federal
and state laws and regulations govern numerous matters including: changes in the
ownership or control of banks and bank holding companies; maintenance of
adequate capital and the financial condition of a financial institution;
permissible types, amounts and terms of extensions of credit and investments;
permissible non-banking activities; the level of reserves against deposits; and
restrictions on dividend payments. The OCC possesses cease and desist powers to
prevent or remedy unsafe or unsound practices or violations of law by banks
subject to their regulation, and the Federal Reserve Board possesses similar
powers with respect to bank holding companies. These and other restrictions
limit the manner in which we may conduct our business and obtain
financing.
The First
Bancorp 2009 Form 10-k
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9
Under
regulatory capital adequacy guidelines and other regulatory requirements, we
must meet guidelines that include quantitative measures of assets, liabilities,
and certain off-balance sheet items, subject to qualitative judgments by
regulators about components, risk weightings and other factors. If we fail to
meet these minimum capital guidelines and other regulatory requirements, our
financial condition would be materially and adversely affected. Our failure to
maintain the status of “well-capitalized” under our regulatory framework could
affect the confidence of our customers in us, thus compromising our competitive
position. In addition, failure to maintain the status of “well-capitalized”
under our regulatory framework or “well-managed” under regulatory examination
procedures could compromise our status as a bank holding company and related
eligibility for a streamlined review process for acquisition
proposals.
The
Cost of FDIC Insurance May Increase.
The FDIC
has publicly stated that past bank failures and reserves against future failures
have lowered the FDIC insurance fund to 0.22% of insured deposits as of June 30,
2009 from 0.40% and 1.22% at December 31, 2008 and 2007, respectively. In order
to keep the insurance fund from falling to a level that could undermine public
confidence, there was a one-time special insurance premium paid by all
FDIC-insured banks of 0.05% on each insured depository institution’s total
assets minus Tier 1 capital as of June 30, 2009. To ensure that the reserve
ratio returns to 1.15% within the statutorily mandated period of time, meet the
FDIC’s liquidity needs without imposing additional burdens on the industry
during a period of stress, and ensure that the deposit insurance system remains
directly industry-funded, in 2009 the FDIC Board took the following
steps:
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·
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Impose
no further special assessments under the final rule adopted in May
2009.
|
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·
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Maintain
assessment rates at their current levels through the end of 2010 and
thereafter adopt a uniform 3 basis point increase in assessment rates
effective January 1, 2011.
|
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·
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Extend
to eight years the Amended Restoration Plan to raise the Deposit Insurance
Fund reserve ratio to 1.15 percent.
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Require
all institutions to prepay, on December 30, 2009, their estimated
risk-based assessments for the fourth quarter of 2009 and for all of 2010,
2011, and 2012, at the same time that institutions pay their regular
quarterly deposit insurance assessments for the third quarter of 2009. An
institution would initially account for the prepaid assessments as a
prepaid expense and amortize this amount over a three-year
period.
|
While the
FDIC projects that the 2009 special assessment, raising the assessment schedule
and prepaying three-year’s projected assessments will recapitalize the insurance
fund to 1.15% of insured deposits in eight years, there can be no assurance that
additional payments related to FDIC insurance will not be required and that such
payments could materially or adversely affect the Company’s results of
operations.
Interest
rate risk.
Our main
source of income is net interest income, which is equal to the difference
between the interest income received on loans, investment securities and other
interest-bearing assets and the interest expense incurred in connection with
deposits, borrowings and other interest-bearing liabilities. As a result, our
net interest income can be affected by changes in market interest rates. These
rates are highly sensitive to many factors beyond our control, including general
economic conditions, both domestic and foreign, and the monetary and fiscal
policies of various governmental and regulatory authorities. We have asset and
liability management policies that attempt to minimize the potential adverse
effects of changes in interest rates on our net interest income, primarily by
altering the mix and maturity of loans, investments and funding sources.
However, even with these policies in place, we cannot provide assurance that
changes in interest rates will not negatively impact our operating results. For
a further discussion on the Company’s exposure to interest rate risk, see Item
7A: Quantitative and Qualitative Disclosures about Market Risk.
Furthermore,
our banking business is affected not only by general economic conditions, but
also by the monetary policies of the Federal Reserve Board. Changes in monetary
or legislative policies may affect the interest rates we must offer to attract
deposits and the interest rates we can charge on our loans, as well as the
manner in which we offer deposits and make loans. These monetary policies have
had, and are expected to continue to have, significant effects on the operating
results of depository institutions, including the Bank. Increases in interest
rates also may reduce the demand for loans and, as a result, the amount of loan
and commitment fees the Bank receives.
Credit
risk.
A number
of factors can impact the ability of borrowers to repay their current loan
obligations, which could not only result in increased loan defaults,
foreclosures and write-offs, but also necessitate further increases to our
allowance for loan losses. If customers default on the repayment of their loans,
our profitability could be adversely affected. A borrower’s default on its
obligations under one or more of our loans may result in lost principal and
interest income and increased operating expenses as a result of the allocation
of Management time and resources to the collection and work-out of the loans. If
collection efforts are unsuccessful or acceptable workout arrangements cannot be
reached, we may
The First
Bancorp 2009 Form 10-k
Page
10
have to
write-off the loans in whole or in part. Although we may acquire real estate or
other assets that secure the defaulted loans through foreclosure or other
similar remedies, the amount owed under the defaulted loans may exceed the value
of the assets acquired.
Management
periodically makes a determination of our allowance for loan losses based on
available information, including the quality of our loan portfolio, economic
conditions, the value of the underlying collateral and the level of our
non-accruing loans. If assumptions prove to be incorrect, our allowance may not
be sufficient. Increases in this allowance will result in an expense for the
period. If, as a result of general economic conditions or an increase in
non-performing loans, Management determines that an increase in our allowance
for loan losses is necessary, we may incur additional expenses.
As an
integral part of their examination processes, bank regulatory agencies
periodically review our allowance for loan losses and the value we attribute to
real estate acquired through foreclosure or other similar remedies. These
regulatory agencies may require us to adjust our determination of the value of
these items. These adjustments could negatively impact our results of operations
or financial condition.
Because
we serve primarily individuals and smaller businesses located in coastal Maine,
the ability of customers to repay their loans is impacted by the economic
conditions in this area. In addition, our ability to continue to originate loans
may be impaired by adverse changes in local and regional economic conditions.
These events also could have an adverse effect on the value of our collateral
and our financial condition.
In the
course of business, we may acquire, through foreclosure, properties securing
loans that are in default. In commercial real estate lending, there is a risk
that hazardous substances could be discovered on these properties. In this
event, we might be required to remove these substances from the affected
properties at our sole cost and expense. The cost of this removal could exceed
the value of the affected properties. We may not have adequate remedies against
the prior owners or other responsible parties and could find it difficult or
impossible to sell the affected properties. The occurrence of one or more of
these events could adversely affect our financial condition or operating
results.
Liquidity
and funding.
We have
traditionally obtained funds principally through deposits and borrowings. As a
general matter, deposits are a lower-cost source of funds than borrowings,
because interest rates paid for deposits are typically less than interest rates
charged for borrowings. If, as a result of competitive pressures, market
interest rates, general economic conditions or other events, the balance of our
deposits decreases relative to our overall banking operations, we may have to
rely more heavily on borrowings as a source of funds in the future. Such an
increased reliance on borrowings could have a negative impact on our results of
operations or financial condition. In addition, fluctuations in interest rates
may result in disintermediation, which is the flow of funds away from depository
institutions into direct investments that pay higher rates of return, and may
affect the value of our investment securities and other interest-earning
assets.
Our
access to funding sources in amounts adequate to finance our activities could be
impaired by factors that affect us specifically or the financial services
industry in general. Factors that could detrimentally impact our access to
liquidity sources include a decrease in the level of our business activity due
to a market downturn or adverse regulatory action against us. Our ability to
borrow could also be impaired by factors that are not specific to us, such as a
severe disruption of the financial markets or negative views and expectations
about the prospects for the financial services industry as a whole should the
recent turmoil faced by banking organizations in the domestic and worldwide
credit markets continue or worsen.
Loss
of lower-cost funding sources.
Checking
and savings, NOW, and money market deposit account balances and other forms of
customer deposits can decrease when customers perceive alternative investments,
such as the stock market, as providing a better risk/return tradeoff. If
customers move money out of bank deposits and into other investments, we could
lose a relatively low cost source of funds, increasing our funding costs and
reducing our net interest income and net income. Advances from the Federal Home
Loan Bank of Boston (“FHLB”) are currently a relatively low-cost source of
funding. The availability of qualified collateral on the Bank’s balance sheet
determines the level of advances available from FHLB and a deterioration in
quality in the Bank’s loan portfolio can adversely impact the availability of
this source of funding.
Competition
in the financial services industry.
We face
substantial competition in all areas of our operations from a variety of
different competitors, many of which are larger and may have more financial
resources than we do. We compete with other providers of financial services such
as commercial and savings banks, savings and loan associations, credit unions,
money market and mutual funds, mortgage companies, asset managers, insurance
companies and a wide array of other local, regional and national institutions
which offer financial services. Mergers between financial institutions within
Maine and in neighboring states have added competitive pressure. If we are
unable to compete effectively, we will lose market share and our income
generated from loans, deposits, and other financial products will
decline.
The First
Bancorp 2009 Form 10-k
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11
Allowance
for loan losses may be insufficient.
The Bank
maintains an allowance for loan losses based on, among other things, national
and regional economic conditions, historical loss experience and delinquency
trends. We make various assumptions and judgments about the collectability of
our loan portfolio, including the creditworthiness of borrowers and the value of
the real estate and other assets serving as collateral for the repayment of
loans. In determining the size of the allowance for loan losses, we rely on our
experience and our evaluation of economic conditions. However, we cannot predict
loan losses with certainty, and we cannot provide assurance that charge-offs in
future periods will not exceed the allowance for loan losses. During 2009, the
Bank experienced incremental increases in both non-performing loans and net loan
charge-offs, as compared to prior periods. No assurance can be given that the
relevant economic and market conditions will improve or will not further
deteriorate. Hence, the persistence or worsening of such conditions could result
in an increase in delinquencies, could cause a decrease in our interest income,
or could continue to have an adverse impact on our loan loss experience, which,
in turn, may necessitate increases to our allowance for loan losses. If net
charge-offs exceed the Bank’s allowance, its earnings would decrease. In
addition, regulatory agencies review the Bank’s allowance for loan losses and
may require additions to the allowance based on their judgment about information
available to them at the time of their examination. Management could also decide
that the allowance for loan losses should be increased. An increase in the
Bank’s allowance for loan losses could reduce its earnings.
Changes
in primary market area could adversely impact results of operations and
financial condition.
Most of
the Bank’s lending is in Mid-Coast and Down East Maine. As a result of this
geographic concentration, a significant broad-based deterioration in economic
conditions in this area or Northern New England could have a material adverse
impact on the quality of the Bank’s loan portfolio, and accordingly, our results
of operations. Such a decline in economic conditions could impair borrowers’
ability to pay outstanding principal and interest on loans when due and,
consequently, adversely affect the cash flows of our business.
The
Bank’s loan portfolio is largely secured by real estate collateral. A
substantial portion of the real and personal property securing the loans in the
Bank’s portfolio is located in Mid-Coast and Down East Maine. Conditions in the
real estate market in which the collateral for the Bank’s loans is located
strongly influence the level of the Bank’s non-performing loans and results of
operations. The recent decline in the Mid-Coast and Down East Maine area real
estate values, as well as other external factors, could adversely affect the
Bank’s loan portfolio.
Operational
risk.
We face
the risk that the design of our controls and procedures, including those to
mitigate the risk of fraud by employees or outsiders, may prove to be inadequate
or are circumvented, thereby causing delays in detection of errors or
inaccuracies in data and information. Management regularly reviews and updates
our internal controls, disclosure controls and procedures, and corporate
governance policies and procedures. Any system of controls, however well
designed and operated, is based in part on certain assumptions and can provide
only reasonable, not absolute, assurances that the objectives of the system are
met. Any failure or circumvention of our controls and procedures or failure to
comply with regulations related to controls and procedures could have a material
adverse effect on our business, results of operations and financial
condition.
We may
also be subject to disruptions of our systems arising from events that are
wholly or partially beyond our control (including, for example, computer viruses
or electrical or telecommunications outages), which may give rise to losses in
service to customers and to financial loss or liability. We are further exposed
to the risk that our external vendors may be unable to fulfill their contractual
obligations (or will be subject to the same risk of fraud or operational errors
by their respective employees as are we) and to the risk that our (or our
vendors’) business continuity and data security systems prove to be
inadequate.
Our
performance is largely dependent on the talents and efforts of highly skilled
individuals. There is intense competition in the financial services industry for
qualified employees. In addition, we face increasing competition with businesses
outside the financial services industry for the most highly skilled individuals.
Our business operations could be adversely affected if we were unable to attract
new employees and retain and motivate our existing employees.
Claims
and litigation pertaining to fiduciary responsibility or lender
liability.
From time
to time as part of our normal course of business, customers make claims and take
legal action against the Bank based on actions or inactions of the Bank. If such
claims and legal actions are not resolved in a manner favorable to us, they may
result in financial liability and/or adversely affect the market perception of
the Company and its products and services. This may also impact customer demand
for the Company’s products and services. Any financial liability or reputation
damage could have a material adverse effect on our business, which, in turn,
could have a material adverse effect on our financial condition and results of
operations.
The First
Bancorp 2009 Form 10-k
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12
There
may not be a robust trading market for the common stock.
Although
our common stock is traded on the NASDAQ Global Select market, the trading
volume of the common stock has historically not been substantial. Over the
five-year period ending December 31, 2009, for example, the average monthly
trading volume of our common stock has been 185,745 shares or approximately
1.91% of the outstanding common stock. Due to the limited trading volume in our
common stock, the intraday spread between bid and ask prices of the shares can
be quite high. There can be no assurance that a more robust, active or
economical trading market for our common stock will develop. The market value
and liquidity of our common stock may, as a result, be adversely
affected.
The
price of our common stock may fluctuate.
The price
of our common stock on the NASDAQ Global Select Market constantly changes and
recently, given the uncertainty in the financial markets, has fluctuated widely.
We expect the market price of our common stock will continue to fluctuate.
Holders of our common stock will be subject to the risk of volatility and
changes in prices. Our common stock price can fluctuate as a result of many
factors which are beyond our control, including:
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quarterly
fluctuations in our operating and financial
results;
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operating
results that vary from the expectations of Management, securities analysts
and investors;
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changes
in expectations as to our future financial performance, including
financial estimates by securities
analysts;
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·
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events
negatively impacting the financial services industry which result in a
general decline for the industry;
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·
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announcements
of material developments affecting our operations or our dividend
policy;
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future
sales of our equity securities;
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|
new
laws or regulations or new interpretations of existing laws or regulations
applicable to our business;
|
|
·
|
changes
in accounting standards, policies, guidance, interpretations or
principles; and
|
|
·
|
general
domestic economic and market
conditions.
|
In
addition, recently the stock market generally has experienced extreme price and
volume fluctuations, and industry factors and general economic and political
conditions and events, such as economic slowdowns or recessions, interest rate
changes or credit loss trends, could also cause our stock price to decrease
regardless of our operating results.
Future
offerings of debt or other securities may adversely affect the market price of
our stock.
In the
future, we may attempt to increase our capital resources or, if our or the
Bank’s capital ratios approach or fall below the required minimums, we or the
Bank could be forced to raise additional capital by making additional offerings
of debt or preferred equity securities, including medium-term notes, trust
preferred securities, senior or subordinated notes and preferred stock. Upon
liquidation, holders of our debt securities and shares of preferred stock and
lenders with respect to other borrowings will receive distributions of our
available assets prior to the holders of our common stock. Additional equity
offerings may dilute the value for existing Shareholders or reduce the market
price of our common stock, or both. Holders of our common stock are not entitled
to preemptive rights or other protections against dilution.
None
The First
Bancorp 2009 Form 10-k
Page
13
The
principal office of the Company and the Bank is located in Damariscotta, Maine.
The Bank operates 14 full-service banking offices in four counties in the
Mid-Coast and Down East regions of Maine:
|
Lincoln
County
|
Knox
County
|
Hancock
County
|
Washington
County
|
|
Boothbay
Harbor
|
Camden
|
Bar
Harbor
|
Eastport
|
|
Damariscotta
|
Rockland
|
Blue
Hill
|
Calais
|
|
Waldoboro
|
Rockport
|
Ellsworth
|
|
|
Wiscasset
|
Northeast
Harbor
|
||
|
Southwest
Harbor
|
First
Advisors, the investment management and trust division of the Bank, operates
from two offices in Bar Harbor and Damariscotta. The Bank also maintains an
Operations Center in Damariscotta.
The
Company owns all of its facilities except for the land on which the Ellsworth
branch is located, and except for the Camden, Calais, and Northeast Harbor
offices and the Southwest Harbor drive-up facility, for which the Bank has
entered into long-term leases. Management believes that the Bank’s current
facilities are suitable and adequate in light of its current needs and its
anticipated needs over the near term.
There are
no material pending legal proceedings to which the Company or the Bank is a
party or to which any of its property is subject, other than routine litigation
incidental to the business of the Bank. None of these proceedings is expected to
have a material effect on the financial condition of the Company or of the
Bank.
None.
The First
Bancorp 2009 Form 10-k
Page
14
The
common stock of The First Bancorp (ticker symbol FNLC) trades on the NASDAQ
Global Select Market System. As of December 31, 2009, there were 9,744,170
shares outstanding and held of record by approximately 3,446 Shareholders. The
following table reflects the high and low prices of actual sales in each quarter
of 2009 and 2008. Such quotations do not reflect retail mark-ups, mark-downs or
brokers’ commissions.
|
2009
|
2008
|
|||||||||||||||
|
High
|
Low
|
High
|
Low
|
|||||||||||||
|
1st
Quarter
|
$ | 20.29 | $ | 10.77 | $ | 15.74 | $ | 13.95 | ||||||||
|
2nd
Quarter
|
21.80 | 14.49 | 18.00 | 13.65 | ||||||||||||
|
3rd
Quarter
|
20.50 | 17.29 | 23.05 | 12.88 | ||||||||||||
|
4th
Quarter
|
19.00 | 14.65 | 22.98 | 12.84 | ||||||||||||
The last
transaction in the Company’s stock on NASDAQ during 2009 was on December 31 at
$15.42 per share. There are no warrants outstanding with respect to the
Company’s common stock other than warrants to purchase up to 225,904 shares of
its common stock (subject to adjustment) at $16.60 per share issued to the U.S.
Treasury incident to the Company’s participation in the CPP program. The Company
has no securities outstanding which are convertible into common
equity.
The
ability of the Company to pay cash dividends depends on receipt of dividends
from the Bank. While the Company’s preferred stock issued under the CPP Program
remains outstanding, the Company may not increase the dividend paid on its
common stock without U.S. Treasury approval during the first three years.
Dividends may be declared by the Bank out of its net profits as the directors
deem appropriate, subject to the limitation that the total of all dividends
declared by the Bank in any calendar year may not exceed the total of its net
profits of that year plus retained net profits of the preceding two years. The
amount available for dividends in 2010 will be that year’s net income plus $11.8
million. The payment of dividends from the Bank to the Company may be
additionally restricted if the payment of such dividends resulted in the Bank
failing to meet regulatory capital requirements. The Bank is also required to
maintain minimum amounts of capital-to-total-risk-weighted-assets, as defined by
banking regulators. At December 31, 2009, the Bank was required to have minimum
Tier 1 and Tier 2 risk-based capital ratios of 4.00% and 8.00%, respectively.
The Bank’s actual ratios were 13.62% and 14.88%, respectively, as of December
31, 2009. The table below sets forth the cash dividends declared in the last two
fiscal years:
|
Date
Declared
|
Amount
Per Share
|
Date
Payable
|
|||
|
March
20, 2008
|
$ | 0.185 |
April
30, 2008
|
||
|
June
19, 2008
|
$ | 0.190 |
July
31, 2008
|
||
|
September
18, 2008
|
$ | 0.195 |
October
31, 2008
|
||
|
December
18, 2008
|
$ | 0.195 |
January
30, 2009
|
||
|
March
18, 2009
|
$ | 0.195 |
April
30, 2009
|
||
|
June
18, 2009
|
$ | 0.195 |
July
31, 2009
|
||
|
September
17, 2009
|
$ | 0.195 |
October
30, 2009
|
||
|
December
17, 2009
|
$ | 0.195 |
January
29, 2010
|
||
The First
Bancorp 2009 Form 10-k
Page
15
Securities
Authorized for Issuance Under Equity Compensation Plans
The
following table lists the amount and weighted-average exercise price of
securities authorized for issuance under equity compensation plans:
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
||||||||||
|
Plan
category
|
(a)
|
(b)
|
(c)
|
|||||||||
|
Equity
compensation plans approved by security holders
|
55,000 | $ | 15.89 | - | ||||||||
|
Equity
compensation plans not approved by security holders
|
- | $ | - | - | ||||||||
|
Total
|
55,000 | $ | 15.89 | - | ||||||||
Performance
Graph
Set forth
below is a line graph comparing the five-year cumulative total return of $100.00
invested in the Company’s common stock (“FNLC”), assuming reinvestment of all
cash dividends and retention of all stock dividends, with a comparable amount
invested in the Standard & Poor’s 500 Index (“S&P 500”) and the NASDAQ
Combined Bank Index (“NASD Bank”). The NASD Bank index is a
capitalization-weighted index designed to measure the performance of all NASDAQ
stocks in the banking sector.
|
2004
|
2005
|
2006
|
2007
|
2008
|
2009
|
|
|
FNLC
|
100.00
|
103.71
|
102.02
|
93.15
|
133.86
|
107.09
|
|
S&P
500
|
100.00
|
104.92
|
121.49
|
128.13
|
80.72
|
102.09
|
|
NASD
Bank
|
100.00
|
98.04
|
111.59
|
89.48
|
70.25
|
58.99
|
The First
Bancorp 2009 Form 10-k
Page
16
Repurchase
of Shares and Use of Proceeds
On August
16, 2007, the Company announced that its Board of Directors had authorized a
program for the repurchase of up to 300,000 shares of the Company’s common stock
or approximately 3.1% of the outstanding shares. This program ended on August
16, 2009. Under the program the Company repurchased 182,869 shares at an average
price of $15.63 and at a total cost of $2.9 million. As a consequence of the
Company’s issuance of securities under the U.S. Treasury’s CPP program, its
ability to repurchase stock while such securities remain outstanding is
restricted to purchases from employee benefit plans. During the year ended
December 31, 2009, the Company repurchased 15,925 shares from employee benefit
plans at an average price of $16.51 per share and for total proceeds of
$263,000. Repurchase transactions from employee benefit plans in 2009 are
detailed in the following table:
|
Month
|
Total
Number
of
Shares
Purchased
|
Average
Price Paid Per Share
|
Total
Number of Shares Purchased as Part of a Publicly Announced Plan or
Program
|
Maximum
Number of Shares that may yet be Purchased under the Plan or
Program
|
||||||||||||
|
January
2009
|
1,077 | $ | 16.50 | 1,077 | 123,450 | |||||||||||
|
February
2009
|
820 | 14.46 | 820 | 122,630 | ||||||||||||
|
March
2009
|
666 | 13.93 | 666 | 121,964 | ||||||||||||
|
April
2009
|
1 | 20.00 | 1 | 121,963 | ||||||||||||
|
May
2009
|
75 | 16.21 | 75 | 121,888 | ||||||||||||
|
June
2009
|
- | - | - | 121,888 | ||||||||||||
|
July
2009
|
4,717 | 19.26 | 4,717 | 117,171 | ||||||||||||
|
August
2009
|
260 | 19.89 | 40 | - | ||||||||||||
|
September
2009
|
70 | 19.13 | - | - | ||||||||||||
|
October
2009
|
860 | 17.06 | - | - | ||||||||||||
|
November
2009
|
7,378 | 15.02 | - | - | ||||||||||||
|
December
2009
|
1 | 11.00 | - | - | ||||||||||||
|
Total
|
15,925 | $ | 16.51 | 7,396 | - | |||||||||||
Unregistered
Sales of Equity Securities
The
Company issues shares to the Bank’s 401k Investment and Savings Plan pursuant to
an exemption from registration under the Securities Act of 1933, as amended (the
“Securities Act”), contained in Section 3(a)(11) thereof and Rule 147
promulgated thereunder. Sales in 2009 are presented in the following
table:
|
Month
|
Shares
|
Average
Price
|
Proceeds
|
|||||||||
|
January
2009
|
385 | $ | 16.57 | $ | 6,378 | |||||||
|
February
2009
|
671 | 14.62 | 9,807 | |||||||||
|
March
2009
|
5,552 | 12.46 | 69,183 | |||||||||
|
April
2009
|
1,138 | 16.77 | 19,088 | |||||||||
|
May
2009
|
633 | 15.61 | 9,880 | |||||||||
|
June
2009
|
592 | 17.39 | 10,296 | |||||||||
|
July 2009
|
577 | 19.05 | 10,990 | |||||||||
|
August 2009
|
355 | 19.85 | 7,047 | |||||||||
|
September 2009
|
400 | 18.69 | 7,477 | |||||||||
|
October
2009
|
404 | 17.67 | 7,137 | |||||||||
|
November
2009
|
705 | 15.31 | 10,794 | |||||||||
|
December
2009
|
- | - | - | |||||||||
|
Total
|
11,412 | $ | 14.73 | $ | 168,077 | |||||||
In
addition, on January 9, 2009, the Company issued 25,000 shares of its Series A
Preferred Stock, as well as warrants to purchase up to 225,904 shares of its
common stock, to the U.S. Treasury under the CPP Program for total proceeds of
$25,000,000 pursuant to an exemption from registration under Section 4(2) of the
Securities Act. The preferred shares were subsequently registered with the
Securities and Exchange Commission.
The First
Bancorp 2009 Form 10-k
Page
17
The
First Bancorp, Inc. and Subsidiary
|
Years ended December 31,
|
||||||||||||||||||||
|
Dollars
in thousands,
except
for per share amounts
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Summary
of Operations
|
||||||||||||||||||||
|
Interest
Income
|
$ | 62,569 | $ | 71,372 | $ | 71,721 | $ | 64,204 | $ | 50,431 | ||||||||||
|
Interest
Expense
|
18,916 | 33,669 | 39,885 | 33,589 | 18,848 | |||||||||||||||
|
Net
Interest Income
|
43,653 | 37,703 | 31,836 | 30,615 | 31,583 | |||||||||||||||
|
Provision
for Loan Losses
|
12,160 | 4,700 | 1,432 | 1,325 | 200 | |||||||||||||||
|
Non-Interest
Income
|
12,754 | 9,646 | 10,145 | 10,306 | 9,034 | |||||||||||||||
|
Non-Interest
Expense
|
26,658 | 22,994 | 22,183 | 22,439 | 22,518 | |||||||||||||||
|
Net
Income
|
13,042 | 14,034 | 13,101 | 12,295 | 12,843 | |||||||||||||||
|
Per
Common Share Data
|
||||||||||||||||||||
|
Net
Income
|
||||||||||||||||||||
|
Basic
|
$ | 1.22 | $ | 1.45 | $ | 1.34 | $ | 1.25 | $ | 1.32 | ||||||||||
|
Diluted
|
1.22 | 1.44 | 1.34 | 1.25 | 1.30 | |||||||||||||||
|
Cash
Dividends (Declared)
|
0.780 | 0.765 | 0.690 | 0.610 | 0.530 | |||||||||||||||
|
Book
Value
|
12.66 | 12.09 | 11.58 | 10.98 | 10.52 | |||||||||||||||
|
Market
Value
|
$ | 15.42 | 19.89 | 14.64 | 16.72 | 17.58 | ||||||||||||||
|
Financial
Ratios
|
||||||||||||||||||||
|
Return
on Average Equity
|
10.66 | % | 12.02 | % | 11.89 | % | 11.63 | % | 12.98 | % | ||||||||||
|
Return
on Average Tangible Equity
|
13.77 | 15.75 | 15.89 | 15.75 | 17.81 | |||||||||||||||
|
Return
on Average Assets
|
0.96 | 1.10 | 1.13 | 1.14 | 1.36 | |||||||||||||||
|
Average
Equity to Average Assets
|
10.85 | 9.14 | 9.53 | 9.81 | 10.44 | |||||||||||||||
|
Average
Tangible Equity to Average Assets
|
8.80 | 6.98 | 7.13 | 7.24 | 7.61 | |||||||||||||||
|
Net
Interest Margin (Tax-Equivalent)
|
3.66 | 3.33 | 3.13 | 3.24 | 3.84 | |||||||||||||||
|
Dividend
Payout Ratio (Declared)
|
63.93 | 52.76 | 51.49 | 48.80 | 40.15 | |||||||||||||||
|
Allowance
for Loan Losses/Total Loans
|
1.43 | 0.90 | 0.74 | 0.76 | 0.79 | |||||||||||||||
|
Non-Performing
Loans to Total Loans
|
1.95 | 1.27 | 0.31 | 0.42 | 0.40 | |||||||||||||||
|
Non-Performing
Assets to Total Assets
|
1.80 | 1.31 | 0.56 | 0.32 | 0.30 | |||||||||||||||
|
Efficiency
Ratio (Tax-equivalent)
|
43.39 | 46.07 | 50.16 | 52.12 | 52.89 | |||||||||||||||
|
At
Year End
|
||||||||||||||||||||
|
Total
Assets
|
$ | 1,331,394 | $ | 1,325,744 | $ | 1,223,250 | $ | 1,104,869 | $ | 1,042,209 | ||||||||||
|
Total
Loans
|
952,492 | 979,273 | 920,164 | 838,145 | 772,338 | |||||||||||||||
|
Total
Investment Securities
|
272,375 | 247,839 | 208,585 | 172,301 | 173,033 | |||||||||||||||
|
Total
Deposits
|
922,667 | 925,736 | 781,280 | 805,235 | 713,964 | |||||||||||||||
|
Total
Borrowings
|
249,778 | 272,074 | 316,719 | 179,862 | 215,189 | |||||||||||||||
|
Total
Shareholders’ Equity
|
$ | 147,938 | $ | 117,181 | $ | 112,453 | $ | 107,327 | $ | 103,452 | ||||||||||
|
High
|
Low
|
|||||||||||||||||||
|
Market
price per common share of stock during 2009
|
$ | 21.80 | $ | 10.77 | ||||||||||||||||
The First
Bancorp 2009 Form 10-k
Page
18
The First
Bancorp, Inc. (the “Company”) was incorporated in the State of Maine on January
15, 1985, and is the parent holding company of The First, N.A. (the “Bank”). At
the Company’s Annual Meeting of Shareholders on April 30, 2008, the Company’s
name was changed to The First Bancorp, Inc. from First National Lincoln
Corporation.
The
Company generates almost all of its revenues from the Bank, which was chartered
as a national bank under the laws of the United States on May 30, 1864. The
Bank, which has fourteen offices along coastal Maine, emphasizes personal
service to the communities it serves, concentrating primarily on small
businesses and individuals.
The Bank
offers a wide variety of traditional banking services and derives the majority
of its revenues from net interest income – the spread between what it earns on
loans and investments and what it pays for deposits and borrowed funds. While
net interest income typically increases as earning assets grow, the spread can
vary up or down depending on the level and direction of movements in interest
rates. Management believes the Bank has modest exposure to changes in interest
rates, as discussed in “Interest Rate Risk Management” elsewhere in Management’s
Discussion. The banking business in the Bank’s market area historically has been
seasonal with lower deposits in the winter and spring and higher deposits in the
summer and fall. This seasonal swing is fairly predictable and has not had a
materially adverse effect on the Bank.
Non-interest
income is the Bank’s secondary source of revenue and includes fees and service
charges on deposit accounts, fees for processing merchant credit card receipts,
income from the sale and servicing of mortgage loans, and income from investment
management and private banking services through First Advisors, a division of
the Bank.
Forward-Looking
Statements
This
report contains statements that are “forward-looking statements.” We may also
make written or oral forward-looking statements in other documents we file with
the SEC, in our annual reports to Shareholders, in press releases and other
written materials, and in oral statements made by our officers, directors or
employees. You can identify forward-looking statements by the use of the words
“believe”, “expect”, “anticipate”, “intend”, “estimate”, “assume”, “outlook”,
“will”, “should”, “may”, “might, “could”, and other expressions that predict or
indicate future events and trends and which do not relate to historical matters.
You should not rely on forward-looking statements, because they involve known
and unknown risks, uncertainties and other factors, some of which are beyond the
control of the Company. These risks, uncertainties and other factors may cause
the actual results, performance or achievements of the Company to be materially
different from the anticipated future results, performance or achievements
expressed or implied by the forward-looking statements.
Some of
the factors that might cause these differences include the following: changes in
general national, regional or international economic conditions or conditions
affecting the banking or financial services industries or financial capital
markets, volatility and disruption in national and international financial
markets, government intervention in the U.S. financial system, reductions in net
interest income resulting from interest rate volatility as well as changes in
the balance and mix of loans and deposits, reductions in the market value of
wealth management assets under administration, changes in the value of
securities and other assets, reductions in loan demand, changes in loan
collectibility, default and charge-off rates, changes in the size and nature of
the Company’s competition, changes in legislation or regulation and accounting
principles, policies and guidelines, and changes in the assumptions used in
making such forward-looking statements. In addition, the factors described under
“Risk Factors” in Item 1A of this Annual Report on Form 10-K for the fiscal year
ended December 31, 2009, as filed with the SEC, may result in these differences.
You should carefully review all of these factors, and you should be aware that
there may be other factors that could cause these differences. These
forward-looking statements were based on information, plans and estimates at the
date of this quarterly report, and we assume no obligation to update any
forward-looking statements to reflect changes in underlying assumptions or
factors, new information, future events or other changes.
Although
The First Bancorp, Inc. believes that the expectations reflected in such
forward-looking statements are reasonable, actual results may differ materially
from the results discussed in these forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to
republish revised forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
Readers are also urged to carefully review and consider the various disclosures
made by the Company, which attempt to advise interested parties of the facts
that affect the Company’s business.
The First
Bancorp 2009 Form 10-k
Page
19
Critical Accounting
Policies
Management’s
discussion and analysis of the Company’s financial condition is based on the
consolidated financial statements which are prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of such financial statements requires Management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosure of contingent assets and
liabilities. On an ongoing basis, Management evaluates its estimates, including
those related to the allowance for loan losses, goodwill, the valuation of
mortgage servicing rights, and other-than-temporary impairment on securities.
Management bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis in making judgments about the carrying values of
assets that are not readily apparent from other sources. Actual results could
differ from the amount derived from Management’s estimates and assumptions under
different assumptions or conditions.
Allowance for Loan Losses.
Management believes the allowance for loan losses requires the most significant
estimates and assumptions used in the preparation of the consolidated financial
statements. The allowance for loan losses is based on Management’s evaluation of
the level of the allowance required in relation to the estimated loss exposure
in the loan portfolio. Management believes the allowance for loan losses is a
significant estimate and therefore regularly evaluates it for adequacy by taking
into consideration factors such as prior loan loss experience, the character and
size of the loan portfolio, business and economic conditions and Management’s
estimation of potential losses. The use of different estimates or assumptions
could produce different provisions for loan losses.
Goodwill.
Management utilizes
numerous techniques to estimate the value of various assets held by the Company,
including methods to determine the appropriate carrying value of goodwill as
required under FASB ASC Topic 350 “Intangibles – Goodwill and Other.” In
addition, goodwill from a purchase acquisition is subject to ongoing periodic
impairment tests, which include an evaluation of the ongoing assets, liabilities
and revenues from the acquisition and an estimation of the impact of business
conditions.
Mortgage Servicing Rights.
The
valuation of mortgage servicing rights is a critical accounting policy which
requires significant estimates and assumptions. The Bank often sells mortgage
loans it originates and retains the ongoing servicing of such loans, receiving a
fee for these services, generally 0.25% of the outstanding balance of the loan
per annum. Mortgage servicing rights are recognized when they are acquired
through the sale of loans, and are reported in other assets. They are amortized
into non-interest income in proportion to, and over the period of, the estimated
future net servicing income of the underlying financial assets. Management uses
an independent firm which specializes in the valuation of mortgage servicing
rights to determine the fair value which is recorded on the balance sheet. The
most important assumption is the anticipated loan prepayment rate, and increases
in prepayment speed results in lower valuations of mortgage servicing rights.
The valuation also includes an evaluation for impairment based upon the fair
value of the rights, which can vary depending upon current interest rates and
prepayment expectations, as compared to amortized cost. Impairment is determined
by stratifying rights by predominant characteristics, such as interest rates and
terms. The use of different assumptions could produce a different valuation. All
of the assumptions are based on standards the Company believes would be utilized
by market participants in valuing mortgage servicing rights and are consistently
derived and/or benchmarked against independent public sources.
Other-Than-Temporary Impairment on
Securities.
One of the significant estimates related to investment
securities is the evaluation of other-than-temporary impairments. The evaluation
of securities for other-than- temporary impairments is a quantitative and
qualitative process, which is subject to risks and uncertainties and is intended
to determine whether declines in the fair value of investments should be
recognized in current period earnings. The risks and uncertainties include
changes in general economic conditions, the issuer’s financial condition and/or
future prospects, the effects of changes in interest rates or credit spreads and
the expected recovery period of unrealized losses. Securities that are in an
unrealized loss position are reviewed at least quarterly to determine if
other-than-temporary impairment is present based on certain quantitative and
qualitative factors and measures. The primary factors considered in evaluating
whether a decline in value of securities is other-than-temporary include: (a)
the length of time and extent to which the fair value has been less than cost or
amortized cost and the expected recovery period of the security, (b) the
financial condition, credit rating and future prospects of the issuer, (c)
whether the debtor is current on contractually obligated interest and principal
payments, (d) the volatility of the securities’ market price, (e) the intent and
ability of the Company to retain the investment for a period of time sufficient
to allow for recovery, which may be at maturity and (f) any other information
and observable data considered relevant in determining whether
other-than-temporary impairment has occurred, including the expectation of
receipt of all principal and interest when due.
The First
Bancorp 2009 Form 10-k
Page
20
Use of Non-GAAP Financial
Measures
Certain
information in Management’s Discussion and Analysis of Financial Condition and
Results of Operations and elsewhere in this Report contains financial
information determined by methods other than in accordance with accounting
principles generally accepted in the United States of America ("GAAP").
Management uses these “non-GAAP” measures in its analysis of the Company’s
performance and believes that these non-GAAP financial measures provide a
greater understanding of ongoing operations and enhance comparability of results
with prior periods as well as demonstrating the effects of significant gains and
charges in the current period. The Company believes that a meaningful analysis
of its financial performance requires an understanding of the factors underlying
that performance. Management believes that investors may use these non-GAAP
financial measures to analyze financial performance without the impact of
unusual items that may obscure trends in the Company’s underlying performance.
These disclosures should not be viewed as a substitute for operating results
determined in accordance with GAAP, nor are they necessarily comparable to
non-GAAP performance measures that may be presented by other
companies.
In
several places net interest income is presented on a fully taxable equivalent
basis. Specifically included in interest income was tax-exempt interest income
from certain investment securities and loans. An amount equal to the tax benefit
derived from this tax exempt income has been added back to the interest income
total, which adjustments increased net interest income accordingly. Management
believes the disclosure of tax-equivalent net interest income information
improves the clarity of financial analysis, and is particularly useful to
investors in understanding and evaluating the changes and trends in the
Company’s results of operations. Other financial institutions commonly present
net interest income on a tax-equivalent basis. This adjustment is considered
helpful in the comparison of one financial institution’s net interest income to
that of another institution, as each will have a different proportion of
tax-exempt interest from its earning assets. Moreover, net interest income is a
component of a second financial measure commonly used by financial institutions,
net interest margin, which is the ratio of net interest income to average
earning assets. For purposes of this measure as well, other financial
institutions generally use tax-equivalent net interest income to provide a
better basis of comparison from institution to institution. The Company follows
these practices.
The
following table provides a reconciliation of tax-equivalent financial
information to the Company’s consolidated financial statements, which have been
prepared in accordance with GAAP. A 35.0% tax rate was used in 2009, 2008 and
2007.
|
Years
ended December 31,
|
||||||||||||
|
Dollars in
thousands
|
2009
|
2008
|
2007
|
|||||||||
|
Net
interest income as presented
|
$ | 43,653 | $ | 37,703 | $ | 31,836 | ||||||
|
Effect
of tax-exempt income
|
2,395 | 2,187 | 2,081 | |||||||||
|
Net
interest income, tax equivalent
|
$ | 46,048 | $ | 39,890 | $ | 33,917 | ||||||
The
Company presents its efficiency ratio using non-GAAP information. The GAAP-based
efficiency ratio is noninterest expenses divided by net interest income plus
noninterest income from the Consolidated Statements of Income. The non-GAAP
efficiency ratio excludes securities losses and other-than-temporary impairment
charges from noninterest expenses, excludes securities gains from noninterest
income, and adds the tax-equivalent adjustment to net interest income. The
following table provides a reconciliation of between the GAAP and non-GAAP
efficiency ratio:
|
Years
ended December 31,
|
||||||||||||
|
In
thousands of dollars
|
2009
|
2008
|
2007
|
|||||||||
|
Non-interest
expense, as presented
|
$ | 26,658 | $ | 22,994 | $ | 22,183 | ||||||
|
Net
securities losses
|
(150 | ) | (89 | ) | - | |||||||
|
Other
than temporary impairment charge
|
(916 | ) | - | - | ||||||||
|
Adjusted
non-interest expense
|
25,592 | 22,905 | 22,183 | |||||||||
|
Net
interest income, as presented
|
43,653 | 37,703 | 31,836 | |||||||||
|
Effect
of tax-exempt income
|
2,395 | 2,187 | 2,081 | |||||||||
|
Non-interest
income, as presented
|
12,754 | 9,646 | 10,145 | |||||||||
|
Effect
of non-interest tax-exempt income
|
185 | 186 | 165 | |||||||||
|
Net
securities gains
|
- | - | 2 | |||||||||
|
Adjusted
net interest income plus non-interest income
|
$ | 58,987 | $ | 49,722 | $ | 44,229 | ||||||
|
Non-GAAP
efficiency ratio
|
43.39 | % | 46.07 | % | 50.16 | % | ||||||
|
GAAP
efficiency ratio
|
47.26 | % | 48.56 | % | 52.84 | % | ||||||
The
Company presents certain information based upon tangible average shareholders’
equity instead of total average shareholders’ equity. The difference between
these two measures is the Company’s intangible assets, specifically goodwill
from prior acquisitions. Management, banking regulators and many stock analysts
use the tangible common equity ratio and the tangible book value per common
share in conjunction with more traditional bank capital ratios to compare the
capital adequacy of banking organizations with significant amounts of goodwill
or other intangible assets, typically stemming from the use of the purchase
accounting method in accounting for mergers and acquisitions. The following
table provides a reconciliation of tangible average shareholders’ equity to the
Company’s consolidated financial statements, which have been prepared in
accordance with U.S. generally accepted accounting principles:
|
Years
ended December 31,
|
||||||||||||
|
In thousands of
dollars
|
2009
|
2008
|
2007
|
|||||||||
|
Average
shareholders’ equity as presented
|
$ | 146,854 | $ | 116,448 | $ | 111,422 | ||||||
|
Intangible
assets
|
27,684 | 27,684 | 27,684 | |||||||||
|
Tangible
average shareholders’ equity
|
$ | 119,170 | $ | 88,764 | $ | 83,738 | ||||||
Executive
Summary
Net
income for the year ended December 31, 2009 was $13.0 million, down $1.0 million
or 7.1% from the $14.0 million posted for the year ended December 31, 2008.
Earnings per common share on a fully diluted basis were $1.22 for the year ended
December 31, 2009, down $0.22 or 15.3% from the $1.44 posted for the year ended
December 31, 2008.
The core
business of The First Bancorp continues to be the spread business from
traditional banking services – the difference between what we earn from loans
and investments and what we pay for deposits and borrowed funds. The spread
business did extremely well in 2009. With low interest rates and a steep yield
curve, net interest income for the year ended December 31, 2009 was up $6.0
million or 15.8% over the year ended December 31, 2008 and the net interest
margin widened from 3.33% for the year ended December 31, 2008 to 3.66% for the
year ended December 31, 2009. Our 2009 operating results also included
nonrecurring revenues of $910,000, after taxes, related to the sale of our
merchant credit card processing portfolio.
At the
same time, we continue to be in the longest and worst recession since the Great
Depression of the 1930’s. With weakening credit quality, the $7.5 million or
158.7% increase in our provision for loan losses in 2009 more than offset the
above-noted increase in net interest income. The slump in the housing market is
continuing and the national unemployment rate is at 10.0%. Fortunately, the
unemployment rate in Maine, at 8.3%, is somewhat better than the national
average. These unemployment numbers, however, do not reflect the number of
people who have experienced reduced incomes from wage cutbacks and loss of
overtime. In Maine, many people who are self-employed are also experiencing a
decline in business revenues impacting their individual incomes as
well.
Total
assets were up $5.7 million or 0.4% over December 31, 2008. The loan portfolio
was down $26.8 million or 2.7%, with a decline in residential mortgages that
refinanced and the sale of such refinanced loans to the secondary market because
of their low interest rates. The investment portfolio was up $24.5 million or
9.9% over December 31, 2008. On the liability side of the balance sheet,
low-cost deposits were up $12.7 million or 4.9% year-to-date, which Management
views as very positive given that these are among our lowest cost sources of
funding.
We also
added $25.0 million in preferred stock in the first quarter of 2009 under the
U.S. Treasury Capital Purchase Program. Our participation in the program
provides us with greater ability to ride out the current economic storm,
especially if conditions worsen, and also provides greater ability to work with
individuals and businesses as they also struggle through these adverse economic
conditions. We continue to be considered well-capitalized by FDIC standards with
total risk-based capital at 14.96%, well above the well-capitalized threshold of
10.00% set by the FDIC.
The First
Bancorp 2009 Form 10-k
Page
21
Results of
Operations
Net
Interest Income
Net
interest income increased 15.8% or $6.0 million to $43.7 million for the year
ended December 31, 2009 from the $37.7 million reported for the year ended
December 31, 2008. This was a result of two factors. Although earning assets
were lower at December 31, 2009 than at December 31, 2008, average earning
assets in 2009 were $79.8 million higher than in 2008. At the same time, actions
taken by the Federal Open Market Committee (“FOMC”) in 2009 resulted in
significantly lower interest rates, which led to the Company’s net interest
margin on a tax-equivalent basis increasing from 3.33% in 2008 to 3.66% in
2009.
Total
interest income in 2009 was $62.6 million, a decrease of $8.8 million or 12.3%
from the $71.4 million posted by the Company in 2008. Total interest expense in
2009 was $18.9 million, a decrease of $14.8 million or 43.8% from the $33.7
million posted by the Company in 2008. The decrease in both interest income and
interest expense was attributable to lower interest rates. Tax-exempt interest
income amounted to $4.4 million for the year ended December 31, 2009, $4.1
million for the year ended December 31, 2008 and $3.9 million for the year ended
December 31, 2007.
The
following tables present changes in interest income and expense attributable to
changes in interest rates, volume, and rate/volume
1
for
interest-earning assets and interest-bearing liabilities. Tax-exempt income is
calculated on a tax-equivalent basis, using a 35.0% tax rate.
|
Year
ended December 31, 2009 compared to 2008
|
||||||||||||||||
|
Dollars
in thousands
|
Volume
|
Rate
|
Rate/Volume
1
|
Total
|
||||||||||||
|
Interest
on earning assets
|
||||||||||||||||
|
Interest-bearing
deposits
|
$ | 4 | $ | (3 | ) | $ | (3 | ) | $ | (2 | ) | |||||
|
Investment
securities
|
3,002 | (2,424 | ) | (491 | ) | 87 | ||||||||||
|
Loans
held for sale
|
30 | (4 | ) | (1 | ) | 25 | ||||||||||
|
Loans
|
2,008 | (10,359 | ) | (355 | ) | (8,706 | ) | |||||||||
|
Total
interest income
|
5,044 | (12,790 | ) | (850 | ) | (8,596 | ) | |||||||||
|
Interest
expense
|
||||||||||||||||
|
Deposits
|
2,694 | (12,373 | ) | (1,449 | ) | (11,128 | ) | |||||||||
|
Borrowings
|
(1,651 | ) | (2,335 | ) | 361 | (3,625 | ) | |||||||||
|
Total
interest expense
|
1,043 | (14,708 | ) | (1,088 | ) | (14,753 | ) | |||||||||
|
Change
in net interest income
|
$ | 4,001 | $ | 1,918 | $ | 238 | $ | 6,157 | ||||||||
|
Year
ended December 31, 2008 compared to 2007
|
||||||||||||||||
|
Dollars
in thousands
|
Volume
|
Rate
|
Rate/Volume
1
|
Total
|
||||||||||||
|
Interest
on earning assets
|
||||||||||||||||
|
Interest-bearing
deposits
|
$ | - | $ | - | $ | 3 | $ | 3 | ||||||||
|
Investment
securities
|
2,592 | (305 | ) | (63 | ) | 2,224 | ||||||||||
|
Loans
held for sale
|
6 | 22 | 47 | 75 | ||||||||||||
|
Loans
|
5,338 | (7,251 | ) | (632 | ) | (2,545 | ) | |||||||||
|
Total
interest income
|
7,936 | (7,534 | ) | (645 | ) | (243 | ) | |||||||||
|
Interest
expense
|
||||||||||||||||
|
Deposits
|
1,272 | (7,688 | ) | (329 | ) | (6,745 | ) | |||||||||
|
Borrowings
|
3,688 | (2,317 | ) | (842 | ) | 529 | ||||||||||
|
Total
interest expense
|
4,960 | (10,005 | ) | (1,171 | ) | (6,216 | ) | |||||||||
|
Change
in net interest income
|
$ | 2,976 | $ | 2,471 | $ | 526 | $ | 5,973 | ||||||||
1
Represents the change attributable
to a combination of change in rate and change in volume.
The First
Bancorp 2009 Form 10-k
Page
22
The
following table presents, for the years ended December 31, 2009, 2008, and 2007,
the interest earned on or paid for each major asset and liability category,
respectively, the average yield for each major asset and liability category, and
the net yield between assets and liabilities. Tax-exempt income has been
calculated on a tax-equivalent basis using a 35% rate. Unrecognized interest on
non-accrual loans is not included in the amount presented, but the average
balance of non-accrual loans is included in the denominator when calculating
yields.
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
Dollars
in thousands
|
Amount
of interest
|
Average
Yield/Rate
|
Amount
of interest
|
Average
Yield/Rate
|
Amount
of interest
|
Average
Yield/Rate
|
||||||||||||||||||
|
Interest
on earning assets
|
||||||||||||||||||||||||
|
Interest-bearing
deposits
|
$ | 1 | 0.25 | % | $ | 3 | 1.65 | % | $ | - | 0.00 | % | ||||||||||||
|
Investment
securities
|
14,893 | 5.42 | % | 14,806 | 6.07 | % | 12,582 | 5.98 | % | |||||||||||||||
|
Loans
held for sale
|
125 | 4.99 | % | 78 | 4.05 | % | 53 | 8.43 | % | |||||||||||||||
|
Loans
|
49,945 | 5.09 | % | 58,672 | 6.16 | % | 61,167 | 7.01 | % | |||||||||||||||
|
Total
interest-earning assets
|
64,964 | 5.16 | % | 73,559 | 6.14 | % | 73,802 | 6.81 | % | |||||||||||||||
|
Interest-bearing
liabilities
|
||||||||||||||||||||||||
|
Deposits
|
11,872 | 1.35 | % | 23,000 | 2.90 | % | 29,745 | 3.93 | % | |||||||||||||||
|
Borrowings
|
7,044 | 2.84 | % | 10,669 | 3.62 | % | 10,140 | 4.71 | % | |||||||||||||||
|
Total
interest-bearing liabilities
|
18,916 | 1.67 | % | 33,669 | 3.10 | % | 39,885 | 4.10 | % | |||||||||||||||
|
Net
interest income
|
$ | 46,048 | $ | 39,890 | $ | 33,917 | ||||||||||||||||||
|
Interest
rate spread
|
3.48 | % | 3.04 | % | 2.71 | % | ||||||||||||||||||
|
Net
interest margin
|
3.66 | % | 3.33 | % | 3.13 | % | ||||||||||||||||||
The First
Bancorp 2009 Form 10-k
Page
23
Average
Daily Balance Sheets
The
following table shows the Company’s average daily balance sheets for the years
ended December 31, 2009, 2008 and 2007.
|
Years
ended December 31,
|
||||||||||||
|
In
thousands of dollars
|
2009
|
2008
|
2007
|
|||||||||
|
Assets
|
||||||||||||
|
Cash
and due from banks
|
$ | 14,288 | $ | 16,281 | $ | 19,978 | ||||||
|
Overnight
funds sold
|
407 | 181 | - | |||||||||
|
Securities
available for sale
|
29,040 | 22,865 | 33,765 | |||||||||
|
Securities
to be held to maturity
|
245,972 | 205,783 | 158,080 | |||||||||
|
Federal
Home Loan Bank and Federal Reserve Bank Stock
|
14,814 | 14,641 | 9,887 | |||||||||
|
Loans
held for sale (fair value approximates cost)
|
2,506 | 1,923 | 623 | |||||||||
|
Loans
|
981,628 | 949,135 | 873,009 | |||||||||
|
Allowance
for loan losses
|
(11,277 | ) | (7,607 | ) | (6,634 | ) | ||||||
|
Net
loans
|
970,351 | 941,528 | 866,375 | |||||||||
|
Accrued
interest receivable
|
6,027 | 6,846 | 6,697 | |||||||||
|
Premises
and equipment, net of accumulated depreciation
|
18,024 | 16,228 | 15,664 | |||||||||
|
Other
real estate owned
|
2,652 | 1,736 | 931 | |||||||||
|
Goodwill
|
27,684 | 27,684 | 27,684 | |||||||||
|
Other
assets
|
21,752 | 17,737 | 16,833 | |||||||||
|
Total
Assets
|
$ | 1,353,517 | $ | 1,273,433 | $ | 1,156,517 | ||||||
|
Liabilities
& Stockholders' Equity
|
||||||||||||
|
Demand
deposits
|
$ | 65,567 | $ | 63,495 | $ | 61,678 | ||||||
|
NOW
deposits
|
106,895 | 105,689 | 102,083 | |||||||||
|
Money
market deposits
|
108,922 | 123,699 | 125,370 | |||||||||
|
Savings
deposits
|
87,921 | 86,018 | 91,967 | |||||||||
|
Certificates
of deposit
|
227,161 | 364,529 | 323,367 | |||||||||
|
Certificates
$100M and over
|
351,552 | 109,988 | 114,764 | |||||||||
|
Total
deposits
|
948,018 | 853,418 | 819,229 | |||||||||
|
Borrowed
funds
|
248,291 | 293,745 | 215,403 | |||||||||
|
Dividends
payable
|
953 | 850 | 739 | |||||||||
|
Other
liabilities
|
9,401 | 8,972 | 9,724 | |||||||||
|
Total
Liabilities
|
1,206,663 | 1,156,985 | 1,045,095 | |||||||||
|
Shareholders'
Equity:
|
||||||||||||
|
Preferred
Stock
|
24,452 | - | - | |||||||||
|
Common
stock
|
97 | 97 | 98 | |||||||||
|
Additional
paid-in capital
|
44,807 | 44,214 | 45,644 | |||||||||
|
Retained
earnings
|
78,072 | 72,492 | 65,366 | |||||||||
|
Accumulated
other comprehensive (loss) income
|
||||||||||||
|
Net
unrealized gains (losses) on available-for-sale securities
|
(310 | ) | (87 | ) | 574 | |||||||
|
Net
unrealized loss on postretirement benefit costs
|
(264 | ) | (268 | ) | (260 | ) | ||||||
|
Total
Stockholders' Equity
|
146,854 | 116,448 | 111,422 | |||||||||
|
Total
Liabilities & Stockholders' Equity
|
$ | 1,353,517 | $ | 1,273,433 | $ | 1,156,517 | ||||||
The First
Bancorp 2009 Form 10-k
Page
24
Non-Interest
Income
Non-interest
income in 2009 was $12.8 million, an increase of 32.2% from the $9.6 million
reported in 2008. This increase was attributable to mortgage origination and
servicing income, which increased $2.2 million or 1,514.5% as a result of a high
volume of residential mortgages refinancing and these loans being sold to the
secondary market, as well as an increase in other operating income of $1.4
million or 26.5% due to the sale of the Company’s merchant credit card
processing portfolio.
Non-interest
expense in 2009 was $26.7 million, an increase of 15.9% from the $23.0 million
reported in 2008. The majority of the increase was attributable to a $916,000
charge for other-than-temporary impairment of investment securities and a $1.3
million increase in FDIC insurance assessments (see “Discussion of Business –
Deposit Insurance Assessments”). Despite these increases in non-interest
expense, the Company’s efficiency ratio improved considerably in 2009 – 43.39%
compared to 46.07% in 2008. The improvement in the efficiency ratio year-to-date
was the result of the increase in both net interest income and non-interest
income previously discussed.
Provision
to the Allowance for Loan Losses
The
Company’s provision to the allowance for loan losses was $12.2 million in 2009
compared to $4.7 million in 2008. The level of provision in 2009 and 2008 was to
maintain the allowance for loan losses at an adequate level given the size of
our loan portfolio and the recent deterioration in asset quality. While the
weakness in the national economy has not hit coastal Maine as hard as many other
parts of the country, the Company has seen an increase in non-performing loans
and net chargeoffs were $7.3 million in 2009 compared to $2.7 million in 2008.
As a result, our provision for loan losses increased by $7.5 million in 2009
from the 2008 level. Despite this increase, our 2009 provision for loan losses
of 0.91% of average assets compares quite favorable to our peer at 1.43% of
average assets. Given the number of economic uncertainties at this time,
Management views it prudent to continue to increase the allowance for loan
losses and that the amount of increase is directionally consistent with the
decline in credit quality seen in the portfolio. A further discussion of asset
and credit quality can be found in “Assets and Asset Quality”.
Net
Income
Net
income for 2009 was $13.0 million – a 7.1% or $1.0 million decrease from net
income of $14.0 million that was posted in 2008. Earnings per share on a fully
diluted basis were $1.22, down $0.22 or 15.3% from the $1.44 reported for the
year ended December 31, 2008.
Key
Ratios
Return on
average assets in 2009 was 0.96%, down from the 1.10% posted in 2008. Return on
average tangible equity was 13.77% in 2009, compared to 15.75% in 2008 and
15.89% in 2007. In 2009, the Company’s dividend payout ratio (dividends declared
per share divided by earnings per share) was 63.93%, compared to 52.76% in 2008
and 51.49% in 2007. The Company’s efficiency ratio – a benchmark measure of the
amount spent to generate a dollar of income – was 43.39% in 2009 compared to
74.23% for the Bank’s peer group, on average. In 2008, the Bank’s efficiency
ratio was 46.07% compared to 64.72% for the Bank’s peer group, on average. The
improvement in 2009 was the result of revenues (net interest income and
non-interest income) increasing at a higher rate than operating expenses. The
efficiency ratio is calculated by dividing the Company’s operating expenses
(which excludes the provision for loan losses) by the total of net interest
income on a tax-equivalent basis before provision for loan losses and other
operating income (which excludes securities gains).
Investment
Management and Fiduciary Activities
As of
December 31, 2009, First Advisors, the Bank’s private banking and investment
management division, had assets under management with a market value of $205.2
million, consisting of 918 trust accounts, estate accounts, agency accounts, and
self-directed individual retirement accounts. This compares to December 31,
2008, when 1,015 accounts with a market value of $223.8 million were under
management. The decline in market value was due to decline in equity markets
that impacted the value of assets under management.
The First
Bancorp 2009 Form 10-k
Page
25
Assets and Asset
Quality
Total
assets were up slightly in 2009, with the investment portfolio increasing $24.5
million or 9.9% over December 31, 2008, while the loan portfolio decreased $26.8
million or 2.7%. Total assets increased 0.4% or $5.7 million from $1.326 billion
at December 31, 2008, to $1.331 billion at December 31, 2009. Although earning
assets were lower at December 31, 2009 than at December 31, 2008, average
earning assets in 2009 were $79.8 million higher than in 2008. This increase in
average earning assets contributed to net interest income increasing $6.0
million or 15.8% during 2009 when compared to 2008.
While
the weaknesses in the national and global economies have not impacted coastal
Maine as much as some other parts of the country, we nevertheless experienced a
deterioration in asset quality in our loan portfolio. Non-performing assets to
total assets stood at 1.80% at December 31, 2009, a significant increase over
1.31% at December 31, 2008. This increase is attributable to the impact that the
weakened economy is having on our borrowers. Small businesses are seeing
revenue/sales decreases and some are struggling to meet their obligations with a
declining revenue base. A number of consumers have lost their jobs or seen a
reduction in hours worked and/or overtime, thereby creating strained finances
resulting in payment issues on their loans. In Management’s opinion, the
Company’s long-standing approach to working with borrowers and ethical loan
underwriting standards helps alleviate some of the payment problems on
customers’ loans and in the end minimizes actual loan losses.
Net
charge offs in 2009 were $7.3 million or 0.75% of average loans outstanding
compared to $2.7 million or 0.28% of average loans outstanding in 2008. Despite
the increase, this is relatively low compared to most banks in the country and
our peer group, which had, on average, net charge offs of 1.49% of average loans
outstanding in 2009. We manage our loan portfolio to minimize losses and have
shown an excellent track record for the past 20 years with annual average
chargeoffs of 0.25% of average loans outstanding.
Residential
real estate loans represent 38.7% of the total loan portfolio, and this loan
category generally has a lower level of losses in comparison to other loan
types. In 2009, the loss ratio for residential mortgages was 0.50% compared to
0.75% for the entire loan portfolio. We have not written subprime mortgages or
“no documentation loans” – the types of loans that are currently defaulting on a
large scale nationwide. The Company does not have a credit card portfolio or
offer dealer consumer loans which generally carry more risk and therefore higher
losses.
The
allowance for loan losses ended the year at $13.6 million and stood at 1.43% of
total loans outstanding compared to 0.90% at December 31, 2008. A $12.2 million
provision for losses was made in 2009, resulting in the allowance for loan
losses increasing $4.8 million or 55.0% from December 31, 2008, after $7.3
million in net chargeoffs. This compares to a $4.7 million provision for losses
in 2008. Management believes this level of provision to be directionally
consistent with a weakening economy and an increase in the level of
non-performing loans. Given the above factors, Management views the $13.6
million allowance for loan losses to be adequate as of December 31,
2009.
Investment
Activities
During
2009, the investment portfolio increased 9.9% to end the year at $272.4 million
compared to $247.8 million at December 31, 2008. The Company’s investment
securities are classified into two categories: securities available for sale and
securities to be held to maturity. Securities available for sale consist
primarily of debt securities which Management intends to hold for indefinite
periods of time. They may be used as part of the Company’s funds management
strategy, and may be sold in response to changes in interest rates, prepayment
risk and liquidity needs, to increase capital ratios, or for other similar
reasons. Securities to be held to maturity consist primarily of debt securities
that the Company has acquired solely for long-term investment purposes, rather
than for trading or future sale. For securities to be categorized as held to
maturity, Management must have the intent and the Company must have the ability
to hold such investments until their respective maturity dates. The Company does
not hold trading account securities.
All
investment securities are managed in accordance with a written investment policy
adopted by the Board of Directors. It is the Company’s general policy that
investments for either portfolio be limited to government debt obligations, time
deposits, and corporate bonds or commercial paper with one of the three highest
ratings given by a nationally recognized rating agency. The portfolio is
currently invested primarily in U.S. Government agency securities and tax-exempt
obligations of states and political subdivisions. The individual securities have
been selected to enhance the portfolio’s overall yield while not materially
adding to the Company’s level of interest rate risk.
The
following table sets forth the Company’s investment securities at their carrying
amounts as of December 31, 2009, 2008, and 2007.
The First
Bancorp 2009 Form 10-k
Page
26
|
Dollars
in thousands
|
2009
|
2008
|
2007
|
|||||||||
|
Securities
available for sale
|
||||||||||||
|
U.S.
Treasury and agency
|
$ | 30,959 | $ | - | $ | - | ||||||
|
Mortgage-backed
securities
|
31,148 | 922 | 1,322 | |||||||||
|
State
and political subdivisions
|
18,514 | 8,910 | 10,855 | |||||||||
|
Corporate
securities
|
818 | 2,977 | 14,727 | |||||||||
|
Other
equity securities
|
399 | 263 | 326 | |||||||||
| $ | 81,838 | $ | 13,072 | $ | 27,230 | |||||||
|
Securities
to be held to maturity
|
||||||||||||
|
U.S.
Treasury and agency
|
$ | 39,099 | $ | 110,513 | $ | 95,009 | ||||||
|
Mortgage-backed
securities
|
90,193 | 60,774 | 30,786 | |||||||||
|
State
and political subdivisions
|
61,095 | 62,330 | 53,914 | |||||||||
|
Corporate
securities
|
150 | 1,150 | 1,645 | |||||||||
| 190,537 | 234,767 | 181,354 | ||||||||||
|
Total
securities
|
$ | 272,375 | $ | 247,839 | $ | 208,584 | ||||||
The
following table sets forth certain information regarding the yields and expected
maturities of the Company’s investment securities as of December 31, 2009.
Yields on tax-exempt securities have been computed on a tax-equivalent basis
using a tax rate of 35%. Mortgage-backed securities are presented according to
their final contractual maturity date, while the calculated yield takes into
effect the intermediate cashflows from repayment of principal which results in a
much shorter average life.
|
Available For Sale
|
Held to Maturity
|
|||||||||||||||
|
Dollars
in thousands
|
Fair
Value
|
Yield
to maturity
|
Amortized
Cost
|
Yield
to maturity
|
||||||||||||
|
U.S.
Treasury & Agency
|
||||||||||||||||
|
Due
in 1 year or less
|
$ | - | 0.00 | % | $ | - | 0.00 | % | ||||||||
|
Due
in 1 to 5 years
|
15,000 | 2.75 | % | - | 0.00 | % | ||||||||||
|
Due
in 5 to 10 years
|
- | 0.00 | % | - | 0.00 | % | ||||||||||
|
Due
after 10 years
|
15,959 | 5.35 | % | 39,099 | 6.07 | % | ||||||||||
|
Total
|
30,959 | 4.09 | % | 39,099 | 6.07 | % | ||||||||||
|
Mortgage-Backed
Securities
|
||||||||||||||||
|
Due
in 1 year or less
|
- | 0.00 | % | 125 | 4.50 | % | ||||||||||
|
Due
in 1 to 5 years
|
91 | 5.71 | % | 1,662 | 4.17 | % | ||||||||||
|
Due
in 5 to 10 years
|
82 | 8.50 | % | 1,255 | 5.79 | % | ||||||||||
|
Due
after 10 years
|
30,975 | 3.52 | % | 87,151 | 3.80 | % | ||||||||||
|
Total
|
31,148 | 3.54 | % | 90,193 | 3.84 | % | ||||||||||
|
State
& Political Subdivisions
|
||||||||||||||||
|
Due
in 1 year or less
|
- | 0.00 | % | 205 | 6.95 | % | ||||||||||
|
Due
in 1 to 5 years
|
3,290 | 7.13 | % | 6,122 | 6.51 | % | ||||||||||
|
Due
in 5 to 10 years
|
3,701 | 7.57 | % | 13,765 | 6.53 | % | ||||||||||
|
Due
after 10 years
|
11,523 | 6.24 | % | 41,003 | 6.40 | % | ||||||||||
|
Total
|
18,514 | 6.66 | % | 61,095 | 6.44 | % | ||||||||||
|
Corporate
Securities
|
||||||||||||||||
|
Due
in 1 year or less
|
- | 0.00 | % | - | 0.00 | % | ||||||||||
|
Due
in 1 to 5 years
|
- | 0.00 | % | 150 | 1.50 | % | ||||||||||
|
Due
in 5 to 10 years
|
- | 0.00 | % | - | 0.00 | % | ||||||||||
|
Due
after 10 years
|
818 | 1.38 | % | - | 0.00 | % | ||||||||||
|
Total
|
818 | 1.38 | % | 150 | 1.50 | % | ||||||||||
|
Equity
Securities
|
399 | 2.43 | % | |||||||||||||
| $ | 81,838 | 4.43 | % | $ | 190,537 | 5.13 | % | |||||||||
The First
Bancorp 2009 Form 10-k
Page
27
Impaired
Securities
The
securities portfolio contains certain securities the amortized cost of which
exceeds fair value, which at December 31, 2009 amounted to an excess of $2.1
million, or 0.8% of the amortized cost of the total securities portfolio. At
December 31, 2008 this amount represented an excess of $8.6 million, or 3.5% of
the total securities portfolio. As a part of the Company’s ongoing security
monitoring process, the Company identifies securities in an unrealized loss
position that could potentially be other-than-temporarily impaired. If a decline
in the fair value of an available-for-sale security is judged to be
other-than-temporary, a charge is recorded in net realized securities losses
equal to the difference between the fair value and cost or amortized cost basis
of the security.
The
Company’s evaluation of securities for impairments is a quantitative and
qualitative process intended to determine whether declines in the fair value of
investment securities should be recognized in current period earnings. The
primary factors considered in evaluating whether a decline in the fair value of
securities is other-than-temporary include: (a) the length of time and extent to
which the fair value has been less than cost or amortized cost and the expected
recovery period of the security, (b) the financial condition, credit rating and
future prospects of the issuer, (c) whether the debtor is current on
contractually obligated interest and principal payments, (d) the volatility of
the securities market price, (e) the intent and ability of the Company to retain
the investment for a period of time sufficient to allow for recovery, which may
be at maturity, and (f) any other information and observable data considered
relevant in determining whether other-than-temporary impairment has
occurred.
The
Company’s best estimate of cash flows uses severe economic recession assumptions
due to market uncertainty. The Company’s assumptions include but are not limited
to delinquencies, foreclosure levels and constant default rates on the
underlying collateral, loss severity ratios, and constant prepayment rates. If
the Company does not expect to receive 100% of future contractual principal and
interest, an other-than-temporary impairment charge is recognized. Estimating
future cash flows is a quantitative and qualitative process that incorporates
information received from third party sources along with certain internal
assumptions and judgments regarding the future performance of the underlying
collateral.
Based on
the foregoing evaluation criteria, during the first quarter of 2009, the Company
concluded that one available-for-sale corporate security with an amortized cost
of $1.0 million was other-than-temporarily impaired, because the Company could
no longer conclude that it is probable that it will recover 100% of the
investment. Accordingly, the Company recorded a $916,000 charge for
other-than-temporary impairment. Management believes this loss was attributable
to potential bankruptcy of the issuer of the security, which ultimately happened
in the second quarter of 2009. While recording this impairment charge is
consistent with GAAP, Management estimates that the ultimate economic losses
that may be realized for other securities in the portfolio may be meaningfully
less than the current “mark-to-market” losses. Management believes that the
difference between the expected losses and current “mark-to-market” losses is
largely attributable to current market illiquidity conditions, de-leveraging,
and the historical disruption in the financial markets in general. In
Management’s opinion, no additional write-down for other-than-temporary
impairment is required.
As of
December 31, 2009, the Company had temporarily impaired securities with a fair
value of $79.1 million and unrealized losses of $2.1 million, as identified in
the table below. Securities in a continuous unrealized loss position more than
twelve-months amounted to $2.2 million as of December 31, 2009, compared with
$17.5 million at December 31, 2008. The Company has concluded that these
securities were not other-than-temporarily impaired. This conclusion was based
on the issuer’s continued satisfaction of the securities issuers’ obligations in
accordance with their contractual terms and the expectation that the issuers
will continue to do so, Management’s intent and ability to hold these securities
for a period of time sufficient to allow for any anticipated recovery in fair
value which may be at maturity, the expectation that the Company will receive
100% of future contractual cash flows, as well as the evaluation of the
fundamentals of the issuers’ financial condition and other objective evidence.
The following table summarizes temporarily impaired securities and their
approximate fair values at December 31, 2009.
|
Less
than 12 months
|
12
months or more
|
Total
|
||||||||||||||||||||||
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
|
In
thousands of dollars
|
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
||||||||||||||||||
|
U.S.
Treasury and agency
|
$ | 19,999 | $ | (707 | ) | $ | - | $ | - | $ | 19,999 | $ | (707 | ) | ||||||||||
|
Mortgage-backed
securities
|
47,509 | (602 | ) | - | - | 47,509 | (602 | ) | ||||||||||||||||
|
State
and political subdivisions
|
9,396 | (147 | ) | 1,350 | (338 | ) | 10,746 | (485 | ) | |||||||||||||||
|
Corporate
securities
|
- | - | 818 | (302 | ) | 818 | (302 | ) | ||||||||||||||||
|
Other
equity securities
|
- | - | 44 | (21 | ) | 44 | (21 | ) | ||||||||||||||||
| $ | 76,904 | $ | (1,456 | ) | $ | 2,212 | $ | (661 | ) | $ | 79,116 | $ | (2,117 | ) | ||||||||||
For
securities with unrealized losses, the following information was considered in
determining that the securities were not other-than-temporarily
impaired:
Securities issued by the U.S.
Treasury and U.S. Government-sponsored agencies and enterprises.
As of
December 31, 2009, the total unrealized losses on these securities amounted to
$707,000, compared with $5.9 million at December 31, 2008. All of these
securities were credit rated “AAA” by the major credit rating agencies.
Management believes that securities issued by the U.S. Treasury bear no credit
risk because they are backed by the full faith and credit of the United States
and that securities issued by U.S. Government-sponsored agencies and enterprises
have minimal credit risk, as these agencies and enterprises play a vital role in
the nation’s financial markets. Management believes that the unrealized losses
at December 31, 2009 were attributable to changes in current market yields and
spreads since the date the underlying securities were purchased, and does not
consider these securities to be other-than-temporarily impaired at December 31,
2009. The Company also has the ability and intent to hold these securities until
a recovery of their amortized cost, which may be at maturity.
Mortgage-backed securities issued by
U.S. Government agencies and U.S. Government-sponsored enterprises.
As of
December 31, 2009, the total unrealized losses on these securities amounted to
$602,000, compared with $297,000 at December 31, 2008. All of these securities
were credit rated “AAA” by the major credit rating agencies. Management believes
that securities issued by U.S. Government agencies bear no credit risk because
they are backed by the full faith and credit of the United States and that
securities issued by U.S. Government-sponsored enterprises have minimal credit
risk, as these agencies enterprises play a vital role in the nation’s financial
markets. Management believes that the unrealized losses at December 31, 2009
were attributable to changes in current market yields and spreads since the date
the underlying securities were purchased, and does not consider these securities
to be other-than-temporarily impaired at December 31, 2009. The Company also has
the ability and intent to hold these securities until a recovery of their
amortized cost, which may be at maturity.
Obligations of state and political
subdivisions.
As of December 31, 2009, the total unrealized losses on
municipal securities amounted to $485,000, compared with $684,000 at December
31, 2008. Municipal securities are supported by the general taxing authority of
the municipality and, in the cases of school districts, are supported by state
aid. At December 31, 2009 all municipal bond issuers were current on
contractually obligated interest and principal payments. The Company attributes
the unrealized losses at December 31, 2009 to changes in prevailing market
yields and pricing spreads since the dates the underlying securities were
purchased, combined with current market liquidity conditions and the disruption
in the financial markets in general. Accordingly, the Company does not consider
these municipal securities to be other-than-temporarily impaired at December 31,
2009. The Company also has the ability and intent to hold these securities until
a recovery of their amortized cost, which may be at maturity.
Corporate securities.
As of
December 31, 2009, the total unrealized losses on corporate securities amounted
to $302,000, compared with $1.7 million at December 31, 2008. Corporate
securities are dependent on the operating performance of the issuers. At
December 31, 2009 all corporate bond issuers were current on contractually
obligated interest and principal payments. The Company attributes the unrealized
losses at December 31, 2009 to changes in prevailing market yields and pricing
spreads since the dates the underlying securities were purchased, combined with
current market liquidity conditions and the disruption in the financial markets
in general. Accordingly, the Company does not consider these corporate
securities to be other-than-temporarily impaired at December 31, 2009. The
Company also has the ability and intent to hold these securities until a
recovery of their amortized cost, which may be at maturity. The previously
discussed security which was designated as other-than-temporarily impaired in
the first quarter of 2009 was evaluated separately because fair value exceeded
its impaired value at December 31, 2009.
Federal
Home Loan Bank Stock
The Bank
is a member of the Federal Home Loan Bank (“FHLB”) of Boston. The FHLB is a
cooperatively owned wholesale bank for housing and finance in the six New
England States. Its mission is to support the residential mortgage and
community-development lending activities of its members, which include over 450
financial institutions across New England. As a requirement of membership in the
FHLB, the Bank must own a minimum required amount of FHLB stock, calculated
periodically based primarily on its level of borrowings from the FHLB. The
Company uses the FHLB for much of its wholesale funding needs. As of December
31, 2009 and December 31, 2008, the Company’s investment in FHLB stock totaled
$14.0 million.
FHLB
stock is a non-marketable equity security and therefore is reported at cost,
which equals par value. Shares held in excess of the minimum required amount are
generally redeemable at par value. However, in the first quarter of 2009 the
FHLB announced a moratorium on such redemptions in order to preserve its capital
in response to current
The First
Bancorp 2009 Form 10-k
Page
28
market
conditions and declining retained earnings. The minimum required shares are
redeemable, subject to certain limitations, five years following termination of
FHLB membership. The Bank has no intention of terminating its FHLB membership.
The Company had no dividend income on its FHLB stock in 2009.
The FHLB
recorded a net loss of $186.8 million for the year ending December 31, 2009.
Losses due to the other-than-temporary impairment of investments in
private-label mortgage-backed securities resulted in a credit loss of $444.1
million for the year. The associated non-credit loss on these securities in 2009
was $885.4 million, which is recorded in capital rather than through earnings,
and contributed largely to an accumulated other comprehensive loss of $1.0
billion at December 31, 2009. Retained earnings increased to $142.6 million at
December 31, 2009, up from an accumulated deficit of $19.7 million at December
31, 2008. This increase was mainly due to the effect of adopting FSP FAS 115-2
and FAS 124-2 on January 1, 2009, which reclassified $349.1 million from
accumulated deficit to accumulated other comprehensive loss. The FHLB remained
in compliance with all regulatory capital ratios as of December 31, 2009, and,
in the most recent information available, was classified “adequately
capitalized” by its regulator, the Federal Housing Finance Agency, as of
September 30, 2009.
Notwithstanding
continued significant credit losses in its investment portfolio, the FHLB
reported modest profitability for the fourth quarter. Net income for the fourth
quarter of 2009 was $6.3 million. The FHLB’s net interest income continues to be
strong, and totaled $311.7 million for the year ending December 31, 2009, and
$88.0 million for the fourth quarter of 2009. The FHLB expects to see volatility
in its earnings in the next several quarters as it works through continued
challenges. In particular, high and prolonged unemployment rates, high
delinquency and foreclosure rates, and declining housing prices may result in
additional credit losses from the FHLB’s private-label mortgage-backed
securities investments. The FHLB will continue to monitor this situation closely
in 2010.
The FHLB
remains focused on returning the FHLB to stable profitability and enhancing the
FHLB’s capital base by building retained earnings. The FHLB’s board of directors
is unlikely to declare any dividends until a consistent pattern of positive net
income is demonstrated, allowing growth in retained earnings, which will likely
preclude a declaration of dividends for at least the first two quarters of 2010.
The opportunity to pay a dividend after that, and the amount of any such
dividend, will be a function of the success that the FHLB has in stabilizing
earnings and building retained earnings, which will be driven in large part by
the performance of its private-label mortgage-backed securities portfolio. The
FHLB’s current retained earnings target is estimated at $925 million, a target
adopted in connection with the FHLB’s Revised Operating Plan to preserve capital
in light of the various challenges to the FHLB. The FHLB’s retained earnings
target could be superseded by mandates from its primary regulator, the Federal
Housing Finance Agency, either in the form of an order specific to the FHLB or
by promulgation of new regulations requiring a level of retained earnings that
is different from the FHLB’s currently targeted level. Moreover, Management and
the board of directors of the FHLB may, at any time, change the FHLB’s
methodology or assumptions for modeling the FHLB’s retained earnings
requirement. Either of these could result in the FHLB further increasing its
retained earnings target or reducing or eliminating the dividend payout, as
necessary.
The
Company periodically evaluates its investment in FHLB stock for impairment based
on, among other factors, the capital adequacy of the FHLB and its overall
financial condition. No impairment losses have been recorded through December
31, 2009. The Bank will continue to monitor its investment in FHLB
stock.
Lending
Activities
The loan
portfolio declined $26.8 million or 2.7% in 2009, with total loans at $952.5
million at December 31, 2009, compared to $979.3 million at December 31, 2008.
While commercial loans increased $18.0 million or 4.7% between December 31, 2008
and December 31, 2009, residential term loans decreased by $64.3 million or
14.9% during the same period as a result of borrowers refinancing home mortgage
loans which were sold by the Bank to the secondary market. At the same time,
municipal loans posted growth of $11.1 million or 31.9%.
Commercial
loans are comprised of three categories, commercial real estate loans,
commercial construction loans and other commercial loans. Commercial real estate
is primarily comprised of loans to small businesses collateralized by
owner-occupied real estate, while other commercial is primarily comprised of
loans to small businesses collateralized by plant and equipment, commercial
fishing vessels and gear, and limited inventory-based lending. Commercial real
estate loans typically have a maximum loan-to-value ratio of 75% based upon
current appraisal information at the time the loan is made. Land development
loans typically have a maximum loan-to-value ratio of 65% based upon current
appraisal information at the time the loan is made. Commercial construction
loans comprise a very small portion of the portfolio, and at 37.7% of capital
are well under the regulatory guidance of 100.0% of total risk-based capital.
Commercial real estate loans are at 185.7% of total risk-based capital, well
under the regulatory guidance of 300.0% of total risk-based capital. Municipal
loans are comprised of loans to municipalities in the State of Maine for
capitalized expenditures, construction projects or tax-anticipation notes. All
municipal loans are considered general obligations of the municipality and as
such are collateralized by the taxing ability of the municipality for repayment
of debt.
The First
Bancorp 2009 Form 10-k
Page
29
Residential
loans are also comprised of two categories, term loans, which include
traditional amortizing home mortgages and home equity loans and lines of credit,
and construction loans, which include loans for owner-occupied residential
construction. Residential loans typically have a 75% to 80% loan to value based
upon current appraisal information at the time the loan is made. Consumer loans
are primarily short-term amortizing loans to individuals collateralized by
automobiles, pleasure craft and recreations vehicles, with a maximum loan to
value ratio of 80%-90% of the purchase price of the collateral. Consumer loans
also include a small amount of unsecured short-term time notes to individuals.
The following table summarizes the loan portfolio as of December 31, 2009, 2008,
2007, 2006 and 2005.
|
As
of December 31,
|
||||||||||||||||||||||||||||||||||||||||
|
In
thousands
of
dollars
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||||||||||||||||||||||
|
Commercial
|
||||||||||||||||||||||||||||||||||||||||
|
Real
estate
|
$ | 240,178 | 25.2 | % | $ | 219,057 | 22.3 | % | $ | 202,301 | 22.0 | % | $ | 140,626 | 16.8 | % | $ | 142,137 | 18.4 | % | ||||||||||||||||||||
|
Construction
|
48,714 | 5.1 | % | 48,182 | 4.9 | % | - | 0.0 | % | - | 0.0 | % | - | 0.0 | % | |||||||||||||||||||||||||
|
Other
|
114,486 | 12.0 | % | 118,109 | 12.1 | % | 109,954 | 11.9 | % | 189,908 | 22.7 | % | 170,108 | 22.0 | % | |||||||||||||||||||||||||
|
Municipal
|
45,952 | 4.8 | % | 34,832 | 3.6 | % | 34,425 | 3.7 | % | 23,724 | 2.8 | % | 20,270 | 2.7 | % | |||||||||||||||||||||||||
|
Residential
|
||||||||||||||||||||||||||||||||||||||||
|
Term
|
367,267 | 38.7 | % | 431,520 | 44.0 | % | 431,237 | 46.9 | % | 371,242 | 44.3 | % | 309,689 | 40.1 | % | |||||||||||||||||||||||||
|
Construction
|
17,361 | 1.8 | % | 26,235 | 2.7 | % | 45,942 | 5.0 | % | 20,258 | 2.4 | % | 26,909 | 3.5 | % | |||||||||||||||||||||||||
|
Home
equity
line
of credit
|
94,324 | 9.9 | % | 77,206 | 7.9 | % | 74,199 | 8.1 | % | 73,453 | 8.8 | % | 83,587 | 10.8 | % | |||||||||||||||||||||||||
|
Consumer
|
24,210 | 2.5 | % | 24,132 | 2.5 | % | 22,106 | 2.4 | % | 18,934 | 2.3 | % | 19,638 | 2.5 | % | |||||||||||||||||||||||||
|
Total
loans
|
$ | 952,492 | 100.0 | % | $ | 979,273 | 100.0 | % | $ | 920,164 | 100.0 | % | $ | 838,145 | 100.0 | % | $ | 772,338 | 100.0 | % | ||||||||||||||||||||
The
following table sets forth certain information regarding the contractual
maturities of the Bank’s loan portfolio as of December 31, 2009:
|
In
thousands of dollars
|
<
1 Year
|
1 -
5 Years
|
5 -
10 Years
|
>
10 Years
|
Total
|
|||||||||||||||
|
Commercial
|
||||||||||||||||||||
|
Real
estate
|
$ | 10,314 | $ | 8,600 | $ | 25,331 | $ | 195,933 | $ | 240,178 | ||||||||||
|
Construction
|
18,506 | 3,243 | 454 | 26,511 | 48,714 | |||||||||||||||
|
Other
|
17,690 | 22,494 | 34,446 | 39,856 | 114,486 | |||||||||||||||
|
Municipal
|
26,277 | 2,607 | 6,375 | 10,693 | 45,952 | |||||||||||||||
|
Residential
|
||||||||||||||||||||
|
Term
|
5,944 | 8,394 | 35,013 | 317,916 | 367,267 | |||||||||||||||
|
Construction
|
9,842 | 947 | 19 | 6,553 | 17,361 | |||||||||||||||
|
Home
equity line of credit
|
1,030 | 1,232 | 1,129 | 90,933 | 94,324 | |||||||||||||||
|
Consumer
|
7,440 | 10,343 | 1,454 | 4,973 | 24,210 | |||||||||||||||
|
Total
loans
|
$ | 97,043 | $ | 57,860 | $ | 104,221 | $ | 693,368 | $ | 952,492 | ||||||||||
The First
Bancorp 2009 Form 10-k
Page
30
The
following table provides a listing of loans by category, excluding loans held
for sale, between variable and fixed rates as of December 31, 2009.
|
Fixed-Rate
|
Adjustable-Rate
|
Total
|
||||||||||||||||||||||
|
In
thousands of dollars
|
Amount
|
%
of total
|
Amount
|
%
of total
|
Amount
|
%
of total
|
||||||||||||||||||
|
Commercial
|
||||||||||||||||||||||||
|
Real
estate
|
$ | 55,378 | 5.8 | % | $ | 184,800 | 19.4 | % | $ | 240,178 | 25.2 | % | ||||||||||||
|
Construction
|
13,733 | 1.4 | % | 34,981 | 3.7 | % | 48,714 | 5.1 | % | |||||||||||||||
|
Other
|
53,399 | 5.6 | % | 61,087 | 6.4 | % | 114,486 | 12.0 | % | |||||||||||||||
|
Municipal
|
42,072 | 4.4 | % | 3,880 | 0.4 | % | 45,952 | 4.8 | % | |||||||||||||||
|
Residential
|
||||||||||||||||||||||||
|
Term
|
128,901 | 13.5 | % | 238,366 | 25.0 | % | 367,267 | 38.7 | % | |||||||||||||||
|
Construction
|
6,726 | 0.7 | % | 10,635 | 1.1 | % | 17,361 | 1.8 | % | |||||||||||||||
|
Home
equity line of credit
|
2,111 | 0.2 | % | 92,213 | 9.7 | % | 94,324 | 9.9 | % | |||||||||||||||
|
Consumer
|
19,454 | 2.0 | % | 4,756 | 0.5 | % | 24,210 | 2.5 | % | |||||||||||||||
|
Total
loans
|
$ | 321,774 | 33.8 | % | $ | 630,718 | 66.2 | % | $ | 952,492 | 100.0 | % | ||||||||||||
Loan
Concentrations
As of
December 31, 2009, the Bank did not have any concentration of loans in one
particular industry that exceeded 10% of its total loan portfolio.
Loans
Held for Sale
Loans
held for sale are carried at the lower of cost or market value, with a balance
of $2.9 million at December 31, 2009 compared with $1.3 million at December 31,
2008. No recourse obligations have been incurred in connection with the sale of
loans. Due to refinancing activity at substantially lower interest rates, $115.7
million of residential mortgages were sold into the secondary market during
2009, much higher than the $19.7 million sold in 2008. This resulted in
non-interest income for mortgage origination and servicing in 2009 being up $2.2
million or 1,514.5% compared to 2008.
Credit
Risk Management and Allowance for Loan Losses
Credit
risk is the risk of loss arising from the inability of a borrower to meet its
obligations. We manage credit risk by evaluating the risk profile of the
borrower, repayment sources, the nature of the underlying collateral, and other
support given current events, conditions, and expectations. We attempt to manage
the risk characteristics of our loan portfolio through various control
processes, such as credit evaluation of borrowers, establishment of lending
limits, and application of lending procedures, including the holding of adequate
collateral and the maintenance of compensating balances. However, we seek to
rely primarily on the cash flow of our borrowers as the principal source of
repayment. Although credit policies and evaluation processes are designed to
minimize our risk, Management recognizes that loan losses will occur and the
amount of these losses will fluctuate depending on the risk characteristics of
our loan portfolio, as well as general and regional economic
conditions.
We
provide for loan losses through the establishment of an allowance for loan
losses which represents an estimated reserve for existing losses in the loan
portfolio. We deploy a systematic methodology for determining our allowance that
includes a quarterly review process, risk assessment, and adjustment to our
allowance. We classify our portfolios as either consumer or commercial and
monitor credit risk separately as discussed below. We evaluate the adequacy of
our allowance continually based on a review of all significant loans, with a
particular emphasis on nonaccruing, past due, and other loans that we believe
require special attention.
The
allowance consists of three elements: (1) specific reserves and valuation
allowances for individual credits; (2) general reserves for types or portfolios
of loans based on historical loan loss experience, judgmentally adjusted for
current conditions and credit risk concentrations; and (3) unallocated reserves.
Combined specific reserves and general reserves by loan type are considered
allocated reserves. All outstanding loans are considered in evaluating the
adequacy of the allowance.
Adequacy
of the allowance for loan losses is determined using a consistent, systematic
methodology, which analyzes the risk inherent in the loan portfolio. In addition
to evaluating the collectibility of specific loans when determining the adequacy
of the allowance for loan losses, Management also takes into consideration other
factors such
The First
Bancorp 2009 Form 10-k
Page
31
as
changes in the mix and size of the loan portfolio, historic loss experience, the
amount of delinquencies and loans adversely classified, economic trends, changes
in credit policies, and experience, ability and depth of lending Management. The
adequacy of the allowance for loan losses is assessed by an allocation process
whereby specific loss allocations are made against certain adversely classified
loans, and general loss allocations are made against segments of the loan
portfolio which have similar attributes. The Company’s historical loss
experience, industry trends, and the impact of the local and regional economy on
the Company’s borrowers, in whole or in part, were considered by Management in
determining the adequacy of the allowance for loan losses.
The
allowance for loan losses is increased by provisions charged against current
earnings. Loan losses are charged against the allowance when Management believes
that the collectibility of the loan principal is unlikely. Recoveries on loans
previously charged off are credited to the allowance. While Management uses
available information to assess possible losses on loans, future additions to
the allowance may be necessary based on increases in non-performing loans,
changes in economic conditions, growth in loan portfolios, or for other reasons.
Any future additions to the allowance would be recognized in the period in which
they were determined to be necessary. In addition, various regulatory agencies
periodically review the Company’s allowance for loan losses as an integral part
of their examination process. Such agencies may require the Company to record
additions to the allowance based on judgments different from those of
Management.
Commercial
Our
commercial portfolio includes all secured and unsecured loans to borrowers for
commercial purposes, including commercial lines of credit and commercial real
estate. Our process for evaluating commercial loans includes performing updates
on loans that we have rated for risk. Our non-performing commercial loans are
generally reviewed individually to determine impairment, accrual status, and the
need for specific reserves. Our methodology incorporates a variety of risk
considerations, both qualitative and quantitative. Quantitative factors include
our historical loss experience by loan type, collateral values, financial
condition of borrowers, and other factors. Qualitative factors include judgments
concerning general economic conditions that may affect credit quality, credit
concentrations, the pace of portfolio growth, and delinquency levels; these
qualitative factors are also considered in connection with the unallocated
portion of our allowance for loan losses.
The
process of establishing the allowance with respect to our commercial loan
portfolio begins when a loan officer initially assigns each loan a risk rating,
using established credit criteria. Approximately 50% of our outstanding loans
and commitments are subject to review and validation annually by an independent
consulting firm, as well as periodically by our internal credit review function.
Our methodology employs Management’s judgment as to the level of potential
losses on existing loans based on our internal review of the loan portfolio,
including an analysis of the borrowers’ current financial position, and the
consideration of current and anticipated economic conditions and their potential
effects on specific borrowers and/or lines of business. In determining our
ability to collect certain loans, we also consider the fair value of any
underlying collateral. We also evaluate credit risk concentrations, including
trends in large dollar exposures to related borrowers, industry and geographic
concentrations, and economic and environmental factors.
Residential
and Consumer
Consumer
and residential mortgage loans are generally segregated into homogeneous pools
with similar risk characteristics. Trends and current conditions in consumer and
residential mortgage pools are analyzed and historical loss experience is
adjusted accordingly. Quantitative and qualitative adjustment factors for the
consumer and residential mortgage portfolios are consistent with those for the
commercial portfolios. Certain loans in the consumer and residential portfolios
identified as having the potential for further deterioration are analyzed
individually to confirm the appropriate risk rating and accrual status, and to
determine the need for a specific reserve. Consumer loans that are greater than
120 days past due are generally charged off. Residential loans that are greater
than 90 days past due are generally placed in non-accrual status unless, through
an internal evaluation, it can be demonstrated that the loans are both well
secured and in the process of collection. In general, the foreclosure process is
also begun at this time.
Unallocated
The
unallocated portion of the allowance is intended to provide for losses that are
not identified when establishing the specific and general portions of the
allowance and is based upon Management’s evaluation of various conditions that
are not directly measured in the determination of the portfolio and loan
specific allowances. Such conditions include general economic and business
conditions affecting our lending area, credit quality trends (including trends
in delinquencies and nonperforming loans expected to result from existing
conditions), loan volumes and concentrations, specific industry conditions
within portfolio categories, recent loss experience in particular loan
categories, duration of the current business cycle, bank regulatory examination
results, findings of external loan review examiners, and
The First
Bancorp 2009 Form 10-k
Page
32
Management’s
judgment with respect to various other conditions including loan administration
and management and the quality of risk identification systems. Management
reviews these conditions quarterly. We have risk management practices designed
to ensure timely identification of changes in loan risk profiles; however,
undetected losses may exist inherently within the loan portfolio. The judgmental
aspects involved in applying the risk grading criteria, analyzing the quality of
individual loans, and assessing collateral values can also contribute to
undetected, but probable, losses.
The
allowance for loan losses includes reserve amounts assigned to individual loans
on the basis of loan impairment. Certain loans are evaluated individually and
are judged to be impaired when Management believes it is probable that the
Company will not collect all of the contractual interest and principal payments
as scheduled in the loan agreement. Under this method, loans are selected for
evaluation based on internal risk ratings or non-accrual status. A specific
reserve is allocated to an individual loan when that loan has been deemed
impaired and when the amount of a probable loss is estimable on the basis of its
collateral value, the present value of anticipated future cash flows, or its net
realizable value. At December 31, 2009, impaired loans with specific reserves
totaled $12.2 million (all of these loans were on non-accrual status) and the
amount of such reserves was $2.2 million. This compares to impaired loans with
specific reserves of $7.6 million at December 31, 2008 (all of these loans were
on non-accrual status) at which time the amount of such reserves was $2.0
million. All of these analyses are reviewed and discussed by the Directors’ Loan
Committee, and recommendations from these processes provide Management and the
Board of Directors with independent information on loan portfolio condition. Our
total allowance at December 31, 2009 is considered by Management to be adequate
to address the credit losses inherent in the current loan portfolio. Management
views the level of the allowance for loan losses as adequate. However, our
determination of the appropriate allowance level is based upon a number of
assumptions we make about future events, which we believe are reasonable, but
which may or may not prove valid. Thus, there can be no assurance that our
charge-offs in future periods will not exceed our allowance for loan losses or
that we will not need to make additional increases in our allowance for loan
losses.
The
allowance for loan losses totaled $13.6 million at December 31, 2009, compared
to $8.8 million at December 31, 2008. The increase in the allowance reflects
Management’s ongoing application of its methodologies to establish the
allowance, which included increases in the allowance for collateral dependent
impaired loans (specific reserves), which increased $0.2 million in 2009 from
$2.0 million at December 31, 2008 to $2.2 million at December 31, 2009. The
specific loans that make up those categories change from period to period.
Impairment on those loans, which would be reflected in the allowance for loan
losses, might or might not exist, depending on the specific circumstances of
each loan. Increases to reflect negative market trends and other qualitative
factors (unallocated reserves) increased $1.2 million in 2009 from $676,000 on
December 31, 2008 to $1.9 million on December 31, 2009.
The
following table summarizes our allocation of allowance by loan type as of
December 31, 2009, 2008, 2007, 2006 and 2005. The percentages are the portion of
each loan type to total loans.
|
Dollars
in
|
As
of December 31,
|
|||||||||||||||||||||||||||||||||||||||
|
thousands
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||||||||||||||||||||||
|
Commercial
|
||||||||||||||||||||||||||||||||||||||||
|
Real
estate
|
$ | 5,297 | 25.2 | % | $ | 2,958 | 22.3 | % | $ | 3,020 | 22.0 | % | $ | 1,905 | 16.8 | % | $ | 1,791 | 18.4 | % | ||||||||||||||||||||
|
Construction
|
896 | 5.1 | % | 650 | 4.9 | % | - | 0.0 | % | - | 0.0 | % | - | 0.0 | % | |||||||||||||||||||||||||
|
Other
|
3,095 | 12.0 | % | 2,595 | 12.1 | % | 1,633 | 11.9 | % | 2,573 | 22.7 | % | 2,142 | 22.0 | % | |||||||||||||||||||||||||
|
Municipal
|
23 | 4.8 | % | 20 | 3.6 | % | 25 | 3.7 | % | 25 | 2.8 | % | 50 | 2.6 | % | |||||||||||||||||||||||||
|
Residential
|
||||||||||||||||||||||||||||||||||||||||
|
Term
|
1,197 | 38.7 | % | 713 | 44.0 | % | 706 | 46.9 | % | 711 | 44.3 | % | 734 | 40.1 | % | |||||||||||||||||||||||||
|
Construction
|
43 | 1.8 | % | 44 | 2.7 | % | 75 | 5.0 | % | 38 | 2.4 | % | 64 | 3.5 | % | |||||||||||||||||||||||||
|
Home
equity
line
of credit
|
515 | 9.9 | % | 482 | 7.9 | % | 491 | 8.1 | % | 470 | 8.8 | % | 560 | 10.8 | % | |||||||||||||||||||||||||
|
Consumer
|
716 | 2.5 | % | 662 | 2.5 | % | 606 | 2.4 | % | 537 | 2.3 | % | 483 | 2.5 | % | |||||||||||||||||||||||||
|
Unallocated
|
1,855 | 0.0 | % | 676 | 0.0 | % | 244 | 0.0 | % | 105 | 0.0 | % | 262 | 0.0 | % | |||||||||||||||||||||||||
|
Total
|
$ | 13,637 | 100.0 | % | $ | 8,800 | 100.0 | % | $ | 6,800 | 100.0 | % | $ | 6,364 | 100.0 | % | $ | 6,086 | 100.0 | % | ||||||||||||||||||||
Based
upon Management’s evaluation, provisions are made to maintain the allowance as a
best estimate of inherent losses within the portfolio. The provision for loan
losses to maintain the allowance was $12.2 million in 2009 compared to $4.7
million in 2008. Net chargeoffs were $7.3 million in 2009 compared to net
chargeoffs of $2.7 million in 2008. Our allowance as a percentage of outstanding
loans has increased from 0.90% as of December 31, 2008 to 1.43% as of December
31, 2009, reflecting the changes in our loss estimates and the increases
resulting from the application of our loss estimate
methodology.
The First
Bancorp 2009 Form 10-k
Page
33
The
following table summarizes the activities in our allowance for loan losses as of
December 31, 2009, 2008, 2007, 2006 and 2005:
|
As
of December 31,
|
||||||||||||||||||||
|
Dollars
in thousands
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Balance
at beginning of year
|
$ | 8,800 | $ | 6,800 | $ | 6,364 | $ | 6,086 | $ | 4,714 | ||||||||||
|
Acquisition
of FNB Bankshares
|
- | - | - | - | 2,066 | |||||||||||||||
|
Loans
charged off:
|
||||||||||||||||||||
|
Commercial
|
||||||||||||||||||||
|
Real
estate
|
2,430 | 3 | 27 | 2 | - | |||||||||||||||
|
Construction
|
- | - | - | - | - | |||||||||||||||
|
Other
|
2,329 | 1,997 | 477 | 854 | 473 | |||||||||||||||
|
Municipal
|
- | - | - | - | - | |||||||||||||||
|
Residential
|
||||||||||||||||||||
|
Term
|
1,767 | 113 | 13 | 42 | 256 | |||||||||||||||
|
Construction
|
47 | - | - | - | - | |||||||||||||||
|
Home
equity line of credit
|
177 | 83 | 50 | 21 | - | |||||||||||||||
|
Consumer
|
826 | 745 | 770 | 394 | 323 | |||||||||||||||
|
Total
|
7,576 | 2,941 | 1,337 | 1,313 | 1,052 | |||||||||||||||
|
Recoveries
on loans previously charged off
|
||||||||||||||||||||
|
Commercial
|
||||||||||||||||||||
|
Real
estate
|
- | - | - | 30 | 18 | |||||||||||||||
|
Construction
|
- | - | - | - | - | |||||||||||||||
|
Other
|
79 | 32 | 142 | 60 | 31 | |||||||||||||||
|
Municipal
|
- | - | - | - | - | |||||||||||||||
|
Residential
|
||||||||||||||||||||
|
Term
|
59 | 5 | 4 | 16 | - | |||||||||||||||
|
Construction
|
- | - | - | - | - | |||||||||||||||
|
Home
equity line of credit
|
1 | - | 21 | - | - | |||||||||||||||
|
Consumer
|
114 | 204 | 174 | 160 | 109 | |||||||||||||||
|
Total
|
253 | 241 | 341 | 266 | 158 | |||||||||||||||
|
Net
loans charged off
|
7,323 | 2,700 | 996 | 1,047 | 894 | |||||||||||||||
|
Provision
for loan losses
|
12,160 | 4,700 | 1,432 | 1,325 | 200 | |||||||||||||||
|
Balance
at end of period
|
$ | 13,637 | $ | 8,800 | $ | 6,800 | $ | 6,364 | $ | 6,086 | ||||||||||
|
Ratio
of net loans charged off to average loans outstanding
|
0.75 | % | 0.28 | % | 0.11 | % | 0.13 | % | 0.13 | % | ||||||||||
|
Ratio
of allowance for loan losses to total loans outstanding
|
1.43 | % | 0.90 | % | 0.74 | % | 0.76 | % | 0.79 | % | ||||||||||
Management
believes the allowance for loan losses is adequate as of December 31, 2009. In
Management’s opinion, the increase in provision for loan losses and the
corresponding increase in the allowance for loan losses is directionally
consistent with the deterioration in credit quality of our loan portfolio and
corresponding increased levels of specific reserves and unallocated reserves, as
well as with the performance of the national and local economies, higher levels
of unemployment and the outlook for the recession continuing for some time to
come.
The First
Bancorp 2009 Form 10-k
Page
34
Nonperforming
Loans
Nonperforming
loans are comprised of loans which have been determined to be impaired when,
based on current information and events, it is probable that we will be unable
to collect all amounts due according to the contractual terms of the loan
agreement. A loan is not considered impaired during a minimal period of delay in
payment if we expect to collect all amounts due, including past-due interest.
When a loan becomes nonperforming (generally 90 days past due), it is evaluated
for collateral dependency based upon the most recent appraisal. If the
collateral value is lower than the outstanding loan balance plus accrued
interest and estimated selling costs, the loan is placed on non-accrual status,
all accrued interest is reversed from interest income, and a specific reserve is
established for the difference between the loan balance and the collateral value
less selling costs. At the same time, a new independent, third-party appraisal
may be ordered, based on the currency of the most recent appraisal and the size
of the loan, and upon receipt of the revised appraisal – typically 30 days for
residential loans and 60-90 days for commercial loans – the loan may have an
additional specific reserve or write down based upon the new appraisal
information.
On an
ongoing basis, if a non-performing loan is collateral dependent as its source of
repayment, we may have an independent appraisal done periodically, based on the
currency of the most recent appraisal and the size of the loan, and an
additional specific reserve or write down based upon the new appraisal
information will be made if appropriate. Once a loan is placed on nonaccrual, it
remains in nonaccrual status until the loan is current as to payment of both
principal and interest and the borrower demonstrates the ability to pay and
remain current. All payments made on nonaccrual loans are applied to the
principal balance of the loan.
Nonperforming
loans, expressed as a percentage of total loans, totaled 1.95% at December 31,
2009 compared to 1.27% at December 31, 2008. The following table shows the
distribution of nonperforming assets and loans greater than 90 days past due as
of December 31, 2009, 2008, 2007, 2006 and 2005:
|
As
of December 31,
|
||||||||||||||||||||
|
Dollars
in thousands
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Commercial
|
||||||||||||||||||||
|
Real
estate
|
$ | 6,589 | $ | 7,477 | $ | 734 | $ | 1,105 | $ | 744 | ||||||||||
|
Construction
|
458 | - | - | - | - | |||||||||||||||
|
Other
|
2,735 | 2,908 | 2,011 | 2,285 | 1,697 | |||||||||||||||
|
Municipal
|
- | - | - | - | - | |||||||||||||||
|
Residential
|
||||||||||||||||||||
|
Term
|
6,322 | 6,594 | 2,109 | 606 | 914 | |||||||||||||||
|
Construction
|
3,182 | - | - | - | - | |||||||||||||||
|
Home
equity line of credit
|
143 | 313 | 299 | 190 | 20 | |||||||||||||||
|
Consumer
|
309 | 137 | 1 | 46 | 45 | |||||||||||||||
|
Total
loans 90 or more days past due
|
$ | 19,738 | $ | 17,429 | $ | 5,154 | $ | 4,232 | $ | 3,420 | ||||||||||
|
Non-accrual
loans included in above total
|
$ | 18,562 | $ | 12,449 | $ | 2,867 | $ | 3,485 | $ | 3,095 | ||||||||||
Impaired
loans increased $6.1 million from December 31, 2008 to December 31, 2009, with
the number of loans increasing by 58 from 81 to 139 during the same period.
Impaired commercial loans decreased $925,000 from December 31, 2008 to December
31, 2009. The specific allowance for impaired commercial loans increased from
$1.8 million at December 31, 2008 to $2.4 million as of December 31, 2009, which
represented the fair value deficiencies for those loans for which the net fair
value of the collateral was estimated at less than our carrying amount of the
loan. Impaired residential loans increased $3.7 million from December 31, 2008
to December 31, 2009, with the recession and resulting higher unemployment
leading to higher levels of delinquent borrowers. Impaired consumer loans were
up slightly from December 31, 2008 to December 31, 2009.
The First
Bancorp 2009 Form 10-k
Page
35
A
restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the
Bank, for economic or legal reasons related to the borrower’s financial
difficulties, grants a concession to the borrower that it would not otherwise
consider. To determine whether or not a loan should be classified as a TDR,
Management evaluates a loan based upon the following criteria:
|
·
|
The
borrower demonstrates financial difficulty; common indicators include past
due status with bank obligations, substandard credit bureau reports, or an
inability to refinance with another lender,
and
|
|
·
|
The
Bank has granted a concession; common concession types include maturity
date extension, interest rate adjustments to below market pricing, and
deferment of payments.
|
As of
December 31, 2009 we had 52 loans with a value of $8.4 million that have been
restructured due to the borrower’s inability to maintain a current status on the
loan that were classified as TDRs. This compares to no loans classified as TDRs
as of December 31, 2008. As of December 31, 2009, six of the loans classified as
TDRs with a total balance of $835,000 were greater than 30 days past due and one
loan with a balance of $234,000 was in the process of foreclosure. Management is
aware of only one TDR with a balance of $77,000 in which the borrower is in the
process of bankruptcy.
Potential
Problem Loans
Potential
problem loans consist of classified accruing commercial and commercial real
estate loans that were between 30 and 89 days past due. Such loans are
characterized by weaknesses in the financial condition of borrower or collateral
deficiencies. Based on historical experience, the credit quality of some of
these loans may improve due to changes in collateral values or the financial
condition of the borrower, while the credit quality of other loans may
deteriorate, resulting in some amount of loss. These loans are not included in
the analysis of non-accrual loans above. At December 31, 2009, there were 28
potential problem loans with a balance of $8.7 million or 0.9% of total loans.
This compares to 26 loans with a balance of $2.0 million or 0.2% of total loans
at December 31, 2008.
As of
December 31, 2009, there were 42 loans in the process of foreclosure with a
total balance of $8.0 million.
Past
Due Loans
The
Bank’s overall loan delinquency ratio was 3.14% at December 31, 2009, versus
2.99% at December 31, 2008. Loans 90 days delinquent and accruing decreased from
$5.0 million at December 31, 2008 to $1.2 million as of December 31, 2009. This
total is made up of 18 loans, with the largest loan totaling $391,000. We expect
to collect all amounts due on these loans, including interest.
The
following table sets forth loan delinquencies as of December 31, 2009, 2008,
2007, 2006 and 2005:
|
As
of December 31,
|
||||||||||||||||||||
|
Dollars
in thousands
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Commercial
|
||||||||||||||||||||
|
Real
estate
|
$ | 9,443 | $ | 10,446 | $ | 2,607 | $ | 2,326 | $ | 1,006 | ||||||||||
|
Construction
|
458 | 584 | 325 | 9 | - | |||||||||||||||
|
Other
|
3,607 | 4,713 | 8,393 | 5,575 | 4,331 | |||||||||||||||
|
Municipal
|
- | - | - | - | - | |||||||||||||||
|
Residential
|
||||||||||||||||||||
|
Term
|
11,747 | 11,526 | 8,803 | 4,067 | 3,093 | |||||||||||||||
|
Construction
|
3,182 | - | - | - | - | |||||||||||||||
|
Home
equity line of credit
|
682 | 1,423 | 872 | 627 | 729 | |||||||||||||||
|
Consumer
|
775 | 609 | 496 | 312 | 328 | |||||||||||||||
|
Total
|
$ | 29,894 | $ | 29,301 | $ | 21,496 | $ | 12,916 | $ | 9,487 | ||||||||||
|
Loans
30-89 days past due to total loans
|
1.26 | % | 1.21 | % | 1.78 | % | 1.04 | % | 0.79 | % | ||||||||||
|
Loans
90+ days past due and accruing to total loans
|
0.12 | % | 0.51 | % | 0.25 | % | 0.09 | % | 0.04 | % | ||||||||||
|
Loans
90+ days past due on non-accrual to total loans
|
1.76 | % | 1.27 | % | 0.31 | % | 0.42 | % | 0.40 | % | ||||||||||
|
Total
past due loans to total loans
|
3.14 | % | 2.99 | % | 2.34 | % | 1.54 | % | 1.23 | % | ||||||||||
The First
Bancorp 2009 Form 10-k
Page
36
Other
Real Estate Owned
Other
real estate owned and repossessed assets (“OREO”) are comprised of properties or
other assets acquired through a foreclosure proceeding, or acceptance of a deed
or title in lieu of foreclosure. Real estate acquired through foreclosure is
carried at the lower of fair value less estimated cost to sell. At December 31,
2009, there were 18 properties owned with a net OREO balance of $5.3 million,
net of an allowance for losses of $0.6 million, compared to December 31, 2008
when there were nine properties owned with a net OREO balance of $2.4 million,
net of an allowance for losses of $0.3 million. The following table presents the
composition of other real estate owned as of December 31, 2009, 2008, 2007, 2006
and 2005:
|
As
of December 31,
|
||||||||||||||||||||
|
Dollars
in thousands
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Carrying
Value
|
||||||||||||||||||||
|
Commercial
|
||||||||||||||||||||
|
Real
estate
|
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
|
Construction
|
1,182 | 1,172 | 1,152 | 950 | - | |||||||||||||||
|
Other
|
1,920 | 731 | - | 463 | - | |||||||||||||||
|
Municipal
|
- | - | - | - | - | |||||||||||||||
|
Residential
|
- | - | - | - | - | |||||||||||||||
|
Term
|
2,826 | 849 | - | - | - | |||||||||||||||
|
Construction
|
- | - | - | - | - | |||||||||||||||
|
Home
equity line of credit
|
- | - | - | - | - | |||||||||||||||
|
Consumer
|
- | - | - | - | - | |||||||||||||||
|
Total
|
$ | 5,928 | $ | 2,752 | $ | 1,152 | $ | 1,413 | $ | - | ||||||||||
|
Related
Allowance
|
||||||||||||||||||||
|
Commercial
|
||||||||||||||||||||
|
Real
estate
|
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
|
Construction
|
476 | 325 | 325 | 250 | - | |||||||||||||||
|
Other
|
- | - | - | 19 | - | |||||||||||||||
|
Municipal
|
- | - | - | - | - | |||||||||||||||
|
Residential
|
- | - | - | - | - | |||||||||||||||
|
Term
|
107 | - | - | - | - | |||||||||||||||
|
Construction
|
- | - | - | - | - | |||||||||||||||
|
Home
equity line of credit
|
- | - | - | - | - | |||||||||||||||
|
Consumer
|
- | - | - | - | - | |||||||||||||||
|
Total
|
$ | 583 | $ | 325 | $ | 325 | $ | 269 | $ | - | ||||||||||
|
Net
Value
|
||||||||||||||||||||
|
Commercial
|
||||||||||||||||||||
|
Real
estate
|
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
|
Construction
|
706 | 848 | 827 | 700 | - | |||||||||||||||
|
Other
|
1,920 | 731 | - | 444 | - | |||||||||||||||
|
Municipal
|
- | - | - | - | - | |||||||||||||||
|
Residential
|
- | - | - | - | - | |||||||||||||||
|
Term
|
2,719 | 849 | - | - | - | |||||||||||||||
|
Construction
|
- | - | - | - | - | |||||||||||||||
|
Home
equity line of credit
|
- | - | - | - | - | |||||||||||||||
|
Consumer
|
- | - | - | - | - | |||||||||||||||
|
Total
|
$ | 5,345 | $ | 2,428 | $ | 827 | $ | 1,144 | $ | - | ||||||||||
The First
Bancorp 2009 Form 10-k
Page
37
Funding, Liquidity and
Capital Resources
As of
December 31, 2009 the Bank had primary sources of liquidity of $206.8 million.
It is Management’s opinion that this is adequate. In addition, the Bank has an
additional $142.6 million in borrowing capacity under the Federal Reserve Bank
of Boston’s Borrower in Custody program, $18.0 million in credit lines with
correspondent banks, and $24.9 million in unencumbered securities available as
collateral for borrowing. These bring the Bank’s primary sources of liquidity to
$392.3 million. The Asset/Liability Committee (“ALCO”) establishes guidelines
for liquidity in its Asset/Liability policy and monitors internal liquidity
measures to manage liquidity exposure. Based on its assessment of the liquidity
considerations described above, Management believes the Company’s sources of
funding will meet anticipated funding needs.
Liquidity
is the ability of a financial institution to meet maturing liability obligations
and customer loan demand. The Bank’s primary source of liquidity is deposits,
which funded approximately 70% of total average assets in 2009. While the
generally preferred funding strategy is to attract and retain low cost deposits,
the ability to do so is affected by competitive interest rates and terms in the
marketplace. Other sources of funding include discretionary use of purchased
liabilities (e.g., FHLB term advances and other borrowings), cash flows from the
securities portfolios and loan repayments. Securities designated as available
for sale may also be sold in response to short-term or long-term liquidity needs
although Management has no intention to do so at this time.
The Bank
has a detailed liquidity funding policy and a contingency funding plan that
provide for the prompt and comprehensive response to unexpected demands for
liquidity. Management has developed quantitative models to estimate needs for
contingent funding that could result from unexpected outflows of funds in excess
of “business as usual” cash flows. In Management’s estimation, risks are
concentrated in two major categories: runoff of in-market deposit balances and
the inability to renew wholesale sources of funding. Of the two categories,
potential runoff of deposit balances would have the most significant impact on
contingent liquidity. Our modeling attempts to quantify deposits at risk over
selected time horizons. In addition to these unexpected outflow risks, several
other “business as usual” factors enter into the calculation of the adequacy of
contingent liquidity including payment proceeds from loans and investment
securities, maturing debt obligations and maturing time deposits. The Bank has
established collateralized borrowing capacity with the Federal Reserve Bank of
Boston and also maintains additional collateralized borrowing capacity with the
FHLB in excess of levels used in the ordinary course of business as well as Fed
Funds lines with two correspondent banks.
Deposits
During
2009, total deposits decreased by $3.0 million or 0.3%, ending the year at
$922.7 million compared to $925.7 million at December 31, 2008. This decrease
was primarily due to a decrease in money market accounts. Average deposits,
however, increased $94.6 million in 2009, as shown in the following table which
sets forth the average daily balance for the Bank’s principal deposit categories
for each period:
|
Years ended December 31,
|
%
change
|
|||||||||||||||
|
Dollars
in thousands
|
2009
|
2008
|
2007
|
2009
vs. 2008
|
||||||||||||
|
Demand
deposits
|
$ | 65,567 | $ | 63,495 | $ | 61,678 | 3.26 | % | ||||||||
|
NOW
accounts
|
106,895 | 105,689 | 102,083 | 1.14 | % | |||||||||||
|
Money
market accounts
|
108,922 | 123,699 | 125,370 | -11.95 | % | |||||||||||
|
Savings
|
87,921 | 86,018 | 91,967 | 2.21 | % | |||||||||||
|
Certificates
of deposit
|
578,713 | 474,517 | 438,131 | 21.96 | % | |||||||||||
|
Total
deposits
|
$ | 948,018 | $ | 853,418 | $ | 819,229 | 11.08 | % | ||||||||
The First
Bancorp 2009 Form 10-k
Page
38
The
average cost of deposits (including non-interest-bearing accounts) was 1.25% for
the year ended December 31, 2009, compared to 2.69% for the year ended December
31, 2008 and 3.75% for the year ended December 31, 2007. The following table
sets forth the average cost of each category of interest-bearing deposits for
the periods indicated.
|
Years ended December 31,
|
|||
|
2009
|
2008
|
2007
|
|
|
NOW
|
0.35%
|
0.63%
|
0.66%
|
|
Money
market
|
1.07%
|
2.88%
|
4.82%
|
|
Savings
|
0.62%
|
0.97%
|
1.12%
|
|
Certificates
of deposit
|
1.75%
|
3.78%
|
5.12%
|
|
Total
interest-bearing deposits
|
1.35%
|
2.90%
|
3.93%
|
Of all
certificates of deposit, $452.1 million or 81.3% will mature by December 31,
2010. As of December 31, 2009, the Bank held a total of $343.2 million in
certificate of deposit accounts with balances in excess of $100,000. The
following table summarizes the time remaining to maturity for these certificates
of deposit:
|
As of December 31,
|
||||||||
|
Dollars
in thousands
|
2009
|
2008
|
||||||
|
Within
3 Months
|
$ | 184,574 | $ | 214,491 | ||||
|
3
Months through 6 months
|
94,778 | 35,475 | ||||||
|
6
months through 12 months
|
27,709 | 22,631 | ||||||
|
Over
12 months
|
36,143 | 18,200 | ||||||
|
Total
|
$ | 343,204 | $ | 290,797 | ||||
Borrowed
Funds
Borrowed
funds consists mainly of advances from the Federal Home Loan Bank of Boston
(FHLB) which are secured by FHLB stock, funds on deposit with FHLB, U.S.
Treasury and Agency notes and mortgage-backed securities and qualifying first
mortgage loans. As of December 31, 2009, the Bank’s total FHLB borrowing
capacity was $253.4 million, of which $54.0 million was unused. As of December
31, 2009, advances totaled $199.4 million, with a weighted average interest rate
of 2.90% and remaining maturities ranging from three days to 15 years. This
compares to advances totaling $220.4 million, with a weighted average interest
rate of 3.38% and remaining maturities ranging from two days to 16 years, as of
December 31, 2008. During 2009, the Bank shifted a portion of its funding from
borrowed funds to wholesale certificates of deposit to increase the Bank’s
immediate sources of liquidity by increasing collateral capacity at the FHLB.
The decrease in the weighted average rate paid on borrowed funds in 2009
compared to 2008 is consistent with the interest rate policy and actions of the
FOMC.
The Bank
offers securities repurchase agreements to municipal and corporate customers as
an alternative to deposits. The balance of these agreements as of December 31,
2009 was $49.7 million, compared to $48.8 million on December 31, 2008, and
$41.1 million on December 31, 2007. The weighted average rates of these
agreements were 1.57% as of December 31, 2009, compared to 2.12% as of December
31, 2008 and 3.46% as of December 31, 2007.
The Bank
participates in the Note Option Depository which is offered by the U.S. Treasury
Department. Under the Treasury Tax and Loan Note program, the Bank accumulates
tax deposits made by its customers and is eligible to receive additional
Treasury Direct investments up to an established maximum balance of $5.0
million. The balances invested by the Treasury are increased and decreased at
the discretion of the Treasury. The deposits are generally made at interest
rates that are favorable in comparison to other borrowings. The balances on the
Treasury Tax and Loan note at December 31, 2009, 2008, and 2007 were $0.6
million, $2.9 million, and $2.0 million, respectively.
The
maximum amount of borrowed funds outstanding at any month-end during each of the
last three years was $306.5 million at the end of February in 2009, $331.7
million at the end of January in 2008, and $316.7 million at the end of December
in 2007. The average amount outstanding during 2009 was $248.3 million with a
weighted average interest rate of 2.84%. This compares to an average outstanding
amount of $293.7 million with a weighted average interest rate of 3.62% in 2008,
and an average outstanding amount of $215.4 million with a weighted average
interest rate of 4.71% in 2007. The decline in average cost realized during 2009
is consistent with the interest rate policy and actions of the
FOMC.
The First
Bancorp 2009 Form 10-k
Page
39
Capital
Resources
Shareholders’
equity as of December 31, 2009 was $147.9 million, compared to $117.2 million as
of December 31, 2008. The Company’s earnings for 2009, net of
dividends paid, plus participation in the U.S. Treasury Capital Purchase Program
(“CPP”), added to shareholders’ equity. The net unrealized loss on
available-for-sale securities, presented in accordance with FASB ASC Topic 740
“Investments – Debt and Equity Securities”, decreased by $0.7 million from
December 31, 2008.
Capital
at December 31, 2009 was sufficient to meet the requirements of regulatory
authorities. Leverage capital of the Company, or total shareholders’ equity
divided by average total assets for the current quarter less goodwill and any
net unrealized gain or loss on securities available for sale and postretirement
benefits, stood at 9.44% on December 31, 2009 and 7.07% at December 31, 2008. To
be rated “well-capitalized”, regulatory requirements call for a minimum leverage
capital ratio of 5.00%. At December 31, 2009, the Company had tier-one
risk-based capital of 13.70% and tier-two risk-based capital of 14.96%, versus
10.11% and 11.13%, respectively, at December 31, 2008. To be rated
“well-capitalized”, regulatory requirements call for minimum tier-one and
tier-two risk-based capital ratios of 6.00% and 10.00%, respectively. The
Company’s actual levels of capitalization were comfortably above the standards
to be rated “well-capitalized” by regulatory authorities.
During
2009, the Company declared cash dividends of $0.195 per share in each quarter or
$0.78 per share for the year. The Company’s dividend payout ratio (dividends
declared per share divided by earnings per share) was 63.93% of earnings in 2009
compared to 52.76% in 2008 and 51.49% in 2007. The ability of the Company to pay
cash dividends to its Shareholders depends on receipt of dividends from its
subsidiary, the Bank. A total of $8.6 million in dividends was declared in 2009
from the Bank to the Company.
In
determining future dividend payout levels, the Board of Directors carefully
analyzes capital requirements and earnings retention, as set forth in the
Company’s Dividend Policy. The Bank may pay dividends to the Company out of so
much of its net profits as the Bank’s directors deem appropriate, subject to the
limitation that the total of all dividends declared by the Bank in any calendar
year may not exceed the total of its net profits of that year combined with its
retained net profits of the preceding two years. Based upon this restriction,
the amount available for dividends in 2010 will be that year’s net income plus
$11.8 million. The payment of dividends from the Bank to the Company may be
additionally restricted if the payment of such dividends resulted in the Bank
failing to meet regulatory capital requirements. Also, pursuant to restrictions
applicable to the Company as a consequence of its participation in the CPP
program discussed below, the Company may not increase its quarterly dividend
above $0.195 per share during the first three years that the CPP shares are
outstanding without the consent of the U.S. Treasury.
In 2009,
21,000 shares of common stock were issued in conjunction with the exercise of
stock options for consideration totaling $134,000 and 42,698 shares were issued
via employee stock programs and the dividend reinvestment plan during the year
for consideration totaling $702,000. The Company also purchased 15,925 shares of
common stock for total consideration of $263,000 during the year.
On
November 21, 2008, the Company received approval for a $25.0 million preferred
stock investment by the U.S. Treasury under the Capital Purchase Program. The
Company completed the CPP investment transaction on January 9, 2009. The CPP
Shares call for cumulative dividends at a rate of 5.0% per year for the first
five years, and at a rate of 9.0% per year in following years. The CPP Shares
qualify as Tier 1 capital on the Company’s books for regulatory purposes and
will rank senior to the Company’s common stock and senior or at an equal level
in the Company’s capital structure to any other shares of preferred stock the
Company may issue in the future. During the first three years these securities
remain outstanding, the Company may increase the dividend on shares of its
common stock only with the consent of the U.S. Treasury.
On August
16, 2007, the Company announced that its Board of Directors had authorized a
program for the repurchase of up to 300,000 shares of the Company’s common stock
or approximately 3.1% of the outstanding shares. This program ended on August
16, 2009 and under the program the Company repurchased 182,869 shares at an
average price of $15.63 and at a total cost of $2.9 million. As a consequence of
the Company’s issuance of securities under the U.S. Treasury’s CPP program, its
ability to repurchase stock while such securities remain outstanding is
restricted to purchases from employee benefit plans. In 2009, the Company
repurchased 11,412 shares from employee benefit plans at an average price of
$14.73 per share and for total proceeds of $168,000.
Except as
identified in Item 1A, “Risk Factors”, Management knows of no present trends,
events or uncertainties that will have, or are reasonably likely to have, a
material effect on capital resources, liquidity, or results of
operations.
The First
Bancorp 2009 Form 10-k
Page
40
Goodwill
On
January 14, 2005, the Company completed the acquisition of FNB Bankshares of Bar
Harbor, Maine, and its subsidiary, The First National Bank of Bar Harbor, which
was merged into the Bank. The total value of the transaction was $48.0 million,
and all of the voting equity interest of FNB Bankshares was acquired in the
transaction. As of December 31, 2009, the Company completed its annual review of
goodwill and determined there has been no impairment.
Contractual
Obligations
The
following table sets forth the contractual obligations and commitments to extend
credit of the Company as of December 31, 2009:
|
Dollars
in thousands
|
Total
|
Less
than
1
year
|
1-3
years
|
3-5
years
|
More
than 5 years
|
|||||||||||||||
|
Borrowed
funds
|
$ | 249,778 | 149,601 | 20,000 | 30,000 | 50,177 | ||||||||||||||
|
Operating
leases
|
907 | 190 | 334 | 131 | 252 | |||||||||||||||
|
Certificates
of deposit
|
556,097 | 452,129 | 56,379 | 47,589 | - | |||||||||||||||
|
Total
|
$ | 806,782 | 601,920 | 76,713 | 77,720 | 50,429 | ||||||||||||||
|
Unused
lines, collateralized by residential real estate
|
$ | 58,751 | 58,751 | - | - | - | ||||||||||||||
|
Other
unused commitments
|
76,125 | 76,125 | - | - | - | |||||||||||||||
|
Standby
letters of credit
|
3,449 | 3,449 | - | - | - | |||||||||||||||
|
Commitments
to extend credit
|
4,512 | 4,512 | - | - | - | |||||||||||||||
|
Total
loan commitments and unused lines of credit
|
$ | 142,837 | 142,837 | - | - | - | ||||||||||||||
The
Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
include commitments to originate loans, commitments for unused lines of credit,
and standby letters of credit. The instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the consolidated
balance sheets. Commitments for unused lines are agreements to lend to a
customer provided there is no violation of any condition established in the
contract and generally have fixed expiration dates. Standby letters of credit
are conditional commitments issued by the Bank to guarantee a customer’s
performance to a third party. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loans to customers.
As of December 31, 2009, the Company’s off-balance-sheet activities consisted
entirely of commitments to extend credit.
Off-Balance Sheet Financial
Instruments
No
material off-balance sheet risk exists that requires a separate liability
presentation.
Capital
Purchases
In 2009,
the Company made capital purchases totaling $3.8 million. This cost will be
amortized over an average of seven years, adding approximately $543,000 to
pre-tax operating costs per year. The capital purchases included real estate
improvements for branch premises and equipment related to
technology.
Effect of Future Interest
Rates on Post-retirement Benefit Liabilities
In
evaluating the Company’s post-retirement benefit liabilities, Management
believes changes in discount rates which have occurred pursuant to newly enacted
Federal legislation will not have a significant impact on the Company’s future
operating results or financial condition.
The First
Bancorp 2009 Form 10-k
Page
41
Market
risk is the risk of loss arising from adverse changes in the fair value of
financial instruments due to changes in interest rates, and the Company’s market
risk is composed primarily of interest rate risk. The Bank’s Asset/Liability
Committee (ALCO) is responsible for reviewing the interest rate sensitivity
position of the Company and establishing policies to monitor and limit exposure
to interest rate risk. All guidelines and policies established by ALCO have been
approved by the Board of Directors.
Asset/Liability
Management
The
primary goal of asset/liability management is to maximize net interest income
within the interest rate risk limits set by ALCO. Interest rate risk is
monitored through the use of two complementary measures: static gap analysis and
earnings simulation modeling. While each measurement has limitations, taken
together they present a reasonably comprehensive view of the magnitude of
interest rate risk in the Company, the level of risk through time, and the
amount of exposure to changes in certain interest rate
relationships.
Static
gap analysis measures the amount of repricing risk embedded in the balance sheet
at a point in time. It does so by comparing the differences in the repricing
characteristics of assets and liabilities. A gap is defined as the difference
between the principal amount of assets and liabilities which reprice within a
specified time period. The cumulative one-year gap, at year-end, was +0.72% of
total assets, which compares to -8.95% of assets at December 31, 2008. ALCO’s
policy limit for the one-year gap is plus or minus 20% of total assets. Core
deposits with non-contractual maturities are presented based upon historical
patterns of balance attrition which are reviewed at least annually.
The gap
repricing distributions include principal cash flows from residential mortgage
loans and mortgage-backed securities in the time frames in which they are
expected to be received. Mortgage prepayments are estimated by applying industry
median projections of prepayment speeds to portfolio segments based on coupon
range and loan age.
The
Company’s summarized static gap, as of December 31, 2009, is presented in the
following table:
| 0-90 | 90-365 | 1-5 | 5+ | |||||||||||||
|
Dollars in
thousands
|
Days
|
Days
|
Years
|
Years
|
||||||||||||
|
Investment
securities at amortized cost
|
$ | 28,564 | $ | 69,880 | $ | 98,862 | $ | 75,260 | ||||||||
|
Federal
Home Loan Bank and Federal Reserve Bank Stock, at cost
|
14,031 | - | - | 1,412 | ||||||||||||
|
Loans
held for sale
|
- | - | - | 2,876 | ||||||||||||
|
Loans
|
426,650 | 157,308 | 280,994 | 87,540 | ||||||||||||
|
Other
interest-earning assets
|
- | 9,492 | - | - | ||||||||||||
|
Non-rate-sensitive
assets
|
8,115 | - | - | 70,410 | ||||||||||||
|
Total
assets
|
477,360 | 236,680 | 379,856 | 237,498 | ||||||||||||
|
Interest-bearing
deposits
|
325,829 | 221,275 | 103,471 | 205,775 | ||||||||||||
|
Borrowed
funds
|
79,604 | 70,008 | 40,047 | 60,119 | ||||||||||||
|
Non-rate-sensitive
liabilities and equity
|
1,850 | 5,850 | 38,800 | 178,766 | ||||||||||||
|
Total
liabilities and equity
|
407,283 | 297,133 | 182,318 | 444,660 | ||||||||||||
|
Period
gap
|
$ | 70,077 | $ | (60,453 | ) | $ | 197,538 | $ | (207,162 | ) | ||||||
|
Percent
of total assets
|
5.26 | % | -4.54 | % | 14.84 | % | -15.56 | % | ||||||||
|
Cumulative
gap (current)
|
70,077 | 9,624 | 207,162 | - | ||||||||||||
|
Percent
of total assets
|
5.26 | % | 0.72 | % | 15.56 | % | 0.00 | % | ||||||||
The
earnings simulation model forecasts one- and two-year net interest income under
a variety of scenarios that incorporate changes in the absolute level of
interest rates as well as basis risk, as represented by changes in the shape of
the yield curve and changes in interest rate relationships. Management evaluates
the effects on income of alternative interest rate scenarios against earnings in
a stable interest rate environment. This analysis is also most useful in
determining the short-run earnings exposures to changes in customer behavior
involving loan payments and deposit additions and withdrawals.
The most
recent simulation model projects net interest income would decrease by
approximately 0.1% of stable-rate net interest income if short-term rates fall
gradually by one percentage point over the next year, and decrease by
approximately 1.0% if short-term rates rise gradually by two percentage points.
Both scenarios are within ALCO’s policy limit of a decrease in net interest
income of no more than 10.0% given a move in interest rates of 2.0% up or 1.0%
down, in the first year. Management believes this reflects a reasonable interest
rate risk position. Within a two-year horizon and assuming no additional change
in interest rates, the model forecasts that net interest income would
be
The First
Bancorp 2009 Form 10-k
Page
42
lower
than that earned in a stable rate environment by 0.8% in a falling rate scenario
and decrease by 4.4% in a rising rate scenario.
The
change in net interest income projections between December 31, 2009, and
December 31, 2008, is attributable to the change in the Company’s mix of assets
and liabilities, as well as lowering of interest rates by the FOMC and the
corresponding steepening of the yield curve which occurred in 2008 and 2009. A
summary of the Company’s interest rate risk simulation modeling, as of December
31, 2009 and 2008 is presented in the following table:
|
Changes
in Net Interest Income
|
2009
|
2008
|
|
Year
1
|
||
|
Projected
changes if rates decrease by 1.0%
|
-0.1%
|
+1.8%
|
|
Projected
change if rates increase by 2.0%
|
-1.0%
|
-1.2%
|
|
Year
2
|
||
|
Projected
changes if rates decrease by 1.0%
|
-0.8%
|
-.0.5%
|
|
Projected
change if rates increase by 2.0%
|
-4.4%
|
-6.4%
|
This
dynamic simulation model includes assumptions about how the balance sheet is
likely to evolve through time and in different interest rate environments. Loans
and deposits are projected to maintain stable balances. All maturities, calls
and prepayments in the securities portfolio are assumed to be reinvested in
similar assets. Mortgage loan prepayment assumptions are developed from industry
median estimates of prepayment speeds for portfolios with similar coupon ranges
and seasoning. Non-contractual deposit volatility and pricing are assumed to
follow historical patterns. The sensitivities of key assumptions are analyzed
annually and reviewed by ALCO.
Interest Rate Risk
Management
A variety
of financial instruments can be used to manage interest rate sensitivity. These
may include the securities in the investment portfolio, interest rate swaps, and
interest rate caps and floors. Frequently called interest rate derivatives,
interest rate swaps, caps and floors have characteristics similar to securities
but possess the advantages of customization of the risk-reward profile of the
instrument, minimization of balance sheet leverage and improvement of liquidity.
As of December 31, 2009, the Company had a de diminimus interest rate cap for
interest rate risk management.
Management
believes that the current level of interest rate risk is acceptable as of
December 31, 2009. The Company engages an independent consultant to periodically
review its interest rate risk position, as well as the effectiveness of
simulation modeling and reasonableness of assumptions used. As of December 31,
2009, there were no significant differences between the views of the independent
consultant and Management regarding the Company’s interest rate risk
exposure.
The First
Bancorp 2009 Form 10-k
Page
43
The
First Bancorp, Inc. and Subsidiary
|
As
of December 31,
|
2009
|
2008
|
||||||
|
Assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 15,332,000 | $ | 16,856,000 | ||||
|
Securities
available for sale
|
81,838,000 | 13,072,000 | ||||||
|
Securities
to be held to maturity, fair value of $192,838,000
at
December 31, 2009, and $229,460,000 at December 31, 2008
|
190,537,000 | 234,767,000 | ||||||
|
Federal
Home Loan Bank and Federal Reserve Bank stock, at cost
|
15,443,000 | 14,693,000 | ||||||
|
Loans
held for sale
|
2,876,000 | 1,298,000 | ||||||
|
Loans
|
952,492,000 | 979,273,000 | ||||||
|
Less
allowance for loan losses
|
13,637,000 | 8,800,000 | ||||||
|
Net
loans
|
938,855,000 | 970,473,000 | ||||||
|
Accrued
interest receivable
|
4,889,000 | 5,783,000 | ||||||
|
Premises
and equipment, net
|
18,331,000 | 16,028,000 | ||||||
|
Other
real estate owned
|
5,345,000 | 2,428,000 | ||||||
|
Goodwill
|
27,684,000 | 27,684,000 | ||||||
|
Other
assets
|
30,264,000 | 22,662,000 | ||||||
|
Total
assets
|
$ | 1,331,394,000 | $ | 1,325,744,000 | ||||
|
Liabilities
|
||||||||
|
Demand
deposits
|
$ | 66,317,000 | $ | 68,399,000 | ||||
|
NOW
deposits
|
114,955,000 | 108,188,000 | ||||||
|
Money
market deposits
|
94,425,000 | 129,333,000 | ||||||
|
Savings
deposits
|
90,873,000 | 82,867,000 | ||||||
|
Certificates
of deposit under $100,000
|
212,893,000 | 246,152,000 | ||||||
|
Certificates
of deposit $100,000 or more
|
343,204,000 | 290,797,000 | ||||||
|
Total
deposits
|
922,667,000 | 925,736,000 | ||||||
|
Borrowed
funds
|
249,778,000 | 272,074,000 | ||||||
|
Other
liabilities
|
11,011,000 | 10,753,000 | ||||||
|
Total
liabilities
|
1,183,456,000 | 1,208,563,000 | ||||||
|
Commitments
and contingent liabilities (notes 12, 15, 19 and 20)
|
||||||||
|
Shareholders’ equity
|
||||||||
|
Preferred
stock, $1,000 preference value per share
|
24,606,000 | - | ||||||
|
Common
stock, one cent par value per share
|
97,000 | 97,000 | ||||||
|
Additional
paid-in capital
|
45,121,000 | 44,117,000 | ||||||
|
Retained
earnings
|
78,450,000 | 74,057,000 | ||||||
|
Accumulated
other comprehensive loss
|
||||||||
|
Net
unrealized loss on securities available for sale, net of
tax
benefit of $67,000 in 2009 and $441,000 in 2008
|
(125,000 | ) | (819,000 | ) | ||||
|
Net
unrealized loss on post-retirement benefit costs,
net
of tax benefit of $114,000 in 2009 and $146,000 in 2008
|
(211,000 | ) | (271,000 | ) | ||||
|
Total
shareholders’ equity
|
147,938,000 | 117,181,000 | ||||||
|
Total
liabilities and shareholders’ equity
|
$ | 1,331,394,000 | $ | 1,325,744,000 | ||||
|
Common stock
|
||||||||
|
Number
of shares authorized
|
18,000,000 | 18,000,000 | ||||||
|
Number
of shares issued
|
9,744,170 | 9,696,397 | ||||||
|
Number
of shares outstanding
|
9,744,170 | 9,696,397 | ||||||
|
Book
value per share
|
$ | 12.66 | $ | 12.09 | ||||
|
The
accompanying notes are an integral part of these consolidated financial
statements
|
||||||||
The First
Bancorp 2009 Form 10-k
Page
44
The
First Bancorp, Inc. and Subsidiary
|
Years
ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
Interest
and dividend income
|
||||||||||||
|
Interest
and fees on loans (includes tax-exempt income of
$1,472,000
in 2009, $1,245,000 in 2008, and $1,179,000 in 2007)
|
$ | 49,277,000 | $ | 58,079,000 | $ | 60,585,000 | ||||||
|
Interest
on deposits with other banks
|
1,000 | 3,000 | - | |||||||||
|
Interest
and dividends on investments (includes tax-exempt income of $2,980,000 in
2009, $2,820,000 in 2008, and $2,685,000 in 2007)
|
13,291,000 | 13,290,000 | 11,136,000 | |||||||||
|
Total
interest and dividend income
|
62,569,000 | 71,372,000 | 71,721,000 | |||||||||
|
Interest
expense
|
||||||||||||
|
Interest
on deposits
|
11,872,000 | 23,000,000 | 29,745,000 | |||||||||
|
Interest
on borrowed funds
|
7,044,000 | 10,669,000 | 10,140,000 | |||||||||
|
Total
interest expense
|
18,916,000 | 33,669,000 | 39,885,000 | |||||||||
|
Net
interest income
|
43,653,000 | 37,703,000 | 31,836,000 | |||||||||
|
Provision
for loan losses
|
12,160,000 | 4,700,000 | 1,432,000 | |||||||||
|
Net
interest income after provision for loan losses
|
31,493,000 | 33,003,000 | 30,404,000 | |||||||||
|
Non-interest
income
|
||||||||||||
|
Fiduciary
and investment management income
|
1,331,000 | 1,475,000 | 1,737,000 | |||||||||
|
Service
charges on deposit accounts
|
2,516,000 | 2,837,000 | 2,740,000 | |||||||||
|
Net
securities gains
|
- | - | 2,000 | |||||||||
|
Mortgage
origination and servicing income
|
2,341,000 | 145,000 | 589,000 | |||||||||
|
Other
operating income
|
6,566,000 | 5,189,000 | 5,077,000 | |||||||||
|
Total
non-interest income
|
12,754,000 | 9,646,000 | 10,145,000 | |||||||||
|
Non-interest
expense
|
||||||||||||
|
Salaries
and employee benefits
|
10,935,000 | 11,333,000 | 11,037,000 | |||||||||
|
Occupancy
expense
|
1,580,000 | 1,518,000 | 1,438,000 | |||||||||
|
Furniture
and equipment expense
|
2,273,000 | 2,005,000 | 1,944,000 | |||||||||
|
FDIC
insurance premiums
|
1,666,000 | 402,000 | 97,000 | |||||||||
|
Net
securities losses
|
150,000 | 89,000 | - | |||||||||
|
Other
than temporary impairment charge
|
916,000 | - | - | |||||||||
|
Amortization
of core deposit intangible
|
283,000 | 283,000 | 283,000 | |||||||||
|
Other
operating expenses
|
8,855,000 | 7,364,000 | 7,384,000 | |||||||||
|
Total
non-interest expense
|
26,658,000 | 22,994,000 | 22,183,000 | |||||||||
|
Income
before income taxes
|
17,589,000 | 19,655,000 | 18,366,000 | |||||||||
|
Income
tax expense
|
4,547,000 | 5,621,000 | 5,265,000 | |||||||||
|
Net
income
|
$ | 13,042,000 | $ | 14,034,000 | $ | 13,101,000 | ||||||
|
Less
dividends and amortization of premium on preferred stock
|
1,161,000 | - | - | |||||||||
|
Net
income available to common shareholders
|
$ | 11,881000 | $ | 14,034,000 | $ | 13,101,000 | ||||||
|
Earnings
per common share
|
||||||||||||
|
Basic
earnings per share
|
$ | 1.22 | $ | 1.45 | $ | 1.34 | ||||||
|
Diluted
earnings per share
|
1.22 | 1.44 | 1.34 | |||||||||
|
Cash
dividends declared per share
|
0.780 | 0.765 | 0.690 | |||||||||
|
Weighted
average number of shares outstanding
|
9,721,172 | 9,701,379 | 9,787,287 | |||||||||
|
Incremental
shares
|
12,072 | 18,952 | 25,731 | |||||||||
|
The
accompanying notes are an integral part of these consolidated financial
statements
|
||||||||||||
The First
Bancorp 2009 Form 10-k
Page
45
Consolidated Statements of
Changes in Shareholders’ Equity
The
First Bancorp, Inc. and Subsidiary
|
Common
stock and
|
Accumulated other
|
Total
|
||||||||||||||||||||||
|
Preferred
|
additional
paid-in capital
|
Retained
|
comprehensive
|
shareholders’
|
||||||||||||||||||||
|
stock
|
Shares
|
Amount
|
earnings
|
income
(loss)
|
equity
|
|||||||||||||||||||
|
Balance
at December 31, 2006
|
$ | - | 9,770,792 | $ | 45,685,000 | $ | 61,298,000 | $ | 344,000 | $ | 107,327,000 | |||||||||||||
|
Net
income
|
- | - | - | 13,101,000 | - | 13,101,000 | ||||||||||||||||||
|
Net
unrealized loss on securities available for sale, net of tax benefit of
$100,000
|
- | - | - | - | (260,000 | ) | (260,000 | ) | ||||||||||||||||
|
Unrecognized
actuarial gain
for
post-retirement benefits,
net
of taxes of $42,000
|
- | - | - | - | 78,000 | 78,000 | ||||||||||||||||||
|
Comprehensive
income
|
- | - | - | 13,101,000 | (182,000 | ) | 12,919,000 | |||||||||||||||||
|
Cash
dividends declared
|
- | - | - | (6,752,000 | ) | - | (6,752,000 | ) | ||||||||||||||||
|
Equity
compensation expense
|
- | - | 59,000 | - | - | 59,000 | ||||||||||||||||||
|
Payment
to repurchase common stock
|
- | (109,860 | ) | (1,687,000 | ) | - | - | (1,687,000 | ) | |||||||||||||||
|
Proceeds
from sale of common stock
|
- | 71,561 | 802,000 | - | - | 802,000 | ||||||||||||||||||
|
Change
in accounting for split dollar life insurance arrangements
|
- | - | - | (215,000 | ) | - | (215,000 | ) | ||||||||||||||||
|
Balance
at December 31, 2007
|
$ | - | 9,732,493 | $ | 44,859,000 | $ | 67,432,000 | $ | 162,000 | $ | 112,453,000 | |||||||||||||
|
Net
income
|
- | - | - | 14,034,000 | - | 14,034,000 | ||||||||||||||||||
|
Net
unrealized loss on securities available for sale, net of tax benefit of
$675,000
|
- | - | - | - | (1,255,000 | ) | (1,255,000 | ) | ||||||||||||||||
|
Unrecognized
actuarial gain
for
post-retirement benefits,
net
of taxes of $1,000
|
- | - | - | - | 3,000 | 3,000 | ||||||||||||||||||
|
Comprehensive
income
|
- | - | - | 14,034,000 | (1,252,000 | ) | 12,782,000 | |||||||||||||||||
|
Cash
dividends declared
|
- | - | - | (7,416,000 | ) | - | (7,416,000 | ) | ||||||||||||||||
|
Equity
compensation expense
|
- | - | 37,000 | - | - | 37,000 | ||||||||||||||||||
|
Payment
to repurchase common stock
|
- | (88,764 | ) | (1,414,000 | ) | - | - | (1,414,000 | ) | |||||||||||||||
|
Proceeds
from sale of common stock
|
- | 52,668 | 732,000 | - | - | 732,000 | ||||||||||||||||||
|
Tax
benefit of disqualifying disposition of stock option
shares
|
- | - | - | 7,000 | - | 7,000 | ||||||||||||||||||
|
Balance
at December 31, 2008
|
$ | - | 9,696,397 | $ | 44,214,000 | $ | 74,057,000 | $ | (1,090,000 | ) | $ | 117,181,000 | ||||||||||||
|
Net
income
|
- | - | - | 13,042,000 | - | 13,042,000 | ||||||||||||||||||
|
Net
unrealized gain on securities available for sale, net of
taxes
of
$374,000
|
- | - | - | - | 694,000 | 694,000 | ||||||||||||||||||
|
Unrecognized
actuarial gain
for
post-retirement benefits, net of tax benefit of $32,000
|
- | - | - | - | 60,000 | 60,000 | ||||||||||||||||||
|
Comprehensive
income
|
- | - | - | 13,042,000 | 754,000 | 13,796,000 | ||||||||||||||||||
|
Cash
dividends declared
|
- | - | - | (8,649,000 | ) | - | (8,649,000 | ) | ||||||||||||||||
|
Equity
compensation expense
|
- | - | 37,000 | - | - | 37,000 | ||||||||||||||||||
|
Proceeds
from sale of preferred stock
|
25,000,000 | - | - | - | - | 25,000,000 | ||||||||||||||||||
|
Premium
on preferred stock issuance
|
(493,000 | ) | - | 493,000 | - | - | - | |||||||||||||||||
|
Amortization
of premium on preferred stock
|
99,000 | - | (99,000 | ) | - | - | - | |||||||||||||||||
|
Payment
to repurchase common stock
|
- | (15,925 | ) | (263,000 | ) | - | - | (263,000 | ) | |||||||||||||||
|
Proceeds
from sale of common stock
|
- | 63,698 | 836,000 | - | - | 836,000 | ||||||||||||||||||
|
Balance
at December 31, 2009
|
$ | 24,606,000 | 9,744,170 | $ | 45,218,000 | $ | 78,450,000 | $ | (336,000 | ) | $ | 147,938,000 | ||||||||||||
|
The
accompanying notes are an integral part of these consolidated financial
statements
|
||||||||||||||||||||||||
The First
Bancorp 2009 Form 10-k
Page
46
The
First Bancorp, Inc. and Subsidiary
|
For
the years ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
Cash
flows from operating activities
|
||||||||||||
|
Net
income
|
$ | 13,042,000 | $ | 14,034,000 | $ | 13,101,000 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
|
1,483,000 | 1,232,000 | 1,224,000 | |||||||||
|
Change
in deferred income taxes
|
(1,210,000 | ) | (1,039,000 | ) | (464,000 | ) | ||||||
|
Provision
for loan losses
|
12,160,000 | 4,700,000 | 1,432,000 | |||||||||
|
Loans
originated for resale
|
(117,282,000 | ) | (19,199,000 | ) | (24,081,000 | ) | ||||||
|
Proceeds
from sales of loans
|
115,704,000 | 19,718,000 | 22,724,000 | |||||||||
|
Net
(gain) loss on sale or call of securities
|
150,000 | 89,000 | (2,000 | ) | ||||||||
|
Write-down
of securities available for sale
|
916,000 | - | - | |||||||||
|
Net
accretion of discounts on investments
|
(2,774,000 | ) | (5,475,000 | ) | (2,996,000 | ) | ||||||
|
Net
loss on sale of other real estate owned
|
223,000 | - | 20,000 | |||||||||
|
Provision
for losses on other real estate owned
|
481,000 | - | 56,000 | |||||||||
|
Equity
compensation expense
|
37,000 | 37,000 | 59,000 | |||||||||
|
Net
change in other assets and accrued interest receivable
|
(4,013,000 | ) | (1,627,000 | ) | (926,000 | ) | ||||||
|
Net
change in other liabilities
|
(728,000 | ) | (1,933,000 | ) | 486,000 | |||||||
|
Net
(gain) loss on sale of premises and equipment
|
11,000 | 17,000 | (34,000 | ) | ||||||||
|
Amortization
of investments in limited partnerships
|
275,000 | 84,000 | - | |||||||||
|
Net
acquisition amortization
|
260,000 | 239,000 | 228,000 | |||||||||
|
Net
cash provided by operating activities
|
18,735,000 | 10,877,000 | 10,827,000 | |||||||||
|
Cash
flows from investing activities
|
||||||||||||
|
Proceeds
from sales of securities available for sale
|
4,051,000 | 14,192,000 | 179,000 | |||||||||
|
Proceeds
from maturities, payments, calls of securities available for
sale
|
10,255,000 | 3,551,000 | 8,883,000 | |||||||||
|
Proceeds
from maturities, payments, calls of securities held to
maturity
|
183,973,000 | 106,450,000 | 90,261,000 | |||||||||
|
Proceeds
from sales of other real estate owned
|
820,000 | - | 978,000 | |||||||||
|
Purchases
of securities available for sale
|
(81,853,000 | ) | (5,373,000 | ) | - | |||||||
|
Investments
in limited partnerships
|
(1,371,000 | ) | (1,700,000 | ) | - | |||||||
|
Purchases
of securities to be held to maturity
|
(138,186,000 | ) | (154,618,000 | ) | (133,008,000 | ) | ||||||
|
Purchases
of FRB and FHLB stock
|
(750,000 | ) | (1,463,000 | ) | (4,983,000 | ) | ||||||
|
Net
(increase) decrease in loans
|
15,017,000 | (63,410,000 | ) | (83,804,000 | ) | |||||||
|
Capital
expenditures
|
(3,798,000 | ) | (796,000 | ) | (2,108,000 | ) | ||||||
|
Proceeds
from sale of premises and equipment
|
1,000 | - | 282,000 | |||||||||
|
Net
cash used in investing activities
|
(11,841,000 | ) | (103,167,000 | ) | (123,320,000 | ) | ||||||
|
Cash
flows from financing activities
|
||||||||||||
|
Net
increase (decrease) in transaction and savings accounts
|
(22,217,000 | ) | 15,826,000 | (24,102,000 | ) | |||||||
|
Net
increase in certificates of deposit
|
19,164,000 | 128,651,000 | 231,000 | |||||||||
|
Advances
on long-term borrowings
|
10,000,000 | 50,000,000 | 100,000,000 | |||||||||
|
Repayments
on long-term borrowings
|
(27,000,000 | ) | - | (62,000,000 | ) | |||||||
|
Net
increase (decrease) in short-term borrowings
|
(5,289,000 | ) | (94,622,000 | ) | 98,880,000 | |||||||
|
Proceeds
from issuance of preferred stock
|
25,000,000 | - | - | |||||||||
|
Payments
to repurchase common stock
|
(263,000 | ) | (1,414,000 | ) | (1,687,000 | ) | ||||||
|
Proceeds
from sale of common stock
|
836,000 | 732,000 | 802,000 | |||||||||
|
Dividends
paid
|
(8,649,000 | ) | (7,281,000 | ) | (6,565,000 | ) | ||||||
|
Net
cash provided (used) by financing activities
|
(8,418,000 | ) | 91,892,000 | 105,559,000 | ||||||||
|
Net
decrease in cash and cash equivalents
|
(1,524,000 | ) | (398,000 | ) | (6,934,000 | ) | ||||||
|
Cash
and cash equivalents at beginning of year
|
16,856,000 | 17,254,000 | 24,188,000 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 15,332,000 | $ | 16,856,000 | $ | 17,254,000 | ||||||
|
Interest
paid
|
$ | 19,160,000 | $ | 34,558,000 | $ | 39,265,000 | ||||||
|
Income
taxes paid
|
5,859,000 | 7,111,000 | 5,919,000 | |||||||||
|
Non-cash
transactions:
|
||||||||||||
|
Transfer
from loans to other real estate owned
|
4,441,000 | 1,601,000 | 737,000 | |||||||||
|
Net
(increase) decrease in unrealized gain on securities available for
sale
|
(1,068,000 | ) | 1,930,000 | 360,000 | ||||||||
|
Net
decrease in net unrealized loss on postretirement benefit
costs
|
60,000 | 3,000 | 78,000 | |||||||||
The
accompanying notes are an integral part of these consolidated financial
statements
The First
Bancorp 2009 Form 10-k
Page
47
Notes to Consolidated
Financial Statements
Nature
of Operations
The First
Bancorp, Inc. (the “Company”) through its wholly-owned subsidiary, The First,
N.A. (“the Bank”), provides a full range of banking services to individual and
corporate customers from fourteen offices in coastal Maine. First Advisors, a
division of the Bank, provides investment management, private banking and
financial planning services. At the Company’s Annual Meeting of Shareholders on
April 30, 2008, the Company’s name was changed to The First Bancorp, Inc. from
First National Lincoln Corporation.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and the
Bank. All intercompany accounts and transactions have been eliminated in
consolidation.
Subsequent
Events
Events
occurring subsequent to December 31, 2009, have been evaluated as to their
potential impact to the financial statements.
Accounting
Standards Codification
In June
2009, the Financial Accounting Standards Board (“FASB”) issued an accounting
standard which established Accounting Standards Codification (the “Codification”
or “ASC”) to become the single source of authoritative generally accepted
accounting principles (“GAAP”) recognized by the FASB to be applied by
nongovernmental entities, with the exception of guidance issued by the U.S.
Securities and Exchange Commission (the “SEC”) and its staff. All guidance
contained in the Codification carries an equal level of authority. The
Codification is not intended to change GAAP, but rather is expected to simplify
accounting research by reorganizing current GAAP into approximately 90
accounting topics. The Company adopted this accounting standard in preparing the
Consolidated Financial Statements for the period ended September 30, 2009. The
adoption of this accounting standard, which was subsequently codified into FASB
ASC Topic 105, “Generally Accepted Accounting Principles,” had no impact on the
Company’s consolidated financial statements.
Use
of Estimates in Preparation of Financial Statements
In
preparing the financial statements in accordance with accounting principles
generally accepted in the United States of America, Management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the date
of the balance sheet and revenues and expenses for the reporting period. Actual
results could differ significantly from those estimates. Material estimates that
are particularly susceptible to significant change in the near-term relate to
the determination of the allowance for loan losses, the valuation of mortgage
servicing rights, and goodwill.
Investment
Securities
Investment
securities are classified as available for sale or held to maturity when
purchased. There are no trading account securities. Securities available for
sale consist primarily of debt securities which Management intends to hold for
indefinite periods of time. They may be used as part of the Bank’s funds
management strategy, and may be sold in response to changes in interest rates or
prepayment risk, changes in liquidity needs, or for other reasons. They are
accounted for at fair value, with unrealized gains or losses adjusted through
shareholders’ equity, net of related income taxes. Securities to be held to
maturity consist primarily of debt securities which Management has acquired
solely for long-term investment purposes, rather than for purposes of trading or
future sale. For securities to be held to maturity, Management has the intent
and the Bank has the ability to hold such securities until their respective
maturity dates. Such securities are carried at cost adjusted for the
amortization of premiums and accretion of discounts. Investment securities
transactions are accounted for on a settlement date basis; reported amounts
would not be materially different from those accounted for on a trade date
basis. Gains and losses on the sales of investment securities are determined
using the amortized cost of the security. For declines in the fair value of
individual debt securities available for sale below their cost that are deemed
to be other than temporary, where the Company does not intend to sell the
security and it is more likely than not that the Company will not be required to
sell the security before recovery of its amortized cost basis, the
other-than-temporary decline in the fair value of the debt security related to
1) credit loss is recognized in earnings and 2) other factors is recognized in
other comprehensive income or loss. Credit loss is deemed to exist if the
present value of expected future cash flows using the effective rate at
acquisition is less than the amortized cost basis of
The First
Bancorp 2009 Form 10-k
Page
48
the debt
security. For individual debt securities where the Company intends to sell the
security or more likely than not will be required to sell the security before
recovery of its amortized cost, the other-than-temporary impairment is
recognized in earnings equal to the entire difference between the security’s
cost basis and its fair value at the balance sheet date.
Loans
Held for Sale
Loans
held for sale consist of residential real estate mortgage loans and are carried
at the lower of aggregate cost or market value, as determined by current
investor yield requirements.
Loans
Loans are
generally reported at their outstanding principal balances, adjusted for
chargeoffs, the allowance for loan losses and any deferred fees or costs to
originate loans. Loan commitments are recorded when funded.
Loan
Fees and Costs
Loan
origination fees and certain direct loan origination costs are deferred and
recognized in interest income as an adjustment to the loan yield over the life
of the related loans. The unamortized net deferred fees and costs are included
on the balance sheets with the related loan balances, and the amortization is
included with the related interest income.
Allowance
for Loan Losses
Loans
considered to be uncollectible are charged against the allowance for loan
losses. The allowance for loan losses is maintained at a level determined by
Management to be adequate to absorb probable losses. This allowance is increased
by provisions charged to operating expenses and recoveries on loans previously
charged off. Arriving at an appropriate level of allowance for loan losses
necessarily involves a high degree of judgment. In determining the appropriate
level of allowance for loan losses, Management takes into consideration several
factors, including reviews of individual non-performing loans and performing
loans listed on the watch report requiring periodic evaluation, loan portfolio
size by category, recent loss experience, delinquency trends and current
economic conditions. Loans more than 30 days past due are considered delinquent.
Impaired loans, including restructured loans, are measured at the present value
of expected future cash flows discounted at the loan’s effective interest rate
or at the fair value of the collateral if the loan is collateral dependent.
Management takes into consideration impaired loans in addition to the above
mentioned factors in determining the appropriate level of allowance for loan
losses.
Goodwill
and Identified Intangible Assets
Intangible
assets include the excess of the purchase price over the fair value of net
assets acquired (goodwill) from the acquisition of FNB Bankshares in 2005 as
well as the core deposit intangible related to the same acquisition. The core
deposit intangible is amortized on a straight-line basis over ten years.
Amortization expense for 2009, 2008 and 2007 was $283,000 and the amortization
expense for each year until fully amortized will be $283,000. The straight-line
basis is used because the Company does not expect significant run off in the
core deposits acquired. The Company annually evaluates goodwill, and
periodically evaluates other intangible assets for impairment on the basis of
whether these assets are fully recoverable from projected, undiscounted net cash
flows of the acquired company. At December 31, 2009, the Company determined
goodwill and other intangible assets were not impaired.
Income
Taxes
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between financial statement carrying amounts of
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect of a change in tax rates on deferred tax assets
and liabilities is recognized in income in the period the change is
enacted.
Accrual
of Interest Income and Expense
Interest
on loans and investment securities is taken into income using methods which
relate the income earned to the balances of loans and investment securities
outstanding. Interest expense on liabilities is derived by applying applicable
interest rates to principal amounts outstanding. Recording of interest income on
problem loans, which includes impaired loans, ceases when collectibility of
principal and interest within a reasonable period of time becomes doubtful. Cash
payments received on non-accrual loans, which includes impaired loans, are
applied to reduce the loan’s principal balance until the remaining principal
balance is deemed collectible, after which interest is recognized when
collected. As a general rule, a loan may be restored to accrual status when
payments are current and repayment of the remaining contractual amounts is
expected or when it otherwise becomes well secured and in the process of
collection.
The First
Bancorp 2009 Form 10-k
Page
49
Premises
and Equipment
Premises,
furniture and equipment are stated at cost, less accumulated depreciation.
Depreciation expense is computed by straight-line and accelerated methods over
the asset’s estimated useful life.
Other
Real Estate Owned (OREO)
Real
estate acquired by foreclosure or deed in lieu of foreclosure is transferred to
OREO and recorded at fair market value, less estimated costs to sell, based on
appraised value at the date actually or constructively received. Loan losses
arising from the acquisition of such property are charged against the allowance
for loan losses. Subsequent provisions to reduce the carrying value of a
property are recorded to the allowance for OREO losses and a charge to
operations on a specific property basis.
Earnings
Per Share
Basic
earnings per share data are based on the weighted average number of common
shares outstanding during each year. Diluted earnings per share gives effect to
the stock options and warrants outstanding, determined by the treasury stock
method.
Post-Retirement
Benefits
The cost
of providing post-retirement benefits is accrued during the active service
period of the employee or director.
Comprehensive
Income
Comprehensive
income includes net income and other comprehensive income (loss), which is
comprised of the change in unrealized gains and losses on securities available
for sale, net of tax, and unrealized gains and loss related to post-retirement
benefit costs, net of tax, is disclosed in the consolidated statements of
changes in shareholders’ equity.
Segments
The First
Bancorp, Inc., through the branches of its subsidiary, The First, N.A., provides
a broad range of financial services to individuals and companies in coastal
Maine. These services include demand, time, and savings deposits; lending;
credit card servicing; ATM processing; and investment management and trust
services. Operations are managed and financial performance is evaluated on a
corporate-wide basis. Accordingly, all of the Company’s banking operations are
considered by Management to be aggregated in one reportable operating
segment.
Loan
Servicing
Servicing
rights are recognized when they are acquired through sale of loans. Capitalized
servicing rights are reported in other assets and are amortized into
non-interest income in proportion to, and over the period of, the estimated
future net servicing income of the underlying financial assets. Servicing rights
are evaluated for impairment based upon the fair value of the rights as compared
to amortized cost. Impairment is determined by stratifying rights by predominant
characteristics, such as interest rates and terms. Impairment is recognized
through a valuation allowance for an individual stratum, to the extent that fair
value is less than the capitalized amount for the stratum.
The First
Bancorp 2009 Form 10-k
Page
50
Stock
Options
The
Company established a Shareholder-approved stock option plan in 1995, under
which the Company may grant options to its employees for up to 600,000 shares of
common stock. The Company believes that such awards align the interests of its
employees with those of its Shareholders. Only incentive stock options may be
granted under the plan. The exercise price of each option grant is determined by
the Options Committee of the Board of Directors, and in no instance shall be
less than the fair market value on the date of the grant. An option’s maximum
term is ten years from the date of grant, with 50% of the options granted
vesting two years from the date of grant and the remaining 50% vesting five
years from date of grant. As of January 16, 2005, all options under this plan
had been granted.
The
Company applies the fair value recognition provisions of FASB ASC Topic 718,
“Compensation – Stock Compensation”, to stock-based employee compensation for
fiscal years beginning on or after January 1, 2006. As a result, $37,000,
$37,000 and $59,000 in compensation cost was included in the Company’s financial
statements for 2009, 2008 and 2007, respectively. The unrecognized compensation
cost to be amortized over a weighted average remaining vesting period of 1.0
years is $37,000 for 21,000 options granted in 2005.
The
weighted average fair market value per share was $4.41 for options granted in
2005. The fair market value was estimated using the Black-Scholes option pricing
model and the following assumptions: quarterly dividends of $0.12, risk-free
interest rate of 4.20%, volatility of 25.81%, and an expected life of ten years.
Volatility is based on
the
actual volatility of the Company’s stock during the quarter in which the options
were granted. The risk-free rate for periods within the contractual life of the
option is based on the U.S. Treasury yield curve at the time of the option
grant.
The
following table summarizes the status of the Company’s non-vested options as of
December 31, 2009.
|
Number
of Shares
|
Weighted
Average Grant Date Fair Value
|
|||||||
|
Non-vested
at December 31, 2008
|
21,000 | $ | 4.41 | |||||
|
Granted
in 2009
|
- | - | ||||||
|
Vested
in 2009
|
- | - | ||||||
|
Forfeited
in 2009
|
- | - | ||||||
|
Non-vested
at December 31, 2009
|
21,000 | $ | 4.41 | |||||
During
2009, 21,000 options were exercised, with total proceeds paid to the Company of
$134,000. The excess of the fair value of the stock issued upon exercise over
the exercise price was $200,000. A summary of the status of the Company’s Stock
Option Plan as of December 31, 2009, and changes during the year then ended, is
presented below.
|
Number
of Shares
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Term
|
Aggregate
Intrinsic
Value
|
|||||||||||||
|
Outstanding
at December 31, 2008
|
76,500 | $ | 13.27 | |||||||||||||
|
Granted
in 2009
|
- | - | ||||||||||||||
|
Vested
in 2009
|
- | - | ||||||||||||||
|
Exercised
in 2009
|
(21,000 | ) | 6.36 | |||||||||||||
|
Forfeited
in 2009
|
- | - | ||||||||||||||
|
Outstanding
at December 31, 2009
|
55,500 | $ | 15.89 | 4.6 | $ | 82,000 | ||||||||||
|
Exercisable
at December 31, 2009
|
34,500 | $ | 14.61 | 4.1 | $ | 82,000 | ||||||||||
For the
purposes of reporting consolidated cash flows, cash and cash equivalents include
cash on hand, amounts due from banks and federal funds sold. At December 31,
2009 the Company had a contractual clearing balance of $500,000 and a reserve
balance requirement of $576,000 at the Federal Reserve Bank, which are satisfied
by both cash on hand at branches and balances held at the Federal Reserve Bank
of Boston. The Company maintains a portion of its cash in bank deposit accounts
which, at times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts. The Company believes it is not exposed
to any significant risk with respect to these accounts.
The First
Bancorp 2009 Form 10-k
Page
51
The
following tables summarize the amortized cost and estimated fair value of
investment securities at December 31, 2009 and 2008:
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
Value
|
|||||||||||||
|
As of December 31,
2009
|
Cost
|
Gains
|
Losses
|
(Estimated)
|
||||||||||||
|
Securities
available for sale
|
||||||||||||||||
|
U.S.
Treasury and agency
|
$ | 31,022,000 | $ | 90,000 | $ | (153,000 | ) | $ | 30,959,000 | |||||||
|
Mortgage-backed
securities
|
31,254,000 | 133,000 | (239,000 | ) | 31,148,000 | |||||||||||
|
State
and political subdivisions
|
18,219,000 | 414,000 | (119,000 | ) | 18,514,000 | |||||||||||
|
Corporate
securities
|
1,120,000 | - | (302,000 | ) | 818,000 | |||||||||||
|
Other
equity securities
|
414,000 | 6,000 | (21,000 | ) | 399,000 | |||||||||||
| $ | 82,029,000 | $ | 643,000 | $ | (834,000 | ) | $ | 81,838,000 | ||||||||
|
Securities
to be held to maturity
|
||||||||||||||||
|
U.S.
Treasury and agency
|
$ | 39,099,000 | $ | 142,000 | $ | (554,000 | ) | $ | 38,687,000 | |||||||
|
Mortgage-backed
securities
|
90,193,000 | 1,839,000 | (363,000 | ) | 91,669,000 | |||||||||||
|
State
and political subdivisions
|
61,095,000 | 1,603,000 | (366,000 | ) | 62,332,000 | |||||||||||
|
Corporate
securities
|
150,000 | - | - | 150,000 | ||||||||||||
| $ | 190,537,000 | $ | 3,584,000 | $ | (1,283,000 | ) | $ | 192,838,000 | ||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
Value
|
|||||||||||||
|
As
of December 31, 2008
|
Cost
|
Gains
|
Losses
|
(Estimated)
|
||||||||||||
|
Securities
available for sale
|
||||||||||||||||
|
Mortgage-backed
securities
|
$ | 900,000 | $ | 22,000 | $ | - | $ | 922,000 | ||||||||
|
State
and political subdivisions
|
8,571,000 | 339,000 | - | 8,910,000 | ||||||||||||
|
Corporate
securities
|
4,566,000 | - | (1,589,000 | ) | 2,977,000 | |||||||||||
|
Other
equity securities
|
295,000 | 2,000 | (34,000 | ) | 263,000 | |||||||||||
| $ | 14,332,000 | $ | 363,000 | $ | (1,623,000 | ) | $ | 13,072,000 | ||||||||
|
Securities
to be held to maturity
|
||||||||||||||||
|
U.S.
Treasury and agency
|
$ | 110,513,000 | $ | 74,000 | $ | (5,871,000 | ) | $ | 104,716,000 | |||||||
|
Mortgage-backed
securities
|
60,774,000 | 640,000 | (297,000 | ) | 61,117,000 | |||||||||||
|
State
and political subdivisions
|
62,330,000 | 952,000 | (684,000 | ) | 62,598,000 | |||||||||||
|
Corporate
securities
|
1,150,000 | - | (121,000 | ) | 1,029,000 | |||||||||||
| $ | 234,767,000 | $ | 1,666,000 | $ | (6,973,000 | ) | $ | 229,460,000 | ||||||||
The
following table summarizes the contractual maturities of investment securities
at December 31, 2009:
|
Securities
available for sale
|
Securities
to be held to maturity
|
|||||||||||||||
|
Amortized
Cost
|
Fair
Value (Estimated)
|
Amortized
Cost
|
Fair
Value (Estimated)
|
|||||||||||||
|
Due
in 1 year or less
|
$ | - | $ | - | $ | 330,000 | $ | 335,000 | ||||||||
|
Due
in 1 to 5 years
|
18,144,000 | 18,381,000 | 7,934,000 | 8,245,000 | ||||||||||||
|
Due
in 5 to 10 years
|
3,671,000 | 3,783,000 | 15,020,000 | 15,591,000 | ||||||||||||
|
Due
after 10 years
|
59,800,000 | 59,275,000 | 167,253,000 | 168,667,000 | ||||||||||||
|
Equity
securities
|
414,000 | 399,000 | - | - | ||||||||||||
| $ | 82,029,000 | $ | 81,838,000 | $ | 190,537,000 | $ | 192,838,000 | |||||||||
At
December 31, 2009, securities with a fair value of $154,034,000 were pledged to
secure borrowings from the Federal Home Loan Bank of Boston, public deposits,
repurchase agreements, and for other purposes as required by law. This compares
to securities with a fair value of $153,560,000, as of December 31, 2008 pledged
for the same purpose.
The First
Bancorp 2009 Form 10-k
Page
52
Gains and
losses on the sale of securities available for sale are computed by subtracting
the amortized cost at the time of sale from the security’s selling price, net of
accrued interest to be received. The following table shows securities gains and
losses for 2009, 2008 and 2007:
|
2009
|
2008
|
2007
|
||||||||||
|
Proceeds
from sales
|
$ | 4,051,000 | $ | 14,192,000 | $ | 179,000 | ||||||
|
Gross
gains
|
20,000 | 123,000 | 2,000 | |||||||||
|
Gross
losses
|
(170,000 | ) | (212,000 | ) | - | |||||||
|
Net
gain (loss)
|
$ | (150,000 | ) | $ | (89,000 | ) | $ | 2,000 | ||||
|
Related
income taxes
|
$ | (52,000 | ) | $ | (31,000 | ) | $ | 1,000 | ||||
Management
reviews securities with unrealized losses for other than temporary impairment.
During the first quarter 2009, the Company took an after-tax charge of $596,000
for other-than-temporary impairment related to one automotive company corporate
security in the investment portfolio. As of December 31, 2009, there were 45
securities with unrealized losses held in the Company’s portfolio. These
securities were temporarily impaired as a result of changes in interest rates
reducing their fair market value, of which eight had been temporarily impaired
for 12 months or more. At the present time, there have been no material changes
in the credit quality of these securities resulting in other than temporary
impairment, and in Management’s opinion, no additional write-down for
other-than-temporary impairment is warranted. Information regarding securities
temporarily impaired as of December 31, 2009 is summarized below:
|
Less
than 12 months
|
12
months or more
|
Total
|
||||||||||||||||||||||
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
|
As of December 31,
2009
|
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
||||||||||||||||||
|
U.S.
Treasury and agency
|
$ | 19,999,000 | $ | (707,000 | ) | $ | - | $ | - | $ | 19,999,000 | $ | (707,000 | ) | ||||||||||
|
Mortgage-backed
securities
|
47,509,000 | (602,000 | ) | - | - | 47,509,000 | (602,000 | ) | ||||||||||||||||
|
State
and political subdivisions
|
9,396,000 | (147,000 | ) | 1,350,000 | (338,000 | ) | 10,746,000 | (485,000 | ) | |||||||||||||||
|
Corporate
securities
|
- | - | 818,000 | (302,000 | ) | 818,000 | (302,000 | ) | ||||||||||||||||
|
Other
equity securities
|
- | - | 44,000 | (21,000 | ) | 44,000 | (21,000 | ) | ||||||||||||||||
| $ | 76,904,000 | $ | (1,456,000 | ) | $ | 2,212,000 | $ | (661,000 | ) | $ | 79,116,000 | $ | (2,117,000 | ) | ||||||||||
As of
December 31, 2008, there were 97 securities with unrealized losses held in the
Company’s portfolio. These securities were temporarily impaired as a result of
changes in interest rates reducing their fair market value, of which 29 had been
temporarily impaired for 12 months or more. Information regarding securities
temporarily impaired as of December 31, 2008 is summarized below:
|
Less
than 12 months
|
12
months or more
|
Total
|
|||||||||||||||||||||||
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
||||||||||||||||||||
|
As of December 31,
2008
|
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
|||||||||||||||||||
|
U.S.
Treasury and agency
|
$ | 64,951,000 | $ | (4,610,000 | ) | $ | 10,043,000 | $ | (1,261,000 | ) | $ | 74,994,000 | $ | (5,871,000 | ) | ||||||||||
|
Mortgage-backed
securities
|
12,498,000 | (110,000 | ) | 3,534,000 | (187,000 | ) | 16,032,000 | (297,000 | ) | ||||||||||||||||
|
State
and political subdivisions
|
13,592,000 | (573,000 | ) | 2,165,000 | (111,000 | ) | 15,757,000 | (684,000 | ) | ||||||||||||||||
|
Corporate
securities
|
1,821,000 | (187,000 | ) | 1,709,000 | (1,523,000 | ) | 3,530,000 | (1,710,000 | ) | ||||||||||||||||
|
Other
equity securities
|
- | - | 32,000 | (34,000 | ) | 32,000 | (34,000 | ) | |||||||||||||||||
| $ | 92,862,000 | $ | (5,480,000 | ) | $ | 17,483,000 | $ | (3,116,000 | ) | $ | 110,345,000 | $ | (8,596,000 | ) | |||||||||||
Federal
Home Loan Bank stock and Federal Reserve Bank stock have also been evaluated for
impairment. The Bank is a member of the Federal Home Loan Bank (“FHLB”) of
Boston. The FHLB is a cooperatively owned wholesale bank for housing and finance
in the six New England States. Its mission is to support the residential
mortgage and community-development lending activities of its members, which
include over 450 financial institutions across New England. As a requirement of
membership in the FHLB, the Bank must own a minimum required amount
of
The First
Bancorp 2009 Form 10-k
Page
53
FHLB
stock, calculated periodically based primarily on the Bank’s level of borrowings
from the FHLB. The Company uses the FHLB for much of its wholesale funding
needs. As of December 31, 2009 and 2008, the Company’s investment in FHLB stock
totaled $14.0 million.
FHLB
stock is a non-marketable equity security and therefore is reported at cost,
which equals par value. Shares held in excess of the minimum required amount are
generally redeemable at par value. However, in the first quarter of 2009 the
FHLB announced a moratorium on such redemptions in order to preserve its capital
in response to current market conditions and declining retained earnings. The
minimum required shares are redeemable, subject to certain limitations, five
years following termination of FHLB membership. The Bank has no intention of
terminating its FHLB membership. The Company had no dividend income on its FHLB
stock in 2009.
The FHLB
recorded a net loss of $186.8 million for the year ending December 31, 2009.
Losses due to the other-than-temporary impairment of investments in
private-label mortgage-backed securities resulted in a credit loss of $444.1
million for the year. The associated non-credit loss on these securities in 2009
was $885.4 million, which is recorded in capital rather than through earnings,
and contributed largely to an accumulated other comprehensive loss of $1.0
billion at December 31, 2009. Retained earnings increased to $142.6 million at
December 31, 2009, up from an accumulated deficit of $19.7 million at December
31, 2008. This increase was mainly due to the effect of adopting FSP FAS 115-2
and FAS 124-2 on January 1, 2009, which reclassified $349.1 million from
accumulated deficit to accumulated other comprehensive loss. The FHLB remained
in compliance with all regulatory capital ratios as of December 31, 2009, and,
in the most recent information available, was classified “adequately
capitalized” by its regulator, the Federal Housing Finance Agency, as of
September 30, 2009.
Notwithstanding
continued significant credit losses in its investment portfolio, the FHLB
reported modest profitability for the fourth quarter. Net income for the fourth
quarter of 2009 was $6.3 million. The FHLB’s net interest income continues to be
strong, and totaled $311.7 million for the year ending December 31, 2009, and
$88.0 million for the fourth quarter of 2009. The FHLB expects to see volatility
in its earnings in the next several quarters as it works through continued
challenges. In particular, high and prolonged unemployment rates, high
delinquency and foreclosure rates, and declining housing prices may result in
additional credit losses from the FHLB’s private-label mortgage-backed
securities investments. The FHLB will continue to monitor this situation closely
in 2010.
The FHLB
remains focused on returning the FHLB to stable profitability and enhancing the
FHLB’s capital base by building retained earnings. The FHLB’s board of directors
is unlikely to declare any dividends until a consistent pattern of positive net
income is demonstrated, allowing growth in retained earnings, which will likely
preclude a declaration of dividends for at least the first two quarters of 2010.
The opportunity to pay a dividend after that, and the amount of any such
dividend, will be a function of the success that the FHLB has in stabilizing
earnings and building retained earnings, which will be driven in large part by
the performance of its private-label mortgage-backed securities portfolio. The
FHLB’s current retained earnings target is estimated at $925 million, a target
adopted in connection with the FHLB’s Revised Operating Plan to preserve capital
in light of the various challenges to the FHLB. The FHLB’s retained earnings
target could be superseded by mandates from its primary regulator, the Federal
Housing Finance Agency, either in the form of an order specific to the FHLB or
by promulgation of new regulations requiring a level of retained earnings that
is different from the FHLB’s currently targeted level. Moreover, Management and
the board of directors of the FHLB may, at any time, change the FHLB’s
methodology or assumptions for modeling the FHLB’s retained earnings
requirement. Either of these could result in the FHLB further increasing its
retained earnings target or reducing or eliminating the dividend payout, as
necessary.
The
Company periodically evaluates its investment in FHLB stock for impairment based
on, among other factors, the capital adequacy of the FHLB and its overall
financial condition. No impairment losses have been recorded through December
31, 2009. The Bank will continue to monitor its investment in FHLB
stock.
The First
Bancorp 2009 Form 10-k
Page
54
At
December 31, 2009 and 2008, the Bank serviced loans for others totaling
$223,837,000 and $168,242,000, respectively. Net gains from the sale of loans
totaled $962,000 in 2009, $249,000 in 2008, and $333,000 in 2007. In 2009,
mortgage servicing rights of $1,133,000 were capitalized and amortization for
the year totaled $539,000. After deducting for an impairment reserve of $73,000
at December 31, 2009, mortgage servicing rights had a fair value of $1,199,000,
which is included in other assets. In 2008, mortgage servicing rights of
$201,000 were capitalized or acquired, and amortization for the year totaled
$366,000. After deducting for an impairment reserve of $368,000 at December 31,
2008, mortgage servicing rights had a fair value of $311,000, which is included
in other assets.
FASB ASC
Topic 860, “Transfers and Servicing”, requires all separately recognized
servicing assets and servicing liabilities to be initially measured at fair
value, if practicable. Servicing assets and servicing liabilities are reported
using the amortization method or the fair value measurement method. In
evaluating the carrying values of mortgage servicing rights, the Company obtains
third party valuations based on loan level data including note rate, type and
term of the underlying loans. The model utilizes several assumptions, the most
significant of which is loan prepayments, calculated using a three-month moving
average of weekly prepayment data published by the Public Securities Association
(PSA) and modeled against the serviced loan portfolio, and the discount rate to
discount future cash flows. As of December 31, 2009, the prepayment assumption
using the PSA model was 256, which translates into an anticipated prepayment
rate of 15.33%. The discount rate is the quarterly average ten-year U.S.
Treasury interest rate plus 4.22%. Other assumptions include delinquency rates,
foreclosure rates, servicing cost inflation, and annual unit loan cost. All
assumptions are adjusted periodically to reflect current circumstances.
Amortization of mortgage servicing rights, as well as write-offs due to
prepayments of the related mortgage loans, are recorded as a charge against
mortgage servicing fee income. Mortgage servicing rights are included in
other assets and detailed in the following table:
|
As
of December 31,
|
2009
|
2008
|
||||||
|
Mortgage
servicing rights
|
$ | 5,086,000 | $ | 3,954,000 | ||||
|
Accumulated
amortization
|
(3,814,000 | ) | (3,275,000 | ) | ||||
|
Impairment
reserve
|
(73,000 | ) | (368,000 | ) | ||||
| $ | 1,199,000 | $ | 311,000 | |||||
The
following table shows the composition of the Company’s loan portfolio as of
December 31, 2009 and 2008:
|
As
of December 31,
|
2009
|
2008
|
||||||
|
Commercial
|
||||||||
|
Real
estate
|
$ | 240,178,000 | $ | 219,057,000 | ||||
|
Construction
|
48,714,000 | 48,182,000 | ||||||
|
Other
|
114,486,000 | 118,109,000 | ||||||
|
Municipal
|
45,952,000 | 34,832,000 | ||||||
|
Residential
|
||||||||
|
Term
|
367,267,000 | 431,520,000 | ||||||
|
Construction
|
17,361,000 | 26,235,000 | ||||||
|
Home
equity line of credit
|
94,324,000 | 77,206,000 | ||||||
|
Consumer
|
24,210,000 | 24,132,000 | ||||||
|
Total
loans
|
$ | 952,492,000 | $ | 979,273,000 | ||||
Loan
balances include net deferred loan costs of $1,352,000 in 2009 and $1,369,000 in
2008. Pursuant to collateral agreements, qualifying first mortgage loans, which
were valued at $295,119,000 and $356,964,000 at December 31, 2009 and 2008,
respectively, were used to collateralize borrowings from the Federal Home Loan
Bank of Boston. In addition, commercial, construction and home equity loans
totaling $366,264,000 were used to collateralize a standby line of credit at the
Federal Reserve Bank of Boston that is currently unused.
At
December 31, 2009 and 2008, non-accrual loans were $18,562,000 and $12,449,000,
respectively. As of December 31, 2009, 2008 and 2007, interest income which
would have been recognized on these loans, if interest had been accrued, was
$1,297,000, $489,000, and $283,000, respectively. Loans more than 90 days past
due accruing interest totaled $1,176,000 at December 31, 2009 and $4,980,000 at
December 31, 2008. The Company continues to
The First
Bancorp 2009 Form 10-k
Page
55
accrue
interest on these loans because it believes collection of principal and interest
is reasonably assured. Allowance for loan losses transactions for the years
ended December 31, 2009, 2008 and 2007 were as follows:
|
For
the years ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
Balance
at beginning of year
|
$ | 8,800,000 | $ | 6,800,000 | $ | 6,364,000 | ||||||
|
Provision
charged to operating expenses
|
12,160,000 | 4,700,000 | 1,432,000 | |||||||||
| 20,960,000 | 11,500,000 | 7,796,000 | ||||||||||
|
Loans
charged off
|
(7,576,000 | ) | (2,941,000 | ) | (1,337,000 | ) | ||||||
|
Recoveries
on loans
|
253,000 | 241,000 | 341,000 | |||||||||
|
Net
loans charged off
|
(7,323,000 | ) | (2,700,000 | ) | (996,000 | ) | ||||||
|
Balance
at end of year
|
$ | 13,637,000 | $ | 8,800,000 | $ | 6,800,000 | ||||||
Information
regarding impaired loans is as follows:
|
As
of December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
Average
investment in impaired loans
|
$ | 16,263,000 | $ | 6,199,000 | $ | 2,427,000 | ||||||
|
Interest
income recognized on impaired loans, all on cash basis
|
70,000 | 24,000 | 163,000 | |||||||||
|
As
of December 31,
|
2009
|
2008
|
||||||
|
Balance
of impaired loans
|
$ | 25,843,000 | $ | 12,449,000 | ||||
|
Less
portion for which no allowance for loan losses is
allocated
|
(13,682,000 | ) | (4,805,000 | ) | ||||
|
Portion
of impaired loan balance for which an allowance for loan losses is
allocated
|
$ | 12,161,000 | $ | 7,644,000 | ||||
|
Portion
of allowance for loan losses allocated to the impaired loan
balance
|
$ | 2,196,000 | $ | 1,957,000 | ||||
Loans to
directors, officers and employees totaled $38,952,000 at December 31, 2009 and
$37,876,000 at December 31, 2008. A summary of loans to directors and executive
officers, which in the aggregate exceed $60,000, is as follows:
|
For
the years ended December 31,
|
2009
|
2008
|
||||||
|
Balance
at beginning of year
|
$ | 23,896,000 | $ | 20,886,000 | ||||
|
New
loans
|
3,820,000 | 12,245,000 | ||||||
|
Repayments
|
(2,341,000 | ) | (9,235,000 | ) | ||||
|
Balance
at end of year
|
$ | 25,375,000 | $ | 23,896,000 | ||||
Premises
and equipment are carried at cost and consist of the following:
|
As
of December 31,
|
2009
|
2008
|
||||||
|
Land
|
$ | 3,556,000 | $ | 3,556,000 | ||||
|
Land
improvements
|
648,000 | 636,000 | ||||||
|
Buildings
|
13,821,000 | 13,788,000 | ||||||
|
Equipment
|
9,532,000 | 6,348,000 | ||||||
| 27,557,000 | 24,328,000 | |||||||
|
Less
accumulated depreciation
|
9,226,000 | 8,300,000 | ||||||
| $ | 18,331,000 | $ | 16,028,000 | |||||
The First
Bancorp 2009 Form 10-k
Page
56
The
following summarizes other real estate owned:
|
As
of December 31,
|
2009
|
2008
|
||||||
|
Real
estate acquired in settlement of loans
|
$ | 5,345,000 | $ | 2,428,000 | ||||
Changes
in the allowance for losses from other real estate owned were as
follows:
|
For
the years ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
Balance
at beginning of year
|
$ | 325,000 | $ | 325,000 | $ | 269,000 | ||||||
|
Losses
charged to allowance
|
(223,000 | ) | - | - | ||||||||
|
Provision
charged to operating expenses
|
481,000 | - | 56,000 | |||||||||
|
Balance
at end of year
|
$ | 583,000 | $ | 325,000 | $ | 325,000 | ||||||
On
January 14, 2005, the Company acquired FNB Bankshares (“FNB”) of Bar Harbor,
Maine, and its subsidiary, The First National Bank of Bar Harbor. The total
value of the transaction was $47,955,000, and all of the voting equity interest
of FNB was acquired in the transaction. The transaction was accounted for as a
purchase and the excess of purchase price over the fair value of net tangible
assets acquired equaled $27,559,000 and was recorded as goodwill, none of which
was deductible for tax purposes. The portion of the purchase price related to
the core deposit intangible is being amortized over its expected economic life,
and goodwill is evaluated annually for possible impairment under the provisions
of FASB ASC Topic 350, “Intangibles – Goodwill and Other”.
The
current and deferred components of income tax expense (benefit) were as
follows:
|
For
the years ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
Federal
income tax
|
||||||||||||
|
Current
|
$ | 5,520,000 | $ | 6,415,000 | $ | 5,500,000 | ||||||
|
Deferred
|
(1,210,000 | ) | (1,039,000 | ) | (464,000 | ) | ||||||
| 4,310,000 | 5,376,000 | 5,036,000 | ||||||||||
|
State
franchise tax
|
237,000 | 245,000 | 229,000 | |||||||||
| $ | 4,547,000 | $ | 5,621,000 | $ | 5,265,000 | |||||||
The
actual tax expense differs from the expected tax expense (computed by applying
the applicable U.S. Federal corporate income tax rate to income before income
taxes) as follows:
|
For
the years ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
Expected
tax expense
|
$ | 6,156,000 | $ | 6,879,000 | $ | 6,428,000 | ||||||
|
Non-taxable
income
|
(1,555,000 | ) | (1,364,000 | ) | (1,244,000 | ) | ||||||
|
State
franchise tax, net of federal tax benefit
|
154,000 | 159,000 | 149,000 | |||||||||
|
Tax
credits, net of amortization
|
(345,000 | ) | (100,000 | ) | - | |||||||
|
Other
|
137,000 | 47,000 | (68,000 | ) | ||||||||
| $ | 4,547,000 | $ | 5,621,000 | $ | 5,265,000 | |||||||
The First
Bancorp 2009 Form 10-k
Page
57
Deferred
tax assets and liabilities are classified as other assets and other liabilities
in the consolidated balance sheets. No valuation allowance is deemed necessary
for the deferred tax asset. Items that give rise to the deferred income tax
assets and liabilities and the tax effect of each at December 31, 2009 and 2008
are as follows:
|
2009
|
2008
|
|||||||
|
Allowance
for loan losses
|
$ | 4,773,000 | $ | 3,080,000 | ||||
|
Other
real estate owned
|
204,000 | 114,000 | ||||||
|
Assets
related to FNB acquisition
|
1,000 | 9,000 | ||||||
|
Accrued
pension and post-retirement
|
1,183,000 | 1,139,000 | ||||||
|
Unrealized
loss on securities available for sale
|
67,000 | 441,000 | ||||||
|
Other
than temporary impairment of securities available for sale
|
321,000 | - | ||||||
|
Other
assets
|
169,000 | 75,000 | ||||||
|
Total
deferred tax asset
|
6,718,000 | 4,858,000 | ||||||
|
Net
deferred loan costs
|
(672,000 | ) | (578,000 | ) | ||||
|
Depreciation
|
(2,106,000 | ) | (1,422,000 | ) | ||||
|
Mortgage
servicing rights
|
(420,000 | ) | (109,000 | ) | ||||
|
Core
deposit intangible
|
(500,000 | ) | (600,000 | ) | ||||
|
Liabilities
related to FNB acquisition
|
(10,000 | ) | (32,000 | ) | ||||
|
Other
liabilities
|
(114,000 | ) | (35,000 | ) | ||||
|
Total
deferred tax liability
|
(3,822,000 | ) | (2,776,000 | ) | ||||
|
Net
deferred tax asset
|
$ | 2,896,000 | $ | 2,082,000 | ||||
At
December 31, 2009, the Company held investments in two limited partnerships with
related New Market Tax Credits. These investments are carried at cost and
amortized on the effective yield method. The tax credits from these investments
are estimated at $530,000 and $154,000 for the years ended December 31, 2009 and
2008, respectively, and are recorded as a reduction of income tax expense.
Amortization of the investments in the limited partnerships totaled $275,000 and
$84,000 for the years ended December 31, 2009 and 2008, respectively, and is
recognized as a component of income tax expense in the consolidated statements
of income. The carrying value of these investments was $2,712,000 and $1,616,000
at December 31, 2009 and 2008, respectively, and is recorded in other assets.
The Company's total exposure to these limited partnerships was $5,712,000 and
$5,516,000, at December 31, 2009 and 2008, respectively, which is comprised of
the Company's equity investment in the limited partnerships and the balance of a
participated loan receivable.
FASB ASC
Topic 740 “Income Taxes” defines the criteria that an individual tax position
must satisfy for some or all of the benefits of that position to be recognized
in a company’s financial statements. Topic 740 prescribes a recognition
threshold of more-likely-than-not, and a measurement attribute for all tax
positions taken or expected to be taken on a tax return, in order for those tax
positions to be recognized in the financial statements. Effective January 1,
2007, the Company has adopted these provisions and there was no material effect
on the financial statements, and no cumulative effect. The Company is currently
open to audit under the statute of limitations by the Internal Revenue Service
for the years ended December 31, 2006 through 2008.
At
December 31, 2009, the scheduled maturities of certificates of deposit are as
follows:
|
Year
of
Maturity
|
Less
than $100,000
|
Greater
than $100,000
|
All
Certificates of Deposit
|
|||||||||
|
2010
|
$ | 145,068,000 | $ | 307,061,000 | $ | 452,129,000 | ||||||
|
2011
|
15,885,000 | 7,566,000 | 23,451,000 | |||||||||
|
2012
|
14,429,000 | 3,119,000 | 17,548,000 | |||||||||
|
2013
|
11,850,000 | 3,530,000 | 15,380,000 | |||||||||
|
2014
|
25,661,000 | 21,928,000 | 47,589,000 | |||||||||
| $ | 212,893,000 | $ | 343,204,000 | $ | 556,097,000 | |||||||
Interest
on certificates of deposit of $100,000 or more was $3,901,000, $6,905,000, and
$11,885,000 in 2009, 2008 and 2007, respectively.
The First
Bancorp 2009 Form 10-k
Page
58
Borrowed
funds consist of advances from the Federal Home Loan Bank of Boston (FHLB),
Treasury Tax & Loan Notes, and securities sold under agreements to
repurchase with municipal and commercial customers. Pursuant to
collateral
agreements, FHLB advances are collateralized by all stock in FHLB, qualifying
first mortgage loans, U.S. Government and Agency securities not pledged to
others, and funds on deposit with FHLB. As of December 31, 2009, the Bank’s
total FHLB borrowing capacity was $253,439,000, of which $54,037,000 was unused
and available for additional borrowings. All FHLB advances as of December 31,
2009, had fixed rates of interest until their respective maturity dates. Under
the Treasury Tax & Loan Note program, the Bank accumulates tax deposits made
by customers and is eligible to receive Treasury Direct investments up to an
established maximum balance. Securities sold under agreements to repurchase
include U.S. Treasury and Agency securities and other securities. Repurchase
agreements have maturity dates ranging from one to 365 days. The Bank also has
in place $10.0 million in credit lines with correspondent banks and a credit
facility of $142,600,000 with the Federal Reserve Bank of Boston using
commercial and home equity loans as collateral which are currently not in
use.
Borrowed
funds at December 31, 2009 and 2008 have the following range of interest rates
and maturity dates:
|
As
of December 31, 2009
|
||||||||
|
Federal
Home Loan Bank Advances
|
||||||||
|
2010
|
0.20% - 5.41 | % | $ | 99,225,000 | ||||
|
2012
|
4.39 | % | 10,000,000 | |||||
|
2013
|
3.49 | % | 10,000,000 | |||||
|
2014
|
2.73% - 3.89 | % | 20,000,000 | |||||
|
2015
and thereafter
|
0.00% - 2.69 | % | 60,177,000 | |||||
| 199,402,000 | ||||||||
|
Treasury
Tax & Loan Notes (rate at December 31, 2009 was 0.00%)
|
variable
|
638,000 | ||||||
|
Repurchase
agreements
|
||||||||
|
Municipal
and commercial customers
|
0.90% - 4.00 | % | 49,738,000 | |||||
| $ | 249,778,000 | |||||||
|
As
of December 31, 2008
|
||||||||
|
Federal
Home Loan Bank Advances
|
||||||||
|
2009
|
0.36% - 5.00 | % | $ | 80,227,000 | ||||
|
2010
|
4.43% - 5.41 | % | 50,000,000 | |||||
|
2012
|
4.39 | % | 10,000,000 | |||||
|
2013
|
3.49 | % | 10,000,000 | |||||
|
2014
and thereafter
|
0.00% - 3.89 | % | 70,184,000 | |||||
| 220,411,000 | ||||||||
|
Treasury
Tax & Loan Notes (rate at December 31, 2008 was 0.00%)
|
variable
|
2,864,000 | ||||||
|
Repurchase
agreements
|
||||||||
|
Municipal
and commercial customers
|
1.49% - 4.75 | % | 48,799,000 | |||||
| $ | 272,074,000 | |||||||
The First
Bancorp 2009 Form 10-k
Page
59
401(k)
Plan
The Bank
has a defined contribution plan available to substantially all employees who
have completed six months of service. Employees may contribute up to $16,500 of
their compensation if under age 50 and $22,000 if over age 50, and the Bank may
provide a match to employee contributions not to exceed 3.0% of compensation
depending on contribution level. Subject to a vote of the Board of Directors,
the Bank may also make a profit-sharing contribution to the Plan. Such
contribution equaled 2.0% of each eligible employee’s compensation in 2009,
2008, and 2007. The expense related to the 401(k) plan was $365,000, $356,000,
and $338,000 in 2009, 2008, and 2007, respectively.
Supplemental
Retirement Plan
The Bank
also provides unfunded, non-qualified supplemental retirement benefits for
certain officers, payable in installments over 20 years upon retirement or
death. The agreements consist of individual contracts with differing
characteristics that, when taken together, do not constitute a postretirement
plan. The costs for these benefits are recognized over the service periods of
the participating officers in accordance with FASB ASC Topic 712, “Compensation
– Nonretirement Postemployment Benefits”. The expense of these supplemental
plans was $214,000 in 2009, $164,000 in 2008, and $153,000 in 2007. As of
December 31, 2009 and 2008, the accrued liability of these plans was $1,418,000
and $1,265,000, respectively.
Post-Retirement
Benefit Plans
The Bank
sponsors two post-retirement benefit plans. One plan currently provides a
subsidy for health insurance premiums to certain retired employees and a future
subsidy for seven active employees who were age 50 and over in 1996. These
subsidies are based on years of service and range between $40 and $1,200 per
month per person. The other plan provides life insurance coverage to certain
retired employees. The Bank also provides health insurance for retired
directors. None of these plans are pre-funded.
The
Company utilizes FASB ASC Topic 712, “Compensation – Nonretirement
Postemployment Benefits”, to recognize the overfunded or underfunded status of a
defined benefit postretirement plan (other than a multiemployer plan) as an
asset or liability in its balance sheet and to recognize changes in the funded
status in the year in which the changes occur through comprehensive income of a
business entity. The Bank sponsors postretirement benefit plans which provide
certain life insurance and health insurance benefits for certain retired
employees and health insurance for retired directors.
The
following tables set forth the accumulated post-retirement benefit obligation,
funded status, and net periodic benefit cost:
|
At
December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
Change
in benefit obligations
|
||||||||||||
|
Benefit
obligation at beginning of year:
|
$ | 1,990,000 | $ | 1,949,000 | $ | 2,005,000 | ||||||
|
Service
cost
|
21,000 | 19,000 | 20,000 | |||||||||
|
Interest
cost
|
134,000 | 134,000 | 136,000 | |||||||||
|
Benefits
paid
|
(143,000 | ) | (155,000 | ) | (144,000 | ) | ||||||
|
Actuarial
(gain) loss
|
(40,000 | ) | 43,000 | (68,000 | ) | |||||||
|
Benefit
obligation at end of year:
|
$ | 1,962,000 | $ | 1,990,000 | $ | 1,949,000 | ||||||
|
Funded
status
|
||||||||||||
|
Benefit
obligation at end of year
|
$ | (1,962,000 | ) | $ | (1,990,000 | ) | $ | (1,949,000 | ) | |||
|
Accrued
benefit cost
|
$ | (1,962,000 | ) | $ | (1,990,000 | ) | $ | (1,949,000 | ) | |||
The First
Bancorp 2009 Form 10-k
Page
60
|
For
the years ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
Components
of net periodic benefit cost
|
||||||||||||
|
Service
cost
|
$ | 21,000 | $ | 19,000 | $ | 20,000 | ||||||
|
Interest
cost
|
134,000 | 134,000 | 136,000 | |||||||||
|
Amortization
of unrecognized transition obligation
|
29,000 | 29,000 | 29,000 | |||||||||
|
Amortization
of prior service credit
|
(1,000 | ) | (3,000 | ) | (3,000 | ) | ||||||
|
Amortization
of accumulated losses
|
24,000 | 21,000 | 26,000 | |||||||||
|
Net
periodic benefit cost
|
$ | 207,000 | $ | 200,000 | $ | 208,000 | ||||||
|
Weighted
average assumptions as of December 31
|
||||||||||||
|
Discount
rate
|
7.0 | % | 7.0 | % | 7.0 | % | ||||||
The above
discount rate assumption was used in determining both the accumulated benefit
obligation as well as the net benefit cost. The measurement date for benefit
obligations was as of year-end for all years presented. The estimated amount of
benefits to be paid in 2010 is $148,000. For years ending 2011 through 2014 the
estimated amount of benefits to be paid is $159,000, $168,000, $156,000 and
$164,000 respectively, and the total estimated amount of benefits to be paid for
years ended 2015 through 2019 is $887,000. Plan expense for 2010 is estimated to
be $188,000.
In
accordance with FASB ASC Topic 715, “Compensation – Retirement Benefits”,
amounts not yet reflected in net periodic benefit cost and included in
accumulated other comprehensive income are as follows:
|
At
December 31,
|
2009
|
2008
|
Portion
to Be Recognized in
Income
in 2010
|
|||||||||
|
Unamortized
prior service credit
|
$ | - | $ | 1,000 | $ | - | ||||||
|
Unamortized
net actuarial loss
|
(233,000 | ) | (297,000 | ) | - | |||||||
|
Unrecognized
transition obligation
|
(92,000 | ) | (121,000 | ) | 29,000 | |||||||
| (325,000 | ) | (417,000 | ) | 29,000 | ||||||||
|
Deferred
tax benefit at 35%
|
114,000 | 146,000 | (10,000 | ) | ||||||||
|
Net
unrecognized post-retirement benefits
included
in accumulated other comprehensive income
|
$ | (211,000 | ) | $ | (271,000 | ) | $ | 19,000 | ||||
On
January 9, 2009, the Company received $25 million from preferred stock issuance
under the U.S. Treasury Capital Purchase Program (the “CPP Shares”) at a
purchase price of $1,000 per share. The CPP Shares call for cumulative dividends
at a rate of 5.0% per year for the first five years, and at a rate of 9.0% per
year in following years, payable quarterly in arrears on February 15, May 15,
August 15 and November 15 of each year. Incident to such issuance, the
Company issued to the U.S. Treasury warrants (the “Warrants”) to purchase up to
225,904 shares of the Company’s common stock at a price per share of $16.60
(subject to adjustment). The CPP Shares and the related Warrants (and any shares
of common stock issuable pursuant to the Warrants) are freely transferable by
the U.S. Treasury to third parties and the Company has filed a registration
statement with the Securities and Exchange Commission to allow for possible
resale of such securities. The CPP Shares qualify as Tier 1 capital on the
Company’s books for regulatory purposes and rank senior to the Company’s common
stock and senior or at an equal level in the Company’s capital structure to any
other shares of preferred stock the Company may issue in the
future.
The
Company may redeem the CPP Shares at any time using any funds available to the
Company, and any redemption would be subject to the prior approval of the
Federal Reserve Bank of Boston. The minimum amount that may be redeemed is 25%
of the original CPP investment. The CPP Shares are “perpetual” preferred stock,
which means that neither Treasury nor any subsequent holder would have a right
to require that the Company redeem any of the shares.
During
the first three years following the Company’s sale of the CPP Shares, the
Company is required to obtain Treasury’s consent to increase the dividend per
share paid on the Company’s common stock unless the Company had redeemed the CPP
Shares in full or Treasury had transferred all of the CPP Shares to other
parties. Also during the first three years following the Company’s sale of the
CPP Shares, the Company is required to obtain Treasury’s consent in order to
repurchase any shares of its outstanding stock of any type (other than purchases
of common stock or preferred stock ranking junior to the CPP Shares in the
ordinary course of the Company’s business and consistent with the Company’s past
practices in connection with a benefit plan) unless the Company had redeemed the
CPP Shares in full or Treasury had transferred all of the CPP Shares to other
parties.
As a
condition to Treasury’s purchase of the CPP Shares, during the time that
Treasury holds any equity or debt instrument the Company issued, the Company is
required to comply with certain restrictions and other requirements relating to
the compensation of the Company’s chief executive officer, chief financial
officer and three other most highly compensated executive officers. These
restrictions include a prohibition on severance payments to those executive
officers upon termination of their employment and a $500,000 limit on the tax
deductions the Company can take for compensation expense for each of those
executive officers in a single year as well as a prohibition on bonus
compensation to such officers other than limited amounts of long-term restricted
stock.
In
conjunction with the sale of the CPP Shares, the Company also issued the
Warrants which have a term of ten years and could be exercised by Treasury or a
subsequent holder at any time or from time to time during their term. Treasury
will not vote any shares of common stock it receives upon exercise of the
Warrants, but that restriction would not apply to third parties to whom Treasury
transferred the Warrants. The Warrants (and any common stock issued upon
exercise of the Warrants) could be transferred to third parties separately from
the CPP Shares. The proceeds from the sale of the CPP Shares were allocated
between the CPP Shares and Warrants based on their relative fair values on the
issue date. The fair value of the Warrants was determined using the
Black-Scholes model which includes the following assumptions: common stock price
of $16.60 per share, dividend yield of 4.70%, stock price volatility of 24.43%,
and a risk-free interest rate of 2.01%. The discount on the CPP Shares was based
on the value that was allocated to the Warrants upon issuance, and is being
accreted back to the value of the CPP Shares over a five-year period (the
expected life of the shares upon issuance) on a straight-line
basis.
On August
16, 2007, the Company announced that its Board of Directors had authorized a
program for the repurchase of up to 300,000 shares of the Company’s common stock
or approximately 3.1% of the outstanding shares. This program ended on August
16, 2009 and under the program the Company repurchased 182,869 shares at an
average price of $15.63 and at a total cost of $2.9 million. As a consequence of
the Company’s issuance of securities under the U.S. Treasury’s CPP program, its
ability to repurchase stock while such securities remain outstanding is
restricted to purchases from employee benefit plans. In 2009, the Company
repurchased 11,412 shares from employee benefit plans at an average price of
$14.73 per share and for total proceeds of $168,000.
The
Company has reserved 700,000 shares of its common stock to be made available to
directors and employees who elect to participate in the stock purchase or
savings and investment plans. During 2006, the number of shares set aside for
these plans was increased by the Board of Directors from 480,000 to 700,000. As
of December 31, 2009, 484,851 shares had been issued pursuant to these plans,
leaving 215,149 shares available for future use. The issuance price is based on
the market price of the stock at issuance date. Sales of stock to directors and
employees amounted to 21,469 shares in 2009, 17,425 shares in 2008, and 17,828
shares in 2007.
In 2001,
the Company established a dividend reinvestment plan to allow Shareholders to
use their cash dividends for the automatic purchase of shares in the Company.
When the plan was established, 600,000 shares were registered with the
Securities and Exchange Commission, and as of December 31, 2009, 155,617 shares
have been issued, leaving 444,383 shares for future use. Participation in this
plan is optional and at the individual discretion of each Shareholder. Shares
are purchased for the plan from the Company at a price per share equal to the
average of the daily bid and asked prices reported on the NASDAQ System for the
five trading days immediately preceding, but not including, the dividend payment
date. Sales of stock under the Dividend Reinvestment Plan amounted to 21,229
shares in 2009, 22,243 shares in 2008, and 20,233 shares in 2007.
The First
Bancorp 2009 Form 10-k
Page
61
The Bank
is party to financial instruments with off-balance-sheet risk in the normal
course of business to meet the financing needs of its customers. These financial
instruments include commitments to originate loans, commitments for unused lines
of credit, and standby letters of credit. The instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
consolidated balance sheets. The contract amounts of those instruments reflect
the extent of involvement the Bank has in particular classes of financial
instruments.
Commitments
for unused lines are agreements to lend to a customer provided there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Bank evaluates each customer’s creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on Management’s credit evaluation of
the borrower. The Bank did not incur any losses on its commitments in 2009, 2008
or 2007.
Standby
letters of credit are conditional commitments issued by the Bank to guarantee a
customer’s performance to a third party, with the customer being obligated to
repay (with interest) any amounts paid out by the Bank under the letter of
credit. The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loans to customers.
The
Bank’s exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for loan commitments and standby letters of credit
is represented by the contractual amount of those instruments.
The Bank
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments. At December 31, 2009 and 2008, the
Bank had the following off-balance-sheet financial instruments, whose contract
amounts represent credit risk:
|
As
of December 31,
|
2009
|
2008
|
||||||
|
Unused
lines, collateralized by residential real estate
|
$ | 58,751,000 | $ | 55,370,000 | ||||
|
Other
unused commitments
|
76,125,000 | 75,236,000 | ||||||
|
Standby
letters of credit
|
3,449,000 | 2,687,000 | ||||||
|
Commitments
to extend credit
|
4,512,000 | 12,496,000 | ||||||
|
Total
|
$ | 142,837,000 | $ | 145,789,000 | ||||
The Bank
grants residential, commercial and consumer loans to customers principally
located in the Mid-Coast and Down East regions of Maine. Collateral on these
loans typically consists of residential or commercial real estate, or personal
property. Although the loan portfolio is diversified, a substantial portion of
borrowers’ ability to honor their contracts is dependent on the economic
conditions in the area, especially in the real estate sector.
The First
Bancorp 2009 Form 10-k
Page
62
The
following table provides detail for basic earnings per share (EPS) and diluted
earnings per share for the years ended December 31, 2009, 2008 and
2007:
|
Income
|
Shares
|
Per-Share
|
||||||||||
|
(Numerator)
|
(Denominator)
|
Amount
|
||||||||||
|
For
the year ended December 31, 2009
|
||||||||||||
|
Net
income as reported
|
$ | 13,042,000 | ||||||||||
|
Less
dividends and amortization of premium on preferred stock
|
1,161,000 | |||||||||||
|
Basic
EPS: Income available to common shareholders
|
11,881,000 | 9,721,172 | $ | 1.22 | ||||||||
|
Effect
of dilutive securities: incentive stock options
|
12,072 | |||||||||||
|
Diluted
EPS: Income available to common shareholders plus assumed
conversions
|
$ | 11,881,000 | 9,733,244 | $ | 1.22 | |||||||
|
For
the year ended December 31, 2008
|
||||||||||||
|
Net
income as reported
|
$ | 14,034,000 | ||||||||||
|
Basic
EPS: Income available to common shareholders
|
14,034,000 | 9,701,379 | $ | 1.45 | ||||||||
|
Effect
of dilutive securities: incentive stock options
|
18,952 | |||||||||||
|
Diluted
EPS: Income available to common shareholders plus assumed
conversions
|
$ | 14,034,000 | 9,720,331 | $ | 1.44 | |||||||
|
For
the year ended December 31, 2007
|
||||||||||||
|
Net
income as reported
|
$ | 13,101,000 | ||||||||||
|
Basic
EPS: Income available to common shareholders
|
$ | 13,101,000 | 9,787,287 | $ | 1.34 | |||||||
|
Effect
of dilutive securities: incentive stock options
|
25,731 | |||||||||||
|
Diluted
EPS: Income available to common shareholders plus assumed
conversions
|
$ | 13,101,000 | 9,813,018 | $ | 1.34 | |||||||
All
earnings per share calculations have been made using the weighted average number
of shares outstanding during the period. The dilutive securities are incentive
stock options granted to certain key members of Management and warrants granted
to the U.S. Treasury under the Capital Purchase program. The dilutive number of
shares has been calculated using the treasury method, assuming that all granted
options and warrants were exercisable at the end of each period.
Certain
assets and liabilities are recorded at fair value to provide additional insight
into the Company’s quality of earnings. Some of these assets and liabilities are
measured on a recurring basis while others are measured on a nonrecurring basis,
with the determination based upon applicable existing accounting pronouncements.
For example, securities available for sale are recorded at fair value on a
recurring basis. Other assets, such as, mortgage servicing rights, loans held
for sale, and impaired loans, are recorded at fair value on a nonrecurring basis
using the lower of cost or market methodology to determine impairment of
individual assets. The Company groups assets and liabilities which are recorded
at fair value in three levels, based on the markets in which the assets and
liabilities are traded and the reliability of the assumptions used to determine
fair value. A financial instrument’s level within the fair value hierarchy is
based on the lowest level of input that is significant to the fair value
measurement (with level 1 considered highest and level 3 considered lowest). A
brief description of each level follows.
Level 1
– Valuation is based
upon quoted prices for identical instruments in active markets.
Level 2
– Valuation is based
upon quoted prices for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active, and model-based
valuation techniques for which all significant assumptions are observable in the
market.
Level 3
– Valuation is
generated from model-based techniques that use at least one significant
assumption not observable in the market. These unobservable assumptions reflect
estimates that market participants would use in pricing the asset or liability.
Valuation includes use of discounted cash flow models and similar
techniques.
The most
significant instruments that the Company fair values include securities which
fall into Level 2 in the fair value hierarchy. The securities in the available
for sale portfolio are priced by independent providers. In obtaining
such
The First
Bancorp 2009 Form 10-k
Page
63
valuation
information from third parties, the Company has evaluated their valuation
methodologies used to develop the fair values in order to determine whether the
valuations are representative of an exit price in the Company’s principal
markets. The Company’s principal markets for its securities portfolios are the
secondary institutional markets, with an exit price that is predominantly
reflective of bid level pricing in those markets.
Assets
and Liabilities Recorded at Fair Value on a Recurring Basis
Securities
Available for Sale.
Investment securities available for sale are recorded
at fair value on a recurring basis. Fair value measurement is based upon quoted
prices for similar assets, if available. If quoted prices are not available,
fair values are measured using matrix pricing models, or other model-based
valuation techniques requiring observable inputs other than quoted prices such
as yield curves, prepayment speeds, and default rates. Recurring Level 1
securities would include U.S. Treasury securities that are traded by dealers or
brokers in active over-the-counter markets. Recurring Level 2 securities include
federal agency securities, mortgage-backed securities, collateralized mortgage
obligations, municipal bonds and corporate debt securities. The following table
presents the balances of assets and liabilities that were measured at fair value
on a recurring basis as of December 31, 2009 and 2008.
|
At
December 31, 2009
|
||||||||||||||||
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
|
Securities
available for sale
|
||||||||||||||||
|
U.S.
Treasury and agency
|
$ | - | $ | 30,959,000 | $ | - | $ | 30,959,000 | ||||||||
|
Mortgage-backed
securities
|
- | 31,148,000 | - | 31,148,000 | ||||||||||||
|
State
and political subdivisions
|
- | 18,514,000 | - | 18,514,000 | ||||||||||||
|
Corporate
securities
|
- | 818,000 | - | 818,000 | ||||||||||||
|
Other
equity securities
|
- | 399,000 | - | 399,000 | ||||||||||||
|
Total
assets
|
$ | - | $ | 81,838,000 | $ | - | $ | 81,838,000 | ||||||||
|
At
December 31, 2008
|
||||||||||||||||
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
|
Securities
available for sale
|
||||||||||||||||
|
Mortgage-backed
securities
|
$ | - | $ | 922,000 | $ | - | $ | 922,000 | ||||||||
|
State
and political subdivisions
|
- | 8,910,000 | - | 8,910,000 | ||||||||||||
|
Corporate
securities
|
- | 2,977,000 | - | 2,977,000 | ||||||||||||
|
Other
equity securities
|
- | 263,000 | - | 263,000 | ||||||||||||
|
Total
assets
|
$ | - | $ | 13,072,000 | $ | - | $ | 13,072,000 | ||||||||
Assets
and Liabilities Recorded at Fair Value on a Non-Recurring Basis
Mortgage
Servicing Rights
. Mortgage servicing rights represent the value
associated with servicing residential mortgage loans. Servicing assets and
servicing liabilities are reported using the amortization method or the fair
value measurement method. In evaluating the carrying values of mortgage
servicing rights, the Company obtains third party valuations based on loan level
data including note rate, type and term of the underlying loans. As such, the
Company classifies mortgage servicing rights as nonrecurring Level
2.
Loans Held for
Sale.
Mortgage loans held for sale are recorded at the lower of carrying
value or market value. The fair value of mortgage loans held for sale is based
on what secondary markets are currently offering for portfolios with similar
characteristics. As such, the Company classifies mortgage loans held for sale as
nonrecurring Level 2.
Other Real Estate
Owned.
Real estate acquired through foreclosure is recorded at fair
value. The fair value of other real estate owned is based on property appraisals
and an analysis of similar properties currently available. As such, the Company
records other real estate owned as nonrecurring Level 2.
Impaired Loans.
A loan is considered to be impaired when it is probable that all of the
principal and interest due under the original underwriting terms of the loan may
not be collected. Impairment is measured based on the fair value of the
underlying collateral. The Company measures impairment on all nonaccrual loans
for which it has established specific reserves as part of the specific allocated
allowance component of the allowance for loan losses. As such, the Company
records impaired loans as nonrecurring Level 2.
The First
Bancorp 2009 Form 10-k
Page
64
The
following table presents assets measured at fair value on a nonrecurring basis
as of December 31, 2009, that have had a fair value adjustment since their
initial recognition as of March 31, 2008. Other real estate owned is presented
net of an allowance for losses of $583,000. Impaired loans are presented net of
their related specific allowance for loan losses of $2,196,000.
|
At December 31, 2009
|
||||||||||||||||
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
|
Mortgage
servicing rights
|
$ | - | $ | 1,199,000 | $ | - | $ | 1,199,000 | ||||||||
|
Loans
held for sale
|
- | 2,876,000 | - | 2,876,000 | ||||||||||||
|
Other
real estate owned
|
- | 5,345,000 | - | 5,345,000 | ||||||||||||
|
Impaired
loans
|
- | 9,965,000 | - | 9,965,000 | ||||||||||||
|
Total
Assets
|
$ | - | $ | 19,385,000 | $ | - | $ | 19,385,000 | ||||||||
The
following table presents assets measured at fair value on a nonrecurring basis
as of December 31, 2008, that have had a fair value adjustment since their
initial recognition as of March 31, 2008. Other real estate owned is presented
net of an allowance for losses of $325,000. Impaired loans are presented net of
their related specific allowance for loan losses of $1,957,000.
|
At December 31, 2008
|
||||||||||||||||
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
|
Mortgage
servicing rights
|
$ | - | $ | 311,000 | $ | - | $ | 311,000 | ||||||||
|
Loans
held for sale
|
- | 1,298,000 | - | 1,298,000 | ||||||||||||
|
Other
real estate owned
|
- | 2,428,000 | - | 2,428,000 | ||||||||||||
|
Impaired
loans
|
- | 10,492,000 | - | 10,492,000 | ||||||||||||
|
Total
Assets
|
$ | - | $ | 14,529,000 | $ | - | $ | 14,529,000 | ||||||||
FASB ASC
Topic 820 “Fair Value Measurements and Disclosures” requires disclosures of fair
value information about financial instruments, whether or not recognized in the
balance sheet, if the fair values can be reasonably determined. Fair value is
best determined based upon quoted market prices. However, in many instances,
there are no quoted market prices for the Company’s various financial
instruments. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques using
observable inputs when available. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. Accordingly, the fair value estimates may not be realized in an immediate
settlement of the instrument. FASB ASC Topic 820 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented may not necessarily
represent the underlying fair value of the Company.
The First
Bancorp 2009 Form 10-k
Page
65
The
estimated fair values for financial instruments as of December 31, 2009 and 2008
were as follows:
|
December 31, 2009
|
December 31, 2008
|
|||||||||||||||
|
Carrying
|
Estimated
|
Carrying
|
Estimated
|
|||||||||||||
|
amount
|
fair
value
|
amount
|
fair
value
|
|||||||||||||
|
Financial
assets
|
||||||||||||||||
|
Cash
and cash equivalents
|
$ | 15,332,000 | $ | 15,332,000 | $ | 16,856,000 | $ | 16,856,000 | ||||||||
|
Securities
available for sale
|
81,838,000 | 81,838,000 | 13,072,000 | 13,072,000 | ||||||||||||
|
Securities
to be held to maturity
|
190,537,000 | 192,838,000 | 234,767,000 | 229,460,000 | ||||||||||||
|
Federal
Home Loan Bank and Federal Reserve Bank stock
|
15,443,000 | 15,443,000 | 14,693,000 | 14,693,000 | ||||||||||||
|
Loans
held for sale
|
2,876,000 | 2,876,000 | 1,298,000 | 1,298,000 | ||||||||||||
|
Loans
(net of allowance for loan losses)
|
938,555,000 | 938,095,000 | 970,473,000 | 994,560,000 | ||||||||||||
|
Cash
surrender value of life insurance
|
9,492,000 | 9,492,000 | 9,148,000 | 9,148,000 | ||||||||||||
|
Accrued
interest receivable
|
4,889,000 | 4,889,000 | 5,783,000 | 5,783,000 | ||||||||||||
|
Financial
liabilities
|
||||||||||||||||
|
Deposits
|
$ | 922,667,000 | $ | 877,883,000 | $ | 925,736,000 | $ | 904,926,000 | ||||||||
|
Borrowed
funds
|
249,778,000 | 255,292,000 | 272,074,000 | 290,336,000 | ||||||||||||
|
Accrued
interest payable
|
1,078,000 | 1,078,000 | 1,322,000 | 1,322,000 | ||||||||||||
The fair
value methods and assumptions for the Company’s financial instruments are set
forth below.
Cash
and Cash Equivalents
The
carrying values of cash equivalents, due from banks and federal funds sold
approximate their relative fair values.
Investment
Securities
The fair
values of investment securities are estimated based on bid prices published in
financial newspapers or bid quotations received from securities dealers. The
fair value of certain state and municipal securities is not readily available
through market sources other than dealer quotations, so fair value estimates are
based on quoted market prices of similar instruments, adjusted for differences
between the quoted instruments and the instruments being valued. Fair values are
calculated based on the value of one unit without regard to any premium or
discount that may result from concentrations of ownership of a financial
instrument, possible tax ramifications, or estimated transaction costs. If these
considerations had been incorporated into the fair value estimates, the
aggregate fair value could have been changed. The carrying values of restricted
equity securities approximate fair values.
Federal
Home Loan Bank and Federal Reserve Bank Stock
The
carrying value approximates fair value.
Loans
Fair
values are estimated for portfolios of loans with similar financial
characteristics. The fair values of performing loans are calculated by
discounting scheduled cash flows through the estimated maturity using estimated
market discount rates that reflect the credit and interest risk inherent in the
loan. The estimates of maturity are based on the Company’s historical experience
with repayments for each loan classification, modified, as required, by an
estimate of the effect of current economic and lending conditions, and the
effects of estimated prepayments. Fair values for significant non-performing
loans are based on estimated cash flows and are discounted using a rate
commensurate with the risk associated with the estimated cash flows. Assumptions
regarding credit risk, cash flows, and discount rates are judgmentally
determined using available market information and specific borrower information.
Management has made estimates of fair value using discount rates that it
believes to be reasonable. However, because there is no market for many of these
financial instruments, Management has no basis to determine whether the fair
value presented above would be indicative of the value negotiated in an actual
sale.
The First
Bancorp 2009 Form 10-k
Page
66
Cash
Surrender Value of Life Insurance
The fair
value is based on the actual cash surrender value of life insurance
policies.
Accrued
Interest Receivable
The fair
value estimate of this financial instrument approximates the carrying value as
this financial instrument has a short maturity. It is the Company’s policy to
stop accruing interest on loans for which it is probable that the interest is
not collectible. Therefore, this financial instrument has been adjusted for
estimated credit loss.
Deposits
The fair
value of deposits is based on the discounted value of contractual cash flows.
The discount rate is estimated using the rates currently offered for deposits of
similar remaining maturities. The fair value estimates do not include the
benefit that results from the low-cost funding provided by the deposits compared
to the cost of borrowing funds in the market. If that value were considered, the
fair value of the Company’s net assets could increase.
Borrowed
Funds
The fair
value of borrowed funds is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently available for
borrowings of similar remaining maturities.
Accrued
Interest Payable
The fair
value estimate approximates the carrying amount as this financial instrument has
a short maturity.
Off-Balance-Sheet
Instruments
Off-balance-sheet
instruments include loan commitments. Fair values for loan commitments have not
been presented as the future revenue derived from such financial instruments is
not significant.
Limitations
Fair
value estimates are made at a specific point in time, based on relevant market
information and information about the financial instrument. These values do not
reflect any premium or discount that could result from offering for sale at one
time the Company’s entire holdings of a particular financial instrument. Because
no market exists for a significant portion of the Company’s financial
instruments, fair value estimates are based on Management’s judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates. Fair value estimates
are based on existing on- and off-balance-sheet financial instruments without
attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments. Other
significant assets and liabilities that are not considered financial instruments
include the deferred tax asset, premises and equipment, and other real estate
owned. In addition, tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of the estimates.
Other
operating income and other operating expense include the following items greater
than 1% of revenues.
|
For
the years ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
Other
operating income
|
||||||||||||
|
Merchant
credit card processing income
|
$ | 2,289,000 | $ | 2,433,000 | $ | 2,528,000 | ||||||
|
ATM
income
|
1,184,000 | 1,156,000 | 971,000 | |||||||||
|
Gain
on sale of merchant credit card processing portfolio
|
1,402,000 | - | - | |||||||||
|
Other
operating expense
|
||||||||||||
|
Merchant
credit card processing fees
|
$ | 2,214,000 | $ | 2,358,000 | $ | 2,427,000 | ||||||
The First
Bancorp 2009 Form 10-k
Page
67
The
ability of the Company to pay cash dividends to its Shareholders depends
primarily on receipt of dividends from its subsidiary, the Bank. The subsidiary
may pay dividends to its parent out of so much of its net income as the Bank’s
directors deem appropriate, subject to the limitation that the total of all
dividends declared by the Bank in any calendar year may not exceed the total of
its net income of that year combined with its retained net income of the
preceding two years and subject to minimum regulatory capital requirements. The
amount available for dividends in 2010 will be 2010 earnings plus retained
earnings of $11,786,000 from 2009 and 2008.
The
payment of dividends by the Company is also affected by various regulatory
requirements and policies, such as the requirements to maintain adequate
capital. In addition, if, in the opinion of the applicable regulatory authority,
a bank under its jurisdiction is engaged in or is about to engage in an unsafe
or unsound practice (which, depending on the financial condition of the bank,
could include the payment of dividends), that authority may require, after
notice and hearing, that such bank cease and desist from that practice. The
Federal Reserve Bank and the Comptroller of the Currency have each indicated
that paying dividends that deplete a bank’s capital base to an inadequate level
would be an unsafe and unsound banking practice. The Federal Reserve Bank, the
Comptroller and the Federal Deposit Insurance Corporation have issued policy
statements which provide that bank holding companies and insured banks should
generally only pay dividends out of current operating earnings.
In
addition to the effect on the payment of dividends, failure to meet minimum
capital requirements can also result in mandatory and discretionary actions by
regulators that, if undertaken, could have an impact on the Company’s
operations. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measurements of the Bank’s assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank’s capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative
measures established by regulation to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios set forth in the table below of Tier 1
capital and Tier 2 or total capital to risk-weighted assets and of Tier 1
capital to average assets. Management believes, as of December 31, 2009, that
the Bank meets all capital adequacy requirements to which it is
subject.
As of
December 31, 2009, the most recent notification from the Office of the
Comptroller of the Currency classified the Bank as well-capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well-capitalized, the Bank must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table. There are no
conditions or events since this notification that Management believes have
changed the institution’s category.
The
actual and minimum capital amounts and ratios for the Bank are presented in the
following table:
|
For
capital
|
To
be well-capitalized
|
|||||||||||
|
adequacy
|
under
prompt corrective
|
|||||||||||
|
Actual
|
purposes
|
action
provisions
|
||||||||||
|
As
of December 31, 2009
|
||||||||||||
|
Tier
2 capital to
|
$ | 129,338,000 | $ | 69,553,000 | $ | 86,941,000 | ||||||
|
risk-weighted
assets
|
14.88 | % | 8.00 | % | 10.00 | % | ||||||
|
Tier
1 capital to
|
$ | 118,437,000 | $ | 34,776,000 | $ | 52,165,000 | ||||||
|
risk-weighted
assets
|
13.62 | % | 4.00 | % | 6.00 | % | ||||||
|
Tier
1 capital to
|
$ | 118,437,000 | $ | 51,559,000 | $ | 64,449,000 | ||||||
|
average
assets
|
9.19 | % | 4.00 | % | 5.00 | % | ||||||
|
As
of December 31, 2008
|
||||||||||||
|
Tier
2 capital to
|
$ | 97,454,000 | $ | 70,243,000 | $ | 87,804,000 | ||||||
|
risk-weighted
assets
|
11.10 | % | 8.00 | % | 10.00 | % | ||||||
|
Tier
1 capital to
|
$ | 88,554,000 | $ | 35,122,000 | $ | 52,682,000 | ||||||
|
risk-weighted
assets
|
10.09 | % | 4.00 | % | 6.00 | % | ||||||
|
Tier
1 capital to
|
$ | 88,554,000 | $ | 51,311,000 | $ | 64,139,000 | ||||||
|
average
assets
|
6.90 | % | 4.00 | % | 5.00 | % | ||||||
The First
Bancorp 2009 Form 10-k
Page
68
The
actual and minimum capital amounts and ratios for the Company, on a consolidated
basis, are presented in the following table:
|
For
capital
|
To
be well-capitalized
|
|||||||||||
|
adequacy
|
under
prompt corrective
|
|||||||||||
|
Actual
|
purposes
|
action
provisions
|
||||||||||
|
As
of December 31, 2009
|
||||||||||||
|
Tier
2 capital to
|
$ | 130,031,000 | $ | 69,557,000 | n/a | |||||||
|
risk-weighted
assets
|
14.96 | % | 8.00 | % | n/a | |||||||
|
Tier
1 capital to
|
$ | 119,130,000 | $ | 34,778,000 | n/a | |||||||
|
risk-weighted
assets
|
13.70 | % | 4.00 | % | n/a | |||||||
|
Tier
1 capital to
|
$ | 119,130,000 | $ | 50,461,000 | n/a | |||||||
|
average
assets
|
9.44 | % | 4.00 | % | n/a | |||||||
|
As
of December 31, 2008
|
||||||||||||
|
Tier
2 capital to
|
$ | 97,649,000 | $ | 70,218,000 | n/a | |||||||
|
risk-weighted
assets
|
11.13 | % | 8.00 | % | n/a | |||||||
|
Tier
1 capital to
|
$ | 88,749,000 | $ | 35,109,000 | n/a | |||||||
|
risk-weighted
assets
|
10.11 | % | 4.00 | % | n/a | |||||||
|
Tier
1 capital to
|
$ | 88,749,000 | $ | 50,204,000 | n/a | |||||||
|
average
assets
|
7.07 | % | 4.00 | % | n/a | |||||||
Various
legal claims also arise from time to time in the normal course of business
which, in the opinion of Management, will have no material effect on the
Company’s consolidated financial statements.
Certain
items from prior year were reclassified in the financial statements to conform
with the current year presentation. These do not have a material impact on the
balance sheet or statement of income presentations.
The First
Bancorp 2009 Form 10-k
Page
69
Condensed
financial information for The First Bancorp, Inc. exclusive of its subsidiary is
as follows:
Balance
Sheets
|
As
of December 31,
|
2009
|
2008
|
||||||
|
Assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 313,000 | $ | 213,000 | ||||
|
Dividends
receivable
|
1,900,000 | 1,800,000 | ||||||
|
Investments
|
260,000 | 123,000 | ||||||
|
Investment
in subsidiary
|
119,786,000 | 89,323,000 | ||||||
|
Goodwill
|
27,559,000 | 27,559,000 | ||||||
|
Other
assets
|
20,000 | 64,000 | ||||||
|
Total
assets
|
$ | 149,838,000 | $ | 119,082,000 | ||||
|
Liabilities and shareholders’
equity
|
||||||||
|
Dividends
payable
|
$ | 1,900,000 | $ | 1,891,000 | ||||
|
Other
liabilities
|
- | 10,000 | ||||||
|
Total
liabilities
|
1,900,000 | 1,901,000 | ||||||
|
Shareholders’
equity
|
||||||||
|
Preferred
stock
|
24,606,000 | - | ||||||
|
Common
stock
|
97,000 | 97,000 | ||||||
|
Additional
paid-in capital
|
45,121,000 | 44,117,000 | ||||||
|
Retained
earnings
|
78,335,000 | 73,259,000 | ||||||
|
Accumulated
other comprehensive loss
|
||||||||
|
Net
unrealized loss on available for sale securities, net
of
tax benefit of $3,000 in 2009 and $11,000 in 2008
|
(10,000 | ) | (21,000 | ) | ||||
|
Net
unrealized loss on post-retirement benefit costs, net
of
tax benefit of $114,000 in 2009 and $146,000 in 2008
|
(211,000 | ) | (271,000 | ) | ||||
|
Total
accumulated other comprehensive loss
|
(221,000 | ) | (292,000 | ) | ||||
|
Total
shareholders’ equity
|
147,938,000 | 117,181,000 | ||||||
|
Total
liabilities and shareholders’ equity
|
$ | 149,838,000 | $ | 119,082,000 | ||||
Statements
of Income
|
For
the years ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
Investment
income
|
$ | 10,000 | $ | 11,000 | $ | 28,000 | ||||||
|
Other
income
|
- | - | 26,000 | |||||||||
|
Other
expense
|
152,000 | 136,000 | 179,000 | |||||||||
|
Loss
before Bank earnings
|
(142,000 | ) | (125,000 | ) | (125,000 | ) | ||||||
|
Equity
in earnings of Bank
|
||||||||||||
|
Remitted
|
8,404,000 | 7,281,000 | 7,825,000 | |||||||||
|
Unremitted
|
4,780,000 | 6,878,000 | 5,401,000 | |||||||||
|
Net
income
|
$ | 13,042,000 | $ | 14,034,000 | $ | 13,101,000 | ||||||
The First
Bancorp 2009 Form 10-k
Page
70
Statements
of Cash Flows
|
For
the years ended December 31,
|
2009
|
2008
|
2007
|
|||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income
|
$ | 13,042,000 | $ | 14,034,000 | $ | 13,101,000 | ||||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
|
- | 2,000 | 1,000 | |||||||||
|
Net
realized loss on sale of securities
|
- | 24,000 | - | |||||||||
|
Equity
compensation expense
|
37,000 | 37,000 | 59,000 | |||||||||
|
(Increase)
decrease in other assets
|
38,000 | (38,000 | ) | (134,000 | ) | |||||||
|
Increase
(decrease) in other liabilities
|
(41,000 | ) | 278,000 | (73,000 | ) | |||||||
|
Gain
on sale of real estate
|
- | - | (27,000 | ) | ||||||||
|
Unremitted
earnings of Bank
|
(4,780,000 | ) | (6,878,000 | ) | (5,401,000 | ) | ||||||
|
Net
cash provided by operating activities
|
8,296,000 | 7,459,000 | 7,526,000 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Proceeds
from maturities and calls of investments
|
- | - | 251,000 | |||||||||
|
Purchases
of investments
|
(120,000 | ) | - | - | ||||||||
|
Preferred
stock investment in subsidiary
|
(25,000,000 | ) | - | - | ||||||||
|
Capital
expenditures
|
- | - | (350,000 | ) | ||||||||
|
Net
cash used in investing activities
|
(25,120,000 | ) | - | (99,000 | ) | |||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Proceeds
from sale of real estate
|
- | 348,000 | 250,000 | |||||||||
|
Proceeds
from issuance of preferred stock
|
25,000,000 | - | - | |||||||||
|
Payments
to purchase common stock
|
(263,000 | ) | (1,414,000 | ) | (1,687,000 | ) | ||||||
|
Proceeds
from sale of common stock
|
836,000 | 732,000 | 802,000 | |||||||||
|
Dividends
paid
|
(8,649,000 | ) | (7,281,000 | ) | (6,565,000 | ) | ||||||
|
Net
cash provided (used) in financing activities
|
16,924,000 | (7,615,000 | ) | (7,200,000 | ) | |||||||
|
Net
increase (decrease) in cash and cash equivalents
|
100,000 | (156,000 | ) | 227,000 | ||||||||
|
Cash
and cash equivalents at beginning of year
|
213,000 | 369,000 | 142,000 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 313,000 | $ | 213,000 | $ | 369,000 | ||||||
The First
Bancorp 2009 Form 10-k
Page
71
In April
2009, the FASB issued a change to ASC Topic 820, “Fair Value Measurements and
Disclosures”, related to determining fair values when there is no active market
or where the price inputs being used represent distressed sales. The update
provides guidance in determining when and how to use modeled values, as opposed
to broker price quotes. The update should result in a greater use of models for
estimating fair value, as well as more consistent approaches in modeling. This
change was effective for interim and annual reporting periods ending after June
15, 2009. This guidance does not require any new fair value measurements.
Management has adopted this guidance and there was no material impact on the
financial statements of the Company.
In April
2009, the FASB issued a change to ASC Topic 820, “Fair Value Measurements and
Disclosures”, intended to bring greater consistency to the timing of impairment
recognition, and provide greater clarity to investors about credit and noncredit
components of impaired debt securities that are not expected to be sold. Under
the guidance, for many securities with other-than-temporary impairment, only the
amount of the estimated credit loss is recorded through earnings, while the
remaining mark-to-market loss is recognized through other comprehensive income
or loss. The change is retroactive, meaning entities will reclassify amounts
back into retained earnings related to non-credit-related market losses on
certain investments held at the beginning of the period of adoption. This
guidance was effective for interim and annual reporting periods ending after
June 15, 2009. Management has adopted this guidance and there was no material
impact on the Company’s financial statements.
In May
2009, the FASB issued a change to ASC Topic 855, “Subsequent Events.” ASC Topic
855 establishes general standards for the evaluation, recognition and disclosure
of events and transactions that occur after the balance sheet date. Although
there is new terminology, the standard is based on the same principles as those
that currently exist in the auditing standards. The standard is effective for
periods ending after June 15, 2009. The adoption of ASC Topic 855 did not have a
material effect on the Company’s consolidated financial statements.
In June
2009, the FASB issued a change to ASC Topic 860, “Transfers and Servicing”, to
improve the reporting for the transfer of financial assets resulting from 1)
practices that have developed since the issuance of a previous FASB statement
that are not consistent with the original intent and key requirements of that
statement and 2) concerns of financial statement users that many of the
financial assets (and related obligations) that have been derecognized should
continue to be reported in the financial statements of transferors. This ASC
must be applied as of the beginning of each reporting entity’s first annual
reporting period that begins after November 15, 2009. Earlier application is
prohibited. The Company does not expect that the adoption of this Statement will
have a material impact on the Company’s consolidated financial
statements.
In June
2009, the FASB issued ASC Topic 105, “Generally Accepted Accounting Principles.”
Under the ASC, the Codification became the source of authoritative GAAP
recognized by the FASB to be applied by non-governmental entities. On the
effective date of this ASC, the Codification superseded all then-existing
accounting and reporting standards, other than those issued by the Securities
and Exchange Commission (SEC). All other non-grandfathered non-SEC accounting
literature not included in the Codification became non-authoritative. This ASC
is effective for financial statements issued for annual periods ending after
September 15, 2009. In the FASB’s view, the issuance of this ASC and the
Codification will not change GAAP, except for those nonpublic nongovernmental
entities that must now apply the American Institute of Certified Public
Accountants Technical Inquiry Service Section 5100, “Revenue Recognition,”
paragraphs 38–76, now part of ASC Topic 985. Management adopted ASC Topic 105 in
2009 and there was no material impact on the Company’s consolidated financial
statements.
In August
2009, the FASB issued Accounting Standards Update (ASU) 2009-05, “Fair Value
Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value,”
which updates ASC Topic 820. The update provides clarification that in
circumstances in which a quoted price in an active market for the identical
liability is not available, a reporting entity is required to measure fair value
using one or more of the following techniques:
|
1.
|
A
valuation technique that uses a) the quoted price of an identical
liability when traded as an asset, or b) quoted prices for similar
liabilities or similar liabilities when traded as
assets.
|
|
2.
|
Another
valuation technique that is consistent with the principles of ASC Topic
820, examples include an income approach, such as a present value
technique, or a market approach, such as a technique that is based on the
amount at measurement date that the reporting entity would pay to transfer
the identical liability or would receive to enter into the identical
liability.
|
This
standard is effective for financial statements issued for the first reporting
period beginning after August 2009. The adoption is not expected to have a
material impact on the Company’s consolidated financial statements.
In
January 2010, the FASB issued ASU 2010-6, “Fair Value Measurements and
Disclosures (Topic 820) - Improving Disclosures about Fair Value Measurements,”
to amend the disclosure requirements related to recurring and nonrecurring fair
value measurements. The guidance requires new disclosures on the transfers of
assets and liabilities between Level 1 (quoted prices in active market for
identical assets or liabilities) and Level 2 (significant other
The First
Bancorp 2009 Form 10-k
Page
72
observable
inputs) of the fair value measurement hierarchy, including the reasons and the
timing of the transfers. Additionally, the guidance requires a roll forward of
activities on purchases, sales, issuance, and settlements of the assets and
liabilities measured using significant unobservable inputs (Level 3 fair value
measurements). The guidance will become effective with the reporting period
beginning January 1, 2010, except for the disclosure on the roll forward
activities for any Level 3 fair value measurements, which will become effective
with the reporting period beginning January 1, 2011. Other than requiring
additional disclosures, adoption of this new guidance will not have a material
impact on the financial statements.
The
following tables provide unaudited financial information by quarter for each of
the past two years:
|
Dollars
in thousands except per share data
|
2008Q1 | 2008Q2 | 2008Q3 | 2008Q4 | 2009Q1 | 2009Q2 | 2009Q3 | 2009Q4 | ||||||||||||||||||||||||
|
Balance
Sheets
|
||||||||||||||||||||||||||||||||
|
Cash
|
$ | 15,837 | $ | 19,997 | $ | 21,667 | $ | 16,856 | $ | 15,815 | $ | 18,575 | $ | 23,921 | $ | 15,332 | ||||||||||||||||
|
Investments
|
218,185 | 231,685 | 246,364 | 247,839 | 309,106 | 283,599 | 250,359 | 272,375 | ||||||||||||||||||||||||
|
FHLB
& FRB stock,
at
cost
|
14,693 | 14,693 | 14,693 | 14,693 | 14,693 | 14,693 | 14,693 | 15,443 | ||||||||||||||||||||||||
|
Net
loans
|
928,887 | 946,267 | 953,797 | 971,771 | 982,158 | 973,746 | 963,817 | 941,730 | ||||||||||||||||||||||||
|
Other
assets
|
70,606 | 72,731 | 74,636 | 74,585 | 76,728 | 79,373 | 79,052 | 86,514 | ||||||||||||||||||||||||
|
Total
assets
|
$ | 1,248,208 | $ | 1,285,373 | $ | 1,311,157 | $ | 1,325,744 | $ | 1,398,500 | $ | 1,369,986 | $ | 1,331,842 | $ | 1,331,394 | ||||||||||||||||
|
Deposits
|
$ | 826,477 | $ | 842,120 | $ | 918,856 | $ | 925,736 | $ | 987,440 | $ | 913,949 | $ | 960,072 | $ | 922,667 | ||||||||||||||||
|
Borrowed
funds
|
295,253 | 317,055 | 264,617 | 272,074 | 254,124 | 297,361 | 213,061 | 249,778 | ||||||||||||||||||||||||
|
Other
liabilities
|
12,867 | 11,440 | 11,812 | 10,753 | 12,336 | 12,478 | 11,095 | 11,011 | ||||||||||||||||||||||||
|
Shareholders’
equity
|
113,611 | 114,758 | 115,872 | 117,181 | 144,600 | 146,198 | 147,614 | 147,938 | ||||||||||||||||||||||||
|
Total
liabilities
&
equity
|
$ | 1,248,208 | $ | 1,285,373 | $ | 1,311,157 | $ | 1,325,744 | $ | 1,398,500 | $ | 1,369,986 | $ | 1,331,842 | $ | 1,331,394 | ||||||||||||||||
|
Income
Statements
|
||||||||||||||||||||||||||||||||
|
Interest
income
|
$ | 18,330 | $ | 17,514 | $ | 17,891 | $ | 17,637 | $ | 16,618 | $ | 16,251 | $ | 15,224 | $ | 14,476 | ||||||||||||||||
|
Interest
expense
|
9,513 | 8,572 | 8,268 | 7,316 | 5,545 | 4,814 | 4,409 | 4,148 | ||||||||||||||||||||||||
|
Net
interest income
|
8,817 | 8,942 | 9,623 | 10,321 | 11,073 | 11,437 | 10,815 | 10,328 | ||||||||||||||||||||||||
|
Provision
for
loan
losses
|
500 | 939 | 875 | 2,386 | 1,650 | 2,950 | 3,060 | 4,500 | ||||||||||||||||||||||||
|
Net
interest income after provision for loan losses
|
8,317 | 8,003 | 8,748 | 7,935 | 9,423 | 8,487 | 7,755 | 5,828 | ||||||||||||||||||||||||
|
Non-interest
income
|
2,176 | 2,518 | 2,856 | 2,096 | 2,586 | 2,963 | 2,977 | 4,229 | ||||||||||||||||||||||||
|
Non-interest
expense
|
5,449 | 5,425 | 6,284 | 5,836 | 6,787 | 6,234 | 6,872 | 6,766 | ||||||||||||||||||||||||
|
Income
before taxes
|
5,044 | 5,096 | 5,320 | 4,195 | 5,222 | 5,216 | 3,860 | 3,291 | ||||||||||||||||||||||||
|
Income
taxes
|
1,453 | 1,493 | 1,488 | 1,187 | 1,494 | 1,454 | 970 | 629 | ||||||||||||||||||||||||
|
Net
income
|
$ | 3,591 | $ | 3,603 | $ | 3,832 | $ | 3,008 | $ | 3,728 | $ | 3,762 | $ | 2,890 | $ | 2,662 | ||||||||||||||||
|
Less
preferred stock
premium
amortization
and
dividends
|
- | - | - | - | 150 | 337 | 337 | 337 | ||||||||||||||||||||||||
|
Net
income available to common shareholders
|
$ | 3,591 | $ | 3,603 | $ | 3,832 | $ | 3,008 | $ | 3,578 | $ | 3,425 | $ | 2,553 | $ | 2,325 | ||||||||||||||||
|
Basic
earnings per share
|
$ | 0.37 | $ | 0.37 | $ | 0.40 | $ | 0.31 | $ | 0.37 | $ | 0.35 | $ | 0.26 | $ | 0.24 | ||||||||||||||||
|
Diluted
earnings per share
|
$ | 0.37 | $ | 0.37 | $ | 0.39 | $ | 0.31 | $ | 0.37 | $ | 0.35 | $ | 0.26 | $ | 0.24 |
The First
Bancorp 2009 Form 10-k
Page
73
Report of Independent
Registered Public Accounting Firm
Berry,
Dunn, McNeil & Parker
The
Shareholders and Board of Directors
The First
Bancorp, Inc.
We have
audited the accompanying consolidated balance sheets of The First Bancorp, Inc.
and Subsidiary as of December 31, 2009 and 2008, and the related consolidated
statements of income, changes in shareholders’ equity, and cash flows for each
of the three years in the period ended December 31, 2009. We have also audited
The First Bancorp, Inc.’s internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The First Bancorp, Inc.’s Management is responsible
for these financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s
Annual Report on Internal Control Over Financial Reporting. Our responsibility
is to express an opinion on these financial statements and an opinion on the
Company’s internal control over financial reporting based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by Management, and
evaluating the overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing
such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with U.S. generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of Management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company’s assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of The First Bancorp,
Inc. and Subsidiary as of December 31, 2009 and 2008, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 2009, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, The First Bancorp, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009, based on
criteria established in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
/s/Berry,
Dunn, McNeil & Parker
Portland,
Maine
March 12,
2010
The First
Bancorp 2009 Form 10-k
Page
74
on Accounting and Financial
Disclosure
None.
As
required by Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange
Act”), as of December 31, 2009, the end of the period covered by this report,
the Company carried out an evaluation under the supervision and with the
participation of the Company’s Management, including the Company’s Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company’s disclosure controls and procedures. In
designing and evaluating the Company’s disclosure controls and procedures, the
Company and its Management recognize that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and the Company’s Management
necessarily was required to apply its judgment in evaluating and implementing
possible controls and procedures. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures are effective to provide reasonable assurance
that information required to be disclosed by the Company in the reports it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms. Also, based on Management’s evaluation, there was
no change in the Company’s internal control over financial reporting that
occurred during the fiscal quarter ended December 31, 2009 that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting. The Company reviews its disclosure controls
and procedures, which may include its internal controls over financial
reporting, on an ongoing basis, and may from time to time make changes aimed at
enhancing their effectiveness and to ensure that the Company’s systems evolve
with its business.
Management’s Annual Report
on Internal Control over Financial Reporting
The
Management of the Company is responsible for the preparation and fair
presentation of the financial statements and other financial information
contained in this Form 10-K. Management is also responsible for establishing and
maintaining adequate internal control over financial reporting and for
identifying the framework used to evaluate its effectiveness. Management has
designed processes, internal control and a business culture that foster
financial integrity and accurate reporting. The Company’s comprehensive system
of internal control over financial reporting was designed to provide reasonable
assurances regarding the reliability of financial reporting and the preparation
of the consolidated financial statements of the Company in accordance with
generally accepted accounting principles. The Company’s accounting policies and
internal control over financial reporting, established and maintained by
Management, are under the general oversight of the Company’s Board of Directors,
including the Board of Directors’ Audit Committee.
Management
has made a comprehensive review, evaluation, and assessment of the Company’s
internal control over financial reporting as of December 31, 2009. The standard
measures adopted by Management in making its evaluation are the measures in
Internal Control – Integrated Framework published by the Committee of Sponsoring
Organizations of the Treadway Commission (“the COSO”). Based upon its review and
evaluation, Management concluded that, as of December 31, 2009, the Company’s
internal control over financial reporting was effective and that there were no
material weaknesses.
Berry,
Dunn, McNeil & Parker, an independent registered public accounting firm,
which has audited and reported on the consolidated financial statements
contained in this Form 10-K, has issued its written attestation report on
Management’s assessment of the Company’s internal control over financial
reporting which follows this report.
/s/Daniel
R.
Daigneault /s/F.
Stephen Ward
Daniel R.
Daigneault, President and
Director F.
Stephen Ward , Treasurer and Chief Financial Officer
(Principal
Executive
Officer)
(Principal Financial Officer, Principal Accounting
Officer)
March 12,
2010
March 12, 2010
The First
Bancorp 2009 Form 10-k
Page
75
None
Information
with respect to directors and executive officers of the Company required by Item
10 shall be included in the Proxy Statement for the Annual Meeting of
Stockholders to be held on April 28, 2010 and is incorporated herein by
reference.
Information
with respect to executive compensation required by Item 11 shall be included in
the Proxy Statement for the Annual Meeting of Stockholders to be held on April
28, 2010 and is incorporated herein by reference.
Information
with respect to security ownership of certain beneficial owners and Management
and related stockholder matters required by Item 12 shall be included in the
Proxy Statement for the Annual Meeting of Stockholders to be held on April 28,
2010 and is incorporated herein by reference.
Information
with respect to certain relationships and related transactions required by Item
13 shall be included in the Proxy Statement for the Annual Meeting of
Stockholders to be held on April 28, 2010 and is incorporated herein by
reference.
Information
with respect to principal accounting fees and services required by Item 14 shall
be included in the Proxy Statement for the Annual Meeting of Stockholders to be
held on April 28, 2010 and is incorporated herein by reference.
The First
Bancorp 2009 Form 10-k
Page
76
A.
Exhibits
Exhibit
2.1 Agreement and Plan of Merger With FNB Bankshares Dated August 25, 2004,
incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K dated August
25, 2004, filed under item 1.01 on August 27, 2004.
Exhibit
3.1 Conformed Copy of the Registrant’s Articles of Incorporation (incorporated
by reference to Exhibit 3.1 to the Company’s Form 8-K filed under item 5.03 on
October 7, 2004).
Exhibit
3.2 Amendment to the Registrant’s Articles of Incorporation (incorporated by
reference to Exhibit 3.1 to the Company’s Form 8-K filed under item 5.03 on May
1, 2008).
Exhibit
3.3 Amendment to the Registrant’s Articles of Incorporation (incorporated by
reference to the Definitive Proxy Statement for the Company’s 2008 Annual
Meeting filed on March 14, 2008).
Exhibit
3.4 Amendment to the Registrant’s Articles of Incorporation authorizing issuance
of preferred stock (incorporated by reference to Exhibit 3.1 to Current Report
on Form 8-K filed on December 29, 2008).
Exhibit
3.5 Conformed Copy of the Company’s Bylaws (incorporated by reference to Exhibit
3.2 to the Company’s Form 8-K filed under item 5.03 on October 7,
2004).
Exhibit
10.2(a) Specimen Employment Continuity Agreement entered into with Mr. McKim,
incorporated by reference to Exhibit 10.2(a) to the Company’s Form 8-K filed
under item 1.01 on January 14, 2005.
Exhibit
10.2(b) Specimen Amendment to Employment Continuity Agreement entered into with
Mr. McKim, incorporated by reference to Exhibit 10.2(b) to the Company’s Form
8-K filed under item 1.01 on January 14, 2005.
Exhibit
10.2(c) Specimen Amendment to Employment Continuity Agreement entered into with
Mr. McKim, incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K
filed under item 1.01 on January 31, 2006.
Exhibit
10.3(a) Specimen Split Dollar Agreement entered into with Mr. McKim with a death
benefit of $250,000. Incorporated by reference to Exhibit 10.3(a) to the
Company’s Form 8-K filed under item 1.01 on January 14, 2005.
Exhibit
10.3(b) Specimen Amendment to Split Dollar Agreement entered into with Mr.
McKim, incorporated by reference to Exhibit 10.3(b) to the Company’s Form 8-K
filed under item 1.01 on January 14, 2005.
Exhibit
10.4 Specimen Amendment to Supplemental Executive Retirement Plan entered into
with Messrs. Daigneault and Ward changing the normal retirement age to receive
the full benefit under the Plan from age 65 to age 63, incorporated by reference
to Exhibit 10.1 to the Company’s Form 8-K filed under item 1.01 on December 30,
2008.
Exhibit
14.1 Code of Ethics for Senior Financial Officers, adopted by the Board of
Directors on September 19, 2003. Incorporated by reference to Exhibit 14.1 to
the Company’s Annual Report on Form 10-K filed on March 15, 2006.
Exhibit
14.2 Code of Business Conduct and Ethics, adopted by the Board of Directors on
April 15, 2004. Incorporated by reference to Exhibit 14.2 to the Company’s
Annual Report on Form 10-K filed on March 15, 2006.
Exhibit
31.1 Certification of Chief Executive Officer Pursuant to Rule 13A-14(A) of The
Securities Exchange Act of 1934
Exhibit
31.2 Certification of Chief Financial Officer Pursuant to Rule 13A-14(A) of The
Securities Exchange Act of 1934
Exhibit
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of
2002
Exhibit
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of
2002
Exhibit
99.1 Certification of Chief Executive Officer Pursuant to 31 U.S.C. Section
30.15
Exhibit
99.2 Certification of Chief Financial Officer Pursuant to 31 U.S.C. Section
30.15
The First
Bancorp 2009 Form 10-k
Page
77
Pursuant
to the requirements of section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
THE FIRST
BANCORP, INC.
/s/
DANIEL R. DAIGNEAULT
Daniel R.
Daigneault, President
March 12,
2010
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
/s/
DANIEL R.
DAIGNEAULT /s/
F. STEPHEN WARD
|
|
Daniel
R. Daigneault, President and
Director F.
Stephen Ward , Treasurer and Chief Financial Officer
|
|
(Principal
Executive
Officer) (Principal
Financial Officer, Principal Accounting Officer)
|
|
March
12,
2010
March 12,
2010
|
|
/s/
STUART G. SMITH
|
|
Stuart
G. Smith, Director and Chairman of the Board
|
|
March
12, 2010
|
|
/s/
KATHERINE M.
BOYD /s/
CARL S. POOLE, JR.
|
|
Katherine
M. Boyd ,
Director Carl
S. Poole, Jr., Director
|
|
March
12,
2010 March
12, 2010
|
|
/s/
ROBERT B.
GREGORY /s/
MARK N. ROSBOROUGH
|
|
Robert
B. Gregory,
Director Mark
N. Rosborough, Director
|
|
March
12,
2010 March
12, 2010
|
|
/s/
TONY C.
MCKIM
/s/ DAVID B. SOULE, JR.
|
|
Tony
C. McKim,
Director David
B. Soule, Jr. , Director
|
|
March
12,
2010
March 12,
2010
|
|
/s/
BRUCE A. TINDAL
|
|
Bruce
A. Tindal, Director
|
|
March
12, 2010
|
The First
Bancorp 2009 Form 10-k
Page
78
TABLE OF CONTENTS
Item 1. Discussion Of BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission Of Matters To A Vote Of Security HoldersItem 5. Market For Registrant S Common Equity, Related Shareholder Matters and Issuer Purchases Of Equity SecuritiesItem 5. Market For Registrant S Common Equity, Related Shareholder MattersItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataNote 1. Summary Of Significant Accounting PoliciesNote 2. Cash and Cash EquivalentsNote 3. Investment SecuritiesNote 4. Loan ServicingNote 5. LoansNote 6. Premises and EquipmentNote 7. Other Real Estate OwnedNote 8. GoodwillNote 9. Income TaxesNote 10. Certificates Of DepositNote 11. Borrowed FundsNote 12. Employee Benefit PlansNote 13. Preferred StockNote 14. Common StockNote 15. Off-balance-sheet Financial Instruments and Concentrations Of Credit RiskNote 16. Earnings Per ShareNote 17. Fair Value DisclosuresNote 18. Other Operating Income and ExpenseNote 19. Regulatory Capital RequirementsNote 20. Legal ContingenciesNote 21 . ReclassificationsNote 22. Condensed Financial Information Of ParentNote 23. New Accounting PronouncementsNote 24. Quarterly InformationItem 9. Changes in and Disagreements with AccountantsItem 9A. Controls and ProceduresItem 9B. Other InformationItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesItem 15. Exhibits, Financial Statement Schedules