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FNLC > SEC Filings for FNLC > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for FIRST BANCORP, INC /ME/

Form 10-Q for FIRST BANCORP, INC /ME/


8-Nov-2013

Quarterly Report


Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
The First Bancorp, Inc. and Subsidiary
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 Securities and Exchange Commission ("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," 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 collectability, 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, 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 Company 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.
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 to determine the appropriate level 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 Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("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.

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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 at fair value 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. The rights are subsequently carried at the lower of amortized cost or fair value. 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. 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, 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 prepared in accordance with GAAP. A 35.0% tax rate was used in both 2013 and 2012.

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                                       For the nine months ended        For the quarters ended
                                             September 30,                   September 30,
Dollars in thousands                      2013            2012            2013            2012
Net interest income as presented     $     27,779     $   29,394     $      9,505     $    9,670
Effect of tax-exempt income                 2,647          2,318              922            792
Net interest income, tax equivalent  $     30,426     $   31,712     $     10,427     $   10,462

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 and Comprehensive Income (Loss). 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 between the GAAP and non-GAAP efficiency ratio:

                                        For the nine months ended           For the quarters ended
                                              September 30,                     September 30,
Dollars in thousands                     2013               2012             2013            2012
Non-interest expense, as presented  $    21,818         $    19,503      $     7,006      $   6,595
Net interest income, as presented        27,779              29,394            9,505          9,670
Effect of tax-exempt income               2,647               2,318              922            792
Non-interest income, as presented         9,488               8,556            2,621          2,492
Effect of non-interest tax-exempt
income                                      133                 137               44             46
Net securities gains                     (1,087 )            (1,967 )              -              -
Adjusted net interest income plus
non-interest income                 $    38,960         $    38,438      $    13,092      $  13,000
Non-GAAP efficiency ratio                 56.00     %         50.74   %        53.51   %      50.73   %
GAAP efficiency ratio                     58.55     %         51.39   %        57.78   %      54.23   %

The Company presents certain information based upon average tangible shareholders' common equity instead of total average shareholders' equity. The difference between these 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 average tangible shareholders' common equity to the Company's consolidated financial statements, which have been prepared in accordance with GAAP:

                                    For the nine months ended September       For the quarters ended
                                                    30,                            September 30,
 Dollars in thousands                     2013                 2012            2013             2012
Average shareholders' equity as
presented                           $     154,029         $    154,955       145,286           156,475
 Less preferred stock                      (5,374 )            (12,329 )           -           (12,353 )
 Less intangible assets                   (30,705 )            (28,451 )     (30,705 )         (28,451 )
Average tangible shareholders'
common equity                             117,950              114,175       114,581           115,671

Executive Summary
Net income for the nine months ended September 30, 2013 was $9.5 million, up $4,000 from the same period in 2012. Earnings per common share on a fully diluted basis were $0.87 for the nine months ended September 30, 2013, down $0.04 or 4.4% from the $0.91 posted for the same period in 2012. For the quarter ended September 30, 2013, net income was $3.4 million, up $142,000 or 4.4% from the same period in 2012. Earnings per common share on a fully diluted basis were $0.31 for the quarter ended September 30, 2013, the same as posted in 2012. Compared to the previous quarter, net income for the quarter ended September 30, 2013 was up $123,000 or 3.8% and earnings per common share on a fully diluted basis were up $0.02 or 6.9%.
This was an excellent quarter for The First Bancorp, Inc. in a number of ways. Net income was the highest quarterly total posted by the Company since the second quarter 2009. Margin compression, which is the result of the low interest rate environment, with a higher volume of assets continuing to reprice downward without the opportunity to reprice a comparable volume of liabilities, appears to have stabilized, with our net interest margin up slightly from the second quarter. At the same

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time, asset quality is greatly improved, with non-performing assets at 1.48% of total assets compared to 2.04% a year ago. Net interest income on a tax-equivalent basis was down $1.3 million or 4.1% in the nine months ended September 30, 2013 compared to the same period in 2012. Margin compression can be seen in our net interest margin, which dropped from 3.16% for the nine months ended September 30, 2012 to 3.04% for same period in 2013. Margin compression was responsible for $1.2 million of the decline in net interest income, and lower volumes of earning assets were responsible for $120,000. For the quarter ended September 30, 2013, net interest income on a tax-equivalent basis was down only $35,000 or 0.3% compared to the same period in 2012, with increased earning assets almost completely offsetting a $199,000 drop due to margin compression. Compared to the previous quarter, net interest income on a tax-equivalent basis was up $441,000 or 4.4%.
Non-interest income in the nine months ended September 30, 2013 was $932,000 or 10.9% higher than in the nine months ended September 30, 2012. This was attributable to an increase in origination income from the sale of refinanced mortgage loans into the secondary market as well as an increase in other operating income. Non-interest expense for the nine months ended September 30, 2013 was $2.3 million or 11.9% higher than in the same period in 2012, due to higher operating costs related to the opening of the de novo Bangor office in the first quarter of 2013, as well as from the Union Street Branch in Rockland that we acquired in the fourth quarter 2012.
The provision for loan losses was $2.8 million less in the first nine months of 2013 compared to the same period in 2012. This, in combination with the increase in noninterest income mentioned above, more than offset the decline in net interest income and increase in operating expenses. The lower provision for loan losses for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012 is attributable to the improving trend in credit quality seen over the past several quarters. Net loan chargeoffs for the nine months ended September 30, 2013, were $3.5 million or 0.55% of average loans on an annualized basis. This was down $1.1 million from net chargeoffs of $4.6 million or 0.70% of average loans on an annualized basis for the first nine months ended September 30, 2012. The allowance for loan losses decreased $43,000 between December 31, 2012 and September 30, 2013, and is 1.45% of loans outstanding compared to 1.44% at year end and 1.69% a year ago. Total past-due loans were 2.67% of total loans as of September 30, 2013 and December 31, 2012, compared to 2.27% of total loans as of September 30, 2012. Non-performing assets stood at 1.48% of total assets as of September 30, 2013, below 1.89% of total assets at December 31, 2012 and well below 2.04% a year ago. Total assets have increased $49.8 million or 3.5% year-to-date. The loan portfolio decreased $7.2 million in the nine months ended September 30, 2013 and decreased $7.8 million from a year ago. The investment portfolio has increased $54.7 million or 12.2% year-to-date and $35.5 million or 7.6% from a year ago. On the liability side of the balance sheet, low-cost deposits have increased $35.9 million or 9.6% year-to-date, and increased $52.4 million or 14.7% over the past year. This year-over-year increase is the result of healthy deposit inflows in 2013 plus $32.2 million added in October 2012 with the purchase of the Union Street branch in Rockland. Local certificates of deposit (CDs) increased $14.6 million and wholesale CDs increased $3.6 million year-to-date. Remaining well capitalized remains a top priority for The First Bancorp, Inc. Since December 31, 2008, the Company's total risk-based capital ratio has increased from 11.13% to 16.08%, well above the well-capitalized threshold of 10.0% set by the Federal Deposit Insurance Corporation.
The Company's operating ratios remain good, with a return on average tangible common equity of 10.29% for the nine months ended September 30, 2013 compared to 10.36% for the same period in 2012. Based upon June 30, 2013 data, our return on average tangible common equity was in the top 50% of all banks in the UBPR peer group, which had an average return on equity of 9.36%. Our efficiency ratio continues to be an important component in our overall performance, and while up to 56.00% for the first nine months of 2013, compared to 50.74% for the same period in 2012, due to the previously noted increased operating costs, it remains well below the UBPR peer group average of 67.07% as of June 30, 2013.

Net Interest Income

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Total interest income of $37.2 million for the nine months ended September 30, 2013, was a decrease of $2.0 million or 5.0% compared to total interest income of $39.1 million for the same period of 2012. Total interest expense of $9.4 million for the nine months ended September 30, 2013 is a $347,000 or 3.6% decrease from total interest expense of $9.7 million for the nine months ended September 30, 2012. As a result, net interest income decreased 5.5% or $1.6 million to $27.8 million for the nine months ended September 30, 2013, from the $29.4 million reported for the same period in 2012. The Company's net interest margin on a tax-equivalent basis decreased from 3.16% in the nine months ended September 30, 2012 to 3.04% for the nine months ended September 30, 2013. This is the result of the low interest rate environment with a higher volume of assets continuing to reprice downward without the opportunity to reprice a comparable volume of liabilities. Tax-exempt interest income amounted to $4.9 million and $4.3 million for the nine months ended September 30, 2013 and 2012, respectively.
Total interest income of $12.7 million for the quarter ended September 30, 2013 is a 1.8% decrease from total interest income of $12.9 million in the comparable period of 2012. Total interest expense of $3.2 million for the quarter ended September 30, 2013 is a 2.2% decrease from total interest expense for the comparable period of 2012. As a result, net interest income decreased 1.7% or $165,000 to $9.5 million for the quarter ended September 30, 2013, from the $9.7 million reported for the same period in 2012. The Company's net interest margin on a tax-equivalent basis decreased from 3.12% for the quarter ended September 30, 2012 to 3.04% for the quarter ended September 30, 2013. Tax-exempt interest income amounted to $1.7 million and $1.5 million for the quarters ended September 30, 2013 and 2012, respectively.
The following tables present the amount of interest earned or paid, as well as the average yield or rate on an annualized basis, for each major category of assets or liabilities for the nine months and quarters ended September 30, 2013 and 2012. Tax-exempt income is calculated on a tax-equivalent basis, using a 35.0% tax rate in 2013 and 2012.

                                                      For the nine months ended
                                         September 30, 2013            September 30, 2012
                                       Amount of      Average        Amount of       Average
Dollars in thousands                   interest      Yield/Rate       interest      Yield/Rate
Interest on earning assets
Interest-bearing deposits            $         6           0.26 %  $          3           0.23 %
Investments                               13,351           3.82 %        13,180           3.82 %
Loans held for sale                           19           3.65 %             8           3.46 %
Loans                                     26,440           4.08 %        28,258           4.31 %
  Total interest-earning assets           39,816           3.98 %        41,449           4.14 %
Interest-bearing liabilities
Deposits                                   6,035           0.89 %         6,370           0.93 %
Other borrowings                           3,355           1.71 %         3,367           1.76 %
  Total interest-bearing liabilities       9,390           1.07 %         9,737           1.11 %
Net interest income                  $    30,426                   $     31,712
Interest rate spread                                       2.91 %                         3.03 %
Net interest margin                                        3.04 %                         3.16 %

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                                                       For the quarters ended
                                         September 30, 2013            September 30, 2012
                                       Amount of      Average        Amount of      Average
Dollars in thousands                   interest      Yield/Rate      interest      Yield/Rate
Interest on earning assets
Interest-bearing deposits            $         2           0.32 %  $         2           0.29 %
Investments                                4,788           3.87 %        4,351           3.78 %
Loans held for sale                            7           3.93 %            4           3.51 %
Loans                                      8,780           4.02 %        9,327           4.24 %
  Total interest-earning assets           13,577           3.96 %       13,684           4.08 %
Interest-bearing liabilities
Deposits                                   2,023           0.86 %        2,073           0.92 %
Other borrowings                           1,127           1.71 %        1,149           1.74 %
  Total interest-bearing liabilities       3,150           1.05 %        3,222           1.11 %
Net interest income                  $    10,427                   $    10,462
Interest rate spread                                       2.91 %                        2.97 %
Net interest margin                                        3.04 %                        3.12 %

The following tables present changes in interest income and expense attributable . . .

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