Bar Harbor Bankshares — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; unaudited consolidated results. Unless noted, amounts are in thousands of dollars. The company operates primarily through Bar Harbor Bank & Trust in Maine.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income (GAAP) | $9,969 | $9,414 | $28,741 | $27,384 |
| Provision for loan losses | $170 | $427 | $928 | $1,302 |
| Non-interest income | $1,925 | $2,298 | $5,749 | $5,972 |
| Non-interest expense | $6,835 | $6,559 | $19,737 | $18,524 |
| Net income | $3,533 | $3,368 | $9,919 | $9,636 |
| Diluted earnings per share | $0.89 | $0.86 | $2.51 | $2.46 |
- Q3 net income rose 4.9%; nine-month net income rose 2.9%. Q3 diluted EPS increased 3.5%; nine-month diluted EPS increased 2.0%.
- Return on average assets was 1.02% for Q3 and 0.99% year to date, versus 1.05% and 1.04% in the comparable 2012 periods. Return on average equity was 11.73% and 10.57%, respectively, versus 10.49% and 10.37%.
- Tax-equivalent net interest income was $10.445 million for Q3, up 6.4%, and $30.035 million year to date, up 5.3%. Tax-equivalent net interest margin declined to 3.12% for Q3 and 3.13% year to date, from 3.20% and 3.22%.
- The year-to-date efficiency ratio increased to 55.7% from 52.7% (Q3: 55.4% versus 50.7%).
- Operating cash flow was $16.347 million for the first nine months, compared with $15.664 million in 2012. Investing activities used $97.645 million and financing activities provided $78.112 million; cash and equivalents declined $3.186 million to $11.806 million.
Financial position, credit, and liquidity
- Total assets were $1.379 billion at September 30, up 5.9% from year-end 2012. Loans were $845.9 million, up 3.8%; available-for-sale securities were $462.4 million, up 10.6%.
- Deposits increased 11.2% to $884.6 million. Total borrowings declined 2.0% to $364.0 million; this comprised $255.0 million of short-term borrowings, $104.0 million of FHLB advances, and $5.0 million of junior subordinated debentures.
- Shareholders’ equity was $123.4 million, down from $128.0 million at year-end, primarily reflecting a $11.629 million other comprehensive loss as securities values fell. The net unrealized loss on the available-for-sale portfolio was $5.228 million at quarter-end, versus a $12.271 million net unrealized gain at year-end.
- Non-performing loans declined 21.2% to $7.773 million, or 0.92% of loans, from $9.867 million, or 1.21%. The allowance was $8.380 million, 0.99% of loans and 107.8% of non-performing loans. Nine-month net charge-offs were $645, or 0.10% annualized, versus $1.470 million and 0.25% in 2012.
- Management reported the company and bank were well-capitalized. Consolidated total risk-based capital was 16.44%, Tier 1 risk-based capital 14.80%, and Tier 1 leverage 8.91%.
- Liquidity measured 10.2% over 30 days and 9.4% over 90 days, above the bank’s 4.0% 30-day policy minimum. Available FHLB capacity was approximately $193 million, and the Federal Reserve secured line was $170.935 million.
Changes, outlook, and risks
- Growth in average earning assets and lower funding costs supported higher net interest income, but falling asset yields compressed margin. Management attributed lower yields to low interest rates, mortgage refinancing and prepayments, and competitive loan pricing.
- Fee income from trust services and card activity improved, while securities gains were materially lower than in 2012. Q3 and nine-month results included net OTTI losses recognized in earnings of $73 and $188, respectively, relating to private-label mortgage-backed securities. Management expected to recover the remaining amortized cost, but noted that adverse collateral performance or market changes could alter that assessment.
- Unrealized securities losses rose notably, particularly on municipal securities and agency mortgage-backed securities, as market yields and pricing spreads increased. Management attributed most declines to market-rate movements and concluded the impairments were temporary; all municipal issuers were current on contractual payments and the portfolio had no below-investment-grade securities.
- Credit quality improved overall, but management cautioned that the economic and real-estate recovery remained uncertain. Lending is concentrated in Maine and includes meaningful exposure to commercial real estate and tourism; about 32% of commercial real estate mortgages were to lodging businesses. One impaired affordable-housing construction loan accounted for $1.845 million, or 23.7% of non-performing loans.
- Interest-rate sensitivity modeling estimated net interest income changes versus a flat-rate case of negative 0.99% at one year and negative 0.27% at two years under a 100-basis-point decline; under a 200-basis-point rise, negative 1.88% and negative 0.17%. Management emphasized these are hypothetical estimates, not forecasts.
- No formal earnings or revenue guidance was provided. The board declared a Q4 2013 dividend of $0.32 per share. Management reported no material change in risk factors, no material control changes, and no expected material effect from routine litigation.
Important facts for investors to verify
- Whether deposit growth is sustainable and how much depends on seasonal balances or reciprocal and brokered funding.
- Whether margin pressure continues as asset yields, funding costs, and interest rates change.
- Credit performance of commercial real estate, lodging-related borrowers, potential problem loans, TDRs, and the affordable-housing loan; two recently modified loans totaling $212 defaulted during the first nine months.
- Valuation and impairment assumptions for securities, especially private-label mortgage-backed securities and municipal bonds, and the effect of further rate changes on equity.
- Capital, liquidity, and dividend capacity under less favorable funding, credit, or market conditions.