Bar Harbor Bankshares — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Unaudited consolidated results; dollar amounts are in thousands except per-share data. Bar Harbor Bankshares is a Maine bank holding company operating primarily through Bar Harbor Bank & Trust.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net interest income (GAAP) | $8,704 | $7,946 | $25,662 | $23,799 |
| Provision for loan losses | $750 | $450 | $1,850 | $1,500 |
| Non-interest income | $2,064 | $2,065 | $5,281 | $5,770 |
| Non-interest expense | $5,684 | $5,518 | $16,981 | $16,115 |
| Net income | $3,010 | $2,870 | $8,652 | $8,633 |
| Net income available to common shareholders | $3,010 | $2,870 | $8,652 | $7,980 |
| Diluted EPS | $0.77 | $0.75 | $2.23 | $2.09 |
- Q3 common income rose 4.9%; nine-month common income rose 8.4%. The larger year-to-date increase versus reported net income reflects preferred-stock dividends and discount accretion in 2010, with none in 2011.
- Tax-equivalent net interest income increased 8.6% in Q3 to $9,063 and 7.0% year to date to $26,775. Tax-equivalent net interest margin was 3.24% for Q3 versus 3.15%; year-to-date margin was 3.23% versus 3.22%.
- Q3 return on average assets was 1.04%, unchanged year over year; return on average equity was 10.45% versus 10.81%. Year-to-date ROA was 1.01% versus 1.07%, and ROE was 10.60% versus 10.94%.
Financial position, funding and cash flow
- At September 30, total assets were $1.156 billion, up 3.4% from December 31, 2010. Loans were $714.2 million, up 1.9%; available-for-sale securities were $388.4 million, up 8.5%.
- Deposits increased 7.6% to $762.1 million. Total borrowings declined 9.7% to $271.0 million, mainly as seasonal deposit inflows supported repayments and the Bank shifted some FHLB funding to brokered time deposits.
- Shareholders’ equity was $117.2 million, compared with $103.6 million at year-end. Regulatory capital ratios were reported as well-capitalized: consolidated total risk-based capital 16.16%, Tier 1 risk-based capital 14.38%, and Tier 1 leverage 9.30%.
- Cash and cash equivalents were $8.5 million, down from $12.8 million at year-end. For the nine months, operating cash flow was $12.5 million, investing activities used $39.6 million, financing activities provided $22.9 million, and cash decreased $4.3 million.
- Management reported liquidity of 11.4% under its 30- and 90-day basic surplus model, against a 4.0% policy minimum. Available FHLB collateral and credit capacity was approximately $150 million; the secured Federal Reserve line was $177.3 million.
Credit quality, changes and unusual items
- Non-performing loans were $12.5 million, or 1.75% of loans, versus $13.7 million and 1.95% at year-end. The allowance was $8.2 million, 1.14% of loans and 65% of non-performing loans.
- Nine-month net charge-offs increased to $2.2 million from $0.8 million; annualized net charge-offs were 0.41% of average loans versus 0.15%. Most of 2011 charge-offs—$1.872 million—related to an affordable-housing development loan. The Bank obtained updated appraisals and charged off part of the balance in Q3.
- Other real estate owned increased to $1.5 million across ten properties from $0.7 million across four properties at year-end. The filing reported no troubled debt restructurings in the first nine months.
- The securities portfolio recorded $1.726 million of year-to-date credit-related OTTI losses in earnings, principally on private-label mortgage-backed securities. Management cited weak real estate markets, higher estimated loss severity and extended foreclosure timelines. It expected to recover the remaining amortized cost of the securities but noted that adverse future performance could change estimates.
- Net securities gains after OTTI were $0.421 million in Q3 and $0.587 million year to date, versus $0.407 million and $1.224 million in the comparable 2010 periods. Lower year-to-date securities gains net of impairment contributed to the decline in non-interest income.
- Commercial real estate lending has local concentration risk: approximately 36.3% of that portfolio was to the lodging industry. The Bank also purchased a seasoned Maine portfolio of prime recreational-vehicle and vessel loans in Q1; management estimated an approximately 6.50% yield based on the portfolio’s terms.
Outlook, risks and contingencies
- The filing provides no formal earnings or revenue guidance. Management said continued low interest rates pressure asset yields, while repricing deposits and borrowings at lower costs has supported margin. Its rate-sensitivity model estimated net interest income changes versus a flat-rate scenario of -1.02% at one year and -5.39% at two years under a 100-basis-point decline, and +0.06% and +4.09% under a 200-basis-point increase. Management cautioned that these are hypothetical estimates, not forecasts.
- Management characterized portfolio credit quality as relatively stable but warned that weak real estate markets, unemployment, local tourism, borrower debt service and collateral values could affect future credit performance. Maine economic conditions and tourism are significant exposures.
- Commitments included $27.7 million to originate loans, $90.0 million of unused lines, $8.7 million of unadvanced construction loans and $0.7 million of standby letters of credit. Amounts are contractual and do not necessarily represent expected future cash requirements.
- The company reported ordinary-course litigation not expected by management to materially affect the financial statements; no material change to previously disclosed risk factors; and effective disclosure controls with no material quarterly change in internal control over financial reporting.
Investor verification priorities
- Review the affordable-housing loan’s remaining exposure, collateral valuation, charge-offs and any further allowance needs.
- Track private-label mortgage-backed securities credit estimates and OTTI charges, including whether actual collateral cash flows support management’s recovery assumptions.
- Assess trends in non-performing and potential problem loans, charge-offs, OREO and allowance coverage, particularly in commercial real estate and lodging.
- Verify deposit stability, seasonal liquidity, brokered funding use and the availability of secured borrowing capacity.
- Compare actual net interest margin and earnings with the filing’s interest-rate sensitivity assumptions; those scenarios are not management guidance.