Business Context and Reporting Period
Company: Bar Harbor Bankshares (Maine)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2011
Business Overview: The Company operates as a bank holding company for Bar Harbor Bank & Trust, providing commercial and consumer banking services primarily in downeast and midcoast Maine. The local economy is heavily influenced by tourism and the hospitality industry.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 2011 | Six Months Ended June 30, 2010 |
|---|---|---|
| Net Income Available to Common Shareholders | $5,642 | $5,110 |
| Diluted Earnings Per Share | $1.46 | $1.34 |
| Total Assets | $1,153,210 | $1,070,073 (Average) |
| Total Loans | $731,292 | $675,889 (Average) |
| Total Deposits | $729,115 | $620,746 (Average Interest Bearing) |
| Net Interest Income (Tax Equivalent) | $17,712 | $16,685 |
| Net Interest Margin (Tax Equivalent) | 3.22% | 3.26% |
| Return on Average Assets (ROA) | 0.99% | 1.09% |
| Return on Average Equity (ROE) | 10.69% | 11.01% |
| Allowance for Loan Losses | $9,535 | $8,470 (End of Period 2010) |
| Non-Performing Loans | $13,509 | $13,677 (End of Period 2010) |
| Cash and Cash Equivalents | $8,722 | $12,815 (End of Period 2010) |
Material Changes vs. Prior Period
- Profitability: Net income available to common shareholders increased 10.4% year-over-year. This increase was significantly aided by the absence of preferred stock dividends and accretion costs ($653 in 2010) following the repurchase of Treasury Preferred Stock in early 2010.
- Asset Growth: Total assets increased 3.2% from year-end 2010 to $1.15 billion. Total loans grew 4.4% to $731.3 million, driven by a purchase of a seasoned consumer loan portfolio and commercial loan growth.
- Net Interest Income: Increased 6.2% on a tax-equivalent basis, primarily due to a 7.3% growth in average earning assets, partially offset by a 4 basis point decline in the net interest margin.
- Non-Interest Income: Declined 13.2% to $3.2 million. The decrease was driven by a reduction in net securities gains, which were offset by higher Other-Than-Temporary Impairment (OTTI) losses of $1.15 million on private label mortgage-backed securities.
- Non-Interest Expense: Increased 6.6% to $11.3 million, attributed to higher loan collection costs, occupancy expenses, and technology upgrades.
- Asset Quality: Non-performing loans decreased slightly to $13.5 million (1.85% of total loans). The allowance for loan losses increased to $9.5 million (1.30% of total loans) to cover elevated levels of delinquent loans and loan growth.
Guidance, Outlook, and Risks
- Interest Rate Environment: Management notes that net interest income is sensitive to the low interest rate environment. While funding costs have declined, earning asset yields have also compressed. The balance sheet is currently positioned to benefit from a rising rate environment over a two-year horizon.
- Securities Portfolio: The Company recognized $1.15 million in OTTI losses on private label mortgage-backed securities. Management believes it will recover the amortized cost basis of these securities but acknowledges that adverse changes in repayment performance could impact future estimates.
- Loan Concentration: Approximately 36.9% of the commercial real estate portfolio is concentrated in the lodging industry, exposing the bank to tourism-related economic fluctuations.
- Capital Position: The Company remains "well-capitalized" under regulatory standards, with a Total Risk-Based Capital ratio of 15.52% and a Tier 1 Leverage ratio of 9.05%.
- Dividends: The Board declared a third-quarter 2011 dividend of $0.275 per share, an increase from the prior year.
Investor Verification Checklist
- OTTI Exposure: Verify the specific credit quality and cash flow projections of the private label mortgage-backed securities that generated $1.15 million in impairment losses.
- Lodging Concentration: Assess the impact of local tourism trends on the $95.7 million loan concentration in the lodging industry.
- Non-Performing Loan Composition: Review the details of the $5.1 million non-performing loan to a non-profit housing authority, which represents 37.7% of total non-performing loans.
- Preferred Stock Impact: Confirm that the year-over-year earnings comparison accounts for the one-time benefit of eliminating preferred stock dividends in 2011.
- Liquidity Sources: Evaluate the reliance on brokered time deposits ($45.7 million increase) to fund asset growth and manage seasonal deposit outflows.