Business Context and Reporting Period
Company: Bar Harbor Bankshares (Maine-based bank holding company)
Filing Type: Form 10-Q (Unaudited Quarterly Report)
Reporting Period: Quarter and six months ended June 30, 2010
Overview: The Company operates primarily through its subsidiary, Bar Harbor Bank & Trust, serving downeast and midcoast Maine. The period was marked by the redemption of all Treasury Preferred Stock and a warrant in connection with the Capital Purchase Program (CPP), funded by a common stock offering completed in late 2009 and early 2010.
Key Financial Metrics
| Metric | Q2 2010 | Q2 2009 | YTD 2010 | YTD 2009 |
|---|---|---|---|---|
| Net Income (Common) | $2,712 | $2,488 | $5,110 | $4,891 |
| Diluted EPS | $0.71 | $0.85 | $1.34 | $1.68 |
| Net Interest Income | $7,795 | $8,843 | $15,853 | $16,783 |
| Net Interest Margin (TE) | 3.17% | 3.54% | 3.26% | 3.49% |
| Non-Interest Income | $1,795 | $1,369 | $3,705 | $2,973 |
| Non-Interest Expense | $5,392 | $5,552 | $10,597 | $10,716 |
| Provision for Loan Losses | $550 | $835 | $1,050 | $1,500 |
| Total Assets | $1,084,547 | N/A | N/A | N/A |
| Total Loans | $684,826 | N/A | N/A | N/A |
| Total Deposits | $668,285 | N/A | N/A | N/A |
| Shareholders' Equity | $103,222 | N/A | N/A | N/A |
Note: All dollar amounts in thousands except per share data. TE = Tax Equivalent.
Material Changes vs. Prior Period
- Earnings Per Share: Diluted EPS declined 16.5% QoQ and 20.2% YTD compared to 2009. This decline is primarily attributed to the issuance of 882,021 shares of common stock in early 2010 to fund the redemption of Treasury Preferred Stock, which increased the share count significantly.
- Net Interest Income: Declined 11.1% in Q2 and 4.5% YTD. The reduction was driven by a compression in the net interest margin (down 37 bps QoQ) due to lower yields on earning assets outpacing the decline in funding costs. Additionally, accelerated amortization of bond premiums on Mortgage-Backed Securities (MBS) due to GSE buybacks of delinquent loans reduced Q2 net interest income by approximately $350.
- Non-Interest Income: Increased 31.1% in Q2 and 24.6% YTD. Growth was driven by higher trust fees (due to increased assets under management) and net securities gains ($505 in Q2 vs. $414 in Q2 2009), partially offset by Other-Than-Temporary Impairment (OTTI) losses of $242 in Q2.
- Non-Interest Expense: Decreased 2.9% in Q2 and 1.1% YTD. The decline was largely due to a $322 reduction in FDIC assessments compared to Q2 2009, which included a one-time emergency special assessment. Salaries and benefits increased 8.9% due to higher health insurance premiums and base salary adjustments.
- Capital Structure: The Company redeemed all 18,751 shares of Series A Preferred Stock held by the Treasury in Q1 2010. In July 2010 (post-period), the Company repurchased the associated warrant for $250,000, fully exiting the CPP.
Outlook, Risks, and Management Commentary
- Interest Rate Strategy: Management is focused on protecting net interest income over a long-term horizon in a rising rate environment. They have shifted from short-term funding to higher-cost long-term funding, which pressures near-term earnings but mitigates long-term risk.
- Credit Quality: Non-performing loans (NPLs) declined to $8.539 million (1.25% of total loans) from $9.176 million at year-end 2009. However, "potential problem loans" increased significantly to $12.089 million (1.77% of total loans), driven largely by a single commercial real estate development loan. Management cites depressed economic conditions and declining real estate values in Maine as ongoing risks.
- Allowance for Loan Losses (ALLL): The ALLL increased to $8.470 million (1.24% of loans) to reflect continued credit deterioration. Net charge-offs were $394 thousand YTD (0.12% annualized), higher than the prior year but still low historically.
- Securities Portfolio: The portfolio contains private label MBS with unrealized losses. Management recorded $540 thousand in OTTI losses YTD but expects to recover the amortized cost basis of remaining impaired securities. Unrealized gains on the portfolio increased to $5.131 million due to declining market yields.
- Liquidity: The Company maintains a strong liquidity position with unused lines of credit at the Federal Home Loan Bank (approx. $80 million) and the Federal Reserve Bank ($140.7 million). Liquidity ratios exceeded policy targets (5.0% over 30-day horizon).
Investor Verification Checklist
- Share Count Impact: Verify the dilution effect of the 882,021 shares issued in early 2010 on future EPS calculations.
- Potential Problem Loans: Review the specific details of the $5.169 million commercial real estate development loan that drove the increase in potential problem loans.
- MBS Amortization: Assess the sustainability of net interest income given the one-time impact of accelerated MBS premium amortization from GSE buybacks.
- OTTI Exposure: Monitor the $3.466 million in unrealized losses on private label MBS and the adequacy of the $540 thousand YTD OTTI provision.
- Capital Ratios: Confirm the Company remains "well-capitalized" (Tier 1 Leverage 9.01%, Total Risk-Based 15.19%) following the Preferred Stock redemption.