Business Context and Reporting Period
Company: Bar Harbor Bankshares (Maine)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Overview: The Company operates as a bank holding company with its primary subsidiary, Bar Harbor Bank & Trust, serving the downeast and midcoast regions of Maine. The reporting period covers the third quarter of 2009, with comparative data provided for the third quarter of 2008 and the nine-month periods ended September 30, 2009 and 2008.
Key Financial Metrics
| Metric (in thousands, except per share) | Q3 2009 | Q3 2008 | 9M 2009 | 9M 2008 |
|---|---|---|---|---|
| Net Income | $3,105 | $2,333 | $8,486 | $6,314 |
| Net Income Available to Common | $2,833 | $2,333 | $7,724 | $6,314 |
| Diluted EPS | $0.95 | $0.78 | $2.63 | $2.09 |
| Total Assets (Period End) | $1,060,707 | N/A | N/A | N/A |
| Total Loans (Period End) | $654,604 | N/A | N/A | N/A |
| Total Deposits (Period End) | $619,097 | N/A | N/A | N/A |
| Net Interest Income | $8,432 | $7,128 | $25,215 | $19,952 |
| Net Interest Margin (Tax-Equiv) | 3.38% | 3.22% | 3.45% | 3.11% |
| Return on Average Assets (ROA) | 1.16% | 0.99% | N/A | N/A |
| Return on Average Equity (ROE) | 14.02% | 14.46% | 13.16% | 12.78% |
Material Changes vs. Prior Period
- Profitability: Net income increased 33.1% in Q3 2009 compared to Q3 2008, driven by a 20.1% increase in net interest income and a 2.8% decrease in non-interest expense.
- Net Interest Margin: The tax-equivalent net interest margin improved by 16 basis points in Q3 2009 (3.38%) and 34 basis points for the nine-month period (3.45%). This improvement was primarily due to the weighted average cost of interest-bearing liabilities declining faster than the yield on earning assets.
- Asset Growth: Total assets increased 9.1% to $1.06 billion from December 31, 2008. Loans grew 3.3% to $654.6 million, led by commercial loans (+9.3%) and tax-exempt loans (+132.3%). Consumer loans declined 5.2% due to principal pay-downs and the sale of low-coupon mortgages.
- Non-Interest Income: Total non-interest income declined 13.8% in Q3 2009, largely due to a 67.4% drop in credit and debit card fees following the sale of the merchant processing portfolio in late 2008. This was partially offset by a 151.6% increase in other operating income (mortgage banking) and net securities gains.
- Non-Interest Expense: Expenses decreased 2.8% in Q3 2009, primarily due to an 84.5% reduction in credit and debit card expenses. However, FDIC insurance assessments increased significantly ($195 in Q3) due to emergency special assessments and the restoration of the Deposit Insurance Fund.
- Capital: The Company issued $18.75 million in Series A Preferred Stock to the U.S. Treasury in January 2009 under the Capital Purchase Program (CPP). As of September 30, 2009, the Company remained "well-capitalized" with a Tier 1 Leverage ratio of 8.32% and a Total Risk-Based Capital ratio of 14.68%.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management anticipates the improving net interest margin trend will level off over the next twelve months as assets and liabilities re-price in the lower rate environment. The Company expects net interest income to remain stable over the one-year horizon and trend upward over the two-year horizon if rates rise.
- Unusual Items:
- OTTI Losses: The Company recognized $511 in other-than-temporary impairment (OTTI) losses in Q3 2009 and $965 for the nine months ended September 30, 2009, related to private label mortgage-backed securities. These were recorded as credit losses in earnings.
- FDIC Assessment: A special emergency FDIC assessment of $495 was recorded in Q2 2009, contributing to higher non-interest expenses.
- Venture Capital Write-down: A $193 write-down of non-marketable venture capital equity investment funds was recorded in Q1 2009.
- Risks and Contingencies:
- Credit Quality: Non-performing loans increased to $7.476 million (1.14% of total loans) from $4.404 million (0.70%) at year-end 2008. The allowance for loan losses increased 34.1% to $7.304 million (1.12% of loans) to cover probable losses.
- Interest Rate Risk: The Company is sensitive to interest rate changes. Modeling suggests a slight decline in net interest income over one year if rates rise 200 basis points, but a strong recovery over two years. A 100 basis point decline in rates could pressure margins over a two-year horizon.
- Economic Conditions: The Company's performance is dependent on the Maine economy, tourism, and real estate markets. Deteriorating conditions could impact loan demand and credit quality.
Investor Verification Checklist
- Allowance Adequacy: Verify the sufficiency of the $7.304 million allowance for loan losses given the 69.8% increase in non-performing loans and the local economic downturn.
- Securities Portfolio: Review the $6.583 million in unrealized losses on private label mortgage-backed securities and the $1.986 million in cumulative OTTI write-downs to assess potential future credit losses.
- FDIC Costs: Confirm the trajectory of FDIC insurance assessments as the Deposit Insurance Fund is restored, which may continue to pressure non-interest expenses.
- Dividend Restrictions: Note that under the CPP agreement, the Company requires Treasury consent to increase common stock dividends above $0.26 per share prior to January 16, 2012.
- Loan Concentration: Assess the impact of the 132.3% growth in tax-exempt loans to municipalities and the 9.3% growth in commercial loans on the overall risk profile.