Bar Harbor Bankshares — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; balance-sheet comparisons are with December 31, 2014. Amounts are in thousands of dollars except per-share data and ratios. Unaudited consolidated results cover the company and subsidiaries, principally Bar Harbor Bank & Trust, operating in Maine.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income (GAAP) | $11,696 | $11,377 | $33,580 | $32,800 |
| Net interest income (tax-equivalent) | $12,218 | $11,852 | $35,006 | $34,229 |
| Net interest margin (tax-equivalent) | 3.20% | 3.38% | 3.20% | 3.35% |
| Net income | $3,931 | $3,867 | $11,685 | $11,511 |
| Diluted EPS | $0.65 | $0.65 | $1.93 | $1.93 |
| Provision for loan losses | $425 | $491 | $1,320 | $1,376 |
| Non-interest income | $2,028 | $1,816 | $6,873 | $6,225 |
| Non-interest expense | $7,820 | $7,212 | $22,754 | $21,419 |
- Quarterly net income rose 1.7%; nine-month net income rose 1.5%. Diluted EPS was unchanged in both comparisons. Annualized ROA and ROE were 0.98% and 10.32% for Q3, versus 1.06% and 10.98%; nine-month figures were 1.02% and 10.40%, versus 1.09% and 11.50%.
- Tax-equivalent net interest income increased 3.1% for the quarter and 2.3% year to date, driven by growth in average earning assets; the margin fell 18 basis points quarterly and 15 basis points year to date. Lower loan yields reflected commercial-loan repricing and residential mortgage originations/refinancing in a low-rate environment.
- Nine-month non-interest income increased 10.4%, including $1,206 of securities gains versus $666 in 2014. Management said gains largely reflected efforts to shorten portfolio duration and manage interest-rate risk. Q3 had no securities gains, compared with an $81 loss in Q3 2014.
- The nine-month efficiency ratio was 55.5%, up from 53.5%; Q3 was 54.4%, up from 52.2%. Management attributed higher expenses in part to compensation, staffing, technology, and professional and shareholder-related costs.
Financial position, funding and cash flow
- Total assets were $1.568 billion, up 7.4% from year-end 2014. Loans were $975.950 million, up 6.2%; securities were $502.680 million, up 6.8%.
- Deposits increased 17.8% to $1.011 billion, including a $94.167 million increase in time deposits, largely from certificates obtained in the national market. Borrowings declined 11.5% to $395.606 million as the bank shifted $51.414 million of borrowings into time deposits. Short-term borrowings were $254.720 million; FHLB long-term advances were $135.886 million; junior subordinated debentures were $5.000 million.
- Cash and cash equivalents were $12.336 million, compared with $9.800 million at year-end. For the nine months, operating cash flow was $14.716 million, investing cash outflow $109.996 million, and financing cash inflow $97.816 million. Investing included $58.603 million in net loans made and $15.000 million of BOLI purchases; deposit growth was a principal source of financing.
- Shareholders’ equity was $154.112 million. The company and bank were reported well-capitalized under Basel III; consolidated ratios were 15.15% CET1, 15.15% Tier 1 risk-based capital, 16.66% total risk-based capital, and 9.04% leverage.
- Management reported liquidity of 13.4% over 30 days and 14.0% over 90 days, against a 4% 30-day policy minimum. Available FHLB collateral/lines approximated $266 million; the Federal Reserve secured line was $152.483 million. Management considered liquidity sufficient, while noting seasonal deposits and possible changes in access to brokered deposits.
- The board declared a Q4 2015 dividend of $0.26 per share, payable December 15, 2015. The company said this was its 18th consecutive quarterly dividend increase.
Material changes and credit quality
- Commercial loans grew 11.5% to $508.079 million, while consumer loans rose 1.3% to $452.505 million. Commercial real estate mortgages were $372.517 million; approximately 26.1% of that portfolio was to the lodging industry.
- Non-performing loans fell 42.8% from year-end to $7.033 million, or 0.72% of loans, from 1.34%. The allowance was $9.037 million, 0.93% of loans and 128.5% of non-performing loans. Nine-month net charge-offs were $1.252 million, or 0.17% annualized of average loans.
- Potential problem commercial relationships increased to 31 totaling $18.545 million, from 27 totaling $13.534 million at year-end. TDRs totaled $2.888 million at September 30; five totaling $812,000 were on non-accrual. Management described overall credit quality as relatively stable.
- BOLI increased to $23.575 million from $8.141 million, principally due to $15 million of purchases. Its cash-value growth contributes to non-interest income and is not subject to income taxes.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management noted that interim results are not necessarily indicative of full-year results.
- Interest-rate sensitivity modeling indicated moderate liability sensitivity. A parallel +200-basis-point shift was modeled to reduce net interest income 1.18% over one year and 3.59% over two years; a -100-basis-point shift was modeled to increase it 0.06% over one year and reduce it 3.86% over two years. Management cautioned that these are hypothetical estimates, not forecasts, and depend on assumptions about rates, prepayments, deposits, and balance-sheet changes.
- Key exposures include Maine economic conditions and tourism, real-estate and commercial credit quality, borrower repayment and collateral values, competition, persistently low rates and margin pressure, securities valuation/credit risk, cyber threats, and banking regulation. The lodging concentration and increase in potential problem loans merit attention.
- The securities portfolio had $1.684 million of gross unrealized losses; $897,000 related to positions held at a loss for at least 12 months. Management recorded no OTTI losses in earnings during the periods and expected to recover amortized cost, but adverse mortgage collateral performance or fair-value changes could alter that assessment.
- Off-balance-sheet commitments to originate loans, unused lines, and unadvanced construction loans totaled $155.213 million; standby letters of credit were $385,000. Routine litigation was not expected by management to have a material adverse effect. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Investor verification priorities
- Track whether loan growth sustains earnings as net interest margin declines, and verify the effect of deposit pricing and funding mix.
- Review migration and resolution of the $18.545 million in potential problem loans, TDR performance, charge-offs, and allowance adequacy.
- Assess commercial real-estate and lodging concentration alongside local tourism and property-market conditions.
- Verify securities impairment assumptions, municipal-credit exposure, and sensitivity of earnings and capital to interest-rate and valuation changes.
- Monitor reliance on national-market time deposits, seasonal deposit outflows, liquidity sources, and dividend growth relative to earnings.