Bar Harbor Bankshares — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise.
Business context and financial results
The company is a Maine-based bank holding company whose principal subsidiary is Bar Harbor Bank & Trust. Its lending and deposit-taking are concentrated in Maine, including tourism-related markets.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net income | $3.873 | $3.857 | $7.754 | $7.644 |
| Diluted EPS | $0.64 | $0.65 | $1.28 | $1.28 |
| Net interest income, GAAP | $10.886 | $10.864 | $21.884 | $21.423 |
| Net interest margin, tax-equivalent | 3.12% | 3.32% | 3.19% | 3.33% |
| Non-interest income | $2.503 | $2.293 | $4.845 | $4.409 |
| Non-interest expense | $7.601 | $7.361 | $14.934 | $14.207 |
- Q2 net income increased 0.4%; first-half net income increased 1.4%. First-half diluted EPS was unchanged year over year. Annualized return on average assets was 1.01% for Q2 and 1.04% for the first half, down from 1.09% and 1.10%, respectively.
- First-half tax-equivalent net interest income grew 1.8% as average earning assets increased 6.3%, but margin declined 14 basis points. Lower loan and securities yields pressured margin; loan growth partially offset the yield declines.
- First-half non-interest income increased 9.9%, mainly from securities gains, which rose to $1.206 from $0.747. Q2 and first-half efficiency ratios were 56.8% and 56.0%, respectively, versus 55.1% and 54.2% a year earlier.
Financial position, cash flow, and credit
- Total assets were $1,560.0 at June 30, up 6.9% from year-end 2014. Loans were $983.2, up 7.0%; available-for-sale securities were $480.1, up 2.0%. Bank-owned life insurance rose to $23.4 from $8.1, reflecting purchases during Q1.
- Deposits totaled $890.1, up 3.7%. Transaction deposits declined seasonally by $20.9, while time deposits increased $53.0, attributed to brokered deposits. Total borrowings rose 15.0% to $514.2, partly funding seasonal deposit outflows and asset growth. Shareholders’ equity was $148.7.
- For the first half, operating cash flow was negative $6.7 versus positive $6.4 in 2014; investing cash flow was negative $83.1 and financing cash flow positive $97.0. Cash and cash equivalents increased $7.2 to $17.0. The cash-flow statement reports a $15.6 increase in other assets; management also reports substantial BOLI purchases.
- Non-performing loans declined 28.1% to $8.84, or 0.90% of loans, from $12.29 and 1.34% at year-end. The allowance was $9.10, 0.93% of loans and 102.9% of non-performing loans. First-half net charge-offs were $0.765, or 0.16% annualized of average loans.
- Potential problem commercial loans increased to $18.2, or 1.85% of total loans, from $13.5, or 1.47%, at year-end. Commercial real estate loans to the lodging industry were approximately 29.9% of the commercial real estate mortgage portfolio.
- Regulatory capital ratios remained above well-capitalized thresholds: consolidated common equity Tier 1 was 14.84%, total risk-based capital 16.34%, and leverage ratio 9.17%. Management characterized capital as strong.
Liquidity, outlook, risks, and unusual items
- The Bank’s 30-day basic-surplus liquidity measure was 3.8% of assets, below its stated 4% policy target, amid seasonal deposit outflows and asset growth. Management anticipated normalization to approximately 6% in Q3 as seasonal deposits returned. Available FHLB collateral/credit capacity was approximately $122 million; the Fed secured line was $154.3 million. Management said liquidity was sufficient, while noting brokered-deposit access and customer savings behavior as risks.
- Interest-rate modeling indicated moderate liability sensitivity. A parallel +200 basis-point shift was modeled to reduce net interest income 2.21% in year one and 5.88% in year two; a -100 basis-point shift was modeled to reduce it 0.06% and 3.64%, respectively. Management cautioned these scenarios are not forecasts and depend on assumptions.
- Four interest-rate cap agreements had $90 million notional and were intended to limit exposure to rising rates on LIBOR-indexed borrowings. The securities portfolio had $4.16 million of unrealized losses versus $2.33 million at year-end; no new OTTI losses were recognized. Management attributed most losses to market rates/spreads and judged them temporary, but adverse collateral performance could change its assessment of private-label mortgage securities.
- Other risk factors include Maine economic and tourism conditions, commercial real estate and lodging concentration, borrower repayment and collateral values, competition, regulation, cybersecurity, and interest-rate movements. Management stated that the local economy and real estate markets will influence future credit quality.
- Off-balance-sheet commitments totaled $147.9 million: $43.9 million to originate loans, $88.6 million of unused lines, and $15.3 million of undrawn construction loans; standby letters of credit were $0.385 million. These amounts do not necessarily represent future cash requirements.
- The company declared a Q3 dividend of $0.255 per share, payable September 15, 2015. No specific earnings guidance was provided. Routine litigation was not expected by management to have a material adverse effect; the filing reported no material changes to the prior annual report’s risk factors.
Most important facts for investors to verify
- Whether loan growth continues to support net interest income as asset yields and the net interest margin remain under pressure.
- Trends in potential problem loans, non-performing loans, charge-offs, and allowance adequacy, particularly in commercial real estate and tourism-related lending.
- Whether seasonal deposit inflows restore liquidity above policy levels and reduce reliance on brokered deposits and borrowings.
- Whether securities valuation losses or private-label mortgage collateral performance require future impairment recognition.
- The sustainability of earnings and dividends given higher operating expenses, reliance on securities gains, and interest-rate sensitivity.