Bar Harbor Bankshares — Q2 2012 Form 10-Q
Period: Quarter and six months ended June 30, 2012; interim financial statements are unaudited. Unless noted, dollar amounts are in thousands. The company is a Maine-based bank holding company, with lending concentrated in downeast and midcoast Maine.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Interest and dividend income | $12,418 | $12,916 | $25,005 | $25,594 |
| Net interest income, GAAP | $8,953 | $8,624 | $17,970 | $16,958 |
| Provision for loan losses | $460 | $600 | $875 | $1,100 |
| Non-interest income | $1,974 | $1,485 | $3,674 | $3,217 |
| Non-interest expense | $6,157 | $5,762 | $11,965 | $11,297 |
| Net income | $3,105 | $2,773 | $6,268 | $5,642 |
| Diluted EPS | $0.79 | $0.72 | $1.61 | $1.46 |
- Q2 net income increased 12.0%; first-half net income increased 11.1%. Q2 return on average assets was 1.01% versus 0.96%, while return on average equity was 10.11% versus 10.26%. First-half ROA was 1.04% versus 0.99%; ROE was 10.31% versus 10.69%.
- Tax-equivalent net interest income was $9,340 for Q2, up 3.8%, and $18,714 for the first half, up 5.7%. Tax-equivalent net interest margin was 3.17% in Q2 versus 3.23%; first-half margin was 3.24% versus 3.22%. The Q2 margin decline reflected lower asset yields; lower funding costs supported first-half margin.
- The efficiency ratio rose to 55.9% from 54.5% in Q2 and to 54.6% from 54.2% for the first half. First-half non-interest income increased 14.2%, while non-interest expense rose 5.9%.
- Operating cash flow was $8,757 versus $6,287 in the first half. Investing used $74,525, principally reflecting securities purchases and net loan growth; financing provided $66,939. Cash and cash equivalents increased $1,171 to $9,891.
Financial position, funding and capital
- Total assets were $1,242,241 at June 30, up 6.4% from year-end 2011. Loans were $776,931, up 6.6%; available-for-sale securities were $404,844, up 6.0%; shareholders’ equity was $124,554 versus $118,250.
- Deposits increased 2.0% to $737,096. Non-interest-bearing, NOW, savings and money-market balances combined declined $6,131, while time deposits rose $20,337, partly due to brokered deposits and seasonal funding needs.
- Total borrowings were $374,680, up 17.0% from $320,283 at year-end, comprising short-term borrowings, FHLB advances and junior subordinated debentures. Management said additional borrowing funded earning-asset growth and seasonal deposit outflows.
- The company and bank were reported as well-capitalized. Consolidated total risk-based capital was 16.01%, Tier 1 risk-based capital 14.31%, and Tier 1 leverage 9.15% at June 30.
- Management reported liquidity of 4.4% over 30 days and 4.5% over 90 days, against a 4.0% 30-day policy minimum. Available secured Federal Reserve credit was approximately $166.9 million, with approximately $95 million of FHLB borrowing availability and collateral capacity.
Credit quality, securities and notable items
- Non-performing loans declined 15.3% from year-end to $10,936, or 1.41% of loans (1.77% at year-end). The allowance was $8,354, equal to 1.08% of loans and 76% of non-performing loans. First-half net charge-offs were $742, or an annualized 0.20% of average loans, compared with $65 and 0.02% in the prior-year period.
- Management cited improving credit metrics but cautioned that real estate conditions, unemployment and the broader economy remained weak. One $2,759 affordable-housing project loan represented 25.2% of non-performing loans; it was on non-accrual, collateral-dependent, and repayment primarily depended on unit sales. Lodging loans were $103,473; lodging made up approximately 32.8% of commercial real estate mortgages.
- First-half OTTI recognized in earnings on private-label mortgage-backed securities was $680, versus $1,154 in 2011; a further $154 non-credit impairment was recorded in other comprehensive income. Management cited depressed housing markets, higher estimated loss severity and extended foreclosure timelines, and warned that future collateral performance could change its estimates.
- Management expected to complete its acquisition of certain assets and assumption of certain liabilities of Maine-based Border Trust Company in Q3 2012. Professional fees related to the planned transaction contributed to higher other operating expense. The filing gives no purchase price or quantified expected financial impact.
- The board declared a Q3 2012 dividend of $0.295 per share. No formal earnings or financial guidance was provided. Interest-rate sensitivity scenarios indicated modest modeled NII declines under specified rate shocks; management emphasized that these scenarios are not forecasts.
- Commitments to originate loans were $37,272, unused lines $91,019, and unadvanced construction loans $4,587; standby letters of credit were $433. Management said amounts may not represent actual future cash requirements. Ordinary-course litigation was not expected to have a material effect; management reported effective disclosure controls and no material change in internal control over financial reporting.
Key facts for investors to verify
- Progress and final terms of the planned Border Trust transaction, including purchase accounting, integration costs and contribution to earnings.
- Whether loan growth and improving non-performing loan metrics continue, and the adequacy of the allowance given higher first-half net charge-offs and identified problem exposures.
- Performance and valuation of private-label mortgage-backed securities, including future credit-loss estimates and any additional OTTI charges.
- Funding mix and cost, particularly reliance on brokered time deposits and borrowings, and the effects of seasonal deposit movements on liquidity.
- Net interest margin and earnings sensitivity to continued low rates or rate changes, as well as the effect of the substantial long-dated securities portfolio.