Bar Harbor Bankshares — Q2 2014 Form 10-Q
Business context and period: Unaudited consolidated results for the three and six months ended June 30, 2014, compared with the same 2013 periods. The Maine-based company operates through Bar Harbor Bank & Trust and related subsidiaries. Unless noted, amounts are in thousands of dollars. Share and per-share data reflect the May 2014 three-for-two stock split.
Key financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net interest income | $10,864 | $9,483 | $21,423 | $18,772 |
| Net income | $3,857 | $3,170 | $7,644 | $6,386 |
| Diluted EPS | $0.65 | $0.54 | $1.28 | $1.08 |
| Provision for loan losses | $428 | $405 | $885 | $758 |
| Non-interest income | $2,293 | $1,874 | $4,409 | $3,824 |
| Non-interest expense | $7,361 | $6,595 | $14,207 | $12,902 |
- Q2 net income rose 21.7%; first-half net income rose 19.7%. First-half return on average assets was 1.10% and return on average equity was 11.79%, versus 0.98% and 10.02% a year earlier.
- Tax-equivalent net interest margin was 3.32% in Q2 and 3.33% for the first half, up 20 and 19 basis points, respectively. The first-half efficiency ratio improved to 54.2% from 55.7%.
- At June 30, total assets were $1.453 billion, loans $900.9 million, available-for-sale securities $477.8 million, deposits $837.0 million and shareholders’ equity $138.0 million. Loans grew 5.6% and assets 5.7% from year-end 2013.
- Cash and cash equivalents were $11.8 million, up $2.6 million from year-end. First-half operating cash flow was $6.4 million; investing activities used $64.4 million and financing activities provided $60.6 million. Loan growth and securities purchases were major investing uses; FHLB advances funded much of the financing inflow.
- Borrowings totaled $471.0 million, up 15.0% from year-end; short-term borrowings were $377.5 million and long-term FHLB advances $88.5 million. Deposits were nearly flat. The company reported 30-day and 90-day liquidity measures of 5.6% and 6.0%, respectively, against a 4.0% policy minimum for the 30-day measure.
- Consolidated regulatory capital ratios were 16.83% total risk-based, 15.20% Tier 1 risk-based and 9.14% Tier 1 leverage; the company and bank were classified as well capitalized.
Material changes and management commentary
- First-half tax-equivalent net interest income increased 14.2%, driven by 7.5% average earning-asset growth and a 19-basis-point margin improvement. Lower funding costs more than offset lower loan yields; securities income increased while loan interest income edged down.
- Trust and financial-services fees increased 18.0% year over year in the first half. Securities gains were $747 for the period, compared with $521 in 2013. Salaries and benefits rose 12.3%, contributing to higher operating expenses.
- Non-performing loans declined to $7.845 million from $8.840 million at year-end; non-performing loans were 0.87% of total loans. The allowance was $8.751 million, 0.97% of loans and 111.5% of non-performing loans. First-half net charge-offs were $609, versus $688 in 2013.
- Consumer loans grew 12.2% from year-end, largely due to purchased residential mortgages; commercial loans were nearly flat. Approximately 33.9% of commercial real estate mortgages were tied to lodging, and total lodging-industry loans were $117.4 million.
- Unrealized securities gains improved substantially: the portfolio’s net unrealized position moved from a loss at year-end to a gain at June 30. The company recorded no OTTI losses in first-half 2014; it continued to identify private-label mortgage-backed securities and municipal credit as areas requiring monitoring.
Outlook, risks and unusual items
- No formal earnings or financial guidance is provided. Management said results depend on Maine economic conditions, tourism, competition, credit quality and interest rates, and cautioned that interim results are not necessarily indicative of full-year results.
- Interest-rate simulations showed moderate liability sensitivity. A parallel 200-basis-point rise was modeled to reduce net interest income 2.66% over one year and 3.71% over two years; a 100-basis-point decline was modeled to reduce it 0.39% and 3.59%, respectively. Management emphasized that these are hypothetical scenarios, not forecasts.
- In Q2 the bank purchased $45 million notional of interest-rate caps to limit exposure to rising rates on specified floating-rate borrowings. The caps had a reported fair value of $2.465 million at quarter-end.
- Credit risks include the local economy and tourism, real estate collateral values, loan concentrations and a $1.261 million non-accrual affordable-housing project loan. Management had charged off $2.014 million of that loan’s original balance. Securities recovery estimates, particularly for private-label mortgage-backed securities, could change with collateral performance and market conditions.
- Off-balance-sheet commitments included $21.1 million to originate loans, $93.2 million of unused credit lines, $18.0 million of undrawn construction loans and $325,000 of standby letters of credit. Management said routine litigation was not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
- The board declared a Q3 2014 dividend of $0.23 per share, payable September 15, 2014. The share repurchase authorization was extended through August 17, 2016; 157,731 shares had been repurchased under the plan to date.
Important facts for investors to verify
- Whether loan growth, particularly purchased residential mortgages, can be sustained without weakening underwriting or margins.
- Performance of lodging-related credits, the affordable-housing non-accrual loan and potential problem loans; monitor allowance adequacy and charge-offs.
- Funding mix and reliance on borrowings as deposits remain flat, along with liquidity capacity and the cost and effectiveness of the interest-rate caps.
- Interest-rate exposure and the assumptions underlying management’s sensitivity simulations; actual outcomes may differ materially.
- Quality and valuation of the securities portfolio, including municipal and private-label mortgage-backed securities, and the persistence of securities gains and improved unrealized values.