Bar Harbor Bankshares — Q1 2014 Form 10-Q
Business context and period: Unaudited consolidated results for the three months ended March 31, 2014, compared with Q1 2013; balance-sheet comparisons are with December 31, 2013. The company operates through Bar Harbor Bank & Trust, with lending concentrated in Maine. Amounts below are in $thousands except per-share data and percentages.
Financial performance and position
| Metric | Q1 2014 / March 31, 2014 | Comparable period / prior date |
|---|---|---|
| Net income | $3,787 | $3,216 in Q1 2013; up 17.8% |
| Diluted EPS | $0.95 | $0.82 in Q1 2013 |
| Net interest income, GAAP | $10,559 | $9,289 in Q1 2013 |
| Net interest income, tax-equivalent | $11,033; net interest margin 3.34% | $9,689; margin 3.15% in Q1 2013 |
| Non-interest income | $2,116 | $1,950 in Q1 2013 |
| Non-interest expense | $6,846 | $6,307 in Q1 2013 |
| Provision for loan losses | $457 | $353 in Q1 2013 |
| Returns and efficiency | ROA 1.11%; ROE 12.06%; efficiency ratio 53.6% | ROA 1.00%; ROE 10.14%; efficiency ratio 55.3% in Q1 2013 |
| Total assets | $1,404,083 | $1,373,893 at December 31, 2013 |
| Total loans / allowance | $866,621 / $8,722 | $852,857 / $8,475 at December 31, 2013 |
| Total deposits | $865,469 | $835,651 at December 31, 2013 |
| Total borrowings | $401,983 | $409,445 at December 31, 2013 |
| Shareholders’ equity | $129,729 | $121,379 at December 31, 2013 |
Q1 operating cash flow was $3,983, investing cash flow was negative $21,424, and financing cash flow was $21,224. Cash and cash equivalents increased $3,783 to $12,983. The company reported consolidated total risk-based capital of 16.83%, Tier 1 risk-based capital of 15.17%, and Tier 1 leverage of 9.19%; it and the Bank were classified as well-capitalized.
Material changes and management commentary
- Net interest income rose 13.9% on a tax-equivalent basis, supported by 7.4% average earning-asset growth and a 19-basis-point margin improvement. Lower funding costs more than offset lower loan yields: the cost of interest-bearing liabilities fell 29 basis points to 0.85%, while the earning-asset yield declined 6 basis points to 4.10%.
- Loans grew 1.6% from year-end. Consumer loans increased 5.2%, largely reflecting the purchase of a residential loan portfolio; commercial loans declined 1.6%, with payoffs and portfolio cash flows exceeding new originations. Securities increased 3.3% to $464,827.
- Deposits increased 3.6%, but non-interest-bearing, NOW, savings and money-market deposits fell by a combined $18,364. Time deposits rose $48,182, principally from brokered deposits used to replace seasonal outflows and fund asset growth. Borrowings declined 1.8%.
- Non-interest expense increased 8.5%, including higher salaries and benefits, occupancy, and loan-collection/OREO expenses. Net securities gains rose to $397 from $265 and contributed to non-interest income.
- Management said credit quality was relatively stable. Non-performing loans rose 5.4% to $9,314, or 1.07% of loans; the allowance covered 93.6% of non-performing loans. Net charge-offs declined to $210 from $395 in Q1 2013. The provision increase was attributed largely to one non-performing loan.
Outlook, risks, contingencies, and unusual items
- The filing gives no specific earnings or growth guidance. Management cautions that Q1 results are not necessarily indicative of full-year results and describes its interest-rate sensitivity analysis as hypothetical, not a forecast. Under modeled parallel shifts, net interest income changes were negative 0.58% for a 100-basis-point decline and negative 2.31% for a 200-basis-point rise in year one; year-two changes were negative 0.07% and negative 2.76%, respectively.
- Key risks include interest-rate movements, competition, Maine economic and tourism conditions, real-estate and commercial-credit exposure, and changes in collateral values or loan repayment. Approximately 33.8% of commercial real-estate mortgages were lodging-industry loans; total lodging loans were about $115,723. Management noted that the local recovery remained uncertain.
- A non-performing commercial construction/real-estate loan to a local affordable-housing authority accounted for $1,647, or 17.7%, of non-performing loans. It was impaired and on non-accrual; the Bank had previously charged off $2,014 of its original balance. Management also identified $10,385 in performing commercial potential problem loans.
- The securities portfolio had $11,108 of gross unrealized losses at quarter-end, down from $18,630 at year-end. No OTTI losses were recognized in earnings during Q1. Management considered the declines temporary, but noted that adverse changes in private-label mortgage collateral performance or fair values could alter that assessment.
- Off-balance-sheet commitments totaled $132,108, including $94,062 of unused lines, $21,594 of unadvanced construction loans, and $16,452 of loan-origination commitments. Standby letters of credit were $265. Management said commitments generally may expire undrawn.
- Liquidity measures were 9.0% over 30 days and 7.9% over 90 days. Available FHLB collateral/lines were approximately $172 million, and the available secured Federal Reserve line was $165,955. Management judged liquidity sufficient, while noting potential sensitivity to deposit behavior and brokered-deposit availability.
- After quarter-end, the board declared a three-for-two stock split payable May 19, 2014, to holders of record May 5, and a quarterly dividend of $0.223 per post-split share payable June 13. The Q1 dividend was $0.325 per pre-split share. Routine litigation was not expected by management to have a material adverse effect; no material risk-factor changes were reported.
Important facts for investors to verify
- Track non-performing and potential problem loans, especially the affordable-housing exposure, and assess allowance coverage against credit deterioration and charge-offs.
- Review deposit mix and reliance on brokered time deposits alongside seasonal funding needs, borrowing levels, and disclosed liquidity sources.
- Assess whether margin and earnings growth persist as asset yields, funding costs, and interest rates change; distinguish reported results from tax-equivalent measures.
- Monitor unrealized securities losses and management’s assumptions regarding municipal and private-label mortgage-backed securities, including any future impairment recognition.
- Confirm the stock split’s effect on share counts and per-share comparisons, and the dividend amount on the adjusted share basis.
- Consider the size and potential drawdown of off-balance-sheet commitments and the concentration of lending in Maine tourism, lodging, and real estate.