Business Context and Reporting Period
Company: Bar Harbor Bankshares (Maine)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2009
Overview: The Company operates as a bank holding company for Bar Harbor Bank & Trust, serving primarily the coastal regions of Maine. The reporting period reflects operations during a deep economic recession, characterized by declining interest rates and significant volatility in the housing and credit markets. The Company participated in the U.S. Treasury's Capital Purchase Program (CPP) in January 2009.
Key Financial Metrics
| Metric (in thousands) | Q2 2009 | Q2 2008 | 6 Months 2009 | 6 Months 2008 |
|---|---|---|---|---|
| Net Income | $2,756 | $2,029 | $5,381 | $3,981 |
| Net Income Available to Common | $2,488 | $2,029 | $4,891 | $3,981 |
| Diluted EPS | $0.85 | $0.67 | $1.68 | $1.31 |
| Net Interest Income (GAAP) | $8,843 | $6,532 | $16,783 | $12,824 |
| Net Interest Margin (Tax-Equiv) | 3.54% | 3.07% | 3.49% | 3.05% |
| Non-Interest Income | $1,369 | $1,932 | $2,973 | $3,981 |
| Non-Interest Expense | $5,552 | $5,234 | $10,716 | $10,222 |
| Total Assets | $1,070,558 | $972,288 | $1,070,558 | $972,288 |
| Total Loans | $665,370 | $633,603 | $665,370 | $633,603 |
| Total Deposits | $634,959 | $578,193 | $634,959 | $578,193 |
| Shareholders' Equity | $85,413 | $65,445 | $85,413 | $65,445 |
Material Changes vs. Prior Period
- Profitability Growth: Net income increased 35.8% year-over-year for the quarter and 35.2% for the six-month period. This was driven primarily by a significant expansion in the net interest margin (up 47 basis points for the quarter) due to faster declines in funding costs compared to asset yields.
- Balance Sheet Expansion: Total assets grew 10.1% to $1.07 billion. Loans increased 5.0% and securities increased 21.5%, funded by a 9.8% increase in deposits and a 6.1% increase in borrowings.
- Capital Injection: In January 2009, the Company issued $18.75 million of Series A Preferred Stock to the U.S. Treasury under the CPP, significantly boosting Tier 1 capital ratios.
- Non-Interest Income Decline: Non-interest income fell 29.1% for the quarter, largely due to the sale of the merchant processing and Visa credit card portfolios in late 2008 and a $454 charge for other-than-temporary impairment (OTTI) on securities.
- Expense Increases: Non-interest expense rose 6.1% for the quarter, primarily due to a special FDIC deposit insurance assessment of $495, partially offset by lower credit card processing expenses.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
- Net Interest Margin: Management anticipates the improving net interest margin trend will continue into the third quarter of 2009 as interest-bearing liabilities re-price downward while asset yields stabilize.
- Loan Growth: Commercial loan origination is expected to moderate in the remainder of 2009 due to the weakening economy and declining demand.
- Dividends: The Board declared a third-quarter 2009 common dividend of $0.26 per share. Increases above this level require U.S. Treasury consent until January 2012.
Risks and Contingencies
- Securities Impairment: The Company recognized $454 in OTTI losses in Q2 2009 related to private label mortgage-backed securities. While management believes remaining unrealized losses are temporary, further deterioration in the housing market could necessitate additional charges.
- Credit Quality: Non-performing loans rose to 0.91% of total loans ($6.0 million) from 0.70% at year-end 2008. The allowance for loan losses was increased to 1.01% of total loans to reflect deteriorating economic conditions.
- FDIC Assessments: New FDIC assessment factors effective in Q2 2009 (including brokered deposits and secured liabilities) are expected to significantly increase future insurance expenses.
- Interest Rate Risk: The balance sheet is currently liability-sensitive. A 200 basis point rise in rates is projected to decrease net interest income by 0.92% in Year 1, while a 100 basis point decline is projected to have a negligible impact (0.05% increase) in Year 1.
Investor Verification Checklist
- OTTI Methodology: Verify the assumptions used to separate credit losses from non-credit losses in the $1.56 million total impairment on private label mortgage-backed securities.
- Allowance Adequacy: Assess whether the 1.01% allowance for loan losses is sufficient given the rise in non-performing loans and the local economic downturn in Maine.
- Deposit Stability: Review the composition of deposits, noting that brokered deposits now comprise a significant portion ($106 million) to support asset growth.
- FDIC Cost Impact: Monitor future quarters for the full impact of the new FDIC assessment formula on non-interest expenses.
- CPP Restrictions: Confirm compliance with U.S. Treasury restrictions on executive compensation and dividend increases under the Capital Purchase Program.