Bar Harbor Bankshares — Q1 2013 Form 10-Q
Business context and period. Bar Harbor Bankshares, a Maine bank holding company operating through Bar Harbor Bank & Trust, reported unaudited results for the three months ended March 31, 2013. Income-statement comparisons are with Q1 2012; balance-sheet comparisons are with December 31, 2012. Unless otherwise noted, dollar amounts are in thousands.
Key financial results
- Earnings: Net income was $3.216 million, up 1.7% from $3.163 million. Diluted EPS was $0.82 versus $0.81. Annualized ROE declined to 10.14% from 10.51%, and ROA to 1.00% from 1.07%.
- Net interest income and margin: GAAP net interest income rose 3.0% to $9.289 million. On a tax-equivalent basis, it increased 3.4% to $9.689 million. Tax-equivalent net interest margin fell 15 basis points to 3.15% as asset yields fell faster than funding costs; earning-asset yield was 4.16% versus 4.56%, and interest-bearing liability cost was 1.14% versus 1.43%.
- Other income and expenses: Non-interest income increased 14.7% to $1.950 million, including $265,000 in net securities gains and no OTTI losses recognized in earnings (versus $344,000 of net OTTI losses in Q1 2012). Non-interest expense increased 8.6% to $6.307 million, with higher salaries, occupancy, and equipment costs partly offset by lower other operating expense. The efficiency ratio was 55.3%, compared with 53.4%.
- Assets and loans: Total assets were $1.307 billion, up 0.3% from year-end. Loans were $817.2 million, up 0.3%; commercial loans rose 1.1% to $435.6 million while consumer loans declined 0.6% to $367.0 million. Securities available for sale were $423.9 million, up 1.4%.
- Credit quality: Non-performing loans declined 12.9% to $8.592 million, or 1.05% of loans, from $9.867 million, or 1.21%, at year-end. The allowance was $8.055 million, 0.99% of loans and 93.8% of non-performing loans. Q1 net charge-offs were $395,000, or an annualized 0.19% of average loans, versus $315,000, or 0.17%, a year earlier. One affordable-housing project loan accounted for $2.029 million, or 23.6%, of non-performing loans.
- Cash flow: Operating activities generated $4.533 million; investing activities used $13.596 million and financing activities provided $4.376 million. Cash and cash equivalents decreased $4.687 million during the quarter to $10.305 million.
- Funding, debt, and equity: Deposits totaled $801.1 million, up 0.7% from year-end; the increase in time deposits more than offset seasonal declines in demand, NOW, savings, and money-market deposits. Borrowings totaled $371.7 million, essentially unchanged. Shareholders’ equity was $128.1 million. The company reported a $0.305 per-share Q1 dividend and a declared Q2 dividend of $0.31 per share.
- Capital and liquidity: The company reported regulatory capital ratios of 16.20% total risk-based, 14.56% Tier 1 risk-based, and 9.04% Tier 1 leverage, and stated that the company and bank were well capitalized. The bank’s liquidity measure was 6.2% over 30 days and 5.6% over 90 days; management’s minimum 30-day policy level is 4.0%. Available FHLB capacity was approximately $124 million, and the secured Federal Reserve line was $190.8 million.
Material changes and management commentary
- Management cited improving credit quality, commercial loan growth, increased non-interest income, and stronger capital ratios. Earnings grew modestly, but profitability ratios and net interest margin declined.
- The 2012 Border Trust acquisition added three branches and contributed to higher compensation, occupancy, and equipment expenses in Q1 2013. The acquired operations also contributed to the year-over-year growth in average assets.
- Unrealized gains on available-for-sale securities declined: accumulated net unrealized securities gains were $8.891 million at March 31, versus $12.271 million at year-end. Q1 other comprehensive loss was $2.276 million, leaving total comprehensive income of $940,000.
- Management described net interest income as relatively stable in its current-rate scenario. Its interest-rate model estimated that a 100-basis-point parallel decline could reduce net interest income 1.44% over one year and 2.90% over two years; a 200-basis-point rise could increase it 0.37% and 2.08%, respectively. The filing cautions that these scenarios are hypothetical and not forecasts.
- No specific earnings or revenue guidance was provided. Management said it believed liquidity was sufficient for current and future needs, while noting that economic conditions and access to brokered deposits could affect liquidity.
Risks, contingencies, and unusual items
- Key risks include Maine economic conditions and tourism, real-estate and commercial-loan credit exposure, interest-rate changes, competition, and the adequacy of the loan-loss allowance. About 33% of commercial real-estate mortgages were to lodging businesses.
- Private-label mortgage-backed securities remained exposed to adverse changes in collateral performance and fair value. Management expected recovery of amortized cost and recognized no Q1 2013 OTTI loss in earnings, but stated that changed repayment performance could affect that assessment. Unrealized losses on securities totaled $3.592 million at quarter-end.
- Off-balance-sheet commitments included $30.376 million to originate loans, $102.106 million of unused lines, $20.0 million of loan-purchase commitments, and $24.497 million of undisbursed construction loans. Standby letters of credit were $245,000. Contract amounts do not necessarily represent future cash requirements.
- The filing reports ordinary-course litigation that management did not expect to materially affect the financial statements, and no material changes to previously disclosed risk factors. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the lower net interest margin persists and whether loan and deposit growth can offset continued pressure on asset yields.
- Progress in resolving non-performing and restructured loans, especially the $2.029 million affordable-housing exposure, and whether charge-offs or required provisions increase.
- Performance of private-label mortgage-backed securities and municipal securities, including the effect of market-rate changes on unrealized losses and equity.
- Whether deposit mix, brokered funding, and borrowing capacity support liquidity through seasonal outflows and loan commitments.
- Whether acquisition-related operating costs stabilize and whether the reported efficiency ratio improves.