Bar Harbor Bankshares — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. The unaudited consolidated results cover Bar Harbor Bankshares and subsidiaries, principally its Maine-based banking operations. Dollar amounts below are in thousands unless otherwise stated.
Financial results and condition
- Q2 earnings: Net income was $3,170, up 2.1% from $3,105 a year earlier; diluted EPS was $0.80 versus $0.79. For the first half, net income was $6,386, up 1.9%, and diluted EPS was $1.62 versus $1.61.
- Profitability: Q2 ROA was 0.96% and ROE 9.90%, versus 1.01% and 10.11% in Q2 2012. First-half ROA was 0.98% and ROE 10.02%, both lower than the prior-year period. The efficiency ratio increased to 56.5% for Q2 and 55.9% year to date, from 55.9% and 54.6%, respectively.
- Net interest income and margin: GAAP net interest income was $9,483 for Q2, up from $8,953, and $18,772 for the first half, up from $17,970. Tax-equivalent net interest income increased 6.0% in Q2 and 4.7% year to date. Tax-equivalent net interest margin declined to 3.12% from 3.17% for Q2 and to 3.14% from 3.24% for the first half, as asset yields fell faster than funding costs.
- Other income and expenses: First-half non-interest income rose 4.1% to $3,824, while non-interest expense increased 7.8% to $12,902. Securities gains declined to $521 from $1,237. Salaries and benefits rose 12.5% and occupancy costs 26.1%, partly reflecting the Border Trust branches and other staffing and facilities costs.
- Balance sheet: Total assets were $1.343 billion at June 30, up 3.1% from year-end 2012. Loans grew 4.6% to $852.6 million; deposits rose 7.4% to $854.7 million. Securities available for sale were $416.2 million, slightly below year-end.
- Credit quality: Non-performing loans declined 14.2% to $8.468 million, or 0.99% of loans, from $9.867 million and 1.21% at year-end. The allowance was $8.167 million, 0.96% of loans and 96.4% of non-performing loans. First-half net charge-offs were $688, or 0.17% annualized. Potential problem commercial relationships totaled $10.944 million, up from $10.297 million.
- Cash flow and liquidity: First-half operating cash flow was $9.592 million; investing cash flow was negative $57.243 million and financing cash flow positive $46.233 million. Cash and equivalents ended at $13.574 million, down $1.418 million from year-end. The Bank reported liquidity of 8.6% over 30 days and 8.5% over 90 days, and approximately $161 million of available FHLB capacity plus a $174.751 million secured Federal Reserve line.
- Funding and debt: Total borrowings were $361.1 million, down 2.8% from year-end, including $231.6 million of short-term borrowings, $124.5 million of FHLB advances and $5.0 million of junior subordinated debentures. Time deposits increased 14.4%, substantially reflecting brokered deposits used to offset seasonal outflows and fund asset growth.
- Capital and equity: The Company reported regulatory capital ratios of 16.10% total risk-based, 14.48% Tier 1 risk-based and 9.02% Tier 1 leverage, and stated it remained well-capitalized. Shareholders’ equity fell to $120.5 million from $128.0 million, largely because of the securities-related decline in accumulated other comprehensive income.
Material changes and unusual items
- Rising market rates and wider pricing spreads shifted the securities portfolio from a $12.271 million net unrealized gain at December 31, 2012, to a $5.740 million net unrealized loss at June 30, 2013. First-half other comprehensive loss was $11.974 million, resulting in a $5.588 million comprehensive loss despite positive net income.
- The Bank recorded $115 of first-half OTTI credit losses on a previously impaired private-label mortgage-backed security. Management expected to recover the amortized cost of the remaining private-label securities, but noted that adverse collateral performance could change that assessment.
- The largest identified non-performing loan was a $2.029 million commercial construction/land-development loan to a local affordable-housing authority. The project is complete; repayment is expected primarily from unit sales. The Bank had previously charged off $2.014 million of the original balance.
- Commercial real estate lending included significant lodging exposure: lodging loans were $115.083 million, approximately 33.4% of the commercial real estate mortgage portfolio.
- The August 2012 Border Trust acquisition added three branches and contributed to year-over-year operating costs. The filing reports no new acquisition during this quarter.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management cited continued commercial loan growth and improving credit metrics, while noting margin pressure and higher operating expenses.
- Management described the local economy and tourism, interest-rate movements, loan and collateral performance, competition, securities valuations, and access to brokered deposits as important uncertainties. It cautioned that its interest-rate sensitivity modeling is hypothetical, not a forecast. The model showed net interest income versus a flat-rate case declining 1.81% in year one and 0.26% in year two under a 100-basis-point decline; under a 200-basis-point rise, it declined 0.87% in year one and increased 1.01% in year two.
- Off-balance-sheet commitments totaled $149.048 million, including loan-originations, unused credit lines, construction advances and loan-purchase commitments; standby letters of credit were $281. Many commitments may expire undrawn. Management said routine litigation was not expected to have a material adverse effect; no material risk-factor changes were reported.
- The Board declared a Q3 2013 dividend of $0.315 per share. No shares were repurchased during the quarter. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the sizable unrealized securities losses and rate-driven margin pressure persist or affect capital and earnings.
- Performance of the private-label mortgage-backed securities and the affordable-housing loan, including collateral recovery assumptions.
- Whether loan growth is sustained without deterioration in non-performing, delinquent or potential-problem credits, particularly in lodging and other commercial real estate.
- The cost, stability and concentration of brokered time deposits, and continued availability of contingent borrowing facilities.
- Whether expense growth and the higher efficiency ratio moderate, and whether reported earnings remain supported as securities gains decline.