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BHB > SEC Filings for BHB > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for BAR HARBOR BANKSHARES

Form 10-Q for BAR HARBOR BANKSHARES


9-Nov-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's discussion and analysis, which follows, focuses on the factors affecting the Company's consolidated results of operations for the three and nine months ended September 30, 2012 and 2011, and financial condition at September 30, 2012, and December 31, 2011, and where appropriate, factors that may affect future financial performance. The following discussion and analysis of financial condition and results of operations of the Company and its subsidiaries should be read in conjunction with the consolidated financial statements and notes thereto, and selected financial and statistical information appearing elsewhere in this report on Form 10-Q.

Amounts in the prior period financial statements are reclassified whenever necessary to conform to current period presentation.

Unless otherwise noted, all dollars are expressed in thousands except share data.

Use of Non-GAAP Financial Measures: Certain information discussed below is presented on a fully taxable equivalent basis. Specifically, included in interest income in the third quarter of 2012 and 2011 was $836 and $743, respectively, of tax-exempt interest income from certain investment securities and loans. For the nine months ended September 30, 2012 and 2011, the amount of tax-exempt income included in interest income was $2,364 and $2,312, respectively.

An amount equal to the tax benefit derived from this tax exempt income has been added back to the interest income totals discussed in certain sections of this Management's Discussion and Analysis, representing tax equivalent adjustments of $407 and $359 in the third quarter of 2012 and 2011, respectively, and $1,151 and $1,113 for the nine months ended September 30, 2012 and 2011, respectively, which increased net interest income accordingly. The analysis of net interest income tables included in this report on Form 10-Q provide a reconciliation of tax equivalent financial information to the Company's consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles.

Management believes the disclosure of tax equivalent net interest income information improves the clarity of financial analysis, and is particularly useful to investors in understanding and evaluating the changes and trends in the Company's results of operations. Other financial institutions commonly present net interest income on a tax equivalent basis. This adjustment is considered helpful in the comparison of one financial institution's net interest income to that of another institution, as each will have a different proportion of tax-exempt interest from their earning asset portfolios. Moreover, net interest income is a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average earning assets. For purposes of this measure as well, other financial

institutions generally use tax equivalent net interest income to provide a better basis of comparison from institution to institution. The Company follows these practices.

FORWARD LOOKING STATEMENTS DISCLAIMER

Certain statements, as well as certain other discussions contained in this quarterly report on Form 10-Q, or incorporated herein by reference, contain statements which may be considered to be forward-looking within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Readers can identify these forward-looking statements by the use of words like "strategy," "expects," "plans," "believes," "will," "estimates," "intends," "projects," "goals," "targets," and other words of similar meaning. Readers can also identify them by the fact that they do not relate strictly to historical or current facts.

Investors are cautioned that forward-looking statements are inherently uncertain. Forward-looking statements include, but are not limited to, those made in connection with estimates with respect to the future results of operation, financial condition, and the business of the Company which are subject to change based on the impact of various factors that could cause actual results to differ materially from those projected or suggested due to certain risks and uncertainties. Those factors include but are not limited to:

(i) The Company's success is dependent to a significant extent upon general economic conditions in Maine, and Maine's ability to attract new business, as well as factors that affect tourism, a major source of economic activity in the Company's immediate market areas;

(ii) The Company's earnings depend to a great extent on the level of net interest income (the difference between interest income earned on loans and investments and the interest expense paid on deposits and borrowings) generated by the Company's wholly-owned banking subsidiary, Bar Harbor Bank & Trust (the "Bank"), and thus the Company's results of operations may be adversely affected by increases or decreases in interest rates;

(iii) The banking business is highly competitive and the profitability of the Company depends on the Bank's ability to attract loans and deposits in Maine, where the Bank competes with a variety of traditional banking and non-traditional institutions, such as credit unions and finance companies;

(iv) A significant portion of the Bank's loan portfolio is comprised of commercial loans and loans secured by real estate, exposing the Company to the risks inherent in financings based upon analysis of credit risk, the value of underlying collateral, and other intangible factors which are considered in making commercial loans and, accordingly, the Company's profitability may be negatively impacted by judgment errors in risk analysis, by loan defaults, and the ability of certain borrowers to repay such loans during a downturn in general economic conditions;

(v) Adverse changes in repayment performance and fair value of underlying residential mortgage loan collateral, that differ from the Company's current estimates, could change the Company's expectations that it will recover the amortized cost of its private label mortgage backed securities portfolio and/or its conclusion that such securities were not other-than temporarily impaired as of the date of this report;

(vi) Our allowance for loan losses may be adversely impacted by a variety of factors, including, but not limited to, the performance of the Company's loan portfolio, the economy, changes in interest rates, and the view of regulatory authorities toward loan classifications;

(vii) Significant changes in the Company's internal controls, or internal control failures;

(viii) Acts or threats of terrorism and actions taken by the United States or other governments as a result of such threats, including military action, could further adversely affect business and economic conditions in the United States generally and in the Company's markets, which could have an adverse effect on the Company's financial performance and that of borrowers and on the financial markets and the price of the Company's common stock;

(ix) Significant changes in the extensive laws, regulations, and policies governing bank holding companies and their subsidiaries could alter the Company's business environment or affect its operations;

(x) Changes in general, national, international, regional or local economic conditions and credit markets which are less favorable than those anticipated by Company management that could impact the Company's securities portfolio, quality of credits, or the overall demand for the Company's products or services; and

(xi) The Company's success in managing the risks involved in all of the foregoing matters.

Readers should carefully review all of these factors as well as the risk factors set forth in Item 1A- Risk Factors, contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2011. There may be other risk factors that could cause differences from those anticipated by management.

The forward-looking statements contained herein represent the Company's judgment as of the date of this quarterly report on Form 10-Q and the Company cautions readers not to place undue reliance on such statements. The Company disclaims any obligation to publicly update or revise any forward-looking statement contained in the succeeding discussion, or elsewhere in this quarterly report on Form 10-Q, except to the extent required by federal securities laws.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

The Company's significant accounting policies are more fully enumerated in Note 1 to the Consolidated Financial Statements included in Item 8 of its December 31, 2011, report on Form 10-K. The reader of the financial statements should review these policies to gain a greater understanding of how the Company's financial performance is reported.

Management's discussion and analysis of the Company's financial condition and results of operations are based on the Consolidated Financial Statements, which are prepared in accordance with U.S. generally accepted accounting principles. The preparation of such financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Management evaluates its estimates on an ongoing basis. Management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis in making judgments about the carrying values of assets that are not readily apparent from other sources. Actual results could differ from the amount derived from management's estimates and assumptions under different assumptions or conditions. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses, other than temporary impairment on securities, income tax estimates, and the evaluation of intangible assets. The use of these estimates is more fully described in Part I, Item 1, Note 2 of the consolidated financial statements in this quarterly report on Form 10-Q.

SUMMARY FINANCIAL RESULTS

For the three months ended September 30, 2012, the Company reported net income of $3,368, compared with $3,010 in the third quarter of 2011, representing an increase of $358, or 11.9%. The Company's diluted earnings per share amounted to $0.86 for the quarter compared with $0.77 in the third quarter of 2011, representing an increase of $0.09, or 11.7%.

The Company's annualized return on average shareholders' equity ("ROE") amounted to 10.49% for the quarter, compared with 10.45% in the third quarter of 2011. The Company's third quarter return on average assets ("ROA") amounted to 1.05%, compared with 1.04% in the third quarter of 2011.

For the nine months ended September 30, 2012, the Company's net income amounted to $9,636, compared with $8,652 for the same period in 2011, representing an increase of $984, or 11.4%. Diluted earnings per share amounted to $2.46 for the nine months ended September 30, 2012, compared with $2.23 for the same period in 2011, representing an increase of $0.23, or 10.3%.

For the nine months ended September 30, 2012, the Company's ROE amounted to 10.37%, compared with 10.60% for the same period in 2011. The Company's ROA amounted to 1.04% for the nine months ended September 30, 2012, compared with 1.01% for the first nine months of 2011.

As previously announced, on August 10, 2012 the Bank acquired substantially all assets and assumed certain liabilities including all deposits of Border Trust Company ("Border Trust"), a subsidiary of Border Bancshares, Inc., headquartered in Augusta, Maine. The Bank acquired $38,520 of deposits and $33,606 in loans, as well as three branch offices (two of which were leased) located in Kennebec and Sagadahoc Counties. The Bank paid a core deposit premium of 3.85%, or $1,115, and purchased the loan portfolio, excluding selected non-performing loans, at a discount of 2.16%, or $749. In connection with this transaction, the Bank recorded estimated goodwill of $2,073 and an estimated core deposit intangible of $783, or 2.7% of core deposits. The Bank also recorded $829 in non-recurring year-to-date expenses, of which $657 were incurred in the third quarter, including employee severance, professional fees, and other conversion related items.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income is the principal component of the Company's income stream and represents the difference or spread between interest generated from earning assets and the interest expense paid on deposits and borrowed funds. Net interest income is entirely generated by the Bank. Fluctuations in market interest rates as well as volume and mix changes in earning assets and interest bearing liabilities can materially impact net interest income.

Total Net Interest Income: For the three months ended September 30, 2012, net interest income on a tax equivalent basis amounted to $9,821, compared with $9,063 in the third quarter of 2011, representing an increase of $758, or 8.4%. The increase in third quarter 2012 tax-equivalent net interest income compared with the third quarter of 2011 was attributed to average earning asset growth of $114,080 or 10.3%, as the net interest margin declined four basis points.

For the nine months ended September 30, 2012, net interest income on a tax-equivalent basis amounted to $28,535, compared with $26,775 for the same period in 2011, representing an increase of $1,760, or 6.6%. The increase in net interest income was principally attributed to average earning asset growth of $74,581, or 6.7%, as the tax-equivalent net interest margin declined one basis point.

Factors contributing to the changes in net interest income and the net interest margin are more fully enumerated in the following discussion and analysis.

Net Interest Income Analysis: The following tables summarize the Company's average balance sheets and components of net interest income, including a reconciliation of tax equivalent adjustments, for the three and nine months ended September 30, 2012 and 2011:

                           AVERAGE BALANCE SHEET AND

                        ANALYSIS OF NET INTEREST INCOME

                               THREE MONTHS ENDED

                          SEPTEMBER 30, 2012 AND 2011


                                           2012                           2011
                                                    Weighted                       Weighted
                                Average             Average    Average             Average
                                Balance    Interest   Rate     Balance    Interest   Rate
Interest Earning Assets:
Loans (1,3)                   $  798,095    $ 9,464  4.72%    $  723,219   $ 8,813  4.83%
Securities (2,3)                406,563      3,797   3.72%      368,579     4,255   4.58%
Federal Home Loan Bank stock     17,825         22   0.49%       16,068        11   0.27%
Fed funds sold, money market
funds, and time
   deposits with other banks          1        ---   0.00%          538        ---  0.00%

  Total Earning Assets         1,222,484    13,283   4.32%     1,108,404    13,079  4.68%

Non-Interest Earning Assets:
Cash and due from banks           3,375                           8,974
Allowance for loan losses        (8,482)                          (9,698)
Other assets (2)                 64,469                          44,719
  Total Assets                $1,281,846                      $1,152,399



Interest Bearing
Liabilities:
Deposits                      $    721,831  $ 1,941  1.07%    $  687,541   $ 2,202  1.27%
Borrowings                        350,953    1,521   1.72%      279,903     1,814   2.57%
  Total Interest Bearing
Liabilities                     1,072,784    3,462   1.28%      967,444     4,016   1.65%
Rate Spread                                          3.04%                          3.03%

Non-Interest Bearing
Liabilities:
Demand and other
non-interest bearing
deposits                          74,798                         65,455
Other liabilities                  6,476                          5,202
 Total Liabilities              1,154,058                      1,038,101
Shareholders' equity              127,788                       114,298
  Total Liabilities and
Shareholders' Equity          $  1,281,846                    $1,152,399
Net interest income and net
interest margin (3)                          9,821   3.20%                  9,063   3.24%
Less:  Tax Equivalent
adjustment                                    (407)                          (359)
  Net Interest Income                       $ 9,414  3.06%                 $ 8,704  3.12%

(1)

For purposes of these computations, non-accrual loans are included in average loans.

(2)

For purposes of these computations, unrealized gains (losses) on available for sale securities are recorded in other assets.

(3)

For purposes of these computations, interest income, net interest income and net interest margin are reported on a tax equivalent basis.

AVERAGE BALANCE SHEET AND

                        ANALYSIS OF NET INTEREST INCOME

                               NINE MONTHS ENDED

                          SEPTEMBER 30, 2012 AND 2011


                                             2012                             2011
                                                      Weighted                         Weighted
                                 Average              Average     Average               Average
                                 Balance    Interest    Rate      Balance    Interest    Rate
Interest Earning Assets:
Loans (1,3)                     $  770,998   $27,267   4.72%    $    718,633  $26,188    4.87%
Securities (2,3)                  394,669     11,702   3.96%        373,335    13,204    4.73%
Federal Home Loan Bank stock       17,089         63   0.49%        16,068        35     0.29%
Fed funds sold, money market
funds, and time
   deposits with other banks           43         ---  0.00%           182        ---    0.00%

  Total Earning Assets           1,182,799    39,032   4.41%      1,108,218    39,427    4.76%

Non-Interest Earning Assets:
Cash and due from banks             3,169                            7,540
Allowance for loan losses           (8,428)                          (9,313)
Other assets (2)                   59,223                           41,474
  Total Assets                  $1,236,763                      $1,147,919



Interest Bearing Liabilities:
Deposits                        $  687,991   $  5,795  1.13%    $    674,400  $  6,606   1.31%
Borrowings                        354,392      4,702   1.77%        300,036     6,046    2.69%
  Total Interest Bearing
Liabilities                      1,042,383    10,497   1.35%        974,436    12,652    1.74%
Rate Spread                                            3.06%                             3.02%

Non-Interest Bearing
Liabilities:
Demand and other non-interest
bearing deposits                   64,294                           59,270
Other liabilities                   5,967                            5,112
 Total Liabilities               1,112,644                        1,038,818
Shareholders' equity              124,119                           109,101
  Total Liabilities and
Shareholders' Equity            $1,236,763                      $  1,147,919
Net interest income and net
interest margin (3)                           28,535   3.22%                   26,775    3.23%
Less:  Tax Equivalent
adjustment                                    (1,151)                          (1,113)
  Net Interest Income                        $27,384   3.09%                  $25,662    3.10%

(4)

For purposes of these computations, non-accrual loans are included in average loans.

(5)

For purposes of these computations, unrealized gains (losses) on available for sale securities are recorded in other assets.

(6)

For purposes of these computations, interest income, net interest income and net interest margin are reported on a tax equivalent basis.

Net Interest Margin: The net interest margin, expressed on a tax equivalent basis, represents the difference between interest and dividends earned on interest-earning assets and interest paid to depositors and other creditors, expressed as a percentage of average earning assets.

The net interest margin is determined by dividing tax equivalent net interest income by average interest-earning assets. The interest rate spread represents the difference between the average tax equivalent yield earned on interest earning-assets and the average rate paid on interest bearing liabilities. The net interest margin is generally higher than the interest rate spread due to the additional income earned on those assets funded by non-interest bearing liabilities, primarily demand deposits and shareholders' equity.

For the three months ended September 30, 2012, the tax equivalent net interest margin amounted to 3.20%, compared with 3.24% in the third quarter of 2011, representing a decline of four basis points. The decline in the net interest margin was principally attributed to the volume of interest earning assets added to the Company's balance sheet, as the interest rate spread improved one basis point. The yield on earning assets declined 36 basis points to 4.32% while the rate paid on interest bearing liabilities declined 37 basis points to 1.28%.

For the nine months ended September 30, 2012, the tax-equivalent net interest margin amounted to 3.22%, compared with 3.23% for the same period in 2011, representing a decline of one basis point. The decline in the net interest margin was principally attributed to the volume of interest earning assets added to the Company's balance sheet, as the interest rate spread improved four basis points. The yield on earning assets declined 35 basis points to 4.41% while the rate paid on interest bearing liabilities declined 39 basis points to 1.35%.

The following table summarizes the net interest margin components, on a quarterly basis, over the past two years. Factors contributing to the changes in the net interest margin are further enumerated in the following discussion and analysis.

NET INTEREST MARGIN ANALYSIS

FOR QUARTER ENDED

WEIGHTED AVERAGE RATES                2012                         2011             2010
                           Quarter:     3     2     1       4     3     2     1       4
Interest Earning Assets:
Loans (1,3)                           4.72% 4.64% 4.82%   4.88% 4.83% 4.86% 4.93%   5.00%
Securities (2,3)                      3.72% 3.96% 4.22%   4.29% 4.58% 4.78% 4.79%   4.73%

Federal Home Loan Bank stock 0.49% 0.49% 0.50% 0.30% 0.27% 0.30% 0.30% 0.00% Fed Funds sold, money market funds,
and time deposits with other banks 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
  Total Earning Assets                4.32% 4.35% 4.56%   4.61% 4.68% 4.77% 4.81%   4.83%


Interest Bearing Liabilities:
Deposits                              1.07% 1.13% 1.18%   1.25% 1.27% 1.30% 1.36%   1.50%
Borrowings                            1.72% 1.69% 1.91%   2.38% 2.57% 2.69% 2.81%   3.22%
  Total Interest Bearing Liabilities  1.28% 1.33% 1.43%   1.58% 1.65% 1.74% 1.82%   2.03%

Rate Spread                           3.04% 3.02% 3.13%   3.03% 3.03% 3.03% 2.99%   2.80%

Net Interest Margin (3)               3.20% 3.17% 3.30%   3.23% 3.24% 3.23% 3.21%   3.06%

Net Interest Margin without
   Tax Equivalent Adjustments         3.06% 3.04% 3.17%   3.11% 3.12% 3.09% 3.07%   2.92%

(1) For purposes of these computations, non-accrual loans are included in average loans.

(2) For purposes of these computations, unrealized gains (losses) on available for sale securities are recorded in other assets.

(3) For purposes of these computations, interest income, net interest income and net interest margin are reported on a tax equivalent basis.

For the three and nine months ended September 30, 2012, the weighted average yield on average earning assets amounted to 4.32% and 4.41%, compared with 4.68% and 4.76% for the same periods in 2011, representing declines of 36 and 35 basis points, respectively. These declines largely resulted from the replacement of accelerated cash flows from the Bank's mortgage-backed securities portfolio along with the purchase of additional securities during a period of historically low interest rates. The declines were also attributed to the origination and competitive re-pricing of certain commercial loans, as well as residential mortgage loan refinancing activity during a period of historically low interest rates.

For the three and nine months ended September 30, 2012, the weighted average cost of interest bearing liabilities amounted to 1.28% and 1.35%, compared with 1.65% and 1.74% for the same periods in 2011, representing declines of 37 and 39 basis points, respectively. These declines principally reflected the ongoing re-pricing of maturing time deposits and borrowings, combined with the lowering of interest rates on certain of the Bank's core deposit products.

Interest and Dividend Income: For the three months ended September 30, 2012, total interest and dividend income on a tax-equivalent basis amounted to $13,283, compared with $13,079 in the third quarter of 2011, representing an increase of $204, or 1.6%. The increase in interest and dividend income was principally attributed to average earning asset growth of $114,080 or 10.3%, but was largely offset by a 36 basis point decline in the weighted average earning asset yield.

For the three months ended September 30, 2012, tax-equivalent interest income from the securities portfolio amounted to $3,797, representing a decline of $458, or 10.8%, compared with the third quarter of 2011. The decline in interest income from securities was principally attributed to an 86 basis point decline in the weighted average securities portfolio yield to 3.72%, offset in part by a $37,984, or 10.3% increase in total average securities, compared with the third quarter of 2011. The decline in the weighted average securities yield was largely attributed to the ongoing replacement of accelerated mortgage-backed securities cash flows in a historically low interest rate environment combined with incremental securities purchases at low prevailing market yields. Accelerated cash flows were principally attributed to increased securitized loan refinancing activity driven by historically low interest rates, a variety of government stimulus programs, quantitative easing efforts by the Federal Reserve, as well as continuing credit defaults.

For the three months ended September 30, 2012, tax-equivalent interest income from the loan portfolio amounted to $9,464, representing an increase of $651, or 7.4% compared with the third quarter of 2011. The increased income from the loan portfolio was attributed to a $74,876 or 10.4% increase in total average loans, but was largely offset by an 11 basis point decline in the weighted average yield to 4.72%, compared with the third quarter of 2011. The decline in the weighted average loan yield principally reflected the origination and competitive re-pricing of certain commercial loans, as well as elevated levels of residential mortgage loan refinancing activity during a period of historically low interest rates.

For the nine months ended September 30, 2012, total tax-equivalent interest and dividend income amounted to $39,032, compared with $39,427 for the same period in 2011, representing a decline of $395, or 0.1%. The decline in interest and dividend income was principally attributed to a 35 basis point decline in the weighted average earning asset yield, largely offset by earning asset growth of $74,581, or 6.7%.

For the nine months ended September 30, 2012, tax-equivalent interest income . . .

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