Bar Harbor Bankshares — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; comparisons are primarily with 2014. Dollar amounts are in millions unless stated otherwise. The company is a Maine community bank holding company operating Bar Harbor Bank & Trust and trust and investment services, with 15 branches across downeast, midcoast and central Maine.
Financial performance and condition
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total assets at year-end | $1,580.1 | $1,459.3 | +8.3% |
| Loans at year-end | $990.1 | $919.0 | +7.7% |
| Deposits at year-end | $942.8 | $858.0 | +9.9% |
| Borrowings at year-end | $474.8 | $447.0 | +6.2% |
| Net interest income (GAAP) | $44.8 | $43.8 | +2.3% |
| Net income | $15.2 | $14.6 | +3.7% |
| Diluted EPS | $2.50 | $2.45 | +2.0% |
| Operating cash flow | $20.3 | $15.5 | +$4.8 |
- Revenue and margins: Tax-equivalent net interest income rose 2.4% to $46.8 million, supported by 7.1% growth in average earning assets. Tax-equivalent net interest margin declined 14 basis points to 3.19%, as earning-asset yields fell more than funding costs. Non-interest income increased 15.7% to $9.0 million; non-interest expense rose 5.8% to $30.9 million. The efficiency ratio was 56.3%.
- Profitability: Return on average assets declined to 0.98% from 1.03%; return on average equity declined to 10.01% from 10.69%. The effective tax rate was 28.3%.
- Cash flow: Operating activities provided $20.3 million; investing activities used $128.0 million, including securities and loan purchases and $15.0 million for bank-owned life insurance (BOLI); financing activities provided $107.6 million, including deposit growth and FHLB advances. Cash and cash equivalents ended at $9.7 million, down $0.1 million.
- Credit quality: Non-performing loans fell 43.0% to $7.0 million, or 0.71% of loans, from 1.34%. Net charge-offs were 0.14% of average loans. The allowance was $9.4 million, 0.95% of loans and 134.7% of non-performing loans. However, commercial potential problem loans rose to $19.8 million from $13.5 million.
- Capital and liquidity: Shareholders’ equity was $154.2 million. The company’s CET1 ratio was 15.55%, total risk-based capital ratio 17.12%, and leverage ratio 9.37%; the Bank was reported well-capitalized. The Bank’s modeled liquidity surplus was 10.6% over 30 days and 8.7% over 90 days, against a 4% policy minimum. Available FHLB credit capacity was approximately $218.5 million, with an additional $142.8 million secured Federal Reserve line.
Material changes versus 2014
- Loan growth was led by commercial lending, up 11.2% to $506.8 million; residential mortgages rose 6.3% to $406.7 million. Lodging-industry loans declined to $98.2 million, or 9.9% of total loans, from $112.5 million, or 12.2%.
- Deposit growth was strongest in savings and money-market accounts, up 20.8% to $299.1 million. Borrowings also increased, principally to fund earning-asset growth.
- Net securities gains increased to $1.3 million from $0.4 million, reflecting portfolio-duration reduction. No OTTI losses were recognized in 2015 or 2014; $0.25 million was recognized in 2013.
- BOLI cash surrender value increased to $23.7 million from $8.1 million following $15.0 million of purchases. Its income is included in non-interest income and is tax-exempt.
- Net unrealized securities appreciation declined, contributing to a $3.1 million reduction in accumulated other comprehensive income. Total equity nevertheless rose 5.4%, primarily from retained earnings.
Outlook, risks and notable items
- The filing gives no quantified earnings or growth guidance. Management’s stated strategy emphasizes measured loan and deposit growth, strong asset quality, operating efficiency, and careful management of interest-rate and liquidity risks.
- Interest-rate sensitivity modeling showed net interest income could decline 1.84% in year one and 6.85% in year two under a parallel 200-basis-point rate increase; under a 100-basis-point decline, modeled changes were +0.26% and -4.57%. Management cautions these are hypothetical estimates, not forecasts.
- Key exposures include concentration in Maine real estate and commercial borrowers, tourism and seasonal businesses, competition for deposits and loans, interest-rate changes, credit losses, regulatory change, cybersecurity and operational disruption.
- Private-label mortgage-backed securities had $2.7 million amortized cost; $2.0 million was below investment grade. Management expected recovery of amortized cost and recorded no current-period impairment, but adverse collateral performance could change that assessment. Unrealized securities losses totaled $3.0 million at year-end.
- Contractual borrowings totaled $474.8 million; $313.0 million of FHLB advances were due within one year, and $17.0 million of long-term advances were callable. The company also reported $151.5 million in loan commitments and unused credit facilities, plus $0.4 million in standby letters of credit.
- Ordinary-course litigation was not expected by management to have a material financial effect. Renovation of the Bar Harbor headquarters was underway and expected to be completed in 2016.
- The company reported unqualified audit opinions on its financial statements and internal control over financial reporting. Management identified disclosure controls and internal controls as effective at year-end.
Important facts for investors to verify
- Whether the rise in commercial potential problem loans to $19.8 million translates into higher delinquencies, non-performing loans or provisions.
- Whether loan growth and deposit growth can continue without further margin compression or increased reliance on wholesale funding.
- The sustainability of earnings growth given the contribution from securities gains and BOLI, and the 5.8% increase in operating expenses.
- Liquidity and refinancing implications of short-term FHLB advances, callable debt and seasonal deposit patterns.
- Changes in private-label securities’ expected cash flows and the adequacy of the loan-loss allowance as economic and collateral conditions evolve.
- Dividend capacity and capital impact: 2015 dividends were $1.01 per share, with a 39.9% payout ratio; the board declared $0.265 per share for first-quarter 2016.