BAR HARBOR BANKSHARES annual report, FY2014

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Bar Harbor Bankshares — 2014 Form 10-K

Reporting period: Fiscal year ended December 31, 2014; comparisons are primarily with 2013. Unless stated otherwise, dollar amounts are in millions. Bar Harbor is a Maine community bank holding company operating through Bar Harbor Bank & Trust and Bar Harbor Trust Services, with 15 branches in downeast, midcoast, and central Maine.

Financial performance and condition

  • Profitability: Net income was $14.6 million, up 10.8% from $13.2 million; diluted EPS rose 10.4% to $2.45. Return on average assets was 1.03% (0.98% in 2013) and return on average equity was 10.69% (10.52%).
  • Revenue and margins: GAAP net interest income increased 12.1% to $43.8 million. On a tax-equivalent basis, it rose 11.9% to $45.7 million. Tax-equivalent net interest margin expanded 18 basis points to 3.33%, as funding costs fell while earning-asset yield was unchanged at 4.05%. Non-interest income rose 2.5% to $7.8 million; trust and financial services income increased 9.4% to $4.0 million.
  • Expenses and credit costs: Non-interest expense rose 8.8% to $29.2 million, led by a 10.6% increase in salaries and benefits. The efficiency ratio improved to 54.7% from 55.6%. Loan-loss provision was $1.8 million, up from $1.4 million.
  • Balance sheet: Assets increased 6.2% to $1.459 billion. Loans grew 7.8% to $919.0 million, primarily due to residential mortgage growth; securities increased 4.5% to $470.5 million. Deposits rose 2.7% to $858.0 million, while borrowings increased 9.2% to $447.0 million.
  • Asset quality: Non-performing loans increased 39.0% to $12.3 million, or 1.34% of loans, from 1.04%. Management attributed much of the increase to one residential mortgage entering non-accrual. The allowance was $9.0 million, 0.98% of loans and 73.0% of non-performing loans; net charge-offs were 0.15% of average loans versus 0.12%.
  • Cash flow: Operating cash flow was $15.5 million, down from $21.6 million. Investing activities used $70.2 million, including $67.2 million of net lending; financing activities provided $55.2 million. Cash and cash equivalents ended at $9.8 million. For a bank, these cash-flow totals should be read alongside deposit, borrowing, and liquidity disclosures.
  • Capital and liquidity: Shareholders’ equity rose 20.5% to $146.3 million, substantially reflecting the recovery in securities’ unrealized values. The Company reported total risk-based capital of 17.24%, Tier 1 risk-based capital of 15.60%, and leverage capital of 9.30%; it and the Bank were classified as well-capitalized. Liquidity ratios were 6.1% over 30 days and 5.0% over 90 days, against a 4% policy minimum. The Bank reported approximately $139 million of unused FHLB capacity and $157.5 million of available secured Federal Reserve credit.
  • Debt and distributions: Borrowings comprised $313.5 million of short-term borrowings, $128.5 million of long-term FHLB advances, and $5.0 million of junior subordinated debentures. The Company paid $5.4 million in dividends; annual dividends per share were $0.905, up 8.6%.

Material changes versus 2013

  • Loan growth was concentrated in residential mortgages, which increased 20.7% to $382.7 million; the filing says purchased loans contributed substantially. Commercial loans were essentially flat at $455.7 million.
  • Interest expense declined 15.1% to $9.9 million, while tax-equivalent interest income grew 5.9%. Lower replacement costs on maturing deposits and borrowings supported the margin improvement.
  • Unrealized securities losses improved markedly: total gross unrealized losses were $2.3 million versus $18.6 million, and accumulated other comprehensive income moved from a $7.9 million loss to $6.7 million of income. This materially contributed to the increase in equity and reflected market-value changes, not solely operating earnings.
  • No OTTI loss was recognized in 2014, compared with $0.2 million recognized in earnings in 2013. The Company continued to hold private-label mortgage-backed securities previously written down and stated that future collateral performance could change its recovery estimates.
  • Net income rose, but non-interest expenses and credit provision also increased. Non-performing loans rose despite management’s assessment that overall portfolio quality remained stable.
  • The Company effected a three-for-two stock split in May 2014; share and per-share figures in the filing are adjusted for the split.

Outlook, risks, and unusual items

  • The filing provides no specific earnings or revenue guidance. Management describes its strategy as measured growth in loans and deposits, disciplined risk management, customer service, and operating efficiency.
  • Management’s interest-rate model showed moderate liability sensitivity. A parallel 200-basis-point rate increase was estimated to reduce net interest income 2.08% over one year and 2.92% over two years; a 100-basis-point decline was estimated to reduce it 0.55% and 4.94%, respectively. These are scenario estimates, not forecasts, and depend on assumptions about rates, deposit behavior, and prepayments.
  • Key risks include regional economic and real-estate conditions; concentration in Maine and tourism-related lending (lodging loans were 12.2% of total loans); borrower defaults and collateral values; interest-rate and prepayment risk; competition and deposit funding costs; regulatory and capital changes; and cybersecurity, operational, and fiduciary risks.
  • Four interest-rate cap agreements with $90 million total notional were purchased in 2014 to hedge exposure to rising rates on borrowings. Their year-end fair value was $3.5 million. Contractual commitments included $137.4 million of commitments to extend credit and $0.3 million of standby letters of credit; these amounts are not equivalent to expected cash outflows.
  • One affordable-housing commercial loan of approximately $1.3 million remained non-performing and impaired; the Bank had previously charged off $2.0 million of its original balance. The filing reports ordinary-course litigation that management did not expect to have a material financial-statement effect.
  • The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of year-end.

Most important facts for investors to verify

  1. Whether the rise in non-performing loans, especially residential mortgages, continues and whether the allowance remains adequate relative to losses and loan growth.
  2. How much mortgage growth came from purchased loans, and the associated yields, credit profile, and funding needs.
  3. Whether margin performance is sustainable as interest rates, deposit pricing, borrowing costs, and securities prepayments change.
  4. The maturity, repricing, and renewal profile of FHLB advances and time deposits, including reliance on wholesale funding and available collateral.
  5. Whether private-label mortgage-backed securities’ expected cash flows and reported fair values remain supportable under changing collateral conditions.
  6. The effect of Basel III capital and conservation-buffer requirements on capital, dividends, and repurchases; the filing states the new rules began phasing in during 2015.