Bar Harbor Bankshares — FY 2016 Form 10-K
Reporting period: Year ended December 31, 2016. Unless noted, financial amounts below are in millions; the 2016 results are for the company before its Lake Sunapee Bank Group acquisition closed in January 2017.
Business context
Bar Harbor Bankshares is a Maine bank holding company operating through Bar Harbor Bank & Trust and Bar Harbor Trust Services. Its community banking, lending and trust businesses serve Maine markets, with activity concentrated in real estate lending and tourism-related industries. On January 13, 2017, the company completed its acquisition of Lake Sunapee Bank Group, expanding into New Hampshire and Vermont.
Financial results and condition
- Scale: Total assets were $1.755 billion, up 11.1% from $1.580 billion. Loans increased 14.0% to $1.129 billion; deposits rose 11.4% to $1.050 billion.
- Earnings: Net income was $14.933 million, down 1.5% from $15.153 million. Diluted EPS declined to $2.45 from $2.50. Return on average assets was 0.89% (0.98% in 2015) and return on average equity was 9.21% (10.01%).
- Net interest income and margin: GAAP net interest income increased to $45.374 million from $44.834 million; tax-equivalent net interest income was $47.467 million, up 1.4%. Tax-equivalent net interest margin fell 23 basis points to 2.96%, reflecting lower asset yields and a higher funding cost.
- Non-interest items and expenses: Non-interest income increased 37.5% to $12.349 million, largely due to $4.498 million of securities gains, compared with $1.334 million in 2015. Excluding securities gains, non-interest income rose $0.206 million. Non-interest expense grew 16.3% to $35.935 million, including $2.650 million of acquisition and system-conversion costs. Management said these costs reduced 2016 diluted EPS by $0.28.
- Credit quality: Provision for loan losses fell to $0.979 million from $1.785 million. Net charge-offs were essentially zero (net recoveries of $1,000); non-performing loans declined 7.3% to $6.496 million, or 0.58% of loans. The allowance was $10.419 million, equal to 0.92% of loans and 160.4% of non-performing loans. Loans 30–89 days past due rose to $6.103 million from $1.857 million.
- Cash flow: Operating cash flow was $16.791 million, versus $20.331 million. Investing activities used $181.886 million, primarily reflecting securities and loan purchases; financing activities provided $163.814 million, including deposit growth and borrowings. Cash and cash equivalents ended at $8.439 million.
- Funding, debt and liquidity: Total borrowings increased 13.0% to $536.596 million. Year-end deposits were $1.050 billion. Liquidity under the bank’s surplus model was 9.2% over 30 days and 8.7% over 90 days, above its 4% policy minimum. Available secured borrowing capacity included approximately $221.440 million through the FHLB and $130.979 million through the Federal Reserve.
- Capital and shareholder returns: The company reported a 15.01% CET1 ratio, 16.52% total risk-based capital ratio and 8.94% leverage ratio; the bank was categorized as well-capitalized. Shareholders’ equity was $156.740 million. The annual dividend rose 7.9% to $1.09 per share; the payout ratio increased to 44.0% from 39.9%.
Material changes and unusual items
- Loan growth was strongest in residential mortgages, up 24.0% to $506.612 million; commercial loans increased 9.2%. Lodging-industry loans rose to $128.680 million, or 11.4% of total loans.
- Net unrealized securities losses increased: total gross unrealized losses were $8.896 million at year-end, versus $3.041 million in 2015. The company recorded no OTTI losses in 2016 and stated it did not intend, and was not more likely than not required, to sell the impaired securities before recovery.
- The Lake Sunapee transaction consideration at closing was $182.2 million, including 4,163,853 company shares; the acquired group had approximately $1.5 billion in assets. Final purchase accounting was pending and was expected in the first-quarter 2017 reporting.
- A three-for-two stock split was announced in February 2017, payable March 21, 2017. The company also declared a first-quarter 2017 dividend of $0.28 per share.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management described the balance sheet as moderately liability-sensitive: its model estimated that a parallel 200-basis-point rate increase would reduce net interest income by 2.06% over one year and 7.63% over two years; a 100-basis-point decline was estimated to reduce it by 0.18% and 3.22%, respectively. These are scenario estimates, not forecasts, and depend on assumptions about rates, customer behavior, prepayments and balance-sheet growth.
Key risks include interest-rate and margin pressure, commercial and real-estate credit exposure, tourism and regional economic conditions, deposit competition and liquidity costs, acquisition integration, regulatory requirements, and cybersecurity and operational threats. The filing identifies $160.884 million of commitments to extend credit and $0.385 million of standby letters of credit; these are not equivalent to funded liabilities. Routine litigation was not expected by management to have a material effect. The independent auditor issued an unqualified opinion, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether the acquisition’s integration, purchase-price allocation, and realized cost synergies support post-close earnings and capital levels.
- How much 2016 earnings depended on securities gains and whether the margin decline and higher funding costs continue.
- Whether rising early-stage delinquencies, lodging exposure and potential problem loans lead to higher provisions or losses.
- The composition, duration and credit performance of securities with unrealized losses, including private-label mortgage-backed securities and municipal bonds.
- Liquidity and funding needs after the acquisition, including reliance on FHLB borrowing and the maturity profile of time deposits and borrowings.
- That share and per-share figures are adjusted as appropriate for the announced 2017 stock split when making comparisons.