BAR HARBOR BANKSHARES annual report, FY2011

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Bar Harbor Bankshares — FY 2011 Form 10-K

Reporting period: Fiscal year ended December 31, 2011; comparisons are primarily with FY 2010. Amounts are in millions unless otherwise stated. The company is a Maine community bank holding company operating Bar Harbor Bank & Trust and trust and investment services in downeast and midcoast Maine.

Financial performance and condition

  • Scale and balance sheet: Assets were $1,167.5, up 4.4% year over year. Loans were $729.0, up 4.0%; available-for-sale securities were $381.9, up 6.7%. Deposits rose 2.1% to $722.9, and shareholders’ equity increased to $118.3 from $103.6.
  • Earnings: Net income available to common shareholders was $11.0, up 10.3% from $10.0. Diluted EPS was $2.85 versus $2.61. In fourth-quarter 2011, net income available to common shareholders was $2.391 and diluted EPS was $0.61; the supplied filing text does not provide comparable fourth-quarter 2010 figures.
  • Interest income and margins: GAAP net interest income increased 8.5% to $34.4. Tax-equivalent net interest income was $35.9, up 7.6%; tax-equivalent net interest margin improved five basis points to 3.23%. Average earning assets grew 5.9%, while their average yield declined 31 basis points to 4.72%; lower funding costs more than offset the yield pressure.
  • Other income and expenses: Non-interest income declined 8.9% to $6.8, reflecting higher securities-related impairment losses despite stronger realized securities gains. Non-interest expense rose 5.6% to $23.3, including higher compensation and occupancy costs. The efficiency ratio improved to 55.0% from 55.5%.
  • Profitability: Return on average assets was 0.96% versus 0.98%; return on average equity was 9.94% versus 10.07%. The dividend payout ratio was 38.3%. Cash dividends were $1.095 per share for 2011, and the board declared a first-quarter 2012 dividend of $0.285 per share.
  • Credit quality: Provision for loan losses was $2.4, slightly above 2010. Net charge-offs increased to $2.7, or 0.37% of average loans, from $1.6, or 0.24%. Non-performing loans declined to $12.9, or 1.77% of loans, from $13.7, or 1.95%; however, residential non-performing loans rose 41.2% to $4.3. The allowance was $8.2, equal to 1.13% of loans and 64% of non-performing loans.
  • Cash flow: Operating activities generated $16.1; investing activities used $51.8 and financing activities provided $31.6. Cash and cash equivalents ended the year at $8.7, down from $12.8.
  • Debt and liquidity: Total borrowings were $320.3, up 6.8%, primarily to fund earning-asset growth; deposits remained the main funding source. The bank reported liquidity of 6.9% over 30 days and 6.0% over 90 days under its surplus model, against a 4% policy minimum. Available secured borrowing capacity included approximately $120 million through the FHLB and $165.7 million through the Federal Reserve.
  • Capital: The company reported Tier 1 leverage, Tier 1 risk-based, and total risk-based capital ratios of 9.32%, 14.29%, and 16.06%, respectively. The bank also exceeded regulatory “well-capitalized” thresholds.

Material changes from FY 2010

  • Earnings improved as lower deposit and borrowing costs outweighed declining earning-asset yields; tax-equivalent net interest margin rose from 3.18% to 3.23%.
  • Loan growth was driven partly by consumer lending, including a purchase of a seasoned prime consumer-loan portfolio. Commercial loan growth slowed to 1.8%, from 7.7% in 2010.
  • Net charge-offs increased, largely due to a $1.822 million charge-off on a commercial construction loan supporting an affordable-housing project. Non-performing loans overall decreased, but foreclosures and other real estate owned increased: OREO was $2.7 million versus $0.7 million.
  • Net OTTI losses recognized in earnings increased to $2.219 million from $0.898 million, principally on private-label mortgage-backed securities. Unrealized securities losses fell to $4.1 million from $9.2 million.
  • Borrowings increased while deposits grew modestly. Low-cost NOW accounts grew, while savings and money-market deposits declined.
  • The company had exited the Treasury’s Capital Purchase Program: it redeemed the preferred stock in 2010 and repurchased the warrant, and reported no remaining CPP securities.

Outlook, commentary, risks, and unusual items

  • Management outlook: No specific earnings or revenue guidance was provided. Management expected net interest margin to remain generally stable into 2012 if rates stayed near prevailing levels, and anticipated continued declines in the average cost of time deposits. Management stated that moderate-to-strong earning-asset growth would be important to meaningfully increase net interest income.
  • Interest-rate exposure: Modeling indicated relatively small first-year net-interest-income changes under the modeled parallel-rate scenarios, but a 100-basis-point decline was estimated to reduce year-two net interest income by 5.92%; a 200-basis-point increase was estimated to raise it by 2.58%. The filing cautions these are hypothetical sensitivities, not forecasts.
  • Key business risks: Concentration in Maine exposes the bank to local economic and tourism conditions. Commercial real estate, lodging, construction, and real-estate collateral are material credit exposures; lodging-industry loans were about $99.3 million, or 13.6% of loans. Competition, persistent low rates, funding costs, regulation, technology and operational risks, and potential deterioration in real estate or borrower conditions could affect results.
  • Securities and credit items: Private-label MBS amortized cost was $13.5 million; $7.483 million was rated below investment grade by at least one agency. Management recorded $2.219 million of credit-related OTTI in earnings and $0.577 million of non-credit impairment in other comprehensive income. Estimates depend on collateral performance and recovery assumptions.
  • Contingencies: Commitments to originate loans, unused credit lines, and unadvanced construction loans totaled $116.4 million; standby letters of credit were $0.350 million. Four troubled-debt-restructured loans totaling $0.913 million were reported. Routine litigation was not expected by management to have a material effect. The filing states no known trends or regulatory recommendations reasonably likely to materially affect capital, liquidity, or financial condition.
  • Governance and audit: The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded internal controls were effective. Dodd-Frank implementation and related compliance costs remained an evolving regulatory risk.

Important facts for investors to verify

  1. Track subsequent performance, collateral value, and resolution of the affordable-housing loan and the rise in residential non-performing loans and OREO.
  2. Review the allowance’s adequacy against elevated charge-offs, potential problem loans of $9.850 million, and the bank’s concentrated regional and real-estate exposures.
  3. Assess the private-label MBS portfolio, below-investment-grade holdings, impairment assumptions, and any further OTTI charges.
  4. Monitor funding mix and borrowing maturities, including reliance on FHLB advances and wholesale deposits, as well as liquidity under stress.
  5. Compare actual 2012 net interest margin, deposit costs, asset growth, and earnings with management’s conditional commentary; the filing gives no formal earnings guidance.
  6. Confirm dividend sustainability, regulatory capital, and the effects of Dodd-Frank implementation and other compliance requirements.