Bar Harbor Bankshares — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing reports annual results and selected 2013 quarterly data; amounts below are consolidated and generally shown in millions unless otherwise noted. Q4 figures are identified separately.
Business context
Bar Harbor Bankshares is a Maine-based bank holding company operating Bar Harbor Bank & Trust, with 15 branches in downeast, midcoast and central Maine, and a trust and investment-services business. Lending and deposits are concentrated in the company’s regional markets, including tourism, lodging, fishing, healthcare and other local industries.
Financial performance and condition
| Metric | 2013 | 2012 |
|---|---|---|
| Total assets at year-end | $1,373.9 | $1,302.9 |
| Loans at year-end | $852.9 | $815.0 |
| Deposits at year-end | $835.7 | $795.8 |
| Total borrowings at year-end | $409.4 | $371.6 |
| Shareholders’ equity at year-end | $121.4 | $128.0 |
| Net interest income (GAAP) | $39.1 | $37.0 |
| Non-interest income | $7.6 | $7.7 |
| Provision for loan losses | $1.4 | $1.7 |
| Net income | $13.2 | $12.5 |
| Diluted earnings per share | $3.34 | $3.18 |
Net income increased 5.8%, and diluted EPS increased 5.0%. Tax-equivalent net interest income rose 5.8% to $40.8 million, while the tax-equivalent net interest margin narrowed to 3.15% from 3.23%. The reported efficiency ratio was 55.8%. Return on average assets was 0.98% (1.00% in 2012); return on average equity increased to 10.52% from 9.93%.
Q4 2013: Net income was $3.264 million and diluted EPS was $0.82. Net interest income was $10.345 million; provision for loan losses was $0.490 million. The filing excerpt does not provide a clear comparable Q4 2012 figure for these metrics.
Cash flow: Operating activities provided $21.6 million; investing activities used $100.6 million, principally reflecting securities purchases and lending; financing activities provided $73.3 million, including deposit growth and borrowings. Cash and cash equivalents declined $5.8 million to $9.2 million.
Credit, capital and liquidity: Non-performing loans fell to $8.8 million, or 1.04% of loans, from $9.9 million, or 1.21%. Net charge-offs declined to $1.0 million (0.12% of average loans) from $1.8 million (0.23%). The allowance was $8.5 million, or 0.99% of loans. The company reported total risk-based, Tier 1 risk-based and leverage capital ratios of 16.62%, 14.97% and 9.01%, respectively, and was categorized as well-capitalized. Its liquidity model showed 7.6% coverage over 30 days and 6.5% over 90 days; available secured Federal Reserve borrowing capacity was approximately $166 million.
Material changes versus 2012
- Assets grew 5.4%, loans 4.6% and deposits 5.0%. Commercial loans increased 5.7%; residential mortgages increased 6.7%, partly due to a purchased mortgage portfolio.
- Lower funding costs reduced interest expense 15.9%, supporting higher net interest income. However, asset yields fell faster than funding costs and the annual net interest margin declined eight basis points.
- Non-interest income declined 1.9%, mainly as net securities gains fell to $0.7 million from $1.9 million. Trust and financial-services income increased 10.9% to $3.6 million.
- Non-interest expense increased 4.8% to $26.9 million, including higher compensation, occupancy and technology costs. The 2012 Border Trust acquisition added three branches and contributed to year-over-year expense and balance-sheet comparisons.
- Shareholders’ equity declined 5.2% despite higher retained earnings. A $15.6 million other comprehensive loss—primarily from falling securities values as market rates and pricing spreads rose—moved accumulated other comprehensive income from a $7.7 million gain to a $7.9 million loss. Total comprehensive income was a loss of $2.5 million.
- Unrealized securities losses increased to $18.6 million from $2.3 million. The company recorded $0.249 million of net credit-related OTTI losses in earnings, principally on private-label mortgage-backed securities.
Outlook, risks and unusual items
- The filing gives no formal earnings or revenue guidance. Management described continued loan growth, attention to asset quality and operating efficiency, and the importance of managing funding, liquidity and interest-rate exposure.
- Management’s interest-rate model estimated that a parallel 200-basis-point increase could reduce net interest income by 2.60% over one year and 2.00% over two years versus a flat-rate scenario. A 100-basis-point decline was estimated to reduce it by 0.65% and 0.94%, respectively. The company cautions these are scenario analyses, not forecasts.
- Credit exposure is geographically concentrated in Maine and includes commercial real estate and lodging. Lodging-related loans were approximately $115.0 million, or 13.5% of loans. Management cited tourism, local economic conditions, real-estate values and the 2013 partial federal shutdown affecting Acadia National Park as relevant risks.
- One impaired loan to a local affordable-housing authority accounted for $1.845 million of non-performing loans. The project was complete; repayment depended primarily on unit sales. The Bank had previously charged off $2.014 million of the original balance.
- Private-label mortgage-backed securities remain subject to uncertain collateral repayment and valuation. Management said it expected to recover their amortized cost at year-end, but adverse future performance could change that assessment.
- New mortgage Ability-to-Repay rules took effect in January 2014; management anticipated added compliance complexity and costs. Basel III capital rules were scheduled to begin taking effect in 2015, with the conservation buffer phased in afterward.
- The company increased its 2013 dividend to $1.25 per share from $1.17; the first-quarter 2014 dividend was declared at $0.325 per share. Future dividends remain subject to earnings, capital needs and regulatory limits.
Investor verification priorities
- Review securities valuation, unrealized losses and assumptions supporting recovery of private-label mortgage-backed securities.
- Track the affordable-housing impaired loan, other non-performing and potential problem loans, and allowance adequacy.
- Assess the effect of interest-rate changes on margin, securities values, deposit costs and borrowing needs.
- Monitor reliance on FHLB advances and other borrowings, large time-deposit maturities, and seasonal deposit and liquidity patterns.
- Verify whether loan growth and earnings can offset margin pressure, expense growth and the reduced contribution from securities gains.
- Consider the impact of regulatory changes and dividend requirements on compliance costs, capital flexibility and shareholder distributions.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting.