Business Context and Reporting Period
Company: Bar Harbor Bankshares (BHB)
Reporting Period: Fiscal year ended December 31, 2009
Business Overview: BHB is a Maine-based bank holding company operating primarily through its wholly-owned subsidiary, Bar Harbor Bank & Trust. The Bank serves downeast and midcoast Maine with 12 branch offices, focusing on retail and commercial banking, trust services, and investment management. The Company's success is heavily dependent on the local Maine economy, particularly tourism, hospitality, and coastal industries.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Total Assets | $1,072,381,000 | $972,288,000 |
| Total Loans | $669,492,000 | $633,603,000 |
| Total Deposits | $641,173,000 | $578,193,000 |
| Net Interest Income | $33,281,000 | $27,191,000 |
| Net Income | $10,350,000 | $7,731,000 |
| Net Income Available to Common Shareholders | $9,316,000 | $7,731,000 |
| Diluted Earnings Per Share | $3.12 | $2.57 |
| Return on Average Assets | 0.98% | 0.83% |
| Return on Average Equity | 11.65% | 11.87% |
| Tier 1 Leverage Capital Ratio | 10.35% | 6.61% |
| Total Risk-Based Capital Ratio | 17.14% | 11.60% |
Material Changes vs. Prior Period
- Profitability: Net income increased 33.9% to $10.35 million, driven by a 23.8% increase in net interest income (tax-equivalent basis) and improved net interest margin (3.40% vs. 3.13%).
- Asset Growth: Total assets grew 10.3%, fueled by a 19.5% increase in the securities portfolio and a 5.7% increase in loans. Commercial loans grew 14.8%, while consumer loans declined 6.6% due to principal pay-downs and sales of low-rate mortgages.
- Capital Strength: Capital ratios improved significantly following a $18.75 million preferred stock issuance to the U.S. Treasury (CPP) in Q1 2009 and a $20.4 million common stock offering in Q4 2009. The Company redeemed the Treasury preferred stock in February 2010.
- Asset Quality: Non-performing loans increased to $9.176 million (1.37% of total loans) from $4.404 million (0.70%) in 2008. However, net charge-offs improved to 0.13% of average loans from 0.21% in 2008. The allowance for loan losses increased 43.5% to $7.814 million.
- Expenses: Non-interest expense rose 6.0% to $21.75 million, primarily due to a 959.7% increase in FDIC insurance assessments (including a special emergency assessment) and higher salaries/benefits. This was partially offset by a 76.6% decline in credit/debit card expenses following the sale of those portfolios in late 2008.
Guidance, Outlook, and Risks
- Outlook: Management anticipates the improving net interest margin trend will level off in 2010 as assets and liabilities re-price in the low-rate environment. Continued earning asset growth is expected to be necessary to increase net interest income.
- Capital Actions: The Company successfully redeemed its Treasury preferred stock in February 2010, removing dividend restrictions. It intends to seek agreement with the Treasury to repurchase the associated warrant.
- Key Risks:
- Economic Dependence: Heavy reliance on the Maine economy, specifically tourism and hospitality sectors.
- Credit Risk: Exposure to commercial real estate and loans secured by real estate; potential for increased delinquencies if local economic conditions deteriorate.
- Interest Rate Risk: Sensitivity to changes in interest rates affecting net interest income.
- Regulatory: Increased FDIC assessments and potential for further regulatory reform.
- Securities Portfolio: Risk of other-than-temporary impairments (OTTI) on private-label mortgage-backed securities, though management currently expects to recover amortized cost.
Investor Verification Checklist
- Verify the sustainability of the net interest margin improvement given the low interest rate environment.
- Monitor the trend of non-performing loans, specifically the concentration in commercial real estate and the single agricultural loan representing a significant portion of the increase.
- Confirm the status of the warrant repurchase negotiation with the U.S. Treasury.
- Assess the adequacy of the allowance for loan losses relative to the rising non-performing loan ratio.
- Review the impact of the sale of the merchant processing and Visa credit card portfolios on future non-interest income streams.