Bar Harbor Bankshares — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are to December 31, 2017. Unaudited consolidated results. The company operates Bar Harbor Bank & Trust in Maine, New Hampshire and Vermont.
Financial performance
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Net interest income | $23.2 million | $21.4 million; up 8% |
| Net interest margin, FTE | 2.97% | 3.11% |
| Non-interest income | $6.2 million | $5.9 million |
| Non-interest expense | $18.9 million | $20.8 million |
| Net income | $7.8 million | $4.2 million |
| Diluted EPS | $0.50 | $0.29 |
| Adjusted net income and diluted EPS (non-GAAP) | $8.1 million; $0.52 | $6.2 million; $0.43 |
| Efficiency ratio (non-GAAP) | 60.44% | 61.21% |
Revenue, defined as net interest income plus non-interest income, was $29.4 million versus $27.3 million, an 8% increase. Net income growth was helped by substantially lower acquisition and conversion costs: $335,000 versus $3.1 million. The effective tax rate was 20% versus 26%, reflecting the lower federal corporate tax rate under the Tax Cuts and Jobs Act.
Average earning assets yielded 3.92% FTE, while the cost of interest-bearing liabilities was 1.11%. Net interest margin declined as funding costs rose faster than asset yields. Adjusted ROA was 0.93% and adjusted ROE was 9.31% (both non-GAAP); GAAP ROA and ROE were 0.90% and 9.01%.
Balance sheet, liquidity and capital
- Total assets were $3.511 billion, down from $3.565 billion at year-end. Total loans were $2.464 billion, down $21.2 million; total deposits were $2.341 billion, down $10.7 million.
- Commercial and industrial loans grew 11% annualized year to date, while total loans declined 3.4% annualized. Management attributed the quarterly decline partly to delayed loan closings.
- Cash and cash equivalents were $47.8 million, down $42.9 million during the quarter. Operating cash flow was $8.9 million, investing cash flow was positive $6.4 million, and financing cash flow was negative $58.1 million, including repayment of short-term FHLB advances.
- Total borrowings were $785.2 million, down $44.5 million. The average borrowing rate was 1.96% at quarter-end versus 1.66% at year-end. The Bank had $118 million of available secured Federal Reserve borrowing capacity.
- Loans-to-deposits were 105%. Brokered deposits were $450.4 million, about 19% of total deposits. Management said liquidity was adequate but noted seasonal deposit patterns and potential dependence on brokered-deposit access.
- Consolidated total risk-based capital was 13.9%, common equity Tier 1 was 11.4%, and Tier 1 leverage was 8.2%. The company and Bank exceeded applicable “well capitalized” thresholds.
- Shareholders’ equity was $352.2 million. The after-tax AFS securities valuation adjustment reduced equity by approximately $8.2 million during the quarter; accumulated other comprehensive loss widened to $13.2 million.
Credit quality and material changes
The allowance for loan losses was $12.7 million, or 0.51% of loans, versus $12.3 million at year-end. The quarterly provision was $795,000, equal to the prior-year quarter; annualized net charge-offs were 0.07% of average loans. Non-accrual loans rose to $20.3 million from $14.3 million at year-end, and non-accrual loans were 0.83% of total loans versus 0.58%. Management attributed the increase primarily to one large residential relationship and said the full carrying value was expected to be recovered upon settlement. Criticized loans increased to $52.3 million from $48.8 million.
AFS securities had a fair value of $718.6 million and gross unrealized losses of $15.9 million, compared with $7.8 million at year-end. The company recorded no other-than-temporary impairment and said it expected to recover amortized cost and did not intend or expect to be required to sell the securities before recovery.
Outlook, management commentary and risks
- Management reported a strong loan pipeline, particularly in commercial lending, and expected loan growth to improve in Q2 as delayed closings proceeded. No numerical full-year earnings or growth guidance was provided.
- Strategic initiatives included expanded treasury management services, consolidation of retail and commercial branding and leadership, and migration of trust services to a common platform. Management expects these efforts to support fee income, deposits, efficiencies and customer cross-selling.
- The company described itself as moderately liability-sensitive. Its model indicated that a parallel 200-basis-point rate increase could reduce net interest income 9.2% over two years versus the base case, as funding costs initially reprice faster than earning-asset yields. These are hypothetical model results, not forecasts.
- Key risks include interest-rate and margin pressure, credit deterioration and local economic or real-estate weakness, seasonal funding needs, and access to brokered deposits. The company said previously disclosed risk factors had no material changes. Routine litigation was not expected to materially affect results; no significant subsequent events were reported.
- Adoption of ASC 606 reduced retained earnings by $184,000, with no material effect on Q1 operating results. The company was evaluating CECL, effective for it in 2020, and said adoption may result in a higher credit-loss estimate.
Important facts for investors to verify
- Whether the increase in non-accrual loans and criticized credits persists, and whether the large residential relationship is resolved with full recovery.
- How loan growth, deposit mix and funding costs develop, particularly given the $450.4 million of brokered deposits and the 105% loans-to-deposits ratio.
- Whether net interest margin stabilizes as rates and funding costs change, and how actual results compare with the company’s interest-rate sensitivity scenarios.
- Whether the securities portfolio’s unrealized losses remain temporary and whether accumulated other comprehensive loss continues to affect equity and tangible book value.
- Whether management’s Q2 pipeline and strategic initiatives translate into sustainable growth in revenue, earnings and core deposits; adjusted results are non-GAAP and exclude specified items.