Bar Harbor Bankshares — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017; unaudited consolidated results. Comparisons are with the same periods in 2016 unless noted. Results include Lake Sunapee Bank Group from its January 13, 2017 acquisition, so year-over-year comparisons reflect a substantially larger company.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $23.5 million | $11.0 million | $68.7 million | $33.7 million |
| Net interest margin, FTE | 3.06% | 2.84% | 3.13% | 2.90% |
| Net income | $8.6 million | $3.6 million | $19.4 million | $12.3 million |
| Diluted EPS | $0.56 | $0.40 | $1.27 | $1.35 |
| Non-interest income | $7.0 million | $3.4 million | $19.5 million | $10.3 million |
| Non-interest expense | $17.6 million | $8.8 million | $58.5 million | $25.5 million |
| Provision for loan losses | $0.7 million | $0.1 million | $2.2 million | $0.8 million |
- Q3 total revenue (net interest income plus non-interest income) was $30.4 million, versus $14.4 million. Q3 pretax income was $12.2 million, versus $5.5 million.
- Management reported Q3 adjusted earnings of $8.8 million, or $0.57 per diluted share, and a 53.59% adjusted efficiency ratio. These are non-GAAP measures; adjusted earnings exclude specified items, primarily acquisition costs and securities gains or losses.
- Nine-month diluted EPS declined despite higher net income, alongside a substantial increase in weighted-average shares following acquisition share issuance. Adjusted diluted EPS rose to $1.52 from $1.11.
Financial position, funding and cash flow
- At September 30, 2017, assets were $3.48 billion, loans $2.43 billion, deposits $2.28 billion and shareholders’ equity $353.5 million. Loans and deposits were each more than twice their December 2016 balances, primarily because of the acquisition.
- Cash and cash equivalents were $48.7 million. For the first nine months, operating cash flow was $23.1 million, investing cash outflow was $98.2 million and financing cash flow was $115.3 million; cash increased $40.3 million.
- Total borrowings were $818.6 million, up from $536.6 million at year-end 2016. The total borrowing rate was 1.57%, compared with 1.13%. The loan-to-deposit ratio was 107%.
- Brokered deposits were $362.7 million. The bank reported liquidity of 6.6% over 30 days and 10.8% over 90 days under its basic surplus model, against a 4% policy minimum, and $114.6 million of available secured Federal Reserve borrowing capacity.
- Company regulatory capital ratios included 13.8% total capital to risk-weighted assets and 11.3% common equity tier 1. The company and bank reported exceeding applicable well-capitalized thresholds. Tangible equity to tangible assets was 7.26%, down from 8.65% at year-end, reflecting acquisition-related goodwill and intangibles.
Material changes and asset quality
- The Lake Sunapee acquisition expanded the company’s New England footprint to 53 branches and added about $1.2 billion in loans and $1.2 billion in deposits at acquisition. The company issued approximately 4.16 million shares; acquisition consideration was $181.9 million. Goodwill recorded was $95.3 million.
- Organic loan growth was 12.2% annualized year to date, including 20.5% commercial loan growth; organic deposit growth was 10.6% annualized. These exclude acquired balances.
- Non-accrual loans were $6.8 million, or 0.28% of total loans, versus 0.58% at year-end 2016. Total criticized loans were $47.6 million, including acquired loans. The allowance for loan losses was $12.0 million, 0.49% of total loans; this ratio is not directly comparable with pre-acquisition periods because acquired loans were initially recorded at fair value without a carried-over allowance.
- Acquisition and integration expenses were $5.9 million for the first nine months, versus $0.8 million a year earlier. Securities gains fell to $19,000 from $4.5 million year to date in 2016.
Outlook, risks and unusual items
- Management said higher wholesale funding costs and rising rates are expected to pressure net interest margin in the near term. The Q3 margin benefited from $1.0 million of purchased-loan accretion; year-to-date accretion was $2.9 million.
- Interest-rate sensitivity modeling showed moderate liability sensitivity: a parallel 200-basis-point increase was estimated to reduce net interest income by 3.1% over one year and 6.7% over two years versus the base case. A 100-basis-point decline was estimated to increase it by 0.2% and 0.3%, respectively. These are scenarios, not forecasts.
- Management anticipated rolling out enhanced treasury-management offerings by the end of 2017. It also said the October sale of McCrillis & Eldredge Insurance was expected to be accretive to tangible equity in Q4; the subsequent-events note said the sale had no significant balance-sheet impact.
- Key stated risks include acquisition integration and achieving expected cost savings, interest-rate and funding-market changes, local economic and real-estate conditions affecting credit losses, and access to brokered deposits. Management said routine litigation was not expected to materially affect the financial statements. No formal earnings guidance was provided in the filing.
Important facts for investors to verify
- How much reported earnings and margin depend on acquired operations and purchase-accounting accretion, and how quickly acquisition savings are realized.
- Whether organic loan and deposit growth can continue without greater reliance on wholesale borrowings or brokered deposits.
- Trends in criticized and non-accrual loans, acquired-loan performance, charge-offs and allowance adequacy.
- Exposure to rising funding costs and the assumptions underlying the interest-rate sensitivity scenarios.
- The effect of acquisition goodwill and intangibles on tangible book value, capital measures and future impairment risk.