Bar Harbor Bankshares — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unaudited consolidated results; dollar amounts below are in millions unless noted. Comparisons are with Q2 or first-half 2015, or with December 31, 2015 for balance-sheet measures.
Business context and financial performance
The company is a Maine-based bank holding company whose lending is concentrated in Maine. Growth in loans and securities expanded the balance sheet, while management highlighted a proposed acquisition of Lake Sunapee Bank Group.
| Metric | Q2 2016 | First half 2016 |
|---|---|---|
| Net interest income (GAAP) | $11.382; +4.6% | $22.718; +3.8% |
| Net interest margin (tax-equivalent) | 3.04%, down 8 bps | 3.07%, down 12 bps |
| Provision for loan losses | $0.150, versus $0.400 | $0.615, versus $0.895 |
| Non-interest income | $3.614; +44.4% | $6.942; +43.3% |
| Non-interest expense | $8.731; +14.9% | $16.728; +12.0% |
| Net income | $4.311; +11.3% | $8.717; +12.4% |
| Diluted EPS | $0.71, versus $0.64 | $1.43, versus $1.28 |
| Return on average assets / equity, annualized | 1.05% / 10.72% | 1.07% / 10.95% |
Tax-equivalent net interest income rose 5.0% in Q2 and 4.4% year to date, primarily as average earning assets grew 8.0% and 8.3%, respectively. Lower asset yields and higher funding costs compressed margins. Securities gains were a material contributor to non-interest income: $1.699 in Q2 and $3.135 for the first half, compared with $0.587 and $1.206 in 2015. Management said it realized gains as long-term rates fell, while reducing securities duration and interest-rate exposure. The reported efficiency ratio, excluding securities gains and specified nonrecurring items as defined by the company, was 58.8% for Q2 and 58.0% year to date, up from 56.5% and 55.8%.
Financial condition, cash flow, and liquidity
- Assets and lending: Total assets were $1,687.5, up 6.8% from year-end; loans were $1,049.0, up 6.0%. Securities available for sale totaled $532.6, up 5.5%. Commercial real estate mortgages were $390.0; residential mortgages were $446.9.
- Funding and debt: Deposits were $989.8, up 5.0%; time deposits increased 15.2%, partly reflecting national-market deposits. Borrowings totaled $525.1, up 10.6%, including $345.5 short-term borrowings and $174.6 of long-term FHLB advances. Junior subordinated debentures were $5.0.
- Capital: Shareholders’ equity was $165.2, versus $154.2 at year-end. The company and bank were reported as well-capitalized; consolidated total risk-based capital was 17.09%, common equity tier 1 was 15.54%, and leverage ratio was 9.21%.
- Cash flow: First-half operating cash flow was $6.7, investing cash flow was negative $84.6, and financing cash flow was $94.0. Cash and cash equivalents increased $16.1 to $25.9. Financing included a $47.0 net deposit increase and $56.7 net proceeds from FHLB advances.
- Liquidity: Management reported a 10.0% basic surplus position over both 30- and 90-day horizons, against a 4% policy minimum. Available FHLB capacity was approximately $221 million, and the secured Federal Reserve line was $142.953 million. Management said liquidity was sufficient for current and future requirements, while noting reliance on funding markets and seasonal deposits.
Material changes, credit quality, and unusual items
- Non-performing loans declined 20.8% to $5.553 from $7.008 at year-end; they were 0.53% of loans, versus 0.71%. The allowance was $9.891, or 178.1% of non-performing loans, compared with 134.7% at year-end. First-half net charge-offs were $0.163, or 0.03% annualized.
- Potential problem commercial relationships totaled $16.798 across 32 relationships, down from $19.774 at year-end. Loans 30–89 days delinquent and still accruing rose to $4.402 from $1.857. The allowance increased 4.8% to $9.891.
- Approximately 31% of commercial real estate mortgages were to the lodging industry; lodging-industry loans totaled $123.595, up from $98.231 at year-end. Management identified tourism, local economic conditions, collateral values, and borrower repayment as credit risks.
- Merger-related nonrecurring expenses were $0.492 in Q2 and year to date, primarily legal and professional fees. The proposed all-stock acquisition of Lake Sunapee Bank Group was valued at approximately $143 million. Closing was expected in Q4 2016 or Q1 2017, subject to shareholder and regulatory approvals and other conditions. Management projected a combined institution with approximately $3.3 billion in assets, $2.4 billion in net loans, $2.2 billion in deposits, and 49 branches.
- Unrealized gains on available-for-sale securities rose to $17.408 from $8.790 at year-end as market rates declined. The company reported no current-period OTTI losses in earnings, but acknowledged that deterioration in private-label mortgage collateral performance could alter its impairment conclusions.
- On July 19, the board declared a quarterly dividend of $0.275 per share, payable September 15, 2016, to shareholders of record August 15. This was described as the 21st consecutive quarterly increase. No earnings or financial targets were provided.
Outlook, risks, and contingencies
The filing provides no formal earnings guidance. Management’s forward-looking statements are subject to uncertainty, including interest-rate and margin sensitivity, local economic and tourism conditions, competition, credit quality and real-estate collateral values, securities valuations, regulatory and cybersecurity risks, and the completion, integration, costs, and expected benefits of the LSBG merger. The bank’s interest-rate model showed net interest income relatively stable over one year but lower over two years under both modeled rate scenarios: down 0.43% and 7.65% with a 100-basis-point decline, and down 0.91% and 6.86% with a 200-basis-point increase. The filing cautions these scenarios are not forecasts.
Off-balance-sheet commitments included $25.047 of loan-originations, $93.974 of unused lines, $24.180 of unadvanced construction loans, and $0.385 of standby letters of credit. These amounts are not necessarily expected cash outflows. Ordinary-course litigation was not expected by management to have a material adverse effect. The filing reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Merger status, required approvals, closing timetable, total transaction and integration costs, and whether expected synergies are achievable.
- Whether margin pressure continues as funding costs rise, and how much earnings depend on securities gains versus recurring operations.
- Credit trends, particularly delinquency increases, potential problem loans, lodging-sector exposure, and allowance adequacy.
- Funding mix and costs, including growth in time deposits and borrowings, and continued access to contingent liquidity sources.
- Interest-rate exposure and key assumptions behind the company’s sensitivity model; reported scenarios are not forecasts.