Bar Harbor Bankshares — Q2 2022 Form 10-Q
Business context and reporting period
Unaudited results for the quarter and six months ended June 30, 2022; balance-sheet comparisons are primarily against December 31, 2021. The company operates principally through Bar Harbor Bank & Trust, a community bank serving Maine, New Hampshire and Vermont.
Financial performance and condition
| Metric | Q2 / June 30, 2022 | Prior comparable period |
|---|---|---|
| Net interest income | $26.5 million | $22.8 million, Q2 2021 |
| Net interest margin | 3.19% | 2.74%, Q2 2021 |
| Net income / diluted EPS | $10.5 million / $0.70 | $9.0 million / $0.60, Q2 2021 |
| Non-interest income / expense | $9.0 million / $21.7 million | $9.5 million / $21.7 million, Q2 2021 |
| Total assets | $3.716 billion | $3.709 billion, Dec. 31, 2021 |
| Total loans / deposits | $2.727 billion / $3.079 billion | $2.532 billion / $3.049 billion, Dec. 31, 2021 |
| Cash and cash equivalents | $67.1 million | $250.4 million, Dec. 31, 2021 |
| Total borrowings | $177.6 million | $178.5 million, Dec. 31, 2021 |
| Shareholders’ equity | $393.6 million | $424.1 million, Dec. 31, 2021 |
- For the first six months, net income was $19.6 million versus $18.5 million in 2021; diluted EPS was $1.30 versus $1.23. Net interest income was $50.8 million versus $46.2 million.
- Q2 efficiency ratio improved to 59.25% from 63.45%. Six-month ratio was 60.78% versus 62.20%.
- First-half operating cash flow was $19.5 million versus $12.9 million. Investing activities used $224.8 million, mainly reflecting $194.0 million of net loan growth; financing activities provided $22.0 million. Cash fell by $183.3 million during the half.
- Allowance for credit losses was $23.8 million, or 0.87% of loans, versus $22.7 million at year-end. Non-accrual loans declined to $7.9 million from $10.2 million; first-half net recoveries were $127,000.
- At June 30, consolidated capital ratios were 13.76% total risk-based capital, 10.75% common equity tier 1, and 9.16% Tier 1 leverage. The company and Bank met the filing’s well-capitalized standards.
- Management reported approximately $640.6 million of available same-day liquidity, including cash and borrowing capacity. It also cited unused FHLB capacity of $436 million, Federal Reserve capacity of $87 million, and $51 million in other lines of credit.
Material changes versus prior periods
- Q2 net income rose 16% year over year and diluted EPS rose 17%. Higher net interest income and margin reflected higher rates, loan growth, and lower wholesale borrowings; lower funding costs also contributed.
- Loans grew $195.4 million, or 15% annualized, from year-end. Commercial real estate non-owner-occupied loans increased to $1.004 billion from $887.1 million. Deposits rose $30.0 million; core deposits increased while time deposits declined $63.6 million.
- Q2 non-interest income declined 6%, chiefly because mortgage banking income fell to $488,000 from $1.6 million. Customer service fees increased, while wealth management income was broadly flat.
- Q2 provision for credit losses was an expense of $534,000, compared with a $765,000 benefit in Q2 2021. Management attributed the change principally to loan growth versus prior-period credit improvement.
- Available-for-sale securities had $56.2 million of gross unrealized losses at June 30, versus $4.8 million at year-end. Net-of-tax accumulated other comprehensive loss moved to $41.0 million from $2.3 million, largely due to higher interest rates. Total equity declined $30.5 million in the half despite $19.6 million of net income.
- Mortgage loan sales fell substantially: $11.1 million in Q2 versus $56.1 million in Q2 2021. First-half mortgage banking income fell to $1.1 million from $4.1 million.
Outlook, risks and unusual items
- No specific earnings or growth guidance was provided. Management said the balance sheet was asset-sensitive. Its model estimated that a gradual 200-basis-point rate increase would raise net interest income 4.1% over 1–12 months and 12.3% over 13–24 months; a 100-basis-point decline would reduce it 3.2% and 8.9%, respectively. The filing cautions these scenarios are not forecasts and depend on assumptions.
- Management said it expects to recover the amortized cost of securities in unrealized-loss positions and does not intend, or expect to be required, to sell them before recovery. It cited capital, liquidity and historically low portfolio turnover in support; interest-rate changes remain a key source of valuation and earnings risk.
- Credit exposure is concentrated in commercial real estate: CRE loans totaled $1.332 billion, about 49% of total loans. The company described credit quality as strong, but economic conditions, property cash flows and collateral values remain relevant risks.
- In June, the board authorized a 12-month repurchase plan for up to 5% of outstanding shares (approximately 751,000). No shares were repurchased in Q2; management said future purchases would depend on market conditions, rate volatility and loan and risk-weighted-asset growth.
- First-half 2022 non-recurring expenses included $325,000 related to contract renegotiations; the prior-year period included $1.8 million, mostly workforce-reduction costs. Routine litigation was not expected by management to have a material effect; the filing reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Reconcile the loan-to-deposit ratio: selected financial data reports 89% at June 30, while MD&A states 87%; the filing text does not explain the difference clearly.
- Assess the effect of the $56.2 million gross unrealized securities losses, portfolio duration of 5.1 years, and the possibility that securities may need to be sold before recovery.
- Review CRE concentration and trends in criticized loans, delinquencies, non-accruals and allowance coverage as loan balances expand.
- Monitor deposit mix and pricing, falling on-balance-sheet cash, use of short-term FHLB advances, and the assumptions behind reported liquidity capacity.
- Evaluate whether continued loan growth and higher rates sustain margin improvement while mortgage banking income remains weaker and deposit costs reprice.
- Consider the potential dilution or capital effects of any future share repurchases and dividends; the authorized buyback had not begun by quarter-end.