Bar Harbor Bankshares — Q2 2020 Form 10-Q
Business context and reporting period
Unaudited consolidated results for the quarter and six months ended June 30, 2020, compared with the corresponding 2019 periods; balance-sheet comparisons are generally to December 31, 2019. The company operates Bar Harbor Bank & Trust, a community bank serving Maine, New Hampshire and Vermont. COVID-19, related borrower assistance and the Paycheck Protection Program (PPP) materially influenced the period.
Financial performance and condition
- Q2 earnings: Net income was $8.5 million, or $0.55 diluted EPS, versus $6.1 million, or $0.39, a year earlier. Six-month net income was $16.2 million, or $1.04 diluted EPS, versus $13.4 million, or $0.86.
- Interest income and margin: Q2 net interest income increased to $24.6 million from $21.5 million; fully taxable equivalent net interest margin rose to 3.00% from 2.65%. For the first half, net interest income was $49.2 million versus $43.3 million and margin was 3.02% versus 2.71%. Lower funding costs supported the improvement, while earning-asset yields declined.
- Credit costs: Provision for loan losses was $1.4 million in Q2 versus $0.6 million; first-half provision was $2.5 million versus $0.9 million. The allowance was $16.5 million, 0.60% of loans (0.63% excluding SBA-backed PPP loans), compared with $15.4 million and 0.58% at year-end. Management cited economic uncertainty and a specific commercial relationship reserve.
- Non-interest items and expenses: Q2 non-interest income was $9.7 million versus $7.5 million, including $1.4 million in securities gains and stronger mortgage banking income. Q2 non-interest expense was $22.3 million versus $20.9 million, including a $1.4 million debt-extinguishment loss/prepayment penalty. Six-month non-interest income was $18.1 million versus $13.6 million; expense was $44.6 million versus $39.5 million.
- Assets, loans and deposits: Total assets were $3.78 billion, up from $3.67 billion at year-end. Loans were $2.73 billion, up from $2.64 billion; deposits were $2.69 billion, essentially unchanged. Commercial and industrial lending grew substantially, including PPP lending, while residential and consumer balances declined. The loan-to-deposit ratio was 101% versus 98% at year-end.
- Funding, liquidity and cash flow: Borrowings totaled $606.7 million versus $531.3 million at year-end, including $131.2 million of Federal Reserve PPP facility funding. Cash and cash equivalents were $70.7 million. For the six months, operating cash flow was $17.3 million, investing cash outflow $64.4 million and financing cash inflow $60.8 million. Management reported approximately $1.3 billion in available same-day liquidity, including borrowing capacity and liquid investments. The filing does not provide a separate Q2-only cash-flow statement.
- Capital and shareholder returns: Shareholders’ equity was $404.2 million versus $396.4 million. The company and bank exceeded regulatory “well-capitalized” minimums; consolidated total risk-based capital was 13.41% and common equity tier 1 was 10.41%. The company declared a $0.22 per-share Q2 dividend and repurchased 392,323 shares for approximately $7.3 million.
- Asset quality: Non-accrual loans were $14.0 million, or 0.54% of loans excluding PPP balances, per management, versus 0.66% in the year-ago quarter. Past-due and delinquent loans were 0.83% of loans versus 1.19% at year-end. Classified loans totaled $50.3 million; criticized loans totaled $65.4 million.
Material changes versus comparable periods
- Q2 and first-half net income and diluted EPS improved year over year, aided by lower deposit and borrowing costs, stronger net interest margin and increased fee income.
- Commercial lending growth reflected both PPP and non-PPP activity. Management reported approximately 1,900 PPP loans with $131.5 million of principal; it also reported $127.0 million in PPP originations in its loan discussion. These figures use different descriptions and should be reconciled.
- Non-maturity deposits grew, while time deposits declined $254.5 million from year-end. Management said this mix shift reduced reliance on wholesale funding, excluding PPP facility borrowing.
- The securities portfolio declined to $661.8 million from $683.9 million, while its fair-value uplift increased with lower long-term rates. The company sold securities and recorded $1.4 million of Q2 gains.
- Net derivative fair value moved to a $3.7 million liability from a $0.7 million liability at year-end, primarily reflecting lower market rates. Goodwill impairment testing resulted in no impairment in Q2.
Outlook, management commentary and risks
- No numerical earnings guidance was provided. Management said it expected the positive return-on-assets trend to continue as strategies are executed, while emphasizing uncertainty in economic conditions and financial markets in the second half of 2020.
- About 800 loans totaling approximately $400 million were modified during Q2, mostly with temporary principal deferrals and continued interest accrual. Nearly 20% had resumed normalized payments by quarter-end; management expected the remaining modified borrowers to transition in the second half. Accrued interest on these plans was $2.4 million, which management expected to collect.
- PPP loan fee accretion began in Q2 and could accelerate by year-end depending on SBA forgiveness and processing timing. Management described this as a potential source of second-half interest income.
- The company elected under the CARES Act to defer CECL adoption. It estimated that adoption on January 1, 2020 would have increased the allowance by $5 million to $10 million over the December 31, 2019 balance. The company continued using its incurred-loss model and said the existing allowance was adequate based on its assessment and stress testing.
- Interest-rate modeling indicated that a 100-basis-point parallel decline could reduce net interest income by 0.2% over one year and 8.9% over two years versus the modeled base case; a 200-basis-point increase could improve it by 1.2% and 3.4%, respectively. Management cautioned that these are hypothetical scenarios, not forecasts.
- Key risks include COVID-19 effects on borrowers and the economy, credit losses, interest-rate changes, funding-market access and liquidity, and uncertainty in customer behavior and loan-modification outcomes. Management reported no material change to previously disclosed risk factors. Routine litigation was not expected to have a material effect.
Important facts for investors to verify
- How PPP forgiveness timing, fee recognition and the different disclosed PPP loan totals affect future interest income and reported loan balances.
- Whether modified borrowers resume regular payments and whether delinquency, non-accrual and charge-off trends change as relief periods expire.
- Whether the allowance remains adequate under evolving economic forecasts and after the eventual CECL adoption adjustment.
- The durability of margin gains as asset yields reprice, deposit costs change and wholesale funding matures or is refinanced.
- The effect of securities gains, the debt prepayment loss, repurchases and elevated operating costs on recurring earnings and capital.