Bar Harbor Bankshares — Q2 2021 Form 10-Q
Business context and reporting period. Bar Harbor Bankshares is a Maine-based bank holding company operating principally through Bar Harbor Bank & Trust, with more than 50 locations in Maine, New Hampshire, and Vermont. This unaudited filing covers the three and six months ended June 30, 2021; balance-sheet comparisons are to December 31, 2020. Amounts below are in U.S. dollars.
Financial performance and condition
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $22.8 million | $24.6 million | $46.2 million | $49.2 million |
| Net interest margin (FTE) | 2.74% | 2.93% | 2.81% | 3.02% |
| Non-interest income | $9.5 million | $9.7 million | $19.8 million | $18.1 million |
| Non-interest expense | $21.7 million | $22.3 million | $44.2 million | $44.6 million |
| Net income | $9.0 million | $8.5 million | $18.5 million | $16.2 million |
| Diluted earnings per share | $0.60 | $0.55 | $1.23 | $1.04 |
- Profitability and revenue: Q2 net income increased about 6% year over year and diluted EPS increased about 9%. Six-month net income rose about 14%. Total revenue was $32.3 million in Q2 versus $34.3 million, and $65.9 million for the first half versus $67.3 million. Lower net interest income outweighed increased fee income.
- Margins and costs: Q2 FTE net interest margin was 2.74%, down from 2.93%; reported six-month margin was 2.81%, down from 3.02%. Management cited lower asset yields and excess interest-bearing cash as pressures, partly offset by lower funding costs. Q2 adjusted NIM, excluding specified items, was 2.95% versus 2.86% in Q1 2021. The Q2 efficiency ratio was 63.45%.
- Credit provision and asset quality: The company recorded a $765,000 provision benefit in Q2 and a $1.3 million benefit for the first half, compared with provisions of $1.4 million and $2.5 million, respectively, in 2020. Allowance for credit losses was $22.8 million, or 0.91% of loans. Non-accrual loans were $13.6 million (0.54% of loans); past-due loans were 0.15%. First-half net charge-offs were $241,000.
- Cash flow: For the first half, operating activities provided $12.9 million, investing activities provided $21.3 million, and financing activities used $86.5 million. Cash and cash equivalents declined $52.3 million to $173.7 million.
- Balance sheet and liquidity: Total assets were $3.64 billion, down from $3.73 billion at year-end; loans were $2.52 billion, down from $2.56 billion. Deposits were $2.82 billion, down from $2.91 billion, as time deposits fell while non-maturity deposits grew. The loan-to-deposit ratio was 89%. Management reported approximately $1.2 billion of available same-day liquidity, including borrowing capacity and liquid investments.
- Debt and capital: Borrowings totaled $340.0 million, compared with $336.0 million at year-end. Total shareholders’ equity was $415.6 million. The company’s total risk-based capital ratio was 13.95%, and the Bank’s was 13.78%; both were above regulatory “well-capitalized” thresholds. Tangible equity to tangible assets was 8.23%.
Material changes versus comparable periods
- Q2 net interest income fell 7% year over year, primarily amid lower yields and excess cash, while lower deposit costs helped reduce overall funding costs.
- Fee income excluding securities-sale gains increased 13% in Q2, led by customer service, wealth management, and mortgage banking. Customer service fees rose 34% and wealth management income rose 20% year over year.
- Commercial loans excluding Paycheck Protection Program (PPP) loans grew at an 8% annualized rate in Q2; total loans declined 4% year to date, reflecting residential loan runoff and other portfolio movements. PPP loans totaled $65.9 million at quarter-end.
- Core non-maturity deposits rose $143.9 million during the first half, while time deposits declined $227.6 million. Brokered deposits fell $162.3 million, in part because maturities were not replaced amid excess liquidity.
- CECL adoption on January 1, 2021 increased the loan allowance by $5.2 million and the reserve for unfunded commitments by $1.6 million, reducing retained earnings by $5.2 million net of tax. Since adoption, provision benefits reflected improved forecasts and credit quality.
Outlook, management commentary, risks, and unusual items
- Outlook: The filing provides no formal earnings or revenue guidance. Management said it expects expense savings from workforce reductions, vendor contracts, and process efficiencies to phase in over time. A comprehensive expense review included annual salary and benefit reductions of more than $3.0 million.
- Management commentary: Management described credit quality as strong and improving, and said 97% of COVID-related modified loans had resumed normal payment schedules. It noted customer service activity had returned to pre-pandemic levels and that more than 1,000 banking relationships were added in Q2.
- Interest-rate exposure: Modeling indicated a modestly asset-sensitive balance sheet in years one and two. Under a modeled parallel 200-basis-point increase, net interest income was estimated to improve 8.5% in year one and 14.4% in year two; under a 100-basis-point decline, it was estimated to decrease 2.1% and 11.4%, respectively. The company cautioned that these scenarios are not forecasts and depend on assumptions.
- Unusual items: Q2 adjusted earnings excluded $553,000 of non-recurring expenses, primarily workforce-reduction charges, and the net effect of specified non-recurring items reduced net income by $384,000. The board authorized a 12-month repurchase program of up to 747,000 shares (5% of outstanding shares); no shares were repurchased in Q2. A separation agreement with the retiring COO/Chief Risk Officer provides a $250,000 payment and six months of COBRA benefits.
- Risks and contingencies: The filing highlights economic and competitive conditions, interest-rate changes, financial markets, and legislative or regulatory changes as forward-looking risks. The company reported routine litigation that management did not expect to materially affect results. Off-balance-sheet arrangements were principally standby letters of credit. Management identified the allowance for credit losses, taxes, goodwill and intangibles, and fair value measurements as critical accounting estimates.
Important facts for investors to verify
- Whether commercial loan growth and core-deposit growth continue to offset residential loan runoff and declining time deposits, including the effects of PPP forgiveness.
- How net interest margin and funding costs develop as excess cash changes, wholesale funding matures, and interest rates move.
- Whether credit quality remains strong and the $22.8 million loan allowance and $1.9 million unfunded-commitment reserve remain adequate under updated economic conditions.
- The timing and realized amount of the announced expense savings, and any additional restructuring or implementation costs.
- The basis and sustainability of reported adjusted results and margins, which are non-GAAP measures, and the effects of CECL and securities-related accumulated other comprehensive income on equity.
- Use of the authorized share-repurchase program and any material developments in litigation, liquidity, or interest-rate exposure.