Business context and reporting period
Bar Harbor Bankshares (NYSE American: BHB), a Maine bank holding company operating Bar Harbor Bank & Trust in Maine, New Hampshire and Vermont, filed this unaudited Form 10-Q for the quarter ended March 31, 2020. Unless noted, financial statement amounts below are in U.S. dollars; amounts converted from the filing’s thousands are shown in millions.
Financial performance and condition
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior year-end |
|---|---|---|
| Revenue (net interest income plus non-interest income) | $33.0 million | $27.9 million, Q1 2019 |
| Net interest income | $24.6 million | $21.8 million, Q1 2019 |
| Net interest margin, fully taxable equivalent | 3.06% | 2.77%, Q1 2019 |
| Provision for loan losses | $1.1 million | $0.3 million, Q1 2019 |
| Non-interest income / expense | $8.4 million / $22.4 million | $6.2 million / $18.6 million, Q1 2019 |
| Net income / diluted EPS | $7.7 million / $0.50 | $7.3 million / $0.47, Q1 2019 |
| Operating cash flow | $3.0 million | $4.3 million, Q1 2019 |
| Assets / shareholders’ equity | $3.677 billion / $403.8 million | $3.669 billion / $396.4 million, Dec. 31, 2019 |
| Loans / allowance for loan losses | $2.635 billion / $15.3 million | $2.641 billion / $15.4 million, Dec. 31, 2019 |
| Deposits / borrowings | $2.651 billion / $557.4 million | $2.696 billion / $531.3 million, Dec. 31, 2019 |
| Cash and cash equivalents | $85.7 million | $56.9 million, Dec. 31, 2019 |
Material changes versus comparable periods
- Net income rose 6% year over year. Lower funding costs and higher non-interest income more than offset increased operating expenses and loan-loss provision.
- Net interest margin expanded 29 basis points year over year, as lower borrowing and deposit costs outweighed a modest decline in earning-asset yield.
- Non-interest income increased 37%, supported by trust fees, customer service fees and $0.6 million of customer derivative income. Non-interest expense increased about 20%, including higher salary, occupancy and equipment costs associated with the expanded branch and wealth-management businesses.
- Commercial loans grew at a 6.4% annualized rate from year-end, while total loans were down 0.9%; residential and consumer balances declined. Non-maturity deposits grew at a 9.8% annualized rate, but time deposits fell $88.5 million and total deposits declined $45.2 million from year-end.
- Borrowings rose $26.1 million from year-end. The company reported regulatory capital ratios above “well-capitalized” minimums; consolidated total risk-based capital was 13.61% and the Bank’s was 12.58% at March 31.
- Operating cash flow was positive; investing activities provided $47.3 million, while financing activities used $21.6 million. Cash and cash equivalents increased $28.7 million during the quarter.
Outlook, management commentary and risks
- Management described first-quarter performance as strong while emphasizing uncertainty from COVID-19. The filing provides no quantitative full-year earnings or revenue guidance.
- As of April 30, the company reported more than 1,500 SBA-approved Paycheck Protection Program loans totaling $127 million and nearly 500 existing-loan modifications covering $271 million. Management said modified loans continued accruing interest and expected contractual principal and interest to be collected.
- The company elected CARES Act relief to defer CECL implementation and continued using its incurred-loss allowance method at March 31. Management increased qualitative economic adjustments to the allowance and stated it considered the reserve sufficient, while noting that the pandemic’s effects remained uncertain.
- Management reported approximately $1.2 billion of same-day available liquidity and said liquidity, capital and overall balance-sheet positions were strong. It also cited access to federal funding programs and a strategy to secure longer-term funding at favorable rates.
- COVID-19 risks include deterioration in borrower credit quality and collateral values, customer and funding changes, operating disruption, market uncertainty and interest-rate risk. Management noted that trust and investment-management fees are exposed to market conditions.
- Interest-rate sensitivity modeling estimated that a parallel 100-basis-point decline could reduce net interest income 2.2% over one year and 6.4% over two years versus the base case; a 200-basis-point increase was estimated to improve it 1.2% and 3.6%, respectively. The filing cautions these scenarios are hypothetical, not forecasts.
- The company reported no first-quarter goodwill impairment, but said it would continue reassessing as economic conditions change. It reported no significant subsequent events through the date the financial statements were available to be issued and no material change in off-balance-sheet arrangements.
Important facts for investors to verify
- Track borrower deferrals, PPP exposure, delinquencies and credit quality as COVID-19 effects emerge; reported quarter-end results may not reflect later deterioration.
- Review future allowance levels and the timing and impact of CECL adoption, which the company elected to defer under CARES Act relief.
- Reconcile disclosed liquidity availability: MD&A cites $27 million of unused Federal Reserve capacity, while the borrowing note reports a $142.1 million available secured line and $62 million outstanding. Confirm definitions and any intervening usage.
- Assess deposit stability and funding dependence, including the decline in time and brokered deposits, higher borrowings, and the company’s stated access to wholesale funding.
- Monitor unrealized securities values and interest-rate exposure. The filing reports a $7.6 million gross unrealized loss position in available-for-sale securities and cautions that rate-sensitivity estimates depend on assumptions.
- Check the company’s book-value comparisons: the filing reports March 31 book value per share of $25.90 and tangible book value per share of $17.70, but its MD&A contains an inconsistent tangible-book-value comparison.