Bar Harbor Bankshares — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unaudited consolidated results; balance-sheet comparisons are with December 31, 2017. The company operates Bar Harbor Bank & Trust in Maine, New Hampshire, and Vermont.
Financial performance and position
- Q2 earnings: Net income was $8.5 million, or $0.55 per diluted share, versus $6.6 million, or $0.42, in Q2 2017. Adjusted net income, a non-GAAP measure, was $8.7 million ($0.56 per diluted share), up 8% from $8.1 million ($0.52).
- First-half earnings: Net income was $16.3 million, or $1.05 per diluted share, versus $10.8 million, or $0.72. Adjusted net income was $16.8 million ($1.08 per diluted share), up 17% from $14.3 million ($0.95).
- Revenue, Q2: Net interest income was $23.0 million, down from $23.8 million; non-interest income was $7.1 million, up from $6.6 million. Total revenue was $30.1 million versus $30.4 million. First-half net interest income was $46.2 million versus $45.2 million; non-interest income was $13.4 million versus $12.5 million.
- Margins and returns: Q2 fully taxable-equivalent net interest margin was 2.91%, versus 3.16%; first-half margin was 2.95%, versus 3.13%. Q2 return on assets was 0.97% and return on equity 9.65%; first-half figures were 0.94% and 9.34%. The Q2 non-GAAP efficiency ratio was 58.83%, compared with 54.57%; first-half ratio was 59.58%, compared with 57.39%.
- Credit costs: Q2 provision for loan losses was $770,000 versus $736,000; first-half provision was $1.6 million versus $1.5 million. The allowance was $13.1 million, or 0.53% of loans, versus $12.3 million, or 0.48%, at year-end. Annualized net charge-offs were 0.06% of average loans.
- Cash flow: First-half operating cash flow was $15.2 million; investing cash outflow was $10.6 million and financing cash outflow was $33.9 million. Cash and cash equivalents fell $29.3 million to $61.4 million.
- Balance sheet and funding: Total assets were $3.54 billion, down from $3.57 billion. Loans were $2.49 billion, essentially flat; deposits were $2.37 billion, up from $2.35 billion. Total borrowings declined to $778.9 million from $829.7 million, mainly as cash was used to repay short-term FHLB advances. Loans-to-deposits were 105%.
- Capital and securities: Shareholders’ equity was $356.0 million versus $354.6 million. The company’s consolidated total risk-based capital ratio was 13.9%; the Bank’s was 13.7%, above the stated 10.0% well-capitalized minimum. AFS securities were $710.1 million at fair value; their first-half after-tax fair-value adjustment reduced equity by $12.6 million. Accumulated other comprehensive loss was $15.3 million.
Material changes and management commentary
- Q2 net interest income fell despite higher interest income: funding costs rose as deposit and borrowing rates increased. Management attributed margin pressure to short-term rate hikes and a flattening yield curve, and said it extended liability durations to mitigate further tightening.
- Commercial lending was a growth focus. Commercial loans grew at a 9% annualized rate in Q2; commercial and industrial loans increased 14% annualized year to date. Overall loans were nearly unchanged as residential and consumer balances declined.
- Time deposits increased $105.9 million from year-end while non-maturity deposits fell $83.3 million. Brokered time deposits rose to $508.9 million from $378.7 million. Management cited seasonal deposit patterns and a strategy to target funding duration.
- Non-accrual loans increased to $21.9 million, or 0.88% of loans, from $14.3 million, or 0.58%, at year-end. Management attributed the increase primarily to two large residential relationships and said most obligations were expected to be recovered upon settlement.
- Management reported that Q2 non-interest income benefited from higher customer transaction activity and $545,000 in fees from the expanded customer derivatives platform. The company said this platform contributed almost $0.03 of earnings per share.
- Q2 non-interest expense declined to $18.7 million from $20.0 million, largely because acquisition, conversion, and other expenses fell to $214,000 from $2.5 million. Brand-consolidation costs added $318,000 to Q2 other expense. First-half acquisition, conversion, and other expenses were $549,000 versus $5.6 million.
- Management said tangible book value per share, excluding securities adjustments, was $16.81 versus $15.83 at year-end and anticipated a return to pre-acquisition levels by year-end. This is management’s outlook, not a guarantee.
Outlook, risks, and unusual items
- No formal earnings or revenue guidance is provided. Management reported a strong commercial loan pipeline entering Q3 and planned a Q3 conversion of debit cards from Visa to Mastercard, with EMV chips, rewards, instant issuance, and mobile card controls.
- Interest-rate sensitivity analysis indicated moderate liability sensitivity over one- and two-year horizons. Under a modeled parallel 200-basis-point rate increase, net interest income was expected to decline moderately over those horizons as funding costs reprice faster than asset yields. These scenarios are not forecasts and depend on assumptions about rates, deposit behavior, prepayments, and balance-sheet growth.
- Liquidity risks include seasonal deposit movements and potential changes in access to brokered deposits. The Bank reported a $135.4 million available secured Federal Reserve line and stated management believed liquidity was sufficient. Its stated policy is to maintain liquidity of at least 4% of assets.
- Other key uncertainties include credit losses, local economic and real-estate conditions, competition, regulation, and market-rate changes. Management said risk factors were unchanged from the 2017 Form 10-K. Routine litigation was not expected to have a material effect; no significant subsequent events were reported.
- The Tax Act reduced the federal corporate tax rate to 21%; Q2 effective tax rate was 19.9%, compared with 31.6% a year earlier. Adoption of revenue-recognition guidance reduced retained earnings by $184,000 at January 1, 2018; the ASU 2018-02 reclassification shifted $980,000 from accumulated other comprehensive loss to retained earnings with no effect on total equity.
- Management expects CECL adoption in 2020 to change credit-loss estimation and said it may produce a higher credit-loss estimate. Lease-accounting adoption in 2019 was expected to result in recognition of right-of-use assets and lease liabilities for most operating leases.
Important facts for investors to verify
- Whether margin pressure and higher deposit and borrowing costs continue, and how that affects net interest income.
- Trends in non-accrual loans, especially the two large residential relationships, and any resulting provisions, charge-offs, or recoveries.
- Deposit mix and concentration, including brokered deposits, time-deposit maturities, and seasonal funding changes.
- Commercial loan growth and credit quality, alongside the effect of slower residential lending and loan sales.
- Progress toward management’s stated tangible-book-value earn-back target and the impact of further securities fair-value changes.
- How reported results compare with adjusted non-GAAP measures; Q2 2017 included substantially higher acquisition-related costs.