Bar Harbor Bankshares — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Unaudited consolidated results. Comparisons below are year over year unless stated otherwise. Dollar amounts are in millions except per-share data.
Business context and reporting period
Bar Harbor Bankshares is a community bank operating in Maine, New Hampshire and Vermont. On January 13, 2017, it completed its acquisition of Lake Sunapee Bank Group, adding 33 full-service branches and materially expanding the company. The acquired business is included in results from the acquisition date, so reported growth versus 2016 is not directly comparable. The company reported 47 branches and two additional limited-service locations.
Financial performance and condition
- Q2 earnings: Net income was $6.6 million versus $4.3 million; diluted EPS was $0.42 versus $0.47. Adjusted net income, a non-GAAP measure, was $8.1 million and adjusted diluted EPS was $0.52, versus $3.5 million and $0.39, respectively.
- First-half earnings: Net income was $10.8 million versus $8.7 million; diluted EPS was $0.72 versus $0.96. Adjusted net income was $14.3 million versus $7.0 million, and adjusted diluted EPS was $0.95 versus $0.77.
- Net interest and margins: Q2 net interest income was $23.8 million, up from $11.4 million; first-half net interest income was $45.2 million versus $22.7 million. Fully taxable equivalent net interest margin was 3.16% in Q2 versus 3.04%; excluding acquired-loan accretion, it was 3.02% versus 3.04%. Q2 included $1.7 million of purchased-loan accretion.
- Other income and expenses: Q2 non-interest income was $6.6 million versus $3.6 million; 2016 included $1.7 million in securities gains. Q2 non-interest expense was $20.0 million versus $8.7 million, including $2.5 million of merger expenses. First-half merger expenses were $5.6 million. The Q2 efficiency ratio was 56% (non-GAAP), versus 60%.
- Credit costs and quality: Provision for loan losses was $0.7 million in Q2 and $1.5 million for the first half, versus $0.2 million and $0.6 million, respectively. Allowance for loan losses was $11.4 million, or 0.48% of total loans; the ratio is not directly comparable with prior periods because acquired loans were recorded at fair value without a carried-over allowance. Non-accrual loans were $5.3 million, or 0.22% of loans, versus 0.58% at year-end 2016. First-half net charge-offs were $0.5 million.
- Balance sheet: Total assets were $3.50 billion versus $1.76 billion at year-end 2016. Loans were $2.38 billion, deposits $2.21 billion, securities $762.5 million, and shareholders’ equity $347.1 million. The loan-to-deposit ratio was 107%.
- Funding and debt: Total borrowings were $915.1 million, including $659.2 million short-term borrowings and $255.9 million long-term borrowings. The average rate on total borrowings was 1.53%, versus 1.13% at year-end. Brokered deposits were $429.0 million. Excluding acquired balances, deposits increased $12.1 million in the first half; additional FHLB borrowing funded loan growth and investment purchases.
- Liquidity and cash flow: Cash and cash equivalents were $119.0 million at quarter-end. First-half operating cash flow was $10.2 million, investing cash outflow $52.2 million, and financing cash inflow $152.5 million. The bank’s liquidity model measured 8.2% over 30 days and 9.1% over 90 days, above its 4% policy minimum. Management cited approximately $427.9 million of unused lines and eligible collateral availability.
- Capital: The company’s consolidated total capital ratio was 13.6%, common equity tier 1 ratio 11.1%, and tier 1 leverage ratio 7.6%. The bank and holding company met regulatory “well capitalized” requirements.
Material changes versus comparable periods
- The acquisition drove much of the increase in assets, loans, deposits, revenue, staffing and operating expenses. It added $1.21 billion of loans and $1.15 billion of deposits at acquisition; consideration was approximately $181.9 million in stock, and $95.3 million of goodwill was recognized.
- Q2 adjusted diluted EPS increased year over year, while GAAP diluted EPS declined. Management attributed the difference to current-year merger and systems-conversion costs and prior-year gains on securities sales; the higher share count following the stock issuance also affects per-share comparisons.
- First-half organic loan growth was 7.0% annualized and organic deposit growth 2.3% annualized, excluding acquired balances. Commercial loan growth was 5.0% annualized; a large commercial real estate payoff affected Q2 comparisons.
- Tangible book value per share was $15.44, down from $16.61 at year-end, primarily reflecting acquisition goodwill and intangible assets. The tangible equity-to-tangible-assets ratio was 7.01%, versus 8.65% at year-end.
Outlook, risks and unusual items
- No specific earnings or growth guidance was provided. Management said the quarter reflected improved profitability, disciplined expense management and a systems conversion completed on schedule. Its long-term objective is a double-digit annual return on equity.
- Interest-rate modeling showed moderate liability sensitivity. A parallel 200-basis-point rate increase was estimated to reduce net interest income by 3.8% over one year and 6.2% over two years; a 100-basis-point decline was estimated to increase it by 0.7% and 0.8%, respectively. Management cautioned that these are hypothetical sensitivities, not forecasts.
- Key risks include integration and realization of expected cost savings from the Lake Sunapee acquisition, interest-rate and funding-cost changes, credit losses, economic and real-estate conditions, competition, and regulatory changes. Management warned that lower expected cash flows on acquired loans could affect accretion and potentially impairment.
- The filing reported no significant subsequent events through issuance and no material effect expected from ordinary-course litigation. Management said disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of future earnings growth is organic, and what acquisition synergies and integration costs are actually realized?
- Whether purchased-loan accretion, merger expenses and other adjustments support the company’s non-GAAP earnings presentation and how they affect recurring profitability.
- Credit performance and reserve adequacy across acquired and legacy loans, including changes in criticized, non-accrual and past-due balances.
- Funding mix and sensitivity: reliance on short-term FHLB advances and brokered deposits, borrowing costs, and deposit retention after the acquisition.
- Capital and tangible book value trends, including the effect of goodwill and intangibles, and the accuracy of interest-rate sensitivity assumptions.