Bar Harbor Bankshares — Q3 2020 Form 10-Q
Business context and reporting period
Bar Harbor Bankshares is a community bank holding company operating primarily through Bar Harbor Bank & Trust, with more than 50 locations in Maine, New Hampshire and Vermont. This unaudited filing covers the quarter and nine months ended September 30, 2020; income and cash-flow comparisons are year over year, while balance-sheet comparisons are generally to December 31, 2019. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2020 / Sep. 30, 2020 | Comparable period / prior date |
|---|---|---|
| Net income | $8.4 million; diluted EPS $0.56 | Q3 2019: $5.0 million; $0.32 |
| Net interest income | $24.7 million | Q3 2019: $22.4 million |
| Net interest margin (FTE) | 2.98% | Q3 2019: 2.75% |
| Non-interest income | $10.1 million | Q3 2019: $7.6 million |
| Non-interest expense | $22.4 million | Q3 2019: $23.4 million |
| Provision for loan losses | $1.8 million | Q3 2019: $0.9 million |
| Assets | $3.86 billion | Dec. 31, 2019: $3.67 billion |
| Total loans | $2.71 billion | Dec. 31, 2019: $2.64 billion |
| Deposits | $2.93 billion | Dec. 31, 2019: $2.70 billion |
| Borrowings | $445.4 million | Dec. 31, 2019: $531.3 million |
| Cash and cash equivalents | $215.7 million | Dec. 31, 2019: $56.9 million |
| Shareholders’ equity | $404.4 million | Dec. 31, 2019: $396.4 million |
For the first nine months, net income was $24.6 million versus $18.4 million, diluted EPS was $1.60 versus $1.18, and net interest income after provision was $69.6 million versus $63.9 million. Operating cash flow was $32.0 million versus $20.8 million. The company reported a 59.5% adjusted efficiency ratio for Q3, compared with 65.0% a year earlier; this is a non-GAAP measure.
At September 30, the allowance for loan losses was $17.9 million, or 0.66% of loans (0.69% excluding PPP loans, per management). The company reported a 92% loan-to-deposit ratio. Consolidated regulatory capital ratios included 13.32% total capital and 10.29% common equity tier 1; both the company and the bank met the filing’s “well-capitalized” requirements.
Material changes and management commentary
- Profitability improved year over year, supported by lower funding costs, a higher net interest margin and stronger non-interest income. The margin expansion occurred even as earning-asset yields fell, from 4.17% to 3.67%, as funding costs declined from 1.65% to 0.82%.
- Q3 non-interest income growth was led by mortgage banking: secondary-market mortgage sales were $86.2 million versus $20.7 million in Q3 2019. Trust and investment management fees and customer service fees also increased. Nine-month non-interest income included $1.5 million in net securities gains.
- Commercial real estate and commercial and industrial lending increased, while residential and consumer balances declined. Year-to-date total loans rose 3%; deposits rose 12%. Management said it selectively expanded commercial lending and directed most mortgage production to the secondary market.
- Deposit growth and excess liquidity supported a reduction in wholesale borrowings. Securities declined to $618.5 million from $683.9 million at year-end, reflecting portfolio runoff and the company’s deleveraging strategy. Brokered time deposits declined to $327.2 million from $526.9 million.
- Management cited approximately $1.5 billion of available same-day liquidity, including borrowing capacity and unencumbered liquid investments. It stated that liquidity was sufficient for current and future funding needs.
- COVID-19 relief: the company originated approximately 1,900 PPP loans totaling $131.5 million; $3.8 million of net unearned PPP fees remained at quarter-end. Outstanding COVID-related payment deferrals were $78.7 million, or about 3% of loans, down from earlier levels. These deferrals included 110 commercial loans totaling $74.1 million and 86 residential loans totaling $4.6 million.
- Credit quality measures remained low, and management reported no significant risk-rating downgrades or reserve changes from its Q3 commercial-portfolio stress testing. Non-accruing loans were 0.56% of loans excluding PPP loans, as reported by the company. Management noted hotel lending exposure but said degradation had been minimal and cited an average loan-to-value ratio below 60% for that segment.
- The company deferred CECL adoption under the CARES Act and continued using its incurred-loss model. Management estimated a CECL allowance of $23 million to $26 million as of September 30, compared with an estimated $20 million to $23 million at January 1, 2020; the eventual effect depends in part on economic forecasts.
- The annual goodwill impairment test found no impairment. Management said it would continue to monitor the impact of changing economic conditions. The company repurchased about 297,000 shares in Q3; 91,658 shares remained authorized under the existing plan at September 30.
Outlook, risks and contingencies
The filing provides no specific earnings or financial guidance. Management described the economic and COVID-19 outlook as uncertain and noted potential effects on borrower performance, loan losses, customer deposits, brokered-deposit access, interest rates and liquidity. Interest-rate sensitivity modeling indicated that a 100-basis-point decline could reduce net interest income by 0.4% over one year and 9.0% over two years versus the base case; a 200-basis-point increase could improve it by 1.8% and 5.1%, respectively. The filing cautions that these hypothetical results are not forecasts and depend on assumptions about rates, customer behavior, prepayments and balance-sheet changes.
Other items to monitor include the planned transition from LIBOR and other reference rates, which the company was evaluating; ordinary-course litigation, which management did not expect to have a material financial effect; and the company’s $30.5 million of cash collateral posted with counterparties for customer derivative arrangements. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track COVID-related deferrals, PPP forgiveness and fee accretion, and subsequent delinquency, non-accrual and charge-off trends.
- Assess whether the allowance remains adequate as the company adopts CECL and economic forecasts evolve.
- Verify the sustainability of margin improvement given lower asset yields, rate sensitivity and deposit pricing competition.
- Monitor commercial real estate and hotel exposures, criticized loans, and the results of continued portfolio stress testing.
- Review deposit mix and concentration, including brokered deposits, and confirm available liquidity and borrowing capacity.
- Evaluate capital, share repurchases and dividend levels alongside credit conditions and balance-sheet growth.