Bar Harbor Bankshares — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018. Unaudited consolidated results. The company operates principally through Bar Harbor Bank & Trust in Maine, New Hampshire, and Vermont. Dollar amounts below are in U.S. dollars.
Financial performance and condition
- Earnings: Net income was $7.3 million, down 6.8% from $7.8 million in Q1 2018. Diluted EPS was $0.47 versus $0.50. Return on assets was 0.83% and return on equity was 7.83%, compared with 0.90% and 9.01%, respectively.
- Revenue and margins: Net interest income was $21.8 million, down from $23.2 million. Total non-interest income was $6.2 million, roughly flat year over year; total revenue was $27.9 million versus $29.4 million. Net interest margin (fully taxable equivalent) was 2.77%, down from 2.97%; the efficiency ratio increased to 63.94% from 60.44%.
- Interest income and costs: Interest and dividend income rose 8% to $33.2 million, as average earning-asset yields increased to 4.19% from 3.92%. Interest expense rose to $11.5 million from $7.6 million; the cost of interest-bearing liabilities increased to 1.66% from 1.11%.
- Credit costs and quality: Provision for loan losses was $324,000 versus $795,000. Allowance for loan losses was $14.0 million, or 0.55% of loans. Non-accrual loans were $16.6 million, equal to 0.66% of loans; annualized net charge-offs were 0.03% of average loans.
- Balance sheet: Assets were $3.63 billion, up $20.7 million from year-end. Loans were $2.53 billion, up $36.7 million; deposits were $2.47 billion, down $17.5 million. Shareholders’ equity was $381.0 million, and book value per share was $24.54.
- Cash flow: Operating activities provided $4.3 million, compared with $8.9 million a year earlier. Investing activities used $51.0 million, while financing activities provided $2.1 million. Cash and cash equivalents declined $44.7 million during the quarter to $54.1 million.
- Debt and liquidity: Total borrowings were $746.2 million, up $22.4 million from year-end; the weighted average borrowing rate was 2.65%, versus 2.56%. The loan-to-deposit ratio was 102%. The Bank reported $122.6 million of available secured borrowing capacity at the Federal Reserve. Management stated liquidity was sufficient, while noting seasonal deposit patterns and potential dependence on brokered funding.
- Capital and distributions: The Bank’s total capital ratio was 13.69%, CET1 ratio 12.88%, and Tier 1 leverage ratio 8.82%; it remained well-capitalized. The quarterly dividend increased 10% to $0.20 per share. The company authorized a repurchase plan for up to 776,000 shares (5% of outstanding shares) through March 20, 2020; no shares were repurchased in Q1.
Material changes versus comparable periods
- Net income, diluted EPS, net interest income, and net interest margin declined year over year. Management attributed the margin pressure mainly to higher funding costs following 2018 rate increases and a flatter yield curve, partly offset by higher earning-asset yields and lower non-interest expense.
- Non-interest expense decreased to $18.6 million from $18.9 million. Lower salary and benefit expense was partly offset by higher occupancy costs. Q1 2019 had no acquisition, conversion, and other expenses, compared with $335,000 in Q1 2018.
- Loans grew from year-end, led by residential real estate lending; commercial loans declined. Deposits decreased seasonally, with core non-maturity deposits down $41.5 million and time deposits up $24.0 million. Brokered time deposits increased to $534.9 million from $466.9 million at year-end.
- Improved securities fair values contributed to a $6.2 million increase in other comprehensive income and reduced accumulated other comprehensive loss to $5.6 million from $11.8 million at year-end.
Outlook, commentary, and risks
- No specific earnings or growth guidance was provided. Management said Q1 results were in line with expectations, citing seasonality, yield expansion, balance-sheet management, and continued focus on credit quality and organic growth.
- Interest-rate sensitivity modeling showed a moderately liability-sensitive balance sheet. A parallel 200-basis-point increase was modeled to reduce net interest income by 2.02% over one year and 3.27% over two years; a 200-basis-point decrease was modeled to increase it 1.2% over one year but reduce it 1.0% over two years. These are hypothetical scenarios, not forecasts, and depend on assumptions about rates, deposits, prepayments, and balance-sheet changes.
- Key risks include interest-rate and funding-cost changes, seasonal deposit outflows, access to brokered deposits, local economic conditions and real-estate values affecting credit losses, and competitive, regulatory, and financial-market changes. Management identified the allowance for loan losses as a critical estimate.
- The company adopted lease accounting on January 1, 2019, recognizing a $9.0 million right-of-use asset and lease liability; at quarter-end these were $8.8 million each. Adoption of the expected-credit-loss standard (CECL) was scheduled for January 1, 2020; management was evaluating implementation and said the allowance could increase.
- Routine litigation was described as not expected to have a material financial-statement effect. Management reported no material change in risk factors from the 2018 Form 10-K and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether net interest margin stabilizes as deposit and borrowing costs adjust, and how the new deposit hedge performs.
- Whether seasonal core-deposit declines reverse and whether brokered-deposit reliance continues to rise.
- Loan growth and portfolio mix, especially residential growth, commercial-loan trends, and changes in criticized, past-due, or non-accrual loans.
- Allowance adequacy and the estimated impact of CECL adoption on reserves, earnings, and capital.
- Liquidity and capital levels alongside the announced dividend and share-repurchase plan; the filing reports no Q1 repurchases.