Bar Harbor Bankshares — Q3 2019 Form 10-Q
Business context and period. Bar Harbor Bankshares is the parent of Bar Harbor Bank & Trust, a community bank operating in Maine, New Hampshire, and Vermont. This unaudited filing covers the quarter and nine months ended September 30, 2019; balance-sheet comparisons are with December 31, 2018. Amounts below are in U.S. dollars.
Financial performance and condition
| Metric | Q3 2019 / September 30, 2019 | Comparable period / prior year-end |
|---|---|---|
| Net income | $5.0 million; diluted EPS $0.32 | Q3 2018: $9.0 million; $0.58 |
| Adjusted net income and diluted EPS (non-GAAP) | $7.3 million; $0.47 | Q3 2018: $9.0 million; $0.58 |
| Nine-month net income / diluted EPS | $18.4 million / $1.18 | 2018: $25.3 million / $1.63 |
| Net interest income | Q3: $22.4 million; nine months: $65.7 million | Q3 2018: $22.5 million; nine months 2018: $68.6 million |
| Net interest margin, fully taxable equivalent | Q3: 2.75%; nine months: 2.72% | Q3 2018: 2.81%; nine months 2018: 2.90% |
| Total assets | $3.61 billion | $3.61 billion at December 31, 2018 |
| Total loans / deposits | $2.58 billion / $2.49 billion | Loans: $2.49 billion; deposits: $2.48 billion |
| Total borrowings | $684.7 million | $723.8 million |
| Cash and cash equivalents | $71.6 million | $98.8 million |
| Shareholders’ equity | $394.5 million | $370.6 million |
- Revenue and expenses: Q3 net interest income plus non-interest income was $30.1 million, compared with $29.6 million a year earlier. Non-interest income was $7.6 million, up from $7.1 million. Non-interest expense rose to $23.4 million from $17.9 million, including $3.0 million of acquisition, restructuring, and other expenses. Q3 provision for loan losses was $893,000.
- Profitability: Q3 GAAP net income declined about 44% year over year; nine-month net income declined about 27%. Q3 return on assets was 0.55% and return on equity 5.04%; nine-month figures were 0.68% and 6.37%. Q3 efficiency ratio was 65.02%.
- Cash flow: For the nine months, operating activities provided $20.8 million; investing activities used $9.9 million and financing activities used $38.1 million. Cash and cash equivalents fell $27.2 million to $71.6 million.
- Credit quality: Allowance for loan losses was $15.4 million, or 0.60% of loans. Non-accruing loans were $16.7 million, 0.65% of loans; non-performing assets were 0.53% of total assets. Annualized Q3 net charge-offs were 0.02% of average loans. The allowance covered 92% of non-accruing loans, versus 76% at year-end 2018.
- Funding and capital: The loan-to-deposit ratio was 103%. Time deposits included $554.3 million of brokered deposits. The Bank’s total capital, CET1, Tier 1 risk-based, and Tier 1 leverage ratios were 13.45%, 12.60%, 12.60%, and 8.74%, respectively; the filing says the Company and Bank met applicable “well-capitalized” requirements.
Material changes versus comparable periods
- Loan growth was concentrated in commercial real estate: total loans rose $87.1 million, or 4.7%, from year-end; commercial real estate increased 15.7%. Residential loans were broadly flat and consumer loans declined.
- Deposits increased $10.3 million from year-end. Non-maturity deposits grew $40.5 million, while time deposits declined $30.1 million. The average cost of deposits rose to 1.33% in Q3 from 1.06% in Q3 2018; borrowing costs rose to 2.62% from 2.26%.
- Nine-month interest expense increased to $35.6 million from $26.1 million, more than offsetting higher interest income and contributing to lower net interest income and margin.
- The Company reduced securities by $58.4 million from year-end and borrowings by $39.0 million, describing this as a planned deleveraging strategy. It sold securities and used proceeds to pay down higher-cost borrowings. Q3 margin expanded 10 basis points sequentially, according to management, while remaining below Q3 2018.
- Accumulated other comprehensive income moved from a loss of $11.8 million at year-end to income of $3.0 million, primarily reflecting improved unrealized values on available-for-sale securities. This contributed to higher reported equity.
- Classified loans were $33.3 million versus $34.0 million at year-end, while criticized loans increased to $64.6 million from $55.8 million, including higher special-mention balances.
Outlook, management commentary, risks, and unusual items
- Strategic actions: Following a strategic review, the Company announced plans to close five branches by year-end 2019 and consolidate other properties and processes. Management expected these actions and efficiencies to be accretive to earnings beginning in Q1 2020, supporting profitable growth and positive operating leverage; this is a stated expectation, not a guarantee.
- Acquisition: On October 25, 2019, after quarter-end, the Company completed its acquisition of eight central Maine branches from People’s United Bank. The acquired locations had approximately $287 million of deposits, $111 million of loans, and $284 million of assets under management as of March 31, 2019. Initial proceeds were $134 million, including deposit and wealth-management premiums and approximately $4.4 million for premises; proceeds were used to repay FHLB advances. Final purchase-price allocation remained in process. Management expected the acquisition to be immediately accretive to adjusted income in Q4 2019.
- Rate sensitivity: The filing describes the balance sheet as slightly liability-sensitive in year one and asset-sensitive in year two. A modeled parallel 200-basis-point rate decline was estimated to reduce net interest income 0.8% over one year and 7.3% over two years; a 200-basis-point increase was estimated to reduce it 1.1% and 0.6%, respectively. Management cautions these scenarios are not forecasts and depend on assumptions about rates, deposits, prepayments, and customer behavior.
- Credit and accounting risks: Management notes local economic conditions and real-estate values could require higher loan-loss provisions. The Company expected to adopt CECL on January 1, 2020 and said implementation could result in a higher allowance; the amount was not stated. Interest-rate changes, competition, regulation, market conditions, and access to brokered deposits are also identified risks.
- Other items: The Company recorded no other-than-temporary impairment losses on securities in the periods presented and said it expected to recover the amortized cost of securities in unrealized-loss positions. Routine litigation was not expected by management to have a material financial effect. No material changes to previously disclosed risk factors or internal controls were reported.
Most important facts for investors to verify
- Whether the branch acquisition’s final purchase-price allocation, integration costs, and expected accretion align with management’s Q4 2019 expectations.
- Whether branch closures and other efficiency initiatives deliver the expected Q1 2020 earnings benefit, and what implementation costs remain.
- Whether deposit growth and funding mix can support loan growth while reducing reliance on brokered deposits and keeping funding costs contained.
- Whether criticized loans, non-accrual trends, and the allowance remain consistent with management’s credit-quality assessment, particularly as CECL is implemented.
- How realized interest-rate changes affect net interest margin and earnings relative to the filing’s modeled, explicitly non-forecast scenarios.