Bar Harbor Bankshares — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; unaudited consolidated results. The company is a community bank operating primarily in Maine, New Hampshire, and Vermont.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $22.5 million | $23.5 million | $68.6 million | $68.7 million |
| Net interest margin, FTE | 2.81% | 3.06% | 2.90% | 3.13% |
| Net income | $9.0 million | $8.6 million | $25.3 million | $19.4 million |
| Diluted EPS | $0.58 | $0.56 | $1.63 | $1.27 |
| Provision for loan losses | $0.6 million | $0.7 million | $2.2 million | $2.2 million |
| Non-interest income | $7.1 million | $7.0 million | $20.5 million | $19.5 million |
| Non-interest expense | $17.9 million | $17.6 million | $55.4 million | $58.5 million |
- Q3 total revenue (net interest income plus non-interest income) was $29.6 million, versus $30.4 million a year earlier. Q3 net income rose 5%; nine-month net income increased 31%.
- FTE net interest margin compressed as higher funding costs offset higher asset yields. In Q3, interest expense rose to $9.7 million from $6.6 million; average cost of interest-bearing liabilities increased to 1.38% from 0.96%.
- Nine-month non-interest expense declined, mainly reflecting acquisition, conversion, and other expenses of $0.6 million versus $5.9 million in 2017. The reported efficiency ratio was 59.05% for the nine months, compared with 56.26%.
- The Q3 effective tax rate was 18.8%, versus 29.3% in Q3 2017, reflecting the lower federal statutory tax rate.
Financial position, cash flow, and asset quality
- At September 30, total assets were $3.56 billion, total loans $2.48 billion, deposits $2.39 billion, borrowings $782.2 million, and shareholders’ equity $357.7 million. Since year-end 2017, deposits increased $38.3 million, while borrowings declined $47.5 million.
- Cash and cash equivalents were $72.6 million, down from $90.7 million at year-end. Nine-month operating cash flow was $27.2 million; investing cash outflow was $27.9 million and financing cash outflow was $17.4 million. Net cash decreased $18.1 million.
- Loans were essentially flat versus year-end. Commercial loans grew 2.8% year-to-date, while total loans declined 0.1%. The loan-to-deposit ratio was 104%; the company reported a 14.3% annualized Q3 increase in non-maturity deposits. Time deposits included $459.1 million of brokered deposits.
- The allowance for loan losses was $13.5 million, or 0.54% of loans, compared with $12.3 million and 0.49% at year-end. Non-accrual loans rose to $21.8 million from $14.3 million; management said much of the increase involved a few larger relationships and expected recovery upon settlement. Net charge-offs were 0.04% of average loans annualized in Q3.
- Capital remained above regulatory well-capitalized thresholds: the Bank’s total risk-based capital ratio was 13.8%, versus a 10.0% well-capitalized minimum. Available secured borrowing capacity at the Federal Reserve was $112.8 million.
- Unrealized AFS securities losses reduced equity: accumulated other comprehensive loss was $19.7 million, versus $4.6 million at year-end. Management reported no Q3 securities impairment and said it expected to recover amortized cost and did not intend, or expect to be required, to sell loss-position securities before recovery.
Material changes, outlook, and risks
- Q3 results included a $685,000 pretax gain from a partial sale of Visa Class B shares; prior-year Q3 included $329,000 of insurance-business-related income and $346,000 of acquisition and conversion expenses. Nine-month 2018 acquisition, conversion, and other expenses were substantially lower than in 2017.
- Management emphasized core deposit growth, disciplined lending, and organic expansion. It planned a Manchester, New Hampshire branch opening in November 2018 and further branches in Bedford, New Hampshire, and Belfast, Maine, the following year; a commercial loan office in Portland, Maine was also announced. These are plans, not financial guidance.
- No earnings or revenue guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
- Interest-rate risk is material. The bank described its balance sheet as moderately liability-sensitive. Its model estimated that a parallel 200-basis-point rate increase could reduce net interest income 4.6% over one year and 9.9% over two years; a 200-basis-point decline was modeled to increase it 3.0% and 0.8%, respectively. These are scenario estimates, not forecasts, and depend on assumptions about deposits, repricing, and prepayments.
- Other disclosed risks include economic and competitive changes, credit deterioration, real-estate values, funding costs, and availability of brokered deposits. Management noted that local deposit balances are seasonal. No material change to previously disclosed risk factors or significant subsequent event was reported; routine litigation was not expected to have a material effect.
- CECL adoption was planned for January 1, 2020; management was evaluating models and said the change may result in a higher credit-loss estimate. Lease accounting adoption was planned for January 1, 2019.
Most important facts for investors to verify
- Whether deposit pricing and other funding costs continue to outpace loan and securities yield increases, and the resulting impact on net interest margin.
- Developments in the larger non-accrual relationships, classified loans, foreclosures in process, and allowance adequacy.
- Deposit mix and stability, especially growth in brokered time deposits and the availability and cost of wholesale funding.
- Whether unrealized securities losses change materially or create a need to sell securities before recovery.
- Progress and costs associated with planned branch and Portland commercial-office expansion, and whether organic growth improves profitability.
- Actual results versus the filing’s interest-rate sensitivity assumptions, which management explicitly said are not a forecast.