Bar Harbor Bankshares — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited consolidated results. Bar Harbor Bankshares is a community banking and financial services company operating in Maine, New Hampshire, and Vermont.
Business context and material changes
- Completed the acquisition of Lake Sunapee Bank Group on January 13, 2017, issuing approximately 4.16 million shares for total consideration of about $181.9 million. The acquired franchise added 33 full-service branches and materially expanded the company’s balance sheet and operating footprint.
- Acquired assets included approximately $1.21 billion of loans and $155.6 million of securities; assumed deposits were approximately $1.15 billion. The transaction generated $95.0 million of goodwill and a $7.8 million core deposit intangible.
- Results include Lake Sunapee only from the acquisition date, so year-over-year comparisons are substantially affected by the acquisition. The company said it was impractical to report the acquired entity’s post-acquisition revenue and earnings separately.
Key financial results
| Metric | Q1 2017 | Comparable period / date |
|---|---|---|
| Net interest income | $21.4 million | $11.3 million, Q1 2016 |
| Total revenue (net interest income plus non-interest income) | $27.3 million | $14.7 million, Q1 2016 |
| Net income | $4.2 million | $4.4 million, Q1 2016 |
| Diluted EPS | $0.29 | $0.48, Q1 2016; comparative EPS reflects the three-for-two stock split |
| Adjusted net income / diluted EPS (non-GAAP) | $6.2 million / $0.43 | $3.5 million / $0.38, Q1 2016 |
| Net interest margin, fully taxable equivalent | 3.11% | 3.09%, Q1 2016; 3.08% excluding acquired-loan accretion |
| Non-interest expense | $20.8 million, including $3.1 million merger expense | $8.0 million, Q1 2016 |
| Efficiency ratio (non-GAAP) | 63.0% | 58.0%, Q1 2016 |
Higher revenue and net interest income largely reflect the acquisition and increased average earning assets. GAAP net income declined slightly, while diluted EPS also reflected the larger share count after merger consideration. Adjusted results exclude specified non-operating items and are non-GAAP measures.
Financial position, liquidity, and credit
- Balance sheet at March 31: Total assets were $3.43 billion; loans $2.37 billion; available-for-sale securities $724.2 million; deposits $2.17 billion; total borrowings $885.2 million; shareholders’ equity $341.0 million.
- Quarter-end cash: Cash and cash equivalents were $42.0 million, up from $8.4 million at December 31, 2016. Operating cash flow was $1.0 million; investing activities used $54.0 million, including securities purchases; financing activities provided $86.6 million, including net short-term FHLB advances.
- Funding: The loan-to-deposit ratio was 109%. Brokered deposits totaled $322.1 million. Total borrowings had a 1.33% weighted-average rate, versus 1.13% at year-end. Short-term borrowings were $616.3 million, primarily FHLB advances.
- Available funding capacity: Management reported approximately $398 million of unused FHLB lines and net unencumbered qualifying collateral; the available secured Federal Reserve line was $133 million. Management considered liquidity sufficient, while noting that deposit behavior and access to brokered funding could affect liquidity.
- Capital: The company and bank remained “well capitalized.” Company total risk-based capital was 13.6% and common equity tier 1 was 11.1%; the bank’s corresponding ratios were 13.7% and 12.9%.
- Credit quality: Allowance for loan losses was $10.9 million, or 0.46% of total loans; the filing cautions that acquired loans are recorded at fair value without a day-one allowance, limiting comparability. Non-accrual loans were $6.0 million, and annualized net charge-offs were 0.06% of average loans. The acquired portfolio included $17.0 million of purchased credit-impaired loans at carrying value.
- Book value: Book value per share was $22.17; tangible book value per share (non-GAAP) was $15.07, reduced by acquisition-related goodwill and intangibles. Tangible equity to tangible assets was 6.99%.
Management commentary, outlook, and risks
- Management cited 13.3% annualized organic total-loan growth and 20.0% annualized organic commercial-loan growth, excluding acquired balances. Organic deposits declined 10.2% annualized during the quarter; management attributed funding needs partly to seasonal deposit patterns and loan growth.
- Management said margin improved with growth in higher-yielding commercial loans and the lower-cost acquired deposit base. Higher FHLB borrowing costs partly offset that benefit. The company’s stated priorities include realizing opportunities in the expanded footprint, improving operating efficiency, and pursuing profitable growth.
- No specific earnings or revenue guidance was provided. Management’s long-term objective is a double-digit annual return on equity; this is an objective, not a quarterly forecast.
- Interest-rate modeling showed moderate liability sensitivity. A parallel 200-basis-point rate increase was estimated to reduce net interest income 3.20% over one year and 4.86% over two years; a 100-basis-point decline was estimated to increase it 0.43% over one year and reduce it 0.94% over two years. These scenarios are hypothetical, assumption-dependent, and not forecasts.
- Key stated risks include successful integration and realization of merger cost savings, credit losses and local economic or real-estate conditions, interest-rate and funding changes, competition, and regulatory or market developments. The company recognized $3.1 million of acquisition and integration costs in the quarter. It reported no significant subsequent events through May 9, 2017, and described routine litigation as immaterial in management’s view.
- Accounting matters to monitor include expected effects of the future current expected credit loss standard on the credit-loss reserve, and adoption of revenue-recognition and lease standards. The company said the lease standard is expected to affect its balance sheet.
Important facts for investors to verify
- Whether integration proceeds as planned and merger-related costs decline, and whether anticipated synergies are realized.
- Organic loan and deposit trends, the elevated loan-to-deposit ratio, brokered-deposit reliance, and the cost and availability of wholesale funding.
- Credit performance of the acquired portfolio, including purchased credit-impaired loans, and the adequacy of the allowance given the acquisition accounting treatment.
- Capital and tangible-book-value trends after the acquisition, including the effects of goodwill and intangible assets.
- Actual net interest income and funding-cost sensitivity as interest rates and deposit pricing change; scenario estimates are not forecasts.