Bar Harbor Bankshares — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; the filing also reports fourth-quarter results. Bar Harbor Bankshares is a community banking and financial services company operating principally through Bar Harbor Bank & Trust in Maine, New Hampshire, and Vermont.
Financial performance and condition
| Metric | 2018 | 2017 |
|---|---|---|
| Total assets | $3.608 billion | $3.565 billion |
| Total loans | $2.490 billion | $2.486 billion |
| Total deposits | $2.483 billion | $2.352 billion |
| Total borrowings | $723.8 million | $829.7 million |
| Net interest income | $90.9 million | $92.2 million |
| Non-interest income | $27.9 million | $26.0 million |
| Net income | $32.9 million | $26.0 million |
| Diluted earnings per share | $2.12 | $1.70 |
| Net interest margin | 2.87% | 3.10% |
| Return on assets / return on equity | 0.93% / 9.22% | 0.75% / 7.41% |
Total revenue, defined as net interest income plus non-interest income, was $118.8 million, compared with $118.1 million. The efficiency ratio was 59.27%, up from 55.44%. Operating cash flow was $37.7 million, versus $40.1 million; cash and cash equivalents ended the year at $98.8 million.
At year-end, shareholders’ equity was $370.6 million. The company’s Tier 1 capital-to-risk-weighted-assets ratio was 12.68%, and the Bank’s was 12.99%; both were above the applicable well-capitalized thresholds. The loan-to-deposit ratio improved to 100% from 106%. The Bank reported $118.6 million of available secured Federal Reserve borrowing capacity. Management said liquidity was adequate and expected cash, available-for-sale securities, and operating cash flows to meet anticipated needs for at least 12 months.
Material changes versus 2017
- Net income rose 27%, while adjusted net income, a non-GAAP measure, increased 9% to $35.0 million. The effective tax rate fell to 18.7% from 39.0%; 2017 included a $4.0 million tax charge from revaluing deferred tax assets following tax reform.
- Net interest income declined $1.3 million and net interest margin fell 23 basis points, as funding costs increased faster than asset yields. Interest expense rose to $36.6 million from $23.9 million.
- Non-interest income increased, including $2.1 million from the sale of Visa Class B shares, $860,000 of customer loan derivative income, and higher customer service fees. These gains were partly offset by a $924,000 realized loss on securities sales.
- Non-interest expense increased to $75.5 million from $72.7 million; acquisition, conversion, and other expenses declined to $1.7 million from $3.3 million. The 2018 results also included higher staffing and other costs, including brand and ATM-related charges.
- Deposits grew 5.6%, while loans were nearly flat. Commercial and industrial loans grew 5.4%; total commercial loans grew 1.4%.
- Non-performing loans increased to $18.2 million, or 0.73% of loans, from $14.3 million, or 0.58%. The allowance for loan losses rose to $13.9 million, or 0.56% of loans, from $12.3 million, or 0.50%.
- Borrowings fell about 13%, primarily with deposit growth, but their year-end weighted average rate increased to 2.56% from 1.66%. The available-for-sale securities portfolio had a $11.3 million net unrealized loss before tax, contributing to the decline in accumulated other comprehensive income.
Outlook, risks, and notable items
- No quantified earnings or financial guidance is provided. Management said the fourth-quarter securities portfolio repositioning was expected to benefit results beginning in 2019, improve liquidity, and adjust interest-rate risk. It also planned expansion into Bedford, New Hampshire, and Belfast, Maine, during 2019.
- Management cited rising funding costs and a moderately liability-sensitive balance sheet. Its model estimated that a parallel 200-basis-point rate increase would reduce net interest income by 3.72% over 1–12 months and 8.27% over 13–24 months; these are scenario estimates, not forecasts.
- Funding concentration merits attention: $611.7 million of FHLB advances were scheduled to mature within one year, and brokered time deposits totaled $466.9 million at year-end. Management stated that the Bank’s deposit base is seasonal.
- Credit exposure includes commercial lending and real estate; hospitality represented 9.0% of total loans. Non-performing assets rose to $20.6 million from $14.4 million, mainly reflecting higher non-performing loans and real estate owned.
- The company identified local economic and real-estate conditions, interest-rate changes, deposit competition, credit losses, cybersecurity and operational events, regulatory change, and execution of growth initiatives as risks. CECL was scheduled for adoption in 2020; the company was evaluating its effect and said it could increase the credit-loss estimate.
- Other unusual or accounting items: the company adopted the new revenue-recognition standard, reducing retained earnings by $184,000; it recorded no goodwill impairment; and no material pending litigation or significant subsequent events were reported. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether margin pressure and the higher cost of deposits and borrowings continue, and whether the securities repositioning produces the expected 2019 benefit.
- The maturity and refinancing plans for near-term FHLB advances, brokered deposits, and other funding, along with the Bank’s liquidity under seasonal or stressed conditions.
- Whether non-performing loans, criticized credits, real estate owned, and charge-offs stabilize, and whether the allowance remains adequate.
- How much of 2018 earnings growth reflects recurring operations versus the lower tax rate and the Visa-share gain; review the company’s non-GAAP adjustments and efficiency ratio calculation.
- The eventual impact of CECL adoption and whether planned branch and commercial-office expansion generates returns sufficient to cover added costs.