Business context and reporting period
Bar Harbor Bankshares’ Form 10-K covers the fiscal year ended December 31, 2019; it also reports unaudited quarterly results, including fourth quarter 2019. The company operates Bar Harbor Bank & Trust and related trust businesses, serving Maine, New Hampshire and Vermont through more than 50 locations. Its principal activities are community banking, lending, deposits, trust services and mortgage banking.
Financial results and condition
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $118.9 million | $118.8 million |
| Net interest income | $89.8 million | $90.9 million |
| Net interest margin, fully taxable equivalent | 2.78% | 2.87% |
| Non-interest income | $29.1 million | $27.9 million |
| Net income | $22.6 million | $32.9 million |
| Diluted earnings per share | $1.45 | $2.12 |
| Operating cash flow | $36.4 million | $37.7 million |
- Management reported non-GAAP adjusted income of $29.7 million, or $1.91 per diluted share, versus $35.0 million, or $2.25, in 2018. These measures exclude items management considers outside normalized operations and are not substitutes for GAAP results.
- At year-end, assets were $3.669 billion, loans $2.641 billion, deposits $2.696 billion, borrowings $531.3 million and shareholders’ equity $396.4 million. Total loans grew $150.9 million; deposits increased $212.5 million, largely reflecting the branch acquisition.
- Cash and cash equivalents ended the year at $56.9 million, down $41.8 million. Investing activities used $85.0 million; financing activities provided $6.7 million.
- Credit measures improved: non-accruing loans were $11.6 million, or 0.44% of loans, versus $18.2 million, or 0.73%, in 2018. The allowance for loan losses was $15.4 million, 0.58% of loans; net charge-offs were 0.03% of average loans.
- The company and Bank remained well-capitalized. Year-end CET1 ratios were 10.57% for the consolidated company and 11.79% for the Bank. The loan-to-deposit ratio was 98%.
- Fourth-quarter 2019 net income was $4.2 million and diluted EPS was $0.27, compared with $7.6 million and $0.49 in fourth-quarter 2018.
Material changes versus the prior comparable period
- GAAP net income declined by about 31% year over year, despite roughly flat revenue. Higher non-interest expense and funding costs weighed on results; interest expense rose to $45.6 million from $36.6 million.
- Non-interest expense increased to $89.7 million from $75.5 million. The 2019 total included $8.3 million of acquisition, restructuring and other expenses and a $1.1 million loss on debt extinguishment. The strategic review also reclassified a $3.2 million loss on terminated interest-rate caps from accumulated other comprehensive income to expense.
- On October 25, 2019, the company acquired eight central Maine branches. The transaction added approximately $258 million of deposits and $101 million of loans at acquisition, and contributed $18.6 million of goodwill. Management said acquired deposits helped fund repayment of higher-cost FHLB borrowings.
- Borrowings fell by $192.5 million to $531.3 million. The company sold $92 million of lower-yielding securities as part of a balance-sheet remix and issued $40 million of subordinated notes in November, replacing $22 million of higher-cost notes that were called.
- The company closed five branches effective December 31, 2019, following a branch optimization review. Management expected the initiative to be fully accretive beginning in first-quarter 2020.
- Cash dividends rose to $0.86 per share from $0.79; the reported payout ratio increased to 59% from 37%. No shares were repurchased under the authorized plan during 2019.
Outlook, risks and unusual items
The filing provides no specific earnings or revenue guidance. Management said available cash, securities and operating cash flows were expected to meet anticipated cash needs for at least 12 months, while noting that funding needs and access to markets could change. Its interest-rate model indicated a broadly neutral position over one- and two-year horizons: a parallel 200-basis-point increase was modeled to raise net interest income by 0.7% and 3.3%, respectively; a 100-basis-point decline was modeled to reduce it by 1.0% and 3.7%. Management cautioned that these are scenario estimates, not forecasts.
- CECL was scheduled for adoption January 1, 2020. The company estimated a $4 million to $6 million impact to the consolidated financial statements; final model assumptions and controls were still being developed.
- Material risks include sensitivity of net interest income to rates and funding costs; local economic and real-estate conditions; commercial-loan concentration; deposit competition and liquidity; cyber and operational risks; and regulatory change. Commercial loans represented about 51% of the loan portfolio. Hospitality loans were $227 million, or 8.6% of total loans.
- Brokered deposits were $526.9 million at year-end, primarily within time deposits. The Bank reported $144.2 million of available secured borrowing capacity at the Federal Reserve.
- The company reported no material pending legal proceedings and no significant subsequent events through the financial statements’ issuance date. The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether management’s expected branch-closure savings and acquisition benefits materialized after year-end, and how much was recurring versus one-time expense.
- The final CECL adoption adjustment compared with the disclosed preliminary $4 million to $6 million estimate.
- Trends in net interest margin and deposit pricing, including reliance on brokered deposits and the repricing of borrowings.
- Credit quality and allowance adequacy as acquired loans are integrated, particularly commercial real estate and hospitality exposures.
- Capital and liquidity after the acquisition, debt issuance, securities sales and dividend payments; also assess the payout ratio against future earnings.