Business context and reporting period
Bar Harbor Bankshares filed this Form 10-K for the fiscal year ended December 31, 2017. The company provides community banking, lending, wealth management and related services across Maine, New Hampshire and Vermont. Results include Lake Sunapee Bank Group (LSBG) from its January 13, 2017 acquisition, so year-over-year comparisons reflect a substantially larger business.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Total assets, year-end | $3.565 billion | $1.755 billion |
| Total revenue | $118.1 million | $57.7 million |
| Net interest income | $92.2 million | $45.4 million |
| Net income | $26.0 million | $14.9 million |
| Diluted EPS | $1.70 | $1.63 |
| Net interest margin | 3.10% | 2.96% |
| Return on assets | 0.75% | 0.89% |
| Return on equity | 7.41% | 9.21% |
Non-GAAP adjusted income was $32.1 million, or $2.10 per diluted share, versus $13.9 million, or $1.52 per share. The company’s non-GAAP efficiency ratio improved to 55.44% from 58.90%. These adjusted figures exclude items including acquisition costs and the tax-reform charge; they are not GAAP results.
Fourth-quarter 2017 net income was $6.6 million, or $0.43 per diluted share. The quarter included an $8.5 million income-tax expense, including the effect of the tax-law change.
Operating cash flow was $40.1 million; investing activities used $159.0 million and financing activities provided $201.1 million. Cash and cash equivalents ended the year at $90.7 million, up from $8.4 million.
Year-end loans were $2.486 billion, deposits $2.352 billion, borrowings $829.7 million and shareholders’ equity $354.6 million. Total borrowings rose from $536.6 million. Total loans grew 13.1% organically, excluding acquired balances; management reported 23.8% organic growth in commercial loans. The loan-to-deposit ratio was 105.68%.
Non-performing loans were $14.3 million, or 0.58% of loans, versus $6.5 million and 0.58% a year earlier. The allowance for loan losses was $12.3 million, or 0.50% of loans, compared with $10.4 million and 0.92%; acquired loans are recorded at fair value without an acquisition-date allowance, limiting direct comparability. Net charge-offs were 0.04% of average loans.
The company and Bank remained well capitalized. At year-end, the company’s CET1 ratio was 11.26%, total risk-based capital ratio 13.73%, and Tier 1 leverage ratio 8.10%. The Bank’s corresponding ratios were 12.92%, 13.71% and 8.58%.
Material changes versus the prior period
- LSBG acquisition added approximately $1.2 billion of loans, $1.2 billion of deposits and $155.6 million of securities at acquisition; consideration was approximately $181.9 million in stock. Goodwill increased by $95.2 million.
- Assets, loans, deposits, revenue and expenses increased substantially, largely due to the acquisition. Year-end full-time-equivalent staffing rose to 423 from 186.
- Organic loan growth excluding acquired balances was $221.0 million. Net interest margin improved, supported partly by $3.7 million in purchased-loan accretion.
- Non-interest expense increased to $72.7 million from $35.9 million, including $3.3 million of acquisition, conversion and other expenses. Acquisition-related costs were $6.1 million for 2017, including direct acquisition and integration costs as described in the notes.
- The Tax Cuts and Jobs Act led to a $4.0 million charge from remeasuring deferred tax assets and liabilities. The effective tax rate was 39.0%, versus 28.2%.
- Reported ROA and ROE declined, while adjusted ROA and ROE improved. Net income and per-share results are affected by the acquisition and share issuance.
Outlook, commentary, risks and unusual items
Management describes record revenue and earnings, expansion and improving operating efficiency. It expects higher funding costs as rates rise to weigh on near-term net interest margin, and notes that earning-asset growth may be needed to increase net interest income meaningfully. The filing provides no specific earnings or revenue guidance.
Interest-rate modeling showed moderate liability sensitivity: a parallel 200-basis-point rise was estimated to reduce net interest income by 3.44% over 1–12 months and 8.07% over 13–24 months, relative to the model’s flat-rate scenario. Management cautions that these are scenario estimates, not forecasts.
Liquidity management is subject to seasonal deposit patterns. The Bank’s policy targets liquidity of at least 4% of assets; available secured Federal Reserve credit was $117.1 million at year-end. Brokered deposits were $428.3 million, and $608.8 million of FHLB advances were due within one year. Management believes liquidity is sufficient, while noting that market access and funding costs could change.
Key risks include local economic and real-estate conditions, commercial-loan concentrations, credit losses, deposit competition and funding costs, interest-rate movements, acquisition integration and goodwill impairment, regulation, cybersecurity and operational risks. The company reported no material pending litigation. It was evaluating the future CECL credit-loss standard, effective for it in 2020; adoption could increase the allowance, but the impact was not yet clear. The tax accounting included provisional items to be finalized within the permitted measurement period.
Important facts for investors to verify
- How much of reported growth and earnings reflects LSBG versus sustainable organic growth, and whether expected integration savings are being realized.
- Credit trends in commercial real estate and other criticized loans, given the increase in non-performing-loan dollars and the lower allowance-to-loan ratio after the acquisition.
- Funding mix and rollover exposure, including short-term FHLB advances, brokered deposits and the loan-to-deposit ratio.
- Net interest margin sensitivity as rates and deposit costs change, and the contribution of purchased-loan accretion.
- Final tax-reform accounting, CECL implementation effects, and the carrying value of acquisition goodwill and intangibles.
- Dividend sustainability: 2017 cash dividends were $0.75 per share and the payout ratio was 44.3%; future dividends remain subject to earnings, capital needs and regulatory limits.