BHB - Bar Harbor Bankshares Reports Fourth Quarter Results

BAR HARBOR, ME / ACCESSWIRE / January 28, 2021 / Bar Harbor Bankshares (NYSE American:BHB) reported fourth quarter 2020 net income of $8.6 million, or $0.58 per share, compared to $4.2 million, or $0.27 per share, in the same quarter of 2019. Core earnings (non-GAAP) in the fourth quarter 2020 increased to $9.2 million compared to $8.8 million in the fourth quarter of 2019, or increased 11% to $0.62 per share, compared to $0.56 per share, respectively. Non-core expenses (non-GAAP) in the fourth quarter 2020 included swap termination costs and profitability initiative costs while the same quarter of 2019 included acquisition, conversion and balance sheet optimization costs.

FOURTH QUARTER FINANCIAL HIGHLIGHTS

• 11% annualized commercial loan growth, excluding paycheck protection program (PPP) loans
• 3,200 new low cost core deposit accounts
• 3.02% net interest margin
• 0.92% return on assets; 0.98% core return on assets (non-GAAP)
• 0.33% non-performing assets to total assets ratio
• Fee income at 37% of total revenue; 30% of core revenue (non-GAAP)

President and Chief Executive Officer, Curtis C. Simard stated, "While this year has had unique challenges across the regional, national and international stages, we leaned on the culture and infrastructure we have established to support our customers, colleagues, and communities, while not abandoning balanced growth expectations across all business lines. We have proven our commitment to risk management as we safely navigated our operations during the pandemic with established protocols and availability to both customers and prospects alike. This risk management culture extended to increasing remote capabilities while also consistently assessing our credit exposure through quarterly stress testing and steady provisioning throughout the year. We understand our customers and their financial needs because our teams have been in the field helping them navigate the changing landscape. Commercial loans remain a leader of balance sheet growth for the quarter and for the year, guided by stress tested underwriting models we employ.

"Positive trends in credit quality during the year continue to affirm our disciplined approach. By year-end, we had lower levels of non-performing loans, significant improvement in past due and deferred commercial loan accounts and we settled all of our other real estate owned at their carrying values. During the fourth quarter, we expanded stress testing of our commercial loans, including the most watched industries of our footprint specifically hospitality, which demonstrated a better than expected summer tourism season for Northern New England. Results of testing included no significant risk-rating downgrades or changes to reserves. Borrowers with COVID loan modifications continue to demonstrate their repayment capacity and/or have sufficient cash reserves to service their pre-forbearance loans without further government stimulus.

"Fee income continues to be a big part of total revenue for the fourth quarter and for the year 2020. Customer service fees have almost returned to pre-pandemic levels in the second half of the year and are expected to rise on an expanded customer base. Throughout the year we opted to sell our fixed rate residential mortgage production in the secondary market in lieu of taking interest rate and credit risk on our balance sheet. This strategy continues to produce significant fee revenue in the current rate environment. As we look forward, we will continue to take advantage of such opportunities while maintaining a focus on our commercial customer base given the associated loan and derivative fees as well as those generated in treasury and cross-sell to retail and wealth business lines. This demonstrated commitment to risk management enables us to confidently experience growth across Northern New England in the interest of diversification in markets, products, and customer type.

"During the fourth quarter, core deposits increased $86.4 million and our retail team opened an impressive 3,200 new accounts, raising the total to more than 13,250 for the year as we continue to reduce cost of funds and transition to a true franchise, core-operating institution. Excess liquidity generated in the quarter was used to further delever our balance sheet with an early pay-off of our PPP lending facility and other reductions to wholesale funding. We view that more favorably to absorbing duration or rate risk associated with securities investments or mortgage refinancing."

Mr. Simard continued, "We were prepared to adopt CECL as of the end of 2020, but elected to close our fourth quarter under the same accounting method and control environment as the rest of 2020. We will adopt January 1, 2021 to allow a more comparable quarterly presentation as we report in 2021. Had we adopted CECL at year end 2020, the loan loss reserve as a percentage of total loans would have been 95 basis points compared to 74 basis points reported under the incurred loss model. The 95 basis points may change in the first quarter of 2021 based primarily on any changes in economic forecasts.

Mr. Simard went on to say, "We are well poised to further help our communities with the second round of PPP loans authorized by the new stimulus bill. That process has begun for both first time PPP draws as well as for customers in need of second round PPP loans. For the remaining first round of PPP loans previously provided in 2020, we have $53.8 million that are pending various stages of forgiveness with $1.4 million of deferred fees. We expect the majority of remaining forgiveness to occur by the end of the second quarter 2021.

Mr. Simard further stated, "In the fourth quarter we continued our return of capital programs in the form of stock repurchases and dividend payments. Stock repurchases totaled 31 thousand shares at a cost of $625 thousand during the fourth quarter and 720 thousand shares at a cost of $13.9 million on a year to date basis. An additional 61 thousand shares are available to be repurchased before the end of March 2021. Last week we declared our first quarter dividend of $0.22 per share and we are committed to dividend policies as part of our efficient use of capital supported by expanding earnings."

Mr. Simard concluded, "Looking back on the last four years as we expanded into new areas of Northern New England, we have built amazing teams that quickly adapt to diversity and change with a commitment to a model of balancing growth with earnings across our markets. We are positioned for a solid start to 2021 as we continue to build on consistent, repeatable earnings while expanding our profitability metrics across all business lines."

FINANCIAL CONDITION

Total assets were $3.7 billion at the end of the fourth quarter compared to $3.9 billion in the third quarter of 2020. Loans in the fourth quarter decreased by $122.1 million largely due to $78.3 million in PPP loan forgiveness payments and $70.4 million in residential loan sales offset in part by growth in commercial real estate loans. As of year-end outstanding pandemic deferrals, which primarily consist of interest only forbearance, were $68.6 million or 3% of total loans, with residential loans representing $5.9 million of the total or less than 1% of total residential loans. Commercial real estate loan growth of $38.7 million consisted of over $90.0 million in new loans offset by principal payments during the quarter. Non-maturity deposits increased by $86.4 million in the quarter due to growth in new customer accounts combined with government stimulus programs and an overall decrease in consumer spending given current market conditions. Senior borrowings were reduced by $109.4 million primarily from the payoff of our PPP lending facility with the Federal Reserve Bank totaling $131.1 million offset by a shift from brokered deposits to FHLB borrowings.

We have elected to defer the implementation of the accounting standard known as CECL until January 1, 2021 as allowed by the Consolidated Appropriations Act, 2021. The effect of the CECL adoption to the allowance for loan losses and unfunded commitments is estimated to be a total of $6.8 million, which will flow entirely through equity net of deferred taxes.

The fourth quarter 2020 allowance for loan losses increased by $1.2 million, which includes a $1.4 million provision for loan loss offset by net charge-offs of $185 thousand. The allowance for loan losses to total loans ratio for the fourth quarter expanded to 0.74% from 0.66% in the third quarter 2020 based on an increased allowance for commercial loan growth and decrease in total loans. Non-accruing loans in the fourth quarter 2020 decreased $2.2 million primarily due to $1.6 million in payoffs during the quarter. The successful resolution in non-accruals combined with the sale of other real estate owned contributed to the improvement of the non-performing assets to total assets ratio of 0.33% from 0.42% in the prior quarter. The increase in 30-day past due accounts for the quarter is attributable to the payment schedules of residential loans and timing due to the quarter ending on a 31 day month. During the fourth quarter we performed stress testing of 54% of our commercial loan portfolio which included the top 50 relationships, all criticized loans greater than $1.0 million, hospitality loans greater than $250 thousand, all loans over $150 thousand with a pandemic modification and any seasonal payment, restaurant, or 2021 maturing term loans that are greater than $500 thousand. Results of the stress testing led to no significant downgrades or changes to reserves.

The Company's book value per share was $27.58 at year end 2020 compared with $27.09 at the end of the third quarter 2020. Tangible book value per share excluding security adjustments (non-GAAP) was $18.38 at the end of the fourth quarter 2020 compared to $17.78 at the end of the third quarter 2020, and $17.98 at the end of the third quarter 2019, prior to the central Maine branch acquisition.

RESULTS OF OPERATIONS

Net income in the fourth quarter 2020 was $8.6 million, or $0.58 per share, compared to $4.2 million, or $0.27 per share, in the same quarter of 2019. The non-GAAP measure of core earnings in the fourth quarter 2020 totaled $9.2 million or $0.62 per share, compared to $8.8 million, or $0.56 per share, in the same quarter of 2019. Net income benefited from an expanded net interest margin and higher non-interest income. Net interest margin in the fourth quarter 2020 increased to 3.02% from 2.94% in the same period of 2019 primarily due to a lower cost of funds and acceleration of PPP loan fee recognition upon forgiveness. Costs of funds decreased to 0.77% compared to 1.42% in the fourth quarter 2019 due to a shift in funding sources to core deposits. Cost of deposits and borrowings also benefited from the Federal Reserve rate cuts in 2020 and other key indexes in response to the pandemic.

Additionally, excess liquidity was used to pay off $520.4 million of wholesale funding since the fourth quarter of 2019 that further reduced interest expense. The yield on earning assets was 3.65% compared to 4.13% in the fourth quarter 2019 reflecting loan originations and repricing of variable rate products in a lower interest rate environment. The fourth quarter core net interest margin was 2.79% compared to 2.94% in the same period of 2019, which included a drag of 16 basis points and one basis point from excess liquidity, respectively.

Non-interest income in the fourth quarter 2020 was $14.7 million compared to $7.8 million in the same quarter in 2019. The increase is primarily due to a $2.1 million increase in mortgage banking income associated with secondary market sales of $70.4 million compared to $26.5 million in the same quarter of 2019. Customer derivative income increased $611 thousand in conjunction with commercial loan growth. We also took advantage of unrealized gains in the securities portfolio in the fourth quarter 2020 by selling certain investments for a net gain of $4.0 million.

Non-interest expense increased to $27.8 million in the fourth quarter 2020 from $26.8 million in the same quarter of 2019. The increase is primarily a result of higher salary and benefit expense due to additional year-end accruals for incentives on improved performance metrics and post-retirement plans on lower discount rates. Operating expenses remained controlled as the efficiency ratio (non-GAAP) improved to 61.98% from 62.56% for the same period a year ago. Non-core expenses (non-GAAP) in the fourth quarter of 2020 primarily consist a $4.0 million loss on termination of a $50.0 million swap on wholesale borrowings and $600 thousand of profitability initiative costs. Non-core expenses in the same quarter of 2019 include a $3.2 million loss on interest rate cap terminations and a $1.1 million loss on extinguishment of debt due to the inflow of liquidity from the 2019 acquisition.

BACKGROUND

Bar Harbor Bankshares (NYSE American: BHB) is the parent company of its wholly-owned subsidiary, Bar Harbor Bank & Trust. Founded in 1887, Bar Harbor Bank & Trust is a true community bank serving the financial needs of its clients for over 130 years. Bar Harbor provides full-service community banking with office locations in all three Northern New England states of Maine, New Hampshire and Vermont. For more information, visit www.barharbor.bank.

FORWARD LOOKING STATEMENTS

Certain statements under the headings "FOURTH QUARTER FINANCIAL HIGHLIGHTS", "FINANCIAL CONDITION" and "RESULTS OF OPERATIONS" contained in this document that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. When used in this earnings release the words "may," "will," "should," "could," "would," "plan," "potential," "estimate," "project," "believe," "intend," "anticipate," "expect," "target" and similar expressions are intended to identify forward-looking statements, but these terms are not the exclusive means of identifying forward-looking statements. These forward-looking statements are subject to significant risks, assumptions and uncertainties, including among other things, changes in general economic and business conditions, increased competitive pressures, changes in the interest rate environment, legislative and regulatory change, changes in the financial markets, and other risks and uncertainties disclosed from time to time in documents that the Company files with the Securities and Exchange Commission, including but not limited to those discussed in the section titled "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Because of these and other uncertainties, the Company's actual results, performance or achievements, or industry results, may be materially different from the results indicated by these forward-looking statements. In addition, the Company's past results of operations do not necessarily indicate future results. You should not place undue reliance on any of the forward-looking statements, which speak only as of the dates on which they were made. The Company is not undertaking an obligation to update forward-looking statements, even though its situation may change in the future, except as required under federal securities law. The Company qualifies all of its forward-looking statements by these cautionary statements.

NON-GAAP FINANCIAL MEASURES

This document contains certain non-GAAP financial measures in addition to results presented in accordance with accounting principles generally accepted in the United States of America ("GAAP"). These non-GAAP measures are intended to provide the reader with additional supplemental perspectives on operating results, performance trends, and financial condition. Non-GAAP financial measures are not a substitute for GAAP measures; they should be read and used in conjunction with the Company's GAAP financial information. A reconciliation of non-GAAP financial measures to GAAP measures is provided below. In all cases, it should be understood that non-GAAP measures do not depict amounts that accrue directly to the benefit of shareholders. An item which management excludes when computing non-GAAP core earnings can be of substantial importance to the Company's results for any particular quarter or year. The Company's non-GAAP core earnings information set forth is not necessarily comparable to non- GAAP information which may be presented by other companies. Each non-GAAP measure used by the Company in this report as supplemental financial data should be considered in conjunction with the Company's GAAP financial information.

The Company utilizes the non-GAAP measure of core earnings in evaluating operating trends, including components for core revenue and expense. These measures exclude amounts which the Company views as unrelated to its normalized operations, including gains/losses on securities, premises, equipment and other real estate owned, acquisition costs, restructuring costs, legal settlements, and systems conversion costs. Non-GAAP adjustments are presented net of an adjustment for income tax expense.

The Company also calculates core earnings per share based on its measure of core earnings. The Company views these amounts as important to understanding its operating trends, particularly due to the impact of accounting standards related to acquisition activity. Analysts also rely on these measures in estimating and evaluating the Company's performance. Management also believes that the computation of non-GAAP core earnings and core earnings per share may facilitate the comparison of the Company to other companies in the financial services industry. The Company also adjusts certain equity related measures to exclude intangible assets due to the importance of these measures to the investment community.

CONTACTS

Josephine Iannelli; EVP, Chief Financial Officer & Treasurer; (207) 288-3314

BAR HARBOR BANKSHARES
SELECTED FINANCIAL HIGHLIGHTS - UNAUDITED

1. Core measurements are non-GAAP financial measures adjusted to exclude net non-operating charges primarily related to acquisitions, restructurings, system conversions, loss on debt extinguishment and gain or loss on sale of securities, other real estate owned and premises and equipment. Refer to the Reconciliation of Non-GAAP Financial Measures in table J for additional information.
2. Non-GAAP financial measure.
3. All performance ratios are based on average balance sheet amounts, where applicable.
4. Fully taxable equivalent considers the impact of tax-advantaged investment securities and loans.
5. Core net interest margin excludes Paycheck Protection Program loans.
6. Assets acquired from eight branches purchased from People's United Bank, National Association as of October 25, 2019, were excluded from the December 31, 2019 calculation.
7. Earning assets includes non-accruing loans and interest-bearing deposits with other banks. Securities are valued at amortized cost.

BAR HARBOR BANKSHARES
CONSOLIDATED BALANCE SHEETS - UNAUDITED

BAR HARBOR BANKSHARES
CONSOLIDATED LOAN & DEPOSIT ANALYSIS - UNAUDITED
LOAN ANALYSIS

*Indicates ratios of 100% or greater.

DEPOSIT ANALYSIS

BAR HARBOR BANKSHARES
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED

BAR HARBOR BANKSHARES
CONSOLIDATED STATEMENTS OF INCOME (5 Quarter Trend) - UNAUDITED