Bar Harbor Bankshares
Annual Report 2017

Plain-text annual report

2017 summary annual report to shareholdersMaine LocationsBar Harbor~82 Main StreetBlue Hill~21 Main StreetDeer Isle~25 Church StreetEllsworth~125 High StreetEllsworth~135 High StreetLubec~68 Washington StreetMachias~41 Main StreetMilbridge~Main & Bridge StreetNE Harbor~111 Main StreetRockland~245 Camden StreetSomesville~1055 Main StreetSouth China~368 Route 3SW Harbor~314 Main StreetTopsham~2 Main StreetWinter Harbor~385 Main StreetNew Hampshire LocationsAndover~7 Lawrence StreetBradford~115 East Main StreetClaremont~345 Washington StreetConcord~8 Loudon RoadEnfield~468 US Route 4Grantham~165 Route 10SHanover~68 South Main StreetHillsborough~15 Antrim RoadLebanon~106 Hanover StreetLebanon~200 Heater RoadMilford~32 Elm StreetNashua~188 Main StreetNashua~115 DW HighwayNew London~321 Main StreetNew London~116 Newport RoadNewbury~976 Route 103Newport~9 Main StreetNewport~300 Sunapee StreetPeterborough~2–4 Main StreetSunapee~565 Route 11West Lebanon~83 Main StreetVermont LocationsBethel/Royalton~1583 VT Route 107Brandon~2 Park StreetBrandon~1340 Franklin StreetPittsford~Route 7 & Depot Hill RoadQuechee~6931 VT Route 4Randolph~21 Main StreetRandolph~189 VT Route 12 SouthRochester~85 North Main StreetRutland~100 Woodstock Ave.South Royalton~52 Railroad StreetWest Rutland~484 Main StreetWilliamstown~20 Methodist LaneWoodstock~Bond Street Woodstock ~906 W. Woodstock RoadCharter Trust Company NH LocationsConcord~90 North Main Street Hanover~68 South Main StreetMeredith~255 DW HighwayNashua~188 Main StreetNew London~331 Main StreetPeterborough~2-4 Main StreetRochester~34 Wakefield Street a true community bankPOSITIONED FOR SUCCESS2017 summary annual reportloan growth13.14%Loan growth, excluding the impact of acquired loans, were led by 23.83% growth, or an increase of $132M, in commercial real estate and commercial and industrial loans. total assets$3.57BTotal assets are principally comprised of the Company's earnings assets which include loans and securities. Total assets increased by $1.81B during the year.adjusted eps growth38.1%Growth in adjusted earnings reflects operations acquired from Lake Sunapee Bank Group, expanded operations, and improved profitability. Profitability benefited from higher non-interest income and improved operational efficiencies.efficiency ratio55.4%The Company improved its efficiency ratio regardless of the acquisition due to disciplined cost control and operational improvements. POSITIONED FOR SUCCESSadjusted roa.93%The Company drove ROA as it continued to focus on profitable growth and fee income. While ROA was 0.93% for the year, the fourth quarter ROA was 1.02% as the Company expanded revenue streams and increased operational efficienciesadjusted roe9.15%The adjusted ROE was impacted by equity dilution due to stock issued as consideration in the Lake Sunapee Bank Group acquisition in the first quarter, but this was earned back thereafter through strong earnings and realization of synergies from the acquisition.2017 summary annual reportPage 2Dear Fellow Shareholders, Our annual letter to you, and each communication in between has thanked you for supporting our vision of controlled yet prudent investment in:• Leadership - both existing and catalyst recruits alike, • Risk management that starts with credit and extends to all pillars of the discipline, and• Infrastructure development from IT to product advancement to financial oversight and controls. These infrastructure improvements are the table stakes to having growth ambitions in today's ever-changing landscape.The above collectively represents the blue print to our model of balancing growth with earnings. Specifically, it enables us to create shareholder value through sustainable earnings and the potential for dividend consistency as we simply are careful yet focused on proactive development.Delivering on our Strategies and ExpectationsAs we began this journey now five years ago, several key milestones have been achieved. While we will always seek to become better, what has been done to date enabled the successful completion of the acquisition, integration, and conversion of the Lake Sunapee franchise. Not only was it one of the largest mergers in the Northeast, it was com-plicated as we converted both core systems and instituted substan-tial change in the processes of our company, more befitting of our Letter to ShareholdersCURTIS C. SIMARDPresident & Chief Executive OfficerDAVID B. WOODSIDEChairmannew size and one poised for even greater growth. Yet, we emerged a stronger company with improved leadership, security, fraud manage-ment, and controls environments with significant initiatives planned for improving product delivery and advancing our market share in our now expanded footprint.We have demonstrated an ability to not only technically succeed, but we did so with incredible efficiency as we beat all cost and growth initiatives, bringing our earn-back of dilution from the stock funded acquisition inside original expectations. Unified at All Levels While Continuing to Create Depth Our Board of Directors has come together as one united governing body, focused on the best path to meeting our strategic plan and ensuring we deliver on our model of balancing growth and earnings. We have teams that possess the required breadth of skills to manage a growing bank and where needed catalyst recruits are being sought throughout the company with the same vigor as we have demonstrated with senior management.“We are committed to our model and believe that we have only begun to realize the potential a united company like ours can achieve.”2017 summary annual reportPage 3 I'm gratified to report that our Senior Executive Team has yet again improved after the significant enhancements in advance of the acquisition. In 2017, we were fortunate to attract Marion Colombo, John Mercier, and John Land. Marion brings a 30-year career entirely focused on retail banking management that creates superior customer service combined with outbound sales development for deposits. Given that competitive aggression has shifted more frequently to deposits than in recent memory, Marion's hire is critical on many fronts. Most banks our size do not commit to this level of leadership in the retail franchise, instead relying solely on their branch count or legacy. We view her hiring as essential and a significant gain for our company. We now have experience and sophistication as we build on the strengths of our existing team to deliver a best in class retail presence. While we have strong market share in many of our communities, Marion helps to advance a proposition of truly owning our markets and being unafraid to set high goals in newly entered markets while analyzing where we ought to better focus our presence. "We have demonstrated an ability to not only technically succeed, but we did so with incredible efficiency as we beat all cost and growth initiatives..."The True Community Bank CultureWith an expanded footprint, a developed risk and controls model that always looks for blind spots, and some of the best leadership throughout the company and at the Board level, we are very excited about our future. Our team at every level understands the company's plan as we daily underscore our focus on being a True Community Bank culture based on accountability. We are analyzing the best places to have branches, which potential products gaps need to be addressed, and are uniting under one brand: Bar Harbor Bank & Trust. This will allow us to simplify product offerings and marketing efforts as one company rather than regional divisions. It's a necessary and natural evolution that our team welcomes in all three states. We are in fact one franchise deeply rooted in Downeast Maine, yet equally proud of being an important member of our communities throughout all of Northern New England. Our model will be our guide with an undying commitment to brand; a combination that is often difficult to connect and therefore too frequently and consequently ineffective. We understand who we are, what is important to us, and how to best deliver on the commitments we have made.On behalf of the Board of Directors and our 500+ colleagues throughout Maine, New Hampshire, and Vermont, we thank you for your confidence in us. We are committed to our model and believe that we have only begun to realize the potential a united company like ours can achieve.CURTIS C. SIMARDPresident & Chief Executive OfficerDAVID B. WOODSIDEChairman John Mercier is proven in New Hampshire and Vermont with three decades of growing credit related businesses and the associated treasury sales. With significant double-digit annualized commercial loan growth across the footprint once our teams were fully united in the second half of the year, it's clear we know how to build strong and lasting commercial relationships. Deposits and non-interest income are key focus areas in every one of these relationships as we seek to be the most profitable institution possible and know this is the best way to define a relationship. Cross-sell remains the best indicator of relationship value and we believe those who create beneficial solutions for their customers will be rewarded beyond those that simply answer requests.John Land is our most recent recruit upon the planned retirement of Marsha Sawyer after her distinguished 45-year career here at Bar Harbor. We thank her for tremendous contributions over the years and welcome John's proven skills as an expert in Human Resources optimization. Employee and customer experiences are unquestionably linked and are the thread that ties our culture and our performance. John fully understands these interactions define our brand and will be critical to the continued retention and attraction of key talent.2017 summary annual reportPage 4Year Ended(in thousands)20172016AssetsCash and due from banks$ 34,262 $ 8,219 Interest-bearing deposit with the Federal Reserve Bank 56,423 220Total cash and cash equivalents 90,685 8,439 Securities available for sale, at fair value 717,242 528,856 Federal Home Loan Bank stock 38,105 25,331Total securities 755,347 554,187 Commercial real estate 826,746 418,119Commercial and industrial 379,423 151,240 Residential real estate 1,155,682 506,612 Consumer 123,762 53,093 Total loans 2,485,613 1,129,064 Less: Allowance for loan losses (12,325) (10,419)Net loans 2,473,288 1,118,645 Premises and equipment, net 47,708 23,419 Other real estate owned 122 90 Goodwill 100,085 4,935 Other intangible assets 8,383 377 Cash surrender value of bank-owned life insurance 57,997 24,450 Deferred tax assets, net 7,180 5,990 Other assets 24,389 14,817 Total assets$ 3,565,184 $ 1,755,349 LiabilitiesDemand and other non-interest bearing deposits$ 349,055 $ 98,856 NOW deposits 466,610 175,150 Savings deposits 364,799 77,623 Money market deposits 305,275 282,234Time deposits 866,346 416,437Total deposits 2,352,085 1,050,300 Senior borrowings 786,688 531,596Subordinated borrowings 43,033 5,000Total borrowings 829,721 536,596 Other liabilities 28,737 11,713 Total liabilities 3,210,543 1,598,609Shareholders’ equityCapital stock, par value $2.00; authorized 20,000,000 shares; issued 16,428,388 and 10,182,611 shares at December 31, 2017 and December 31, 2016, respectively 32,857 13,577 Additional paid-in capital 186,702 23,027 Retained earnings 144,977 130,489 Accumulated other comprehensive loss (4,554) (4,326)Less, 985,462 and 1,067,016 shares of treasury stock at December 31, 2017 and December 31, 2016, respectively, at cost (5,341) (6,027)Total shareholders’ equity 354,641 156,740Total liabilities and shareholders’ equity$ 3,565,184$ 1,755,349Bar Harbor BanksharesCONSOLIDATED BALANCE SHEETSYears Ended December 31, 2017 and 2016Refer to the Bar Harbor Bankshares 2017Annual Report on Form 10-K for a complete set of audited financial statements and accompanying notes.2017 summary annual reportPage 5Bar Harbor BanksharesCONSOLIDATED STATEMENTS OF INCOMEYears Ended December 31, 2017, 2016 and 2015Refer to the Bar Harbor Bankshares 2017Annual Report on Form 10-K for a complete set of audited financial statements and accompanying notes.Year Ended(in thousands)201720162015 Interest and dividend incomeLoans$ 94,976$ 41,653 $ 39,303Securities and other 21,093 15,834 15,921Total interest and dividend income 116,069 57,487 55,224 Interest expenseDeposits 11,307 6,699 6,097 Borrowings 12,607 5,414 4,293 Total interest expense 23,914 12,113 10,390 Net interest income 92,155 45,374 44,834 Provision for loan losses 2,788 979 1,785 Net interest income after provision for loan losses 89,367 44,395 43,049Non-interest incomeTrust and investment management fee income 12,270 3,829 3,888 Insurance and brokerage service income 1,097 - - Customer service fees 8,484 2,648 2,586Gain on sales of securities, net 19 4,498 1,334Bank-owned life insurance income 1,539 703 606 Other income 2,573 671 565 Total non-interest income 25,982 12,349 8,979Non-interest expenseSalaries and employee benefits 39,589 19,775 17,884 Occupancy and equipment 11,633 4,610 4,569Loss on premises and equipment, net 94 248 7 Outside services 3,000 767 359Professional services 1,655 1,489 1,485Communication 1,289 586 388Amortization of intangible assets 812 92 92 Merger expenses 3,302 2,650 54 Other expenses 11,352 5,718 6,070Total non-interest expense 72,726 35,935 30,908Income before income taxes 42,623 20,809 21,120Income tax expense 16,630 5,876 5,967Net income$ 25,993$ 14,933$ 15,153Earnings per share:Basic $ 1.71 $ 1.65 $ 1.69 Diluted$ 1.70 $ 1.63 $ 1.67 2017 summary annual reportPage 6Bar Harbor BanksharesSENIOR EXECUTIVE TEAMCurtis C. SimardPresidentChief Executive OfficerJohn M. MercierExecutive Vice PresidentCommercial Banking & Treasury ServicesJoseph M. PrattSenior Vice President, President Bar Harbor Trust ServicesJosephine IannelliExecutive Vice PresidentChief Financial Officerand TreasurerGregory W. DaltonExecutive Vice President, Business Banking William J. McIverRegional President for NH/VT, Director of Retail BankingRetired - January 2018Richard B. MaltzExecutive Vice PresidentChief Operating Officer &Chief Risk OfficerMarsha C. SawyerExecutive Vice PresidentHuman ResourcesJOINING OUR SENIOR EXECUTIVE TEAMJohn W. Land, SPHR joined the bank in February of 2018 and will serve as Executive Vice President of Human Resources.Mr. Land brings over 20 years of human resources management experience to the company and will oversee talent recruitment, training, compensation, retention, role design, performance evaluation, policy and procedure, as well as payroll and time management systems.Prior to joining the bank, Mr. Land was employed by Deloitte as a Senior Manager, HR Transformation Consultant. For the seven years prior to this position, he held the role of Principal, HR Effectiveness Consultant for Mercer.Marion Colombo joined the bank in February of 2018 and will serve as Executive Vice President of Retail Delivery.Ms. Colombo joins Bar Harbor Bank & Trust with over 30 years of experience in retail banking. She is responsible for retail strategy and delivery and will work closely with our teams to ensure that customers experience consistently outstanding service across all 49 locations in Maine, New Hampshire and Vermont.Ms. Colombo most recently served as Market President - Retail, Greater Boston and Rhode Island Market, for TD Bank. In her role, Ms. Colombo will help us continue to develop and implement our best in-class community banking model across the entire footprint of the bank.2017 summary annual reportPage 7Bar Harbor BanksharesBOARD OF DIRECTORS David B. Woodside ChairmanBar Harbor, MEChief Executive Officer and General Managerof Acadia CorporationDaina H. BelairLincolnville, MEOwner of Inn at Sunrise PointMatthew L. CarasArrowsic, MEOwner and Managing Director of Leaders LLC.Leonard R. CashmanGrantham, NHOwner and partner of C.O.H PropertiesDavid M. ColterHampden, MEPresident, GAC Chemical CorporationSteven H. DimickRandolph, VTFormer Director for Lake Sunapee Bank Group BoardMartha T. DudmanNortheast Harbor, MEFundraising Consultant and Author, former President of Dudman Communications CorporationStephen W. EnsignNew London, NHFormer Chairman of the Board of Directors for Lake Sunapee Bank GroupLauri E. FernaldMt. Desert, MEPresident and an Owner in Jordan–Fernald Funeral HomeCurtis C. SimardMt. Desert, MEPresident and Chief Executive Officer of the Company and the BankKenneth E. SmithBar Harbor, MEOwner and Innkeeper of Manor House InnStephen R. TherouxNew London, NHFormer President and CEO of Lake Sunapee BankScott G. ToothakerEllsworth, MEPrincipal and Vice President of Melanson Heath & Co.2017 Board of Directors (Back, l-r): David B. Woodside, Stephen W. Ensign, Steven H. Dimick, Kenneth E. Smith, Stephen R. Theroux, Scott G. Toothaker, David M. Colter, Curtis C. Simard. (Front, l-r): Matthew L. Caras, Laurie E. Fernald, Martha T. Dudman, Daina H. Belair and Leonard R. Cashman.In appreciation of 45 years of service to Bar Harbor Bank & TrustWe are both happy and sad to announce the retirement of Marsha Sawyer. Marsha has been an inspiration to all of us; her unconditional dedication, grace, and congeniality is unparalleled.We recognize Marsha for her unwavering commitment to Bar Harbor Bank & Trust. Please join us in wishing Marsha the best of luck in her retirement.2017 summary annual reportPage 8*Note: These performance ratios are non-GAAP financial measures; see 2017 Annual Report on Form 10-K for further discussion.Bar Harbor BanksharesFIVE-YEAR SUMMARY OF FINANCIAL DATAThe following table sets forth selected data for the last five years. As of and for the Years Ended December 31,(in millions, except per share data)20172016201520142013Balance Sheet DataTotal assets$ 3,565 $ 1,755 $1,580 $ 1,459 $1,374 Total investments 755 554 526 492 469 Total loans 2,486 1,129 990 919 853 Deposits 2,352 1,050 943 858 836 Borrowings 830 537 475 447 409 Shareholders' equity 355 157 154 146 121 Results of OperationsNet interest income $ 92 $ 45 $ 45 $ 44 $ 39 Non-interest income 26 12 9 8 8 Total revenue 118 58 54 52 47 Provision for loan losses 3 1 2 2 1 Net income 26 15 15 15 13 Per Common Share DataDiluted earnings$ 1.70 $ 1.63 $ 1.67 $ 1.63 $ 1.48 Adjusted earnings 2.10 1.52 1.58 1.60 1.44 Dividends 0.75 0.73 0.67 0.60 0.56 Book value 22.96 17.19 17.10 16.40 13.70 Tangible book value 15.94 16.61 16.50 15.78 13.06 Performance RatiosReturn on assets0.75%0.89%0.98%1.03%0.98%Adjusted return on assets* 0.93 0.83 0.93 1.01 0.95 Return on equity 7.41 9.21 10.01 10.69 10.52 Adjusted return on equity* 9.15 8.57 9.46 10.51 10.18 Net interest margin 3.10 2.96 3.19 3.33 3.15 Efficiency ratio* 55.44 58.90 55.93 57.09 55.82 Non-interest income/total revenue 21.99 21.39 16.69 15.04 16.22Stock Information - as of December 31, 2017TickerNYSEAM: BHBStock price$27.01 per shareMarket capitalization$417.1 millionPrice to earnings ratio (full year 2017)17.4XPrice to book value1.2XPrice to tangible book value1.7X52 week price range$25.49 to $33.08Annualized dividend (Q1 2018)$0.75 per shareDividend yield2.8%Shares outstanding15.4 millionAverage daily volume (full year 2017)29,000 sharesCorporate Profile - as of December 31, 2017• $3.6 billion in total assets.• 47 full-service branches.• Branches located across Maine, New Hampshire and Vermont.• A true community bank providing commercial, retail, wealth and treasury management services.• Wealth assets under management of $1.8 billion..2017 summary annual reportPage 9SUMMARY FINANCIAL RESULTSBar Harbor Bankshares produced record revenue and earnings in 2017 due to business expansion and increased operational efficiencies. Net income in 2017 was $26.0 million, or $1.70 per share, compared with $14.9 million in 2016 or $1.63 per share. The Company’s 2017 results included almost a full year benefit from the operations of Lake Sunapee Bank Group (“LSBG”). The acquisition of LSBG closed in early January 2017.Adjusted income (non-GAAP) in 2017 increased to $32.1 million, or $2.10 per share, from $13.9 million in 2016, or $1.52 per share. The measure of adjusted income excludes an after-tax reduction of $2.1 million, or $0.13 per share, during 2017 related to acquisition expenses offset by a one-time benefit associated with the sale of the Company’s insurance subsidiary. Adjusted income also excluded the $4.0 million, or $0.26 per share, reduction due to the revaluation of net deferred tax assets required by the Tax Cuts and Jobs Act of 2017. Adjusted income in 2016 included an after-tax reduction of $1.7 million, or $0.19 per share, related to acquisition costs and an after-tax benefit of $2.9 million, or $0.32 per share, related to gains from security sales.Return on assets in 2017 was 0.75% as compared to 0.89% in 2016 while adjusted return on assets (non-GAAP) improved to 0.93% in 2017 from 0.83% in 2016. In a similar trend, return on equity was 7.41% for 2017 compared to 9.21%; however, adjusted return on equity (non-GAAP) improved to 9.15% in 2017 from 8.57% in 2016. The Company’s efficiency ratio (non-GAAP) improved to 55% in 2017 from 59% in 2016 and net interest margin improved to 3.10% in 2017 from 2.96% in 2016.Total assets increased to $3.6 billion in 2017 from $1.8 billion in 2016, which includes the $1.6 billion of assets that were acquired from LSBG. Excluding the impact of the acquisition, total loans grew by $221.0 million or 13.1% during 2017 primarily due to commercial loan growth. All major categories of assets, liabilities and equity increased due to the acquired balances which as of the acquisition date included $1.2 billion in loans, $155.6 million in securities, $1.2 billion in deposits, and $182 million in equity as a result of the issuance of common shares of the Company to LSBG shareholders.RESULTS OF OPERATIONSNet Interest Income: Net interest income increased year-over-year by $46.8 million to $92.2 million. The increase was driven by a $1.6 billion increase in average earning assets, which includes organic growth and benefit of the LSBG acquisition. Net interest margin increased to 3.10% in 2017 compared to 2.96% in 2016. Net interest spread increased 13 basis points mostly from the addition of acquired loans but also reflecting higher yields on commercial loans. Weighted average yields for commercial real estate and commercial and industrial loans increased to 4.24% and 4.73% in 2017 from 3.71% and 4.03% in 2016, respectively. Net interest margin in 2017 also benefited from purchased loan accretion totaling $3.7 million in the year.Lower costs of interest-bearing deposits acquired from LSBG were offset by increased rates on FHLB advances and repurchase agreements year over year as well as acquired subordinated borrowings. For short-term advances, weighted average rates increased to 1.49% from 0.97% in 2016 while advances greater than one year showed a 13 basis point increase in weighted average rates year-over-year. Higher wholesale funding costs resulted from fed funds rate hikes. Increases in overall cost of funds are expected to have a negative impact on net interest margin in the near-term as rates increase and the Company employs strategies to mitigate the impact.Non-Interest Income: Non-interest income for the year increased to $26.0 million from $12.3 million in 2016. Gains from sales of securities in 2016 increased non-interest income by $4.5 million. Non-interest income in 2017, excluding gains on securities, increased $18.1 million from 2016. Revenue from trust and investment management services as well as financial services on a year-to-date basis increased $8.4 million from 2016, which is principally due to the addition of Charter Trust Company as part of the LSBG acquisition. Income from trust and investment management services are principally derived from fee income based on a percentage of the fair market value of client assets under management and held in custody. Revenue from financial services is derived from retail brokerage services conducted through Bar 2017 summary annual reportPage 10Harbor Financial Services, an independent third-party broker. Fee income from trust, investment management and financial services represented 47% of total non-interest income in 2017 compared to 31% in 2016.Income from customer service fees is principally derived from overdraft fees, monthly deposit account maintenance and activity fees, automated teller machine (“ATM”) fees and a variety of other deposit account related fees. Customer services fees also include Bank’s debit card product and merchant credit and debit card processing fees. Customer service fees increased $5.8 million compared to 2016 also as a result of the acquisition given the broader customer deposit base and higher number of ATM transactions. In 2017, the Company also benefited from $1.1 million in fees from its insurance subsidiary, which was acquired from the LSBG acquisition. The Company sold the insurance subsidiary in October 2017.Non-Interest Expense: Non-interest expense increased to $72.7 million from $35.9 million in 2016. Salary and employee benefit costs increased by $19.8 million compared with 2016 principally due to the LSBG acquisition. Full time equivalent staff totaled 423 at the end of 2017 compared with 186 at the end of 2016. Salary and employee benefit costs decreased on a quarterly basis in the second half of 2017 reflecting a positive trend of disciplined cost control and realized cost saves with the acquisition. Occupancy expenses increased $7.0 million as compared to 2016 due to costs of operating additional branches from the acquisition. Acquisition costs totaled $3.3 million in 2017 and $2.7 million in 2016. Acquisition costs in 2017 include severance, system conversion and professional costs, which were offset in part by a one-time benefit from the sale of the Company's insurance subsidiary.Income Tax Expense: The effective tax rate was 39.0% in 2017 compared to 28.2% in 2016. The increase in the effective tax rate was a direct result of the Tax Cuts and Jobs Act of 2017. The tax reform resulted in a $4.0 million income tax charge in the fourth quarter due to the revaluation of net deferred tax assets.FINANCIAL CONDITIONLoans: The acquisition of LSBG increased the legal lending limit of the Bank and expanded the lending area across all three of the northern New England states which resulted in organic growth in the loan portfolio. Total loans increased to $2.5 billion in 2017 from $1.1 billion in 2016, of which $1.2 billion were acquired from Lake Sunapee Bank. Excluding the impact of the acquired balances, total loans increased during 2017 by $221.0 million or 13.1%.At December 31, 2017, commercial loans comprised 49.0% of the total loan portfolio, compared with 50% at December 31, 2016. Residential real estate mortgage loans, comprised 46% of total loans at December 31, 2017, compared with 45% at December 31, 2016. Total commercial loans had a 23.8% organic growth rate led mostly by commercial and industrial loans. Outside of acquired loans, growth for residential mortgage loans remained relatively flat compared to 2016.0.74%0.94%1.01%1.02%0.93%Q1-2017Q2-2017Q3-2017Q4-2017FY 2017Adjusted Return on Assets7.88%9.32%9.90%9.97%9.15%Q1-2017Q2-2017Q3-2017Q4-2017FY 2017Adjusted Return on Equity2017 summary annual reportPage 11Allowance for loan losses: During 2017, the allowance for loan losses increased $1.9 million to $12.3 million, which is due to the increase in business activity loans and lower charge-off activity reflecting improved asset quality. Asset quality remained steady with non-accruing loans to total loans ratios at 0.58% at year-end 2017 and 2016. The ratio of net charge-offs to total loans remain near zero in 2017 and 2016. The ratio of the allowance to total loans decreased to 0.50% in 2017 from 0.92% in 2016, which was primarily due to the volume of loans acquired from LSBG.Securities: Total securities increased $201.2 million which includes $156.3 million in securities acquired from LSBG and $180.9 million in securities purchased during the year ended December 31, 2017. Securities purchased included $149.4 million of mortgage-backed securities guaranteed by US Government agency and US Government-sponsored enterprises, $21.8 million of corporate bonds, and $8.8 million of FHLB stock. The increase was primarily offset by $126.8 million of maturities, calls, and pay-downs of amortizing securities and $7.5 million in FHLB stock repurchases. The weighted average yield on the Company’s securities portfolio was 3.10% in 2017 compared to 3.24% in prior year. Deposits: Excluding the impact of acquired balances, total deposits increased 14.4% to $1.2 billion in 2017 compared to 2016. Core deposits are still the primary funding source for loan growth and the Company took on additional FHLB borrowings in order to fund additional loan growth in the period. Organic growth for demand deposits and other interest bearing deposits, NOW accounts, and savings and money market accounts in total remained close to zero for 2017 compared to 2016, while time deposits grew to $575.0 million with an organic growth rate of 38% excluding the impact of acquired balances.Borrowings: FHLB borrowings increased by $236.2 million during 2017, of which $175.7 million was assumed from the acquisition. Excluding the impact of the acquisition, the increase was mostly in short term FHLB advances to fund loans during the first half of the year.shareholders' equity: Excluding the $181.9 million of common stock of the Company issued to LSBG shareholders, total equity increased by $16.0 million, or 10.2%, during 2017. Accumulated other comprehensive loss increased by $228 thousand primarily due to the changes in fair value of the Company’s derivative hedges offset by improvements in its available for sale securities positions.The Company evaluates changes in tangible book value, a non-GAAP financial measure which is a commonly considered valuation metric used by the investment community and which parallels some regulatory capital measures. Tangible book value increased to $246.2 million as of December 31, 2017 from $151.0 million at year-end 2016. The Company’s ratio of tangible equity to tangible assets stood at 7.12% at the end of 2017, compared to 8.65% at the end of 2016. The decrease in the ratio is primarily due to the share issuance offset by goodwill and other intangible assets recorded for the LSBG acquisition in the first quarter 2017. The LSBG acquisition resulted in a $95.1 million increase in goodwill. $827 $379 $1,156 $124 Loan Compositionas of December 31, 2017 (in millions)Commercial Real Estate (33%)Commercial and Industrial (15%)Residential Real Estate (46%)Consumer (5%)61.62%54.64%53.59%52.80%55.44%Q1-2017Q2-2017Q3-2017Q4-2017FY 2017Efficiency Ratio2017 summary annual reportPage 12A TRUE COMMUNITY BANKBar Harbor Bank & Trust is the only community Bank headquartered in Northern New England with branches in Maine, New Hampshire and Vermont. The Bank is a true community bank providing exceptional commercial, retail and wealth management banking services through a network of 47 full-service branches. The Company’s corporate goal is to be among the most profitable banks in New England, and its business model is centered on the following:• Employee and customer experience is the foundation of superior performance, which leads to significant financial benefit to shareholders• Geography, heritage and performance are key while remaining true to a community culture• Strong commitment to risk management while balancing growth and earnings• Service and sales driven culture with a focus on core business growth• Investment in processes, products, technology, training, leadership and infrastructure• Expansion of the Company’s brand and business to deepen market presence• Opportunity and growth for existing employees while adding catalyst recruits across all levels of the CompanyThe Bank serves affluent and growing markets in Maine, New Hampshire and Vermont. Within our markets, tourism, agriculture, fishing, and forestry industries remain strong and continue to drive economic activity. These core markets have also maintained their strength through diversification into various services industries. The following is a summary of the regions that the Bank primarily serves:The Bank operates 14 full-service branches principally located in downeast, midcoast and central Maine, which can generally be characterized as rural areas. In Maine the Company considers its primary market areas to be Hancock, Knox, Washington, Kennebec and Sagadahoc counties.The economies in these counties are based primarily on tourism, healthcare, fishing and lobstering, agriculture, state government, and small local businesses and are also supported by a large contingent of retirees.The Bank operates 20 full-service branches and two stand-alone drive-up windows in New Hampshire. There are several distinct markets within this region. The first is centered in Nashua, New Hampshire, which is a regional commercial, entertainment and dining destination. Bordering Massachusetts, Nashua enjoys a vibrant high-tech industry and a robust retail industry due in part to the state's absence of a sales tax. The west-central area of New Hampshire includes the towns of Lebanon and Hanover, which are home to Dartmouth-Hitchcock Medical Center and Dartmouth College, respectively.The Bank operates 13 full service-branches and one stand-alone drive-up window in Vermont. The branches are primarily located in central Vermont within the counties of Rutland, Windsor and Orange.These markets are home to many attractions, including Killington Mountain, Okemo Resort, and the city of Rutland. Popular vacation destinations in this region include Woodstock, Brandon, Ludlow and Quechee.new hampshiremainevermontBar Harbor Banksharescorporate informationAnnual MeetingThe Annual Meeting of shareholders of Bar Harbor Bankshares will be held at 11:00 a.m. on Tuesday, May 15, 2018 at the Bar Harbor Club located on West Street in Bar Harbor, Maine.Financial InformationShareholders, analysts and other investors seeking financial information about Bar Harbor Bankshares should contact:Josephine IannelliExecutive Vice President, CFO, Treasurer207-667-0660 –Kimberly Pruett IlgVP, Investor Relations and CAPA207-667-0660InternetBar Harbor Bank & Trust information, as well as Bar Harbor Bankshares Form 10-K, is available at www.bhbt. com.Shareholder AssistanceQuestions concerning your shareholder account, including change of address forms, records or information about lost certificates or dividend checks, should be directed to our transfer agent:Broadridge Corporate Issuer Solutions, Inc.P.O. Box 1342Brentwood, NY 11717877-456-4860/ www.shareholder.broadridge.comStock Exchange ListingBar Harbor Bankshares common stock is traded on the NYSE American (www.nyse.com), under the symbol BHB.Form 10-K Annual ReportThe Company refers you to its Annual Report on Form 10-K for year ended December 31, 2017 for detailed financial data, management’s discussion and analysis of financial condition and results of oper ations, disclosures about market risk, market information including stock graphs, descriptions of the business of the Company and its products and services, and a listing of its executive officers.Mailing AddressIf you need to contact our corporate head quarters office, write: Bar Harbor BanksharesPost Office Box 400 82 Main Street Bar Harbor, Maine 04609-0400 207-288-3314 • 888-853-7100Printed Financial InformationWe will provide, without charge, and upon written request, a copy of the Bar Harbor Bankshares Annual Report to the Securities and Exchange Commission on Form 10-K. The Bank will also provide, upon request, Annual Disclosure Statements for Bar Harbor Bank & Trust as of December 31, 2017.Please contact Kimberly Pruett Ilg, Vice President of Investor Relations at 207-667-0660 or via U.S. mail at the address above.Bar Harbor Bankshares | 82 Main Street | Bar Harbor, Maine 04609888-853-7100 | bhbt.com

Continue reading text version or see original annual report in PDF format above