Bar Harbor Bankshares Reports Fourth Quarter Earnings

Bar Harbor Bankshares (NYSE American: BHB) reported record GAAP earnings in 2017 of $26.0 million, or $1.70 per share, compared with $14.9 million in 2016, or $1.63 per share. Core earnings in 2017 increased to $32.1 million, or $2.10 per share, from $13.9 million in 2016, or $1.52 per share. Earnings grew during 2017 due to business expansion, investments in talent and increased operational efficiencies.

Fourth quarter GAAP earnings were $6.6 million, or 43 cents per share. Core earnings totaled $9.0 million, or 58 cents per share. GAAP earnings included a $4.0 million income tax charge due to the revaluation of net deferred tax assets required by the Tax Cuts and Jobs Act of 2017 (“TCJA”). In addition, there was a net benefit of $2.6 million, which included the sale of the insurance subsidiary offset by other one-time charges.

FOURTH QUARTER FINANCIAL HIGHLIGHTS (comparisons are to prior quarter unless otherwise stated):

• 1.02% core return on assets (non-GAAP measure)
• 21% annualized commercial loan growth
• 13% annualized total deposit growth
• 53% efficiency ratio (non-GAAP measure)
• 9.97% core return on equity (non-GAAP measure)

President and Chief Executive Officer, Curtis C. Simard stated, “We delivered a strong finish to all of our key performance indicators within mere quarters of doubling our asset size and successfully completing a system conversion. Based on our momentum, we are well ahead of the earn back period from the acquisition and are poised to deliver another great year as we hold firm to our model of balancing growth and earnings.”

Mr. Simard went on to say, “Management continues to evolve as we attract seasoned, proven executives and senior managers to join our team. Earlier this week we announced a new EVP, Director of Retail Delivery, Marion Colombo, who will be joining the bank to lead our retail franchise.” Mr. Simard commented, “Simply put, retail branch activity is at the very heart of our business. Finding a long-term proven leader like Marion, who comes with over twenty-nine years of retail experience in many diverse markets, is a significant indication of our commitment to being a true community bank with a growing retail franchise.”

Excluding the impact of TCJA and other one-time adjustments, our fourth quarter performance peaked for the year with a return on assets of 1.02% and a return on equity of 9.97%. The tangible equity to tangible asset ratio (a non-GAAP measure) decreased to 7.12% at the end of the fourth quarter primarily due to the impact of the TCJA adjustment. We expect this reduction will be earned back from related tax savings within the first half of 2018 with opportunities for further expansion thereafter.

Mr. Simard further stated, “Our Commercial teams continue to penetrate their markets as is evidenced by another strong quarter of 21% loan growth led by commercial and industrial loans at 34%. Asset quality metrics remain strong while charge-offs are at historical lows. We also expanded our Treasury Management Services platform during the fourth quarter, which was rolled out in January 2018. Given the talent we have hired to manage this business and the enhanced capabilities, we expect this to be a significant contributor in 2018 in terms of both fee revenue and deposit gathering.”

Mr. Simard concluded, “As we enter 2018, we are positioned to continue with the momentum seen during the second half of 2017 while executing on our strategy to provide our customers with the best customer service. We remain committed to our communities and will seek opportunities to expand our branch model as a true community bank in 2018.”

RESULTS OF OPERATIONS
GAAP earnings decreased to $6.6 million in the fourth quarter from $8.6 million in the third quarter. The decrease was primarily due to the TCJA charge offset by other one-time adjustments including the sale of our insurance subsidiary. Core earnings (a non-GAAP measure) increased to $9.0 million in the fourth quarter compared to $8.8 million in the prior quarter. Yields on loans decreased 1 basis point to 4.12% in the fourth quarter due to lower purchased loan accretion as compared to the third quarter. Excluding the impact of purchase loan accretion, loan yield expanded 2 basis points to 3.92% in the fourth quarter from 3.90% in the third quarter. The loan yield benefited from a $29 million average balance increase in fixed rate commercial real estate products. Security yields decreased in the fourth quarter as a result of accelerated premium amortization. The cost of interest-bearing deposits increased as a result of both interest rate hikes and an extension in maturities as we manage our overall interest rate risk. The Company’s overall cost of funds remained relatively flat for the quarter as the 13% growth in deposits offset more expensive alternative borrowing costs.

Total non-interest income was $6.5 million in the fourth quarter compared to $7.0 million in the prior quarter. The decrease is primarily due to seasonality effects on customer service fees and the curtailment of revenue with the sale of our insurance subsidiary in October 2017. As previously announced, the sale of the insurance subsidiary was part of a strategic decision to redeploy capital and management resources to core businesses. The sale had no significant impact to core net income as the contribution margin was neutral. Trust and management fee income during the fourth quarter remained flat with the third quarter. Overall, the unfavorable variability of transactional fees during 2017 was offset by the growth of assets under management to $445 million at the end of 2017 from $425 million at the end of 2016. Non-interest expense excluding acquisition, conversion and other one-time adjustments decreased $362 thousand in the fourth quarter compared to the linked quarter. The efficiency ratio was 53% for the quarter compared to 54% in the third quarter, which reflects further disciplined cost control.

FINANCIAL CONDITION
Total assets grew $89 million during the fourth quarter to $3.6 billion driven by total loan growth of $57 million, or 9% on an annualized basis. The majority of the loan growth was led by the commercial portfolio, which had an annualized growth rate of 21%. Total loan growth was funded by growth in deposits, which increased $77 million, or 13% on an annualized basis. Non-accruing loans increased by $7.5 million during the quarter primarily due to the deterioration of one specific commercial relationship, which is expected to be settled at the full contractual obligation. Asset quality metrics remain strong with charge-offs at historical lows and an allowance for credit losses to total loans ratio of 0.50%. The Company's book value per share increased to $22.96 from $22.90 in the third quarter while tangible book value (a non-GAAP measure) increased to $15.94 from $15.84.

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 125 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.bhbt.com.

FORWARD LOOKING STATEMENTS
This document contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. There are several factors that could cause actual results to differ significantly from expectations described in the forward-looking statements. For a discussion of such factors, please see the Company’s most recent reports on Forms 10-K and 10-Q filed with the Securities and Exchange Commission and available on the SEC’s website at www.sec.gov. The Company does not undertake any obligation to update forward-looking statements.

NON-GAAP FINANCIAL MEASURES
This document contains certain non-GAAP financial measures in addition to results presented in accordance with Generally Accepted Accounting Principles (“GAAP”). These non-GAAP measures provide supplemental perspectives on operating results, performance trends, and financial condition. They 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 included beginning on page J in the accompanying financial tables. In all cases, it should be understood that non-GAAP per share measures do not depict amounts that accrue directly to the benefit of shareholders.

The Company utilizes the non-GAAP measure of core earnings in evaluating operating trends, including components for core revenue and expense. These measures exclude items which the Company does not view as related to its normalized operations. These items include securities gains/losses, acquisition costs, restructuring costs, and systems conversion costs. Non-core adjustments are presented net of an adjustment for income tax expense. This adjustment is determined as the difference between the GAAP tax rate and the effective tax rate applicable to core income. The efficiency ratio is adjusted for non-core revenue and expense items and for tax preference items. The Company also calculates measures related to tangible equity, which adjust equity (and assets where applicable) to exclude intangible assets due to the importance of these measures to the investment community. Charges related to the acquisition of Lake Sunapee Bank Group consist primarily of severance and retention cost, systems conversion and integration costs, and professional fees. The Company’s disclosure of organic growth of loans in 2017 is also adjusted for the Lake Sunapee Bank Group acquisition.

(1) Adjusted measurements are non-GAAP financial measures that are adjusted to exclude net non-operating charges primarily related to acquisitions, and gain on sale of securities. 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 annualized and are based on average balance sheet amounts, where applicable.
(4) Fully taxable equivalent considers the impact of tax advantaged investment securities and loans.
(5) Generally accepted accounting principles require that loans acquired in a business combination be recorded at fair value, whereas loans from business activities are recorded at cost. The fair value of loans acquired in a business combination includes expected loan losses, and there is no loan loss allowance recorded for these loans at the time of acquisition. Accordingly, the ratio of the loan loss allowance to total loans is reduced as a result of the existence of such loans, and this measure is not directly comparable to prior periods. Similarly, net loan charge-offs are normally reduced for loans acquired in a business combination since these loans are recorded net of expected loan losses. Therefore, the ratio of net loan charge-offs to average loans is reduced as a result of the existence of such loans, and this measure is not directly comparable to prior periods. Other institutions may have loans acquired in a business combination, and therefore there may be no direct comparability of these ratios between and among other institutions.

(1) The Company completed the acquisition of Lake Sunapee Bank Group on January 13, 2017.
(2) Adjusted for 3-for-2 stock-split completed in March 2017.

(1) Non-GAAP financial measure.
(2) Acquired Lake Sunapee Bank loans are as of January 13, 2017.

(1) Non-GAAP financial measure.
(2) Acquired Lake Sunapee Bank deposits are as of January 13, 2017.

(1) Adjusted for 3-for-2 stock-split completed in March 2017.

(1) Adjusted for 3-for-2 stock split completed in March 2017.

(1) Total loans include non-accruing loans.
(2) Average balances for securities available-for-sale are based on amortized cost.

(1) Total tangible shareholders' equity is computed by taking total shareholders' equity less the intangible assets at period-end. Total tangible assets is computed by taking total assets less the intangible assets at period-end.
(2) Ratios are annualized and based on average balance sheet amounts, where applicable. Quarterly data may not sum to year-to-date data due to rounding.
(3) Core return on tangible equity is computed by dividing the total core income adjusted for the tax-effected amortization of intangible assets, assuming a marginal rate of 37.57% in 2017 and 35.0% in 2016, by tangible equity.
(4) Non-GAAP financial measure.
(5) Efficiency ratio is computed by dividing total core tangible non-interest expense by the sum of total net interest income on a fully taxable equivalent basis and total core non-interest income. The Company uses this non-GAAP measure to provide important information about its operating efficiency.

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Bar Harbor Bankshares
Josephine Iannelli, 207-288-3314
EVP, Chief Financial Officer & Treasurer
or
Marsha Sawyer, 207-288-3314
EVP, Investor Relations