Executive Summary / Key Takeaways

• Bar Harbor Bankshares, a community-focused regional bank in Northern New England, reported stable GAAP net income of $10.2 million ($0.66 diluted EPS) for Q1 2025, with core non-GAAP net income slightly higher at $10.5 million ($0.68 diluted EPS), demonstrating resilience in a challenging rate environment.
• Net interest income saw a modest increase, driven by yield expansion on earning assets, particularly commercial adjustable-rate loans, while managing rising deposit costs.
• Non-interest income growth, notably from wealth management (AUM up 6% year-over-year) and customer derivatives, helped offset increased operating expenses, including those related to technology enhancements and the pending merger.
• The company maintains strong asset quality metrics, with low net charge-offs and a stable allowance for credit losses, alongside robust liquidity and capital levels exceeding regulatory "well capitalized" thresholds.
• A definitive merger agreement to acquire Guaranty Bancorp, Inc. (WGSR) represents a key strategic initiative aimed at expanding the company's New Hampshire footprint, though successful integration and realization of anticipated benefits are critical factors to monitor.

A Northern New England Anchor Pursues Growth

Bar Harbor Bankshares, rooted in its 1887 founding in Bar Harbor, Maine, has long served as a cornerstone community bank across Northern New England. Operating primarily through its subsidiary, Bar Harbor Bank & Trust, the company delivers a comprehensive suite of banking and nonbanking services to consumers and businesses, spanning lending, deposits, wealth management, and trust services. This established presence and deep local relationships form the bedrock of its business model, generating revenue predominantly through net interest income from its loan and investment portfolios and non-interest income streams like fees from financial services.

In a dynamic financial landscape characterized by fluctuating interest rates and evolving customer expectations, Bar Harbor Bankshares is strategically positioning itself for future growth. While the company operates within a single reportable segment focused on community banking, its strategic initiatives, particularly recent merger activity, signal a clear intent to expand its geographic reach and enhance its competitive standing. The company's approach emphasizes localized service delivery, a key differentiator in its regional markets.

Investment in technology is a necessary component of modern banking, and Bar Harbor Bankshares is directing resources towards "technology infrastructure enhancements and other projects," as reflected in increased professional services expenses. While specific details on proprietary core technology or quantifiable performance metrics related to these investments are not extensively disclosed, the strategic intent is clearly to improve operational capabilities. This is particularly relevant when considering the competitive environment, where some peers are noted for having a technological edge, potentially offering faster digital processing or more advanced analytics. Bar Harbor Bankshares' ability to effectively leverage technology will be crucial in balancing its community-focused model with the efficiency demands of the digital age.

The competitive arena in Northern New England includes a mix of regional banks like Camden National Corporation (CAC), NBT Bancorp Inc. (NBTB), and Berkshire Hills Bancorp Inc. (BHLB), as well as larger national players such as KeyCorp (KEY) and various credit unions and fintech firms. Bar Harbor Bankshares holds an estimated 10-15% aggregate market share in the region, demonstrating solid local penetration. Its strengths lie in its strong community brand, customer loyalty, and specialized services, particularly in tax-exempt entity lending and municipal services, where it holds a notable niche market share lead. However, compared to larger or more tech-focused competitors, Bar Harbor Bankshares faces challenges related to scale, which can lead to higher operating costs per unit, and a relative lag in the speed of technological innovation and digital processing. This dynamic necessitates a strategic focus on leveraging its local advantages while pursuing efficiencies and targeted growth.

Performance Reflecting Strategic Adaptation

Bar Harbor Bankshares' financial performance in the first quarter of 2025 provides insight into its ability to navigate the current economic climate and execute its strategy. GAAP net income remained stable at $10.2 million, or $0.66 per diluted share, compared to $10.1 million, or $0.66 per diluted share, in the first quarter of 2024. Core non-GAAP net income showed a slight uptick to $10.5 million, or $0.68 per diluted share, compared to $10.1 million in the prior year period.

Net interest income increased to $29.0 million for the three months ended March 31, 2025, up from $28.1 million in the same period of 2024. This improvement was primarily driven by yield expansion on earning assets, with the overall yield increasing to 5.16% from 5.10%. The repricing of commercial adjustable-rate loans and a $146 million year-over-year increase in commercial loan balances were significant contributors. Loan yields specifically rose to 5.42% from 5.31%. However, this was partially offset by a rise in the cost of interest-bearing deposits, which increased to 2.31% from 2.26%, reflecting the competitive pricing environment. Total interest expense grew by 4.3% year-over-year, influenced by both higher deposit costs and a $169.7 million increase in total deposits, which saw growth in both non-maturity and time deposit categories.

Non-interest income demonstrated solid growth, increasing by $532 thousand to $8.9 million in Q1 2025 compared to $8.4 million in Q1 2024. This was primarily fueled by a 6.7% increase in wealth management income, reaching $3.9 million, driven by higher security valuations contributing to a 6% ($300 million) growth in non-brokerage assets under management to $2.8 billion. Customer derivative income also saw a notable increase of $212 thousand, reflecting higher volume and dollars in customer swaps influenced by interest rates. These gains were partially tempered by a decrease in customer service fees, including lower non-sufficient funds and interchange income.

Operating expenses rose by $1.2 million to $24.7 million in Q1 2025 from $23.5 million in Q1 2024. Key drivers included a 4% increase in salaries and employee benefits due to cost of living adjustments, losses on the sale of outdated premises and equipment ($90 thousand), increased acquisition and conversion expenses ($219 thousand) related to the pending merger, higher outside services costs ($144 thousand) from recruiting fees, and increased professional services ($192 thousand) for technology infrastructure consulting. Despite these increases, the efficiency ratio improved slightly to 62.00% from 62.71%, indicating effective cost management relative to revenue growth.

Balance Sheet Strength and Strategic Liquidity

As of March 31, 2025, Bar Harbor Bankshares maintained a stable balance sheet with total assets of $4.06 billion, compared to $4.08 billion at December 31, 2024. Total loans remained relatively flat quarter-over-quarter at $3.1 billion, experiencing a slight annualized decrease of 3% driven by seasonality and the interest rate environment, but were up year-over-year. The loan portfolio saw minor shifts, with commercial real estate increasing and commercial and industrial and residential real estate decreasing slightly from the prior quarter.

Asset quality remains a notable strength. The allowance for credit losses on loans decreased marginally to $28.6 million from $28.7 million, with the coverage ratio remaining stable at 0.92% of total loans (compared to 0.91% in Q4 2024). Net charge-offs were minimal at $73 thousand on an annualized basis for Q1 2025. Non-accrual loans saw a slight increase to 0.26% of total loans from 0.23% in the prior first quarter, but overall credit quality metrics continue to be strong, supported by relatively stable collateral values. The allowance for credit losses on available-for-sale securities increased to $1.2 million from $568 thousand, primarily related to one corporate debt security with unrealized losses.

Total deposits were flat quarter-over-quarter at $3.30 billion. The interest rate environment continued to influence deposit mix, with a shift from non-interest bearing demand deposits (down $28.2 million) to interest-bearing demand (up $19.8 million) and time deposits (up 16% annualized to $863 million). Borrowings decreased by $50 million to $200 million, driven by paydowns.

Liquidity is actively managed and remains robust. As of March 31, 2025, available same-day liquidity totaled approximately $1.0 billion, including cash ($88.1 million), unused borrowing capacity at the FHLB ($359.1 million), unused borrowing capacity at the Federal Reserve Discount Window ($103.8 million), and unused lines of credit ($41.0 million). This position comfortably exceeds the bank's policy target of at least 8.00% of total assets and is considered sufficient to meet current and future funding requirements, although management acknowledges potential impacts from changes in economic conditions or access to wholesale markets.

Capital levels for both the Company and the Bank are strong and exceed all regulatory requirements, classifying them as "well capitalized." The company's book value per share increased to $30.51, and tangible book value per share (non-GAAP) rose to $22.47 as of March 31, 2025. Bar Harbor Bankshares expects to continue its practice of paying quarterly cash dividends, having declared $0.30 per share for Q1 2025, up from $0.28 in Q1 2024, balancing business needs with shareholder returns.

The Strategic Imperative: Merger and Expansion

The most significant strategic initiative currently underway for Bar Harbor Bankshares is the definitive merger agreement to acquire Guaranty Bancorp, Inc. , parent company of Woodsville Guaranty Savings Bank. Signed on March 11, 2025, this all-stock transaction is valued at approximately $41.6 million, or $56.94 per share, with each outstanding share of Guaranty common stock to be exchanged for 1.85 shares of Bar Harbor common stock. The stated objective is to expand Bar Harbor Bankshares' presence in New Hampshire, leveraging the combined entity's footprint and capabilities.

This merger is expected to yield anticipated benefits and cost savings, contributing to future financial performance. However, successful integration is paramount. Combining the businesses involves minimizing disruption to existing customer relationships and business functions, and harmonizing standards, controls, procedures, and policies. Failure to effectively integrate could result in increased costs, lower-than-expected revenues, and a diversion of management's focus, potentially hindering the realization of the merger's strategic value.

Furthermore, the completion of the merger is contingent upon receiving necessary regulatory approvals from bank regulatory agencies and other governmental authorities. The approval process considers various factors, including the regulatory standing of both parties. Delays or the imposition of burdensome conditions by regulators could impact the timing or feasibility of the merger, or reduce its anticipated benefits. The merger agreement also includes specific closing conditions, including the absence of certain legal proceedings, and a termination right for Guaranty under certain stock price performance scenarios for BHB. These factors introduce uncertainty regarding the timing and ultimate completion of the transaction.

Competitive Dynamics and Future Outlook

Bar Harbor Bankshares operates in a competitive landscape where its community-focused model and local market expertise are key strengths. Its established brand and customer loyalty provide a degree of deposit stability and recurring revenue that can be advantageous compared to competitors with less localized approaches. The focus on niche markets like municipal lending also offers a valuable differentiator.

However, the competitive analysis highlights areas where Bar Harbor Bankshares faces challenges. Its smaller scale compared to larger regional or national banks can result in higher operating costs per unit, potentially impacting profitability margins relative to more efficient peers. While the company is investing in technology, it appears to lag behind some competitors in terms of digital processing speed and overall technological innovation, which could affect its ability to attract and retain tech-savvy customers and compete effectively in digital channels.

The pending merger with Guaranty Bancorp is a strategic move aimed at addressing some of these competitive dynamics by increasing scale and expanding market presence, particularly in New Hampshire. A successful integration could lead to improved efficiencies and a stronger competitive position. However, the risks associated with integration and regulatory approval are significant and warrant close monitoring.

Looking ahead, Bar Harbor Bankshares' performance will likely be influenced by the trajectory of interest rates, the success of the Guaranty Bancorp merger integration, and its ability to manage operating expenses while investing in necessary technology. The company's asset sensitivity suggests that rising interest rates could potentially benefit net interest income, while falling rates could have an adverse effect, as indicated by its interest rate sensitivity modeling. Maintaining strong asset quality in potentially changing economic conditions will also be critical. While specific quantitative guidance from management is not available, analyst projections suggest modest earnings growth for 2025.

Conclusion

Bar Harbor Bankshares presents an investment profile centered around a stable, community-oriented banking franchise in Northern New England, currently embarking on a strategic expansion through a significant merger. The company's recent performance demonstrates resilience in net interest income generation and growth in key non-interest income areas like wealth management, supported by strong asset quality, robust liquidity, and solid capital levels. The commitment to returning value to shareholders through dividends is also evident.

The core investment thesis hinges on the successful integration of the Guaranty Bancorp merger, which holds the potential to enhance scale, improve efficiency, and strengthen the company's competitive footprint in New Hampshire. However, investors must weigh this growth opportunity against the inherent risks of merger integration, potential regulatory hurdles, and the ongoing challenge of managing costs and investing in technology in a competitive environment. Bar Harbor Bankshares' ability to leverage its deep community roots and niche market strengths while effectively executing its integration strategy and adapting to technological demands will be key determinants of its long-term value creation. Investors should monitor the progress of the merger integration, trends in asset quality, and the company's ability to maintain expense discipline as it pursues growth.