UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarter ended September 30, 1997March 31, 1998 Commission File
No. 841105-D
BAR HARBOR BANKSHARES
Maine 01-0393663
(State or other jurisdiction of (I.R.S.
Employer
incorporation or organization
Identification No.)
P. O. Box 400
82 Main Street, Bar Harbor, ME 04609-
0400
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (207)
288-
3314288-3314
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES: XX NO:
Indicate the number fof shares outstanding of each of the
issuer's classes of common stock as of September 30, 1997:March 31, 1998:
Common Stock: 1,820,5831,821,807
TABLE OF CONTENTS
Financial Information Page
Item 1. Financial Statements
Consolidated Balance Sheets 3-43
December 31, 19961997 and September 30, 1997March 31, 1998
Consolidated Statements of Earnings 54
Three months ended March 31, 1997 and nine months ended September 30,
1996
and 19971998
Consolidated Statements of Changes in 5
Stockholders' 6
Equity
NineThree months ended September 30, 1996March 31, 1997 and 19971998
Consolidated Statement of Cash Flows 7-8
Nine6-7
Three months ended September 30, 1996March 31, 1997 and 19971998
Rate Volume Analysis 9
Nine8
Three months ended September 30, 1996March 31, 1997 and 1997
Rate Sensitivity Report 10
As of September 30, 19971998
Notes to Financial Statements 11-149-11
Item II. Management's Discussion and Analysis of 15-2012-
Financial 16
Condition and Results of
Operations
Signature Page 2117
BAR HARBOR BANKSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30,MARCH 31, 1997 AND DECEMBER 31, 19961998
(in thousands, except number of shares and per share data)
(Unaudited)
SEPTEMBER 30 DECEMBERMarch March 31,
31, 1998 1997 31, 1996
ASSETS
Cash and Due from Banks $11,848,684 $11,298,408$8,787 $7,537
Federal Funds Sold 0 2,000,000
Investment Securities 19,594,802 19,384,4330
Securities Available for Sale at market17,343 14,608
Securities Held to Maturity (Market
Value 84,259,797 82,716,836
$84,937,13990,093 85,351
$90,830 in 19971998 and $85,503,679$86,248 in
1996)1997)
Other Securities 5,992,156 5,623,6396,050 6,012
Loans Held for Sale 154,600 336,540620 365
Loans, net of allowance for
possible loan
losses 215,646,132 207,667,053
of $4,470,196$4,749 in 1998 and 211,365 212,396
$4,743
in 1997 and
$4,249,128 in 1996
Premises and Equipment 7,755,035 7,498,0467,581 7,658
Other Assets 8,493,200 8,617,7909,177 8,799
Total Assets $353,744,406 $345,142,74
5$351,016 $342,726
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand Deposits $42,184,730 $35,918,779$34,793 $36,838
NOW Accounts 41,893,275 40,529,50939,996 39,536
Savings Deposits 54,306,807 53,085,06251,415 53,378
Time $100,000 and over 14,716,135 14,611,616
Other Time 109,696,865 107,530,192Deposits 118,889 122,152
Total Deposits 262,797,812 251,675,158245,093 251,903
Securities sold under Repurchase
6,150,441 8,246,079
Agreements 4,337 4,474
Advances from Federal Home Loan 39,351,495 43,908,26352,967 39,160
Bank
Other Liabilities 4,225,978 3,426,3205,049 4,727
Total Liabilities 312,525,726 307,255,820307,445 300,264
Commitments and Contingent Liabilities
Capital Stock, par value $2
Authorized 10,000,000 shares
Issued 1,821,807 in 1998 and
1,820,583 in 1997 and
1,818,237 in 1996 3,641,166 3,636,4743,644 3,641
Surplus 7,574,170 7,489,1277,645 7,574
Retained Earnings 31,368,973 28,204,82933,635 32,562
Net unrealized appreciation on
securities (13) 24
available (25,629) (103,505) for sale, net of tax benefit
Less: Cost of 100,000 shares of
(1,340,000) (1,340,000)
Treasury Stock (1,340) (1,340)
TOTAL STOCKHOLDERS' EQUITY 41,218,680 37,886,92543,571 42,461
TOTAL LIIABILITIES AND STOCKHOLDERS' $353,744,406 $345,142,74$351,016 $342,726
EQUITY 5
The accompanying notes are an integral part of these
consolidated financial statements.
BAR HARBOR BANKSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENT OF EARNINGS
(in thousands, except number of shares and per share data)
(UNAUDITED)
THREE THREE
NINE NINE
MONTHS MONTHS MONTHS MONTHS
ENDING ENDING
ENDING ENDING
09/30/3/31/98 3/31/97
09/30/96 09/30/97 09/30/96
Interest & Fees on $5,506,167 $5,150,807 $15,708,9 $1,147,611
Loans 18$5,059 $5,026
Interest and Dividends on
Investment 1,577,767 1,581,668 4,788,011 4,498,022
Securities:
Taxable Interest Income 1,629 1,596
Non-taxable 159,852 191,830 506,421 581,432 Interest Income 124 180
Dividends 104,711 88,910 299,788 260,781100 96
Federal Funds 23,381 5,933 37,507 22,916
Sold 15 9
Total Interest 7,371,878 7,019,148 21,340,64 20,510,762
Income 56,928 6,907
Interest on 2,254,863 2,161,816 6,536,644 6,718,415
Deposits 2,142 2,139
Interest in Short 697,316 624,714 2,267,558 1,754,156
Termon Borrowings 690 726
Total Interest 2,952,179 2,786,530 8,804,202 8,472,571
Expense 2,832 2,865
Net Interest Income 4,419,699 4,232,618 12,536,44 12,038,191
34,096 4,042
Provision for Loan 180,000 120,000 540,000 600,000
Losses 84 180
Net Interest Income after
4,239,699 4,112,618 11,996,44 11,438,191
Provision for 3
Loan Losses 4,012 3,862
Other Income 1,44,644 1,684,273 3,581,247 3,741,7031,126 1,027
Investment 140,751 0 140,751 16,934 Securities Gains 57 (56)
(Losses)
Other Expenses::
Salaries & 1,534,273 1,467,981 4,423,730 4,265,530
Employee Benefits 1,491 1,460
Other 1,788,000 1,512,297 4,341,907 3,759,334
Investment 22,250 0 78,104 0
Securities Losses1,307 1,055
Income Before 2,478,571 2,816,613 6,874,700 7,171,964
Income Taxes 2,396 2,318
Income Tax Expense 789,261 726,837 2,196,445 2,050,829772 744
Net Income 1,689,310 2,089,776 4,678,255 5,121,135
Earnings per Share:
Based on1,624 1,575
PER COMMON SHAE DATA, BASED ON
1,721,807 shares for 1998,
AND 1,720,583 shares for 1997 $0.94 $0.92
1,718,237 for 1996
and 1,720,583 $0.98 $1.22 $2.72 $2.98
shares for
1997
Dividends Per Share $0.30 $0.25 $0.88 $0.65$0.32 $0.28
The accompanying notes are an integral part of these
consolidated
financial statements
BAR HARBOR BANKSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
QUARTERS ENDED SEPTEMBER 30, 1996MARCH 31, 1997 AND 19971998
(in thousands, except number of shares and per share data)
(UNAUDITED)
ACCUMULATE
D OTHER
COMPRE- NET
UNREALIZ
ED NET
CAPITAL RETAINEDCAPITA RETAINE HENSIVE TREASURY LOSS ON STOCKHOLDERSTOCKHOLDERS
L SUIRPL D INCOME STOCK SUIRPLU EARNINGS'
STOCK US EARNING EQUITY
S'
S SECURITI EQUITY
ES
Balance, 12/31/95 $3,627, $7,368, $23,523,96 $3,636 $7,489 $28,205 ($1,340, $63,293 $33,242,824
210 695 626 000)103) ($1,340) $37,887
Net Earnings 5,121,13 5,121,135
51,575 $1,575
Other
comprehensive
income, net of tax
Unrealized
gains/losses on ($161)
securities
Other
Comprehensive (161) ($161)
income
Comprehensive $1,414
Income
Cash Dividends (1,116,8 (1,116,854)
Declared 54)
Net Unrealized
Depreciation on
Securities
Available for Sale (219,448 (219,448)
Net of Tax )
benefit of
$80,712dividends
declared ($0.28
per share) ($482) ($482)
Sale of Stock
9,264 120,432 0 0 0 129,696
(4,632(2,346 shares) 5 85 $90
Balance, 9/30/96 3,636,4 7,489,1 27,527,9 (1,340,0 (156,155 37,157,353
74 27 07 00) )3/31/97 $3,641 $7,574 $29,298 ($264) ($1,340) $38,908
Balance, 12/31/96 3,636,4 7,489,1 28,204,8 (1,340,0 (103,505 37,886,926
74 27 29 00) )$ 3,641 $ 7,574 $32,652 24 ($1,340) $42,461
Net Earnings 4,678,25
51,624 $1,624
Other
comprehensive
income, net of tax
Unrealized
gains/losses on ($37)
securities
Other
comprehensive (37) ($37)
income
Comprehensive $1,587
Income
Cash Dividends (1,514,1 4,678,255
Declared 12)
Net Unrealized
Depreciation on
Securities
Available for 77,876 77,876
Sale,
Net of Tax
benefit of
$47,334dividends
declared ($0.32
per share) (551) ($551)
Sale of Stock
4,692 85,043 0 0 0 89,735
(2,346(1,224 shares) 2 71 $73
Balance, 9/30/97 $3,641, $7,574, $31,368,3/31/98 $3,644 $7,645 $33,635 ($1,340,13) ($25,629 $41,218,680
166 170 972 000) )1,340) $43,571
The accompanying notes are an integral part of these consolidated financial
statements.
BAR HARBOR BANKSHARES AND SUBSIDIARY
COLSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)(in thousands)
SEPTEMBER SEPTEMBER
30,MARCH MARCH
31, 31,
1998 1997 30, 1996
Cash Flows from Operating Activities:
Net Income $4,678,255 $5,121,135$1,624 $1,575
Adjustments to reconcile net earnings
to net
cash provided by operating activities: 693,083 566,161225 222
Depreciation
Provision for Loss Losses 540,000 600,00084 180
Provision for Losses on Other Real
Estate 0 (4,664)
Estate0
Owned
New Loans Originated for Sale (3,369,340) (7,108,320)(4,423) (925)
Proceeds from Sale of Mortgages
Held 3,651,076 7,028,6034,210 861
for Sale
Gain on Sale of Mortgages
Originated (13,537) (15,108)(31) (30)
for Sale
Net Securities Gains (62,648) (16,934)
Net Amortization of Bond Premium 89,855 224,20749 23
(Gain) Loss on sale of premises and
1,953equipment 0 equipment0
Net Change in Other Assets 40,076 (287,745)(375) (335)
Net Change in Other Liabilities 799,658 1,039,202322 530
Net Cash Provided by Operating 1,685 2,101
Activities 7,048,431 7,146,537
Cash Flows from Investing Activities:
Net decrease (increase) in Federal
Funds Sold 0 0
Purchases of Securities Held to
Maturity (19,843,240) (13,636,697
)(17,121) (5,054)
Proceeds from Maturity and Principal
Paydowns 4,830 4,847
of Securities 12,460,509 6,591,798
Heldheld to Maturitymaturity
Proceeds from Call of Securities Held 7,500 175
to 5,750,000 5,420,608 Maturity
Purchases of Securities Available for (4,000) (500)
Sale (1,250,000) (5,503,125)
Proceeds from Maturity and Principal
Paydowns 209 39
of Securities 118,741 0
Availableavailable for Salesale
Proceeds from Salesale and calls of
Securities Available 1,060,021 500,000securities available for Sale
Purchase of Other Securities (453,700)
Proceeds from sales of Other Securities 147,831 37,930sale 1,000 60
Net decrease (increase) in other
securities 0 0
Net Loans Made to Customers (8,611,570) (10,009,102
)915 (2,860)
Capital Expenditures (938,619) (1,894,340)(148) (346)
Proceeds from sale of other real
estate owned 0 0
Proceeds from Sale of Fixed Assets 16,0000 0
Net Cash Used in Investing Activities (11,544,027) (18,492,928
)(6,815) (3,639)
Cash Flows from Financing Activities:
Net Change in Savings, NOW and Demand 8,851,462 11,187,990(3,547) (7,683)
Deposits
Net Change in Time Deposits 2,271,192 (5,676,985)(3,263) 383
Net Change in securities sold under
Repurchase Agreements (2,095,638) 1,071,183(137) (2,852)
Purchase of Advances from FHLB 24,000,000 33,000,000
Repayment of Advances18,500 3,000
Proceeds from FHLB (25,000,000) (13,000,000
)(9,500) (5,000)
Net Change in Other Short Term Other 4,805 10,642
Borrowed (3,556,768) (16,110,515
Funds )
Proceeds from Sale of Capital Stock 89,735 129,69673 90
Payment of Dividends (1,514,111) (1,116,854)(551) (482)
Net Cash Provided by Financing 6,380 (1,903)
Activities 3,045,872 9,484,515
Net Increase In(Decrease) in Cash and Cash 1,250 (3,441)
Equivalents (1,449,724) (1,861,876)
Cash and Cash Equivalents at Beginning of 13,298,408 12,559,7977,537 13,298
Year
Cash and Cash Equivalents at End of $8,787 $9,857
Quarter $11,848,684 10,697,921
Supplemental Disclosures of Cash Flow
Information:
Cash Paid during the Year for:
$8,797,662 8,533,008
Interest $2,877 $2,841
Income Taxes, Net of Refunds $1,678,000 1,450,000$50 $279
Non-Cash Transactions:;
Transfers from Loans to Real Estate
Owned $0 193,000$0
(Other Assets)
Transfer of Securities from Held to
$0 $0
Maturity to Available for Sale Available for Sale$0 $0
The accompanying notes are an integral part of these
consolidated financial statements
RATE VOLUME ANALYSIS
The following table represents a summary of the changes in
interest earned and interest paid as a result of changes in
rates and changes in volumes.
For each category of earning assets and interest bearing
liabilities, information is provided with respect to changes
attributable to change in rate (change in rate multiplied by
old volume) and change in volume (change in volume multiplied
by old rate). The change in interest due to both volume and
rate has been allocated to volume and rate changes in
proportion to the relationships of the absolute collar
amounts of the change in each.
YEAR-TO-DATE FIGURES AS OF SEPTEMBER 30,MARCH 31, 1998
COMPARED TO MARCH 31, 1997
(in thousands, except number of shares
per share data)
INCREASES (DECREASES) DUE TO:
VOLUME RATE NET
Loans $104 ($71) $33
Taxable Securities 93 (56) 37
Tax Exempt Securities (70) 15 (55)
Federal Funds Sold and Money
Market Funds 5 1 6
TOTAL EARNING ASSETS $132 ($111 $21
)
Deposits 15 (12) 3
Borrowings (58) 22 (36)
Total Interest Bearing ($43) $10 ($33)
Liabilities
NET CHANGE IN INTEREST $175 ($121 $54
)
YEAR-TO-DATE FIGURES AS OF MARCH 31, 1997
COMPARED TO SEPTEMBER 30,MARCH 31, 1996
INCREASES (DECREASES) DUE TO:
VOLUME RATE NET
Loans $846,105$281 ($284,798 $561,307257 $24
)
Taxable Securities 154,135 174,861 328,99675 64 138
Tax Exempt Securities (85,893) 10,882 (75,011)(13) (3) (16)
Federal Funds Sold and Money
13,501 1,090 14,591
Market Funds 4 0 4
TOTAL EARNING ASSETS 927,848 (97,965) 829,883$347 $197 $150
Deposits (4,746) (177,025) (181,771)(66) (103) (168)
Borrowings 416,398 97,004 513,402212 4 216
Total Interest Bearing 411,651 (80,020) 331,631$147 ($99) $48
Liabilities
NET CHANGE IN INTEREST $516,197$200 ($17,945) $498,25298) $102
YEAR-TO-DATE FIGURES AS OF SEPTEMBER 30, 1996
COMPARED TO SEPTEMBER 30, 1995
INCREASES (DECREASES) DUE TO:
VOLUME RATE NET
Loans $853,768 ($36,779) $816,989
Taxable Securities 545,049 (129,372) 415,677
Tax Exempt Securities (57,057) (8,572) (65,629)
Federal Funds Sold and Money (58,848) (9,377) (68,225)
Market Funds
TOTAL EARNING ASSETS $1,282,912 ($184,100 $1,098,812
)
Deposits 357,112 283,876 640,988
Borrowings 116,955 (82,522) 34,433
Total Interest Bearing 474,067 201,354 675,421
Liabilities
NET CHANGE IN INTEREST $808,845 ($385,454 $423,391
)
INTEREST RATE SENSITIVITY ANALYSIS
AS OF SEPTEMBER 30, 1997
(UNAUDITED)
Amounts in Thousands
The following table sets forth the amounts of interest-earning
assets and interest-bearing liabilities outstanding at September
30, 1997, which are anticipated by the Bank, based upon certain
assumptions, to reprice or mature in each of the future time
periods shown.
TOTAL TO ONE TO FIVE GREATER THAN
ONE YEAR YEARS FIVE YEARS TOTAL
Loans - Fixed Rate $22,348 $32,197 $16,855 $71,400
Loans - Variable Rate 103,715 38,973 2,058 144,746
Investments 47,394 32,465 30,004 109,863
Federal Funds Sold 0 0 0 0
Interest Rate/Swap 5,000 10,000 0 15,000
Floor
Total Earning Assets $178,457 $113,635 $48,917 $341,009
Deposits $147,446 $10,975 $104,376 $262,797
Repurchase Agreements 6,150 0 281 6,431
Borrowings 29,324 10,028 0 39,352
Interest Rate 5,000 10,000 0 15,000
Swap/Floor
Total Sources $187,920 $31,003 $104,657 $323,580
Net Gap Position ($9,463) $82,632 ($55,740) $17,429
Cumulative Gap (9,462) $73,169 $17,429 $17,429
Rate Sensitive
Asset/Rate Sensitive 94.96% 366.53% 46.74% 105.93%
Liabilities
Except as stated below, the amounts of assets and liabilities
shown which reprice or mature during a particular period were
determined in accordance with the earlier of term to repricing
or the contractual terms of the asset or liability. The Bank has
assumed that 4 1/2% of its savings is more rate sensitive and will
react to rate changes, and has therefore categorized it in the 3-
12 month time horizon. The remainder is stable and is listed in
the greater than five year category. NOW accounts, other than
seasonal fluctuations approximating $2,500,000, are stable and
are listed in the greater than five year category. Money market
accounts are assumed to reprice in three months or less.
Certificates of deposit are assumed to reprice at the date of
contractual maturity. Fixed rate mortgages, totaling
$42,000,000 are amortized using the weighted average maturity of
147 months, with an additional prepayment rate of 9%, which
approximates the Bank's prior experience.
NOTES TO FINANCIAL STATEMENTS DATED SEPTEMBER 30, 1997MARCH 31, 1998
(Tables presented in thousands)
1. Summary of interim financial statement adjustments.
The accompanying unaudited statements reflect all
adjustments (all of which are normal and recurring in nature)
which are, in the opinion of management, necessary to present
a fair statement of the results for the interim periods
presented. The financial statements should be read in
conjunction with the Consolidated Financial Statements and
related Notes included in the Bank's 19961997 Annual Report.
Effect of recent accounting pronouncements:
During 1997, the Company adopted SFAS No. 125 and No.127
which relate to the accounting for transfers and servicing of
financial assets and extinguishment of certain liabilities.
The adoption of these standards did not have a material
effect on the financial statements.
The Financial Accounting Standards Board (FASB) issued the
following statements of financial accounting standards (SFAS)
during 1997:
SFAS No. 128 Earnings per share
SFAS No. 129 Disclosure of information about capital
structure
SFAS No. 130 Reporting comprehensive income
SFAS No. 131 Disclosure about Segments of an enterprise and
related information.
These four statements do not change the measurement or
recognition methods used in the financial statements but
rather deal with disclosure and presentation requirements.
At December 31, 1997, the Company adopted SFAS No. 128 which
specifies the computation and disclosure requirements for
earnings per share for entities with publicly held common
stock. The Company has no potential common stock and
therefore no diluted earnings per share.
At December 31, 1997, the Company adopted SFAS No. 129. This
statement has no effect on the Company's financial statements
as the capital disclosures meet the requirements of SFAS No.
129.
At March 31, 1998, the Company adopted SFAS No. 130.
Comprehensive income may be reviewed in the Statement of
Changes in Stockholders' Equity.
At March 31, 1998, the Company adopted SFAS No. 131. This
statement has no effect on the Company's financial
statements.
In February, 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Post Retirement
Benefits" effective for financial statements for the fiscal
year beginning after December 15, 1997. SFAS No. 132, which
supersedes the benefit disclosure requirements in FASB
Statements No's 87,88 and 106, requires entities to
standardize the disclosure requirements for pension and other
post retirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations
and fair value of plan assets that will facilitate financial
analysis. The Company expects no material impact from
adopting SFAS No. 132.
September 30, 1997March 31, 1998
2. INVESTMENT SECURITIES CARRYING CARRYING
AVAILABLE FOR SALE VALUE VALUE
a: U. S. Treasury and other $16,813 $16,777
government $19,062,412 $19,029,402 agencies
b: Marketable equity 550 566
securities 550,000 565,400
Total Securities Available $17,363 $17,343
For Sale $19,612,412 $19,594,802
HELD TO MATURITY:
a: U. S. Treasury and other $75,077 $75,604
government $65,965,950 $66,365,062 agencies
b: States of the U.S. and
other political 10,034,504 10,300,681
subdivisions 7,647 7,860
c: Corporate bonds 8,259,343 8,271,3967,369 7,366
Total Securities Held to $90,093 $90,830
Maturity $84,259,797 $84,937,139
OTHER SECURITIES $5,992,156 $5,992,156$6,050 $6,050
TOTAL SECURITIES $109,864,365 $110,524,097$113,506 $114,223
The Bank does not hold any securities for a single issuer
which exceed 10% of the Bank's stockholders' equity.
September 30,March December
31, 1998 31, 1997 1996
3. LOANS
a: Commercial, agricultural and $35,112 $33,897
other $40,472,832 $39,451,440 loans
b: Real Estate - Construction 7,002,109 8,905,8238,277 7,925
c: Real Estate - Mortgage 156,393,879 146,361,313156,055 158,649
d: Installment Loans 16,247,508 17,241,47216,670 16,668
Total Loans $220,116,328 $211,960,048$216,114 $217,139
4. CHANGES IN ALLOWANCE FOR March March
POSSIBLE LOAN September 30, September 30,
LOSSES: 31, 31,
1998 1997 1996
Balance, beginning January 1 $4,292,995 $4,047,883$4,743 $4,293
Provision charged to income 540,000 600,00084 180
Recoveries of amounts 33 26
charged 92,491 100,840
Losses charged to provision 455,290 461,073111 133
Balance, ending September 30 $4,470,196 $4,287,650
Information regarding impaired loans is as follows for September
30, 1997:
March 31 $4,749 $4,366
Information regarding March Decembe
impaired loans: 31, r 31,
1998 1997
Average investment in $1,887 $2,045
impaired loans $1,837,397
Interest income recognized
on impaired loans including
interest income 107,260$131 $165
recognized on cash basis
Interest income recognized
on impaired loans on cash $131 $165
basis 107,260
Balance of impaired loans 2,070,475$1,887 $2,670
Less portion for which no
allowance for loan losses is 0 0
allowed
Portion of impaired loan
balance for which an $1,887 $2,670
allowance for 2,070,475 credit losses
is allocated
Portion of allowance for
loan losses allocated to the 122,502$110 $104
impaired loan balance
5. CHANGES IN ALLOWANCE FOR OTHER
REAL ESTATE:
9/30/97 9/30/3/31/98 3/31/9 3/31/96
9/30/957
Balance, beginning January $17 $23 $26
1 $22,589 $26,000 $30,486
Provision charged to income 0 (4,664) 9,7780 (2)
income
Losses charged to 0 0 0
provision 5,124 21,336 15,110
Balance, ending September 30 $17,465 $0 $25,154March 31 $17 $23 $24
6. The aggregate dollar amount of loans made to directors,
executive officers or principal holders of equity securities
as of September 30, 1997March 31, 1998 and December 31, 19961997 respectively were:
Aggregate amount, beginning 1/1 $3,806,555 $3,279,479$3,952 $3,807
New loans 1,600,011 912,044692 1,693
Repayments 1,267,063 384,96876 1,548
Aggregate amount, ending 9/30/97 $4,139,503$4,568
3/31/98
Aggregate amount, ending $3,952
12/31/96 $3,806,55597
7. OTHER ASSETS SeptemberMarch 31, December
30,1998 31, 1997 31, 1996
a: Interest earned but not paid on:
Loans $1,499,649 $1,426,296$1,785 $1,437
Investments 1,105,491 1,237,564906 1,041
b: Other Real Estate Owned 58,950 270,430
8. INCOME TAXES:
The Company adopted Financial Accounting Standards No. 109
"Accounting for Income Taxes" effective January 1, 1993. The
standard requires adoption of a liability method of accounting
for income taxes. The accounting change had no effect on the
company's net income or retained earnings.
Components of income tax expense for the period ended September
30, 1997185 59
8. INCOME TAXES:
Components of income tax expense for the period ended
March 31, 1998 are as follows:
Current
Federal $2,342,974$914
State 70,27725
Deferred (216,806)
$2,196,445(167)
$772
Actual tax expense differs from the expected tax expense
computed by applying the applicable federal corporate income
tax rate of 34% is as follows for the sixthree months ended September 30,
1997:March 31,
1998:
Computed tax expense $2,330,796$793
Tax exempt interest (186,532)(45)
Other 52,181
$2,196,44524
$772
At September 30, 1997,March 31, 1998, items giving rise to the deferred
income tax assets and liabilities, using a tax rate of 34%,
are as follows:
ASSET LIABILITY
ASSET LIABILITY
Allowance for possible losses on
loans and real $1,363,764
estate owned $1,452
Deferred and accrued employee 970
benefits
955,440Deferred mortgage servicing 64
rights
Deferred loan origination fees 67,839296
Securities losses not currently 15
deductible 0
Core deposit intangibles 76,66557
Depreciation 0 44,63765
Other 25,935
$2,489,643 $44,6379
$2,799 $129
No valuation allowance is deemed necessary for the deferred
tax asset.
9. INCOME TAX EXPENSE March 31, March 31,
1998 1997 1996
Federal Income Tax $2,126,168 $1,982,793$747 $718
State Income Tax 70,277 68,03625 26
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following is the review of the results of operations
for September 30,March 31, 1998, as compared to March 31, 1997, are
reflected throughshowing
earnings with a 3% increase, and changes in the balance sheet.sheet
of $6 million over last year. Total assets
grew by $11,700,000 in 1997 and $18,000,000 in 1996, each
compared to the previous year's third quarter end. The major
changes are found in the loan portfolio with small growth
visible through the investment portfolio.
The investment portfolio net growth of $1,700,000 has been
in the area of US Government agency debentures. Purchases inloans remained constant
over the past twelve months, havewith the balance within the
portfolio between consumer and commercial loans also
remaining constant. The investment portfolio grew by $5.5 million
or 5% over the past year. Purchase in the investment portfolio
totaled $27,000,000,in excess of which
$10,500,000 have been in callable agencies$48.7 million; however, maturities and principal
paydowns from the majorityBank's mortgage backed securities
portfolios were $42.6 million for the same period. Purchases
were made of the remaining purchases have been in government sponsoredUS government-sponsored debentures or mortgage
backed pools. The bank has had $6,750,000 calledMany of the debentures are callable securities
and some have supported the bank's earnings in lieu of
selling fed funds. Unrealized gains and losses gained
strength with the reduction of the unrealized loss of
$265,000 to $13,000. This shift is indicative of the current
economic marketplace. This is also visible in the past twelve months, $ 11,000,000 in principal paydowns from
mortgage backed securities, $2,500,000 in maturing tax-exempt
securities and $2,500,000 in other security paydowns. As a
comparison, from September 30, 1996 to September 30, 1995, the
Bank's available for sale portfolio changed by the one-time
transfer of securities at market value totaling $5,600,000 in
accordance with the Financial Accounting Standards Board
implementation guidance issued in November of 1995. The Bank's
other securities portfolio includes $5,853,000 in Federal Home
Loan Bank (FHLB) stock. Ownership of stock is required by the
FHLB for participation in their funding programs.
Thetotal
market value of the held to maturity portion of the
portfolio that is $677,000 morecurrently $718,000
greater than the book value, with the
AFS portfolio market value at $17,600 less than the book value. At September 30, 1996, the market value of the
entire investment portfolio was $695,000 below book value
and represented a potential loss of less than one-half of
one percent of the book value of the portfolio, had the
entire portfolio been sold at that date.
The Bank does not hold any securities (such as structured debt
tied to multiple indices, interest only or principal only
securities) that may experience considerable change in their
market values by a greater degree than traditional debt and
could materially affect the entire portfolio. It does hold one
structured note, a 10-year step-up government agency debenture
that matures in November of 2005. The structure is to step up
annually by 1/8 of 1% after three years (November 1998). It is
currently earning 7% and is being called as of November of this
year.
The taxable portions of the Bank's securities have been
earning 7.23% for the first nine months of 1997, an
increase of 13 basis points since September 30, 1996.
In the loan portfolio, which has grown by almost
$8,800,000 (4%) inarea, the past twelve months, the Bank's
concentration has been through the extension of loans
secured by real estate to its customers totaling
$14,000,000 more than one year ago. Reductions in the loan
portfolio were found in the commercial loan portfolio
($3,400,000) and the construction portfolio ($1,700,000).
This compares to 1996's growth of $12,000,000 (6.2%) in
loan growth, with $8,000,000 of the loan growth being
secured by real estate and granted to the Bank's consumer
customers. The Bank continues to experience
strong competition from other financial institutions inwithin
its market
area.
From September 30, 1996 to September 30, 1997,marketplace. Within the past twelve months a mixture of
increased deposits and funding from the Federal Home Loan Bank
funded the bank's assets. Total deposits increased by
$5,800,000 with equal growthlocal bank
has opened a branch in the demand deposit accounts, NOW
accountsBank's home
office community and certificatesstrongest market area (Mount Desert
Island), and a second local bank has announced the opening of
deposit. Also, fora branch also on Mount Desert Island. Bar Harbor Banking and
Trust Company's strength lies in the same
period, advances throughrelationships built with
its customers and the Federal Home Loan Bank increased by
almost $2,800,000. In 1996, the funding for the asset growth
had come from borrowings primarily through the Federal Home Loan
Bank. Total advances increased by $28,000,000 and include
$12,000,000ability to offer prompt service in
longer-term borrowings as funding for certain
specific commercial credits. During both years, short-term
borrowings were reduced through seasonal deposit growth,
investment maturities and/or calls and principal paydowns from
the Bank's mortgage backed securities portfolio.response to their needs.
Liquidity is measured by the Bank's ability to meet cash
needs at a reasonable cost or minimum loss to the Bank.
Liquidity management involves the ability to meet cash flow
requirements of its customers, which may come from depositors
withdrawing funds or borrowers requiring funds to meet credit
needs. Without adequate liquidity management, the Bank would
not be able to meet the needs of the individuals and
communities it serves. The Bank utilizes a Basic
Surplus/Deficit model to measure its liquidity over a 30-day
and a 90-day time horizon. We examine theThe relationship between liquid
assets and short-term liabilities that are vulnerable to non-replacementnon-
replacement within a 30-
day period. The 90-day analysis extends to include a projection
of subsequent cash flow funding needs over an additional 60-day
time horizon.30-day period are examined. The Bank's
policyPolicy is to maintain its liquidity position at a minimum of
5% of total assets. For the past
twelve months, theThe Bank has maintained liquidity in its
balance sheet in excess of 14%.15% for the past twelve months.
Liquidity as measured by the Basic Surplus/Deficit model was
16.7%19.2% as of March 31, 1998 for the 30-day horizon and 15.7%19.8%
for the 90-day horizon as of September 30, 1997.horizon.
How the changes in the balance sheet have affected the Bank
may be viewed through net interest income in the earnings statement for the periods
ending September 30,March 31, 1997 and 1998. With a relatively flat
change in the balance sheet from year to year, earnings grew
by $50,000. In comparison, the Bank experienced a 6% growth
in the balance sheet in 1997 when compared to 1996, and 1997.
Net interest income, affectedwith
earnings increasing by rates,$52,000.
Rates, volumes and the mix of earning assets and
interest bearing liabilities is aheadaffect interest income. For the
first three months of September 1996's1998, net interest income increased by
almost $500,000.$54,000 and was a factor of the growth in the balance sheet
coming from investments, with yields earning less than loans,
and savings realized in funding costs. Interest income earned fromon
loans increased in 1997 by $846,000more than $100,000 but was reduced by
$70,000 due to volumes of loans with an offsetting reduction in earnings
of $285,000 due to changes in rates. This is indicative of the
competitive market in Downeast Maine. Overall yields from the
loan portfolio decreased by 39 basis points of 1996's yields.
Net interest income for the first nine months of 1996 added
earnings of $850,000 due to volumes of loans with a small
reduction in earnings of $37,000 due to changes in rates.
Overall yields from the loan portfolio remained within 5 basis
points of 1995's yields.
The investment portfolio, with net growth in assets of only
$1,700,000, has shown increasesdecreases in interest income due both
to volumes ($82,000) and rates ($187,000). The overall
yieldcharged on
the entire investment portfolio has actually
increased by 5 basis points during the past twelve months.
Looking at 1996, the investment interest increased by
virtueportions of purchases (totaling $429,000); however, as rates
remained flat and with larger coupons maturing the
portfolio experienced decreases due to rate changes
totaling $147,000, similar to the loan portfolio. Overall, the loan portfolio
yield dropped by 23 basis points. Interest on investments
droppedincreased due to volumes and partially due to a shift from
tax exempt income to taxable income as maturing tax exempt
securities are being replaced by taxable securities. The
entire portfolio is earning 6.8% and only 8 basis points less
than it was a year ago. Interest bearing liabilities
decreased by less than one-half of 1%, but the same ascost of those
liabilities decreased by more than 1%. For the past several
years, the Bank has maintained its cost of deposits by not
increasing its interest rates on savings, NOW and money
market accounts. The overall cost of liabilities went down
by 17 basis points between March 31, 1998 and March 31, 1997.
For the first three months of 1997, net interest income
increased by $100,000 and was attributable to the following.
The loan yield, 5portfolio yielded the Bank interest income of
$280,000 more than in 1996 through increases in volumes, but
experienced offsetting decreases in interest income totaling
$257,000 due to decreases in rates, leaving the growth in
loan interest income virtually flat over that twelve month
period. Yields on loans decreased by 21 basis points from
yearMarch 1996 to year.
WithMarch of 1997.
Although the Bank well matchedinvestment portfolio did not grow between
the years ended March 31, 1996 and 1997, the portfolio
changed as securities matured or were called. Total
investment income grew by $126,000, with increases in both
rates and volumes on those securities that are taxable
($142,000) and decreasing in both rates and volumes on tax
exempt securities owned by the repricing of its balance
sheet,bank ($16,000). The yield on
the funding costs followed a similar pattern as is
described above for loansentire securities portfolio went up just slightly (6
basis point) between March 31, 1996 and investments. TheMarch 31, 1997
At March 31, 1997, the Bank's cost of interest
bearing liabilities increaseddeposits had
decreased by 4% in 1997 as compared to 1996,
with the interest paid on deposits decreasing primarily$168,000, $65,000 due to rates ($177,000).reductions in volumes
of certificates of deposit and $102,000 due to reductions in
rates. The cost of borrowings increased predominantlyby $216,000, which
is comprised of $212,000 due to increased volumes ($416,000), but also by rates
($97,000). The overall cost of funding the bank's assets has
increased by 19 basis points over the past twelve months. In
1996, the cost of deposits rose based on volumes ($357,000) and rates $284,000) while the cost of borrowed funds increased dueonly
$4,000 increase, attributed to volumes ($117,000) but decreased by $82,500 because of rate changes. Reference is made to the earlier discussion that the
Bank elected to fund its asset growth through borrowings instead
of deposits for 1996.increases. The cost of
depositspurchased funds increased by 21
basis points whereas the cost of borrowings decreased by 268.5 basis points between September 30, 1995March
31, 1996 and 1996.
With1997.
The Bank's position with regard to interest rate
sensitivity consists of the Bank is
somewhat liability sensitive with $9,500,000 morematching of its assets and
liabilities for repricing within a year. There is some
exposure to rising rates out beyond a year when compared to its assets.
Based on simulations, if interest rates were to rise by 200
basis points and ifwith the Bank
were to maintain the balance sheet
as it stands today,having almost $21 million invested in callable securities
with final maturities of ten years or less that potentially
would not be called. The gap analysis in today's interest
rate environment shows the Bank with approximately $28
million more liabilities than assets that would reduce its net interest
income by $350,000 during the next two years.be repricable
within twelve months. If rates were to drop by 200 basis
points, simulations based on a static balance sheet indicate
that the Bank would experience an increase
in itsBank's net interest income could rise by
approximately $193,000 during the first year of $676,000.
Due to changesthe drop,
while increasing its income in the methodology used for computingsecond year by $135,000.
If rates were to rise by 200 basis points, the Bank could
experience a drop in interest income in the first year by
$77,000, and drop additional interest earnings in the second
year by $400,000.
The Bank has maintained its reserve for possible loan
losses and due to the recessionary
natureat better than 2% of the economy in the early 1990's, the Bank increased
itstotal loans outstanding for a
number of years, with a ratio to gross loans to over 2% and has maintained that
reserve to loan ratio through September 30, 1997.of 2.2% as of March 31, 1998.
The Bank reviews its allocation to the reserve on a monthly
basis and funds the reserve as deemed necessary. TheThis review
includes a provision for specific credits, provisions due to
historic loan losses by loan types and reserves reflecting
industry concentrations, credit concentrations, current
economic conditions and underwriting standards. In 1995, the
Bank added a provision for impaired loans in accordance with
FASB 114, "Accounting By Creditors for
Impairment of a Loan", as amended by Statement No. 114/118. A
loan is impaired when it is probable that the Bank will not
collect all amounts due according to the contractual terms
of the loan agreement. Impaired loans are loans that are
carried on a non-accrual status. Loans are returned to
accrual status and are no longer considered to be impaired
when they become current as to principal and interest or
demonstrate a period of performance under the contractual
terms, and in management's opinion are fully collectable.
Certain loans are exempt from the provisions including
large groups of smaller balance homogenous loans that are
collectively evaluated for impairment, such as consumer and
residential mortgage loans. Impaired loans totaled
$2,070,475 and $1,604,919 at September 30, 1997 and 1996,
respectively. Reference is made to the notes included within
this filing that outlineoutlines the impaired loan figures. Losses
in the loan portfolio wereare estimated at $500,000 for fiscal year 1997,1998,
with charged off loansfirst quarter 1998 charge offs totaling $455,000
for$110,000
compared to $133,000 during the first nine monthsquarter of this year. Losses for 1996
were originally estimated at $840,000 with $461,000 charged
off through September 30, 1996.1997. The
amounts represented below are the total dollars outstandingpast due for
the first ninethree months of each year listed.
The bank retains a conservative posture with regard to non-
accruing loans, placing loans onto non-accrual status once
they become past due 90 days or more. This is shown
through the figures below, with the bank retaining only
$428,000 in loans that are still accruing and are 90 days
or more past due. This represents two-tenths of one
percent of gross loans outstanding for the bank.
Category 1997 1996 1995
Category 1998 1997 1996
90-day past due and still $1,102,919 $1,302,437 $1,247,941
accruing
$427,618 $830,532 $711,943
Non-accruing $4,599,245 $3,557,518 $2,584,343
$5,026,863 $4,388,050 $3,296,286$3,438,992 $3,207,492 $3,289,461
$4,541,911 $4,509,929 $4,537,402
Gross Loans $220,116,328 $211,360,9 $199,190,0
48 24loans $216,113,8 $214,687,01 $201,502,68
53 6 2
Percentage of gross 2.28% 2.08% 1.65%
loans Non-interest income for the first nine months of 1997 is
below the comparable period in 1996 by $160,000. The Trust
Department has produced $320,000 more income in this period,
based on fees structured on market values of total assets per
customer account and an increase in book assets of more than
$8,000,000. However, in September of 1996, the bank received a
non-recurring income entry of $278,000 representing an insurance
payoff from a policy written on certain key persons in the Bank.
Robert Avery, director and former president of the Bank passed
away in August of 1996 resulting in this one-time, tax
deductible payment. The 1996 non-recurring income entry is
creating the variance between the two years.
A review of the Bank's non-interest income shows the first
nine months of 1996 ahead of the same period for 1995 by
$558,000. $200,000 of that pertains to the Trust Department's
charge to its customers of scheduled fees, based on increased
book assets of almost $25,000,000. In addition, as of January
1, 1996, the Bank implemented FASB Statement No. 122,
"Accounting for Mortgage Servicing Rights" that has positively
impacted the Bank's earnings by $126,000 year to date.
Salaries and benefits are 3.7% more than as of September
30, 1996 and include merit increases and accruals for the bank's
incentive plan. Depreciation expense is $100,000 more than a
year ago and includes the addition of the Operations Center,
opened in January of 1997 and the depreciation of technology
that has been purchased over the past twelve months. New
personal computers, networking servers, communication lines,
document and check imaging equipment are some of the investments
made into technology during this period.
The bank has experienced a number of non-recurring charges
including expenses to complete the installation of and
subsequent training in enhancements in technology begun in
1996. Additionally, the bank paid $123,000 to the Internal
Revenue Service for taxes incurred on a loss taken in 1994
from the sale of a bond fund. This fund was taxed as
ordinary income in the 1994 return, but was challenged by
the IRS in a subsequent audit of that year's return. The
bank appealed the decision by the examiner. Ultimately the
appeal was denied. The bank has refiled the tax return for
1994, as well as 1992 and 1993, based on the determination
by the IRS audit of the classification of the loss on the
bond fund. If the amended returns are accepted, a
potential refund totaling $84,000 would be due the bank.
Audit costs are $80,000 higher than in September of 1996
and include the outsourcing of a large portion of the
bank's internal audit function. Furthermore, with the
conversion of the banking software very close to year-end
last year, the bank sought additional help early in 1997
(reconciling accounts and reviewing controls) from the
bank's accounting firm, Berry, Dunn, McNeil and Parker.
These added costs are non-recurring expenses for the bank.
Accruing for an incentive program reflects the increase in
salary and benefit costs in 1996 over 1995. Although the
program was not new to the Bank in 1996, it was the first
year that the dollars have been allocated prior to year-
end. Excluding the accrual, salary and benefits would have
been 1.6% higher than the first nine months of 1995.
Other expense for the first nine months of 1996 is above
the comparable period in 1995 by $60,000 or 1.6%. A portion of
that containment of costs was attributable to the temporary
relief from FDIC insurance premiums. As a well-capitalized
bank, Bar Harbor Banking and Trust Company has not been required
to pay premiums in either 1996 or 1997. As of September 30,
1995 the Bank had incurred $240,000 in FDIC premiums. In the
fourth quarter of 1995, the Bank sought the services of a
consulting firm to review existing procedures, seeking greater
efficiencies while maintaining quality customer service. The
Bank incurred approximately $120,000 in expenses for these
services during the first nine months of 1996 as the project was
being completed. Additionally, the Bank began numerous projects
as mentioned above. Startup and non-recurring costs for these
projects were included in other expenses through September 30,
1996.
The Bank's year-to-date efficiency ratio is 56% remains
consistent with the 1996 ratio and is well under the
national average.
The Bank's capital to asset ratio is 11.65% and the Bank
far exceeds the required risk based capital ratio of 8% with its
Tier I ratio of 19.0%, total capital ratio of 20.39% and
leverage ratio of 11.9%. Using the risk based capital formula,
the Bank has capital in excess of requirements of $6,500,000.
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
BAR HARBOR BANKSHARES
Date: November 14, 1997 Sheldon F. Goldthwait, Jr.
Chief Executive Officer
Date: November 14,2.10% 2.10% 2.25%
With earnings as of March 31, 1998 $50,000 ahead of
March 31, 1997, the following is a review of non-interest
income and non-interest expense. As stated earlier, the Bank
has maintained a reserve for possible loan losses in excess
of 2% when compared to total loans for a number of years.
With loan growth and net charged off loans slowing down, the
Bank is able to reduce the amount it provides for the
reserve. As of March 31, 1998, the provision for possible
loan losses is $96,000 less than a year before. Other income
is almost $100,000 ahead of last year's first quarter income
and includes the Trust Department income, which is $52,000
ahead of last year's income. No other major category in
other income can be singled out for substantial growth from
year to year.
Other non-interest expense is $252,000 more as of March
31, 1998 when compared to the same period for 1997. The
introduction of the bank's call center, interactive voice
response system and several loan promotions have created
media opportunities for the bank. Additionally, the bank is
involved in several projects as of March 31, 1998, including
the review of banking software. Another expense in 1998,
which was not found in 1997, includes the development of the
bank's Year 2000 assessment and action plan. The due
diligence process will be in place by June 30, 1998 as
recommended by the FDIC. The assessment of customers'
preparedness and the resulting impact on the institution
should be substantially completed by September 30, 1998.
Testing of parts of the bank's hardware and software has
already begun.
In reviewing non-interest income and non-
interest expense for the period between March 31, 1996 and
1997, there are no categories showing significant changes
with dollars exceeding $60,000 and more than 4% for any major
category.
The Bank's capital to asset ratio is 12.4% and the Bank
far exceeds the required risk based capital ratio of 8% with
its Tier 1 ratio of 20.3% and total capital ratio of 21.5% or
additional capital of $28.7 million. These ratios compare
favorably to March 31, 1997 when the capital to average asset
ratio was 11.6%, Tier 1 and total capital ratios compared to
risk weighted assets were 18.3% and 19.5% respectively.
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
BAR HARBOR BANKSHARES
Date: May 15, 1998 Sheldon F. Goldthwait, Jr.
Chief Executive Officer
Date: May 15, 1998 Virginia M. Vendrell
Treasurer and
Chief Financial Officer