20
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 March 31,June 30, 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-
0400046090400
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area
code: (207) 288-3314
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 off shares outstanding of each
of the issuer's classes of common stock as of
March 31, 1998:September 30, 1997:
Common Stock: 1,821,807
TABLE OF CONTENTS
Financial Information
Page
Item 1. Financial Statements
Consolidated Balance Sheets
3 December 31, 1997 and June 30, 1998
Consolidated Statements of Earnings
4 Three months and six months ended June
30, 1997
and 1998
Consolidated Statements of Changes in
5 Stockholders' Equity
Six months ended June 30, 1997 and 1998
Consolidated Statement of Cash Flows 6
Six months ended June 30, 1997 and 1998
Rate Volume Analysis 7
Six months ended June 30, 1997 and 1998
Notes to Financial Statements 8-11
Item II. Management's Discussion and Analysis of 12-15
Financial
Condition and Results of
Operations
Signature Page
Item 1. Financial Statements
Consolidated Balance Sheets 3
December 31, 1997 and March 31, 1998
Consolidated Statements of Earnings 4
Three months ended March 31, 1997 and 1998
Consolidated Statements of Changes in 5
Stockholders' Equity
Three months ended March 31, 1997 and 1998
Consolidated Statement of Cash Flows 6-7
Three months ended March 31, 1997 and 1998
Rate Volume Analysis 8
Three months ended March 31, 1997 and 1998
Notes to Financial Statements 9-11
Item II. Management's Discussion and Analysis of 12-
Financial 16
Condition and Results of
Operations
Signature Page 17
BAR HARBOR BANKSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL
CONDITION
MARCHJUNE 30, 1998 AND DECEMBER 31, 1997
AND 1998
(in thousands, except number of shares and per share data)
(Unaudited)
March MarchJUNE 30,
DECEMBER
1998
31,
31, 1998 1997
ASSETS
Cash and Due from Banks $8,787$11,544 $7,537
Federal Funds Sold 0 0
Securities Available for Sale, 17,34319,360 14,608
at market
Securities Held to Maturity
(Market Value 90,09388,841 85,351
$90,830 in 1998$89,623 at 6/30/98 and $86,248
in
1997)at 12/31/97)
Other Securities 6,050 6,012
Loans Held for Sale 620600 365
Loans, net of allowance for
possible loan losses 224,521
212,396
of $4,749$4,704 in 1998 and 211,365 212,396 $4,743 in
1997
Premises and Equipment 7,5817,748 7,658
Other Assets 9,1779,449 8,799
Total Assets $351,016$368,113
$342,726
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand Deposits $34,793$37,342
$36,838
NOW Accounts 39,99639,678 39,536
Savings Deposits 51,41553,359 53,378
Time Deposits 118,889114,809
122,152
Total Deposits 245,093245,188
251,903
Securities sold under Repurchase 4,316 4,474
Agreements 4,337 4,474
Advances from Federal Home Loan 52,96769,770 39,160
Bank
Other Liabilities 5,0494,266 4,727
Total Liabilities 307,445323,540
300,264
Commitments and Contingent Liabilities
Capital Stock, par value $2
Authorized 10,000,000 shares
Issued 1,821,807 in 1998 and1998and
1,820,583 in 1997 3,644 3,641
Surplus 7,645 7,574
Retained Earnings 33,63534,605 32,562
Net unrealized appreciation on
securities (13)available 19 24
available
for sale, net of tax benefit
Less: Cost of 100,000 shares of (1,340)
(1,340)
Treasury Stock (1,340) (1,340)
TOTAL STOCKHOLDERS' EQUITY 43,57144,573
42,461
TOTAL LIIABILITIES AND STOCKHOLDERS' $351,016$368,113
$342,726 EQUITY
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 SIX-
SIX
MONTHS MONTHS MONTHS MONTHS ENDING
ENDING 3/31/ENDING ENDING
06/30/98 3/31/06/30/97 06/30/
9
06/
30/
97
8
Interest & Fees on $5,276 $5,176
$10,335 $10,202
Loans $5,059 $5,026
Interest and
Dividends on
Investment 1,686 1,615
3,315 3,210
Securities:
Taxable Interest
Income
1,629 1,596
Non-taxable 116 167
240 347
Interest Income
124 180
Dividends 100 96101 99
201 195
Federal Funds Sold 15 95
30 14
Sold
Total Interest 7,194 7,062
14,121 13,968
Income 6,928 6,907
Interest on 2,071 2,143
4,213 4,282
Deposits
2,142 2,139
Interest onin Short
Term 912 844
1,602 1,570
Borrowings 690 726
Total Interest 2,983 2,987
5,815 5,852
Expense 2,832 2,865
Net Interest Income 4,096 4,0424,211 4,075
8,306 8,116
Provision for Loan 84 180
168 360
Losses
Net Interest Income
after 4,127 3,895
8,138 7,756
Provision for
Loan Losses
84 180
Net Interest Income after
Provision for Loan Losses 4,012 3,862
Other Income 1,126 1,0271,263 1,112
2,389 2,139
Investment
63 0
Securities Gains
57 (56)
(Losses)
Other Expenses::
Salaries & 1,432 1,430
2,924 2,889
Employee Benefits
1,491 1,460
Other 1,307 1,0551,681 1,499
2,986 2,554
Investment 0 0
0 56
Securities Losses
Income Before 2,277 2,078
4,680 4,396
Income Taxes 2,396 2,318
Income Tax Expense 772 744729 663
1,501 1,407
Net Income 1,624 1,575
PER COMMON SHAE DATA, BASED ON$1,548 $1,415
$3,179 $2,989
Earnings per Share:
Based on
1,721,807 shares
for 1998 ANDand $0.90 $ .82
$1.85 $1.74
1,720,583
shares for 1997,
$0.94 $0.92
1,718,237 for 1996
Dividends Per Share $0.32 $0.28
The accompanying notes are an integral part of these
consolidated
financial statements$0.34 $0.30
$0.66 $0.58
BAR HARBOR BANKSHARES AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY QUARTERS ENDED
MARCH 31,JUNE 30, 1997 AND 1998
(in thousands, except number of shares and per share data)
(UNAUDITED)
ACCUMULATE
DACCUMULATED
OTHER COMPRE- NET
CAPITA RETAINE HENSIVECAPITAL RETAINED COMPREHENSI TREASURY
STOCKHOLDERS
L SUIRPL DSTOCK SUIRPLUS EARNINGS VE INCOME STOCK '
STOCK US EARNING EQUITY
S
Balance, 12/31/96 $3,636 $7,489 $28,205 ($103) ($1,340) $37,887
Net Earnings 1,575 $1,5752,989 2,989
Other
comprehensive
income,
net of taxtax: (31) (31)
Unrealized
gains/losses on
($161)
securities
Other
Comprehensive (161) ($161)comprehensive
income
Comprehensive $1,414
Income2,958
income
Cash dividends
declaredDividends
Declared ($0.28.58 (998) (998)
per share) ($482) ($482)share
Sale of Stock 5 85 0 0 0 90
(2,346 shares)
5 85 $90
Balance, 3/31/Balance,6/30/97 $3,641 $7,574 $29,298$30,196 ($264)134) ($1,340) $38,908$39,937
Balance, 12/31/96 $ 3,641 $ 7,574 $32,652 2497 $3,642 $7,574 $32,562 $24 ($1,340) $42,461
Net Earnings 1,624 $1,6243,179 3,179
Other
comprehensive
income,
net of taxtax: (5) (5)
Unrealized
gains/losses on
($37)
securities
Other
comprehensive
(37) ($37)
income
Comprehensive $1,587
Income3,174
income
Cash dividends
declaredDividends
Declared ($0.32.66 (1,135) (1,135)
per share) (551) ($551)
Sale of Stock 2 71 0 73
(1,224 shares)
2 71 $73
Balance, 3/31/6/30/98 $3,644 $7,645 $33,635 ($13)$34,605 $19 ($1,340) $43,571$44,573
The accompanying notes are an integral part of these
consolidated financial statements.
BAR HARBOR BANKSHARES AND
SUBSIDIARY COLSOLIDATED STATEMENT
OF CASH FLOWS
(in thousands)(UNAUDITED)
MARCH MARCH
31, 31,JUNE JUNE
30, 30,
1998 1997
Cash Flows from Operating Activities:
Net Income
$1,624 $1,5753,179 $2,989
Adjustments to reconcile net earnings
to net cash provided by
operating activities:
225 222454 443
Depreciation
Provision for Loss Losses
84 180168 360
Provision for Losses on Other Real Estate 0 0
Estate Owned
New Loans Originated for Sale
(4,423) (925)(9,053 (1,738)
)
Proceeds from Sale of Mortgages
8,920 2,153
Held 4,210 861 for Sale
Gain on Sale of Mortgages
(76) (50)
Originated (31) (30) for Sale
Net Amortization of Bond Premium
49 23111 54
(Gain) Loss on sale of premises and equipment2 0
0equipment
Net Change in Other Assets
(375) (335)(589) (404)
Net Change in Other Liabilities
322 530(461) 453
Net Cash Provided by Operating
1,685 2,1012,656 4,260
Activities
Cash Flows from Investing Activities:
Net decrease (increase) in Federal
Funds Sold
0 0
Purchases of Securities Heldsecurities held to
Maturity (17,121) (5,054)(24,77 (7,675)
maturity 0)
Proceeds from Maturity and Principal
Paydowns 4,830 4,847
of Securities
held11,025 9,264
Held to maturityMaturity
Proceeds from Call of Securities Held
7,500 17510,145 4,250
to Maturity
Purchases of Securities Available for
(4,000) (500)(6,000 (1,250)
Sale )
Proceeds from Maturity and Principal
Paydowns 209 39
of availableSecurities
239 78
Available for saleSale
Proceeds from sale and callsSale of securities available for saleSecurities
1,000 60
Net decrease (increase) in other
securities 0 0Available for Sale
Purchase of Other Securities
(38) (454)
Proceeds from sales of Other 119
Securities
Net Loans Made to Customers
915 (2,860)(12,37 (9,831)
8)
Capital Expenditures
(148) (346)(545) (732)
Proceeds from sale of other realOther Real 0 0
estate owned 0 0Owned
Proceeds from Sale of Fixed Assets 0 0
Net Cash Used in Investing Activities
(6,815) (3,639)(21,32 (6,171)
2)
Cash Flows from Financing Activities:
Net Change in Savings, NOW and Demand
(3,547) (7,683)627 (3,363)
Deposits
Net Change in Time Deposits
(3,263) 383(7,343 (1,080)
)
Net Change in securities sold under
(158) (6,199)
Repurchase Agreements
(137) (2,852)
PurchaseProceeds from Federal Home Loan Bank
36,500 13,500
Repayment of Advances from FHLB
18,500 3,000
Proceeds from FHLB (9,500) (5,000)(17,50 (15,000
0) ) Net
Change in Short Term Other 4,805 10,64212,631
Borrowed Funds
11,610
Proceeds from Sale of Capital Stock 7374 90
Payment of Dividends
(551) (482)(1,136 (998)
)
Net Cash Provided by Financing
6,380 (1,903)22,674 (420)
Activities
Net Increase (Decrease) in Cash and Cash
1,250 (3,441)4,007 (2,331)
Equivalents
Cash and Cash Equivalents at Beginning of
7,537 13,298 Year
Cash and Cash Equivalents at End of
$8,787 $9,857$11,54 $10,967
Quarter 4
Supplemental Disclosures of Cash Flow
Information:
Cash Paid during the Year for:
$5,860 $5,854
Interest $2,877 $2,841
Income Taxes, Net of Refunds
$50 $279$1,675 $1,041
Non-Cash Transactions:;
Transfers from Loans to Real Estate
Owned$143 $0
$0Owned (Other Assets)
Transfer of Securities from Held to Maturity to Available for Sale $0 $0
Maturity to Available for Sale
A
v
a
i
l
a
b
l
e
f
o
r
S
a
l
e
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 MARCH 31,JUNE 30,
1998
COMPARED TO
MARCH 31,JUNE 30, 1997
(in thousands, except number of shares
per share data)
INCREASES
(DECREASES) DUE
TO:
VOLUME
RATE NET
Loans $104$674
($71) $33542) $132
Taxable Securities 93 (56) 37257
(146) 111
Tax Exempt Securities (70) 15 (55)(131)
25 (106)
Federal Funds Sold and Money 13
3 15
Market Funds 5 1 6
TOTAL EARNING ASSETS $132$813
($111 $21
)660) $153
Deposits 15 (12) 3$38
($107) ($69)
Borrowings (58) 22 (36)25
6 32
Total Interest Bearing ($43) $10 ($33)64
(101) (37)
Liabilities
NET CHANGE IN INTEREST $175$749
($121 $54
)559) $190
YEAR-TO-DATE FIGURES AS OF MARCH 31,JUNE
30, 1997 COMPARED TO
MARCH 31,JUNE 30, 1996
INCREASES (DECREASES) DUE TO:
VOLUME RATE
NET
Loans $281$580 ($257 $24
)374)
$206
Taxable Securities 75 64 138131 186
317
Tax Exempt Securities (13) (3) (16)(45) 2
(43)
Federal Funds Sold and Money (3) 0
(3)
Market Funds 4 0 4
TOTAL EARNING ASSETS $347 $197 $150$663 ($186)
$477
Deposits (66) (103) (168)($45) ($230)
($275
) Borrowings
212 4 216386 55 441
Total Interest Bearing $147 ($99) $48341 175
166
Liabilities
NET CHANGE IN INTEREST $200$322 ($98) $10211)
$311
NOTES TO FINANCIAL STATEMENTS DATED JUNE
30, 1998
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 1997 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 of the financial statements.
The Financial Accounting Standards Board (FSAB)
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.
143.
NOTES TO FINANCIAL STATEMENTS DATED MARCH 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 1997 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.
March 31,JUNE 30,
1998
2. INVESTMENT SECURITIES CARRYING CARRYINGCARRYIN
MARKET AVAILABLE FOR SALE G
VALUE
VALUE
a: U. S. Treasury and other $16,813 $16,777$18,782
$18,782 government agencies
b: Marketable equity securities 550
566
securities578
Total Securities Available $17,363 $17,343
For $19,332
$19,360 Sale
HELD TO MATURITY:
a: U. S. Treasury and other
$75,077 $75,604$75,429 $76,047 government agencies
b: States of the U.S. and other
6,549 6,722
political subdivisions 7,647 7,860
c: Corporate bonds
7,369 7,3666,863 6,854
Total Securities Held to $90,093 $90,830
Maturity
$88,841 $89,623
OTHER SECURITIES
$6,050 $6,050 TOTAL SECURITIES
$113,506 $114,223$114,22 $115,033
3
The Bank does not hold any securities for a
single issuer which exceed 10% of the Bank's
stockholders' equity.
March December
31, 1998JUNE DECEMBER
30, 31, 1997
3. LOANS1998
3. LOANS
a: Commercial, agricultural and $35,112other
$39,268
$33,897
other
loans
b: Real Estate - Construction
8,2778,631
7,925
c: Real Estate - Mortgage
156,055164,352
158,649
d: Installment Loans
16,67016,974
16,668
Total Loans
$216,114$229,22
$217,139
6
4. CHANGES IN ALLOWANCE FOR March March
POSSIBLE
JUNE JUNE 30,
LOAN LOSSES:
31, 31,30, 1997
1998 1997
Balance, beginning January 1
$4,743
$4,2934,293
Provision charged to income
84 180168 360
Recoveries of amounts 33 26
charged
85 51
Losses charged to provision
111 133292 270
Balance, ending March 31 $4,749 $4,366
Information regarding March Decembe
impaired loans: 31, r 31,June 30
$4,704
$4,434
Information regarding impaired loans is as
follows for JUNE 30, 1998
Ju
n
e
J
u
n
e
3
0
,
3
0
,
1998 1997
Average investment in $1,887 $2,045
impaired loans
$1,789 $1,721
Interest income recognized on impaired
loans including interest
122 49
income $131 $165 recognized on cash basis
Interest income recognized
on impaired loans on cash $131 $165 basis
Balance of impaired loans
$1,887 $2,6701,692 1,810
Less portion for which no allowance for
0 0
loan losses is 0 0
allowedallocated
Portion of impaired loan balance for which
an $1,887 $2,670
allowance for
1,692 1,810
credit losses is allocated
Portion of allowance for loan losses
allocated to the $110 $104
impaired
110 75
loan balance
5. CHANGES IN ALLOWANCE FOR
OTHER REAL ESTATE:
3/31/6/30/98 3/31/6/30/9
3/31/6/30/96
7
Balance, beginning January 1 $17 $23$22
$26
1
Provision charged to income 0 0
(2)
income(3)
Losses charged to provision 0 5
0 0
provision
Balance, ending March 31June 30 $17 $17
$23 $24
6. The aggregate dollar amount of loans made to
directors,
executive officers or principal holders of equity
securities as of March 31,June 30, 1998 and December 31,
1997 respectively, were:
Aggregate amount, beginning 1/1 $3,952
$3,807
New loans 6924,706 1,693
Repayments 76328 1,548
Aggregate amount, ending $4,568
3/31/6/30/98 $8,330
Aggregate amount, ending $3,952
12/31/97
$3,952
7. OTHER ASSETS March 31, DecemberJUNE 30,
DECEMBER
1998
31, 1997
a: Interest earned but not paid
on: $2,184 $1,437
Loans
$1,785 $1,437
Investments 9061,071 1,041
b: Other Real Estate Owned 185202 59
8. INCOME TAXES:
Components of income tax expense for the
period ended March 31,June 30, 1998 are as follows:
Current
Federal $914$1,662
State 2548
Deferred (167)
$772(209)
$1,501
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 threesix months March 31,
1998:ended June 30, 1998.
Computed tax expense $793$1,55
6
Tax exempt (90)
interest
(45)
Other 24
$77235
$1,50
1
At March 31,June 30, 1998, items giving rise to the
deferred income tax assets and liabilities, using
a tax rate of 34%, are as follows:
ASSET
LIABILIT
Y
ASSET LIABILITY
Allowance for possible losses on
loans and real estate owned
$1,452$1,436 0
Deferred and accrued employee
970975 0
benefits
Deferred mortgage servicing 64
rights
0 77
Deferred loan origination fees
296319 0
Securities losses not currently
1538 0
deductible
Core deposit intangibles
5753 0
Depreciation
0 6552
Other
9
$2,79917 0
$2,840
$129
No valuation allowance is deemed necessary for
the deferred tax asset.
9. INCOME TAX EXPENSE March 31, March 31,June 30,
June 30,
1998
1997
Federal Income Tax $747 $718$1,453
1,361 State Income Tax 25 2648
46
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following is the review of the results of the operations
of Bar Harbor Banking and Trust Company for March 31,June
30, 1998, as compared to March 31,June 30, 1997, showingshows
growth in earnings of $190,000 or six percent
ahead of earnings for the first six months of
1997 and will be discussed below. Total assets
have a 5.7% increase or approximately $20 million
greater than the past twelve months with a 3% increase,growth
in both the loan portfolio and changesthe investment
portfolio. The loan growth of $7.8 million since
June 30, 1997 has been predominantly in loans
secured by real estate. The Bank's portfolio of
loans secured by real estate grew by $11.6
million, with an offsetting reduction in the
balance sheetcommercial loan portfolio of $6$5.5 million. The
overall growth in loans compares to a $12.8
million over last year. Total loans remained constantgrowth between the periods of June 30,
1996 to June 30, 1997, where again the growth was
predominantly in the real estate portfolio.
The investment portfolio grew by $12 million over
the past twelve months and includes the purchase
of $54.5 million in securities, with $50.7
million in government agency debentures.
Principal payments, maturities and called
securities for the balance withinpast twelve months total $43
million. Unrealized gains totaling $810,000 were
shown in the portfolio between consumer and commercial loans also
remaining constant.as of June 30, 1998
compared to unrealized losses of $134,000 as of
June 30, 1997. These gains are indicative of the
current national economic interest rate
structure. The investmentgains in the market value of the
held to maturity portfolio greware $783,000 above
book value as of June 30, 1998.
Funding for the asset growth has come from
increases in advances from the Federal Home Loan
Bank totaling $14.7 million. Deposits decreased
overall by $5.5$2 million
or 5% over the past year. Purchasetwelve
months. This compares with funding in 1997, in
which advances increased by $10 million and
deposits decreased by $2 million. The drop in
deposits for both years has been in time
deposits, mostly certificates of deposit.
Expectations by customers of yields in
certificates of deposit exceed alternative
sources of funding. Short term borrowings will
drop during the next three months through
seasonal deposit growth and investment portfolio
totaled in excess of $48.7 million; however, maturities
andas well as principal paydowns from the Bank's
mortgage backed securities portfolios were $42.6 million for the same period. Purchases
were made of US government-sponsored debentures or mortgage
backed pools. Many 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 total
market value of the portfolio that is currently $718,000
greater than book value.
In the loan area, the Bank continues to experience
strong competition from other financial institutions within
its marketplace. Within the past twelve months a local bank
has opened a branch in the Bank's home
office community and strongest market area (Mount Desert
Island), and a second local bank has announced the opening of
a branch also on Mount Desert Island. Bar Harbor Banking and
Trust Company's strength lies in the relationships built with
its customers and the ability to offer prompt service in
response to their needs.portfolio. 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. The
relationship between liquid assets and short-termthe short-
term liabilities that are vulnerable to non-
replacement within a 30-day period are examined.
The Bank's Policypolicy is to maintain its liquidity
position at a minimum of 5% of total assets. The
Bank has maintained liquidity in its balance
sheet in excess of 15% for the past twelve
months. Liquidity as measured by the Basic
Surplus/Deficit model was 19.2%19.29% as of March 31,June 30,
1998 for the 30-day horizon and 19.8%22.9% for the 90-day90-
day horizon.
How changes in the balance sheet have affected
the Bank may be viewed through the earnings
statement for the periods ending March 31,June 30, 1997
and 1998. With a relatively flat
changeThe Bank's net earnings for the first
six months of 1998 are $190,000 ahead of earnings
for the same period in 1997. The comparison will
be discussed below. The Bank's net income for the
balance sheet from year to year, earnings grew
by $50,000. In comparison,first six months of 1997 was one percent
($42,000) below the Bank experienced a 6% growth
in the balance sheet in 1997 when compared to 1996, with
earnings increasing by $52,000.income at June 30, 1996.
Rates, volumes and the mix of earning assets and
interest bearing liabilities affect interest
income. Increases in loan volume of $7.8 million
afforded increased interest income of
approximately $675,000; however, decreases in
rate reduced interest income by over $540,000,
thereby showing an overall increase for loan
interest of $132,000.
For the first threesix months of 1998, net interest income increased by
$54,000 and was a factor of the growth1997, increases in the balance sheet
coming from investments, with yields earning less than loans,
and savings realized in funding costs. Interest earned on
loans increased by more than $100,000 but was reduced by
$70,000 due to decreases in interest rates charged on
portions of the loan portfolio. Overall,
the loan portfolio yield dropped by 23 basis points. Interest on investments
increased 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 cost of those
liabilities decreased by more than 1%. For the past several
years,afforded 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 portfolio yielded the Bankadditional
interest income of $280,000 more than in 1996$206,000 that was achieved
through increases in volumes but
experienced offsetting decreases in interest income totaling $257,000 due to$580,000
and decreases in rates leaving the growth in
loan interest income virtually flat over that twelve month
period.totaling $374,000. Yields
on loans decreased by 2140 basis points from MarchJune
1996 to March ofJune 1997.
AlthoughOn the investment portfolio did not grow between
the years ended March 31, 1996side, interest and 1997, the portfolio
changeddividend
income as securities matured or were called. Total
investment incomeof June 30, 1998 grew by $126,000,only $20,000
when compared to June 30, 1997. Increases were
made based on volumes ($257,000) with increasesoffsetting
decreases in both
rates and volumes on those($146,000) for the taxable
portion of the investment portfolio. Much of the
overall decrease came from the maturity of non-
taxable securities that are not being replaced
with similar securities in the portfolio. Yields
in the overall portfolio decreased by 10 basis
points from year to year. The taxable ($142,000)portion of
the portfolio decreased in yield by 20 basis
points from 7.23% to 7.03%. Interest on
investments in 1997 grew by $271,000, with the
increase related to volumes totaling $83,000 and
decreasingan increase from yields of $188,000 and an actual
increase in both rates and volumes on tax
exempt securities owned by the bank ($16,000). The yield16 basis points in yields on the
entire securitiesinvestment portfolio went up just slightly (6
basis point) between March 31,June of 1996
and March 31, 1997
At March 31, 1997,June of 1997.
With increased interest bearing liabilities of
approximately $15 million, the Bank'sbank has contained
costs by maintaining rates at existing levels and
utilizing the Federal Home Loan Bank for
advances. Costs have increased by $64,000 based
on volume and decreased by more than $100,000
based on rate decreases. The total cost of
deposits hadpurchased funds decreased by $168,000, $65,000seven basis points
over the past twelve months. This translates to
an overall reduction in interest expense of
$38,000.
In 1997, interest bearing liability costs
increased by $166,000 based on increases in
liabilities of $5.7 million. The increase in the
cost of funds came from increased costs incurred
due to reductionsvolume increases totaling $341,000 with an
offset in volumes
of certificates of deposit and $102,000liability costs due to reductions in
rates.rates creating a
reduction of $175,000. The cost of borrowings increased by $216,000, which
is comprised of $212,000 due to increased volumes and only
$4,000 increase, attributed to rate increases. Thetotal cost of
purchased funds increased by 8.56 basis points
between March
31, 1996June 30, 1997 and 1997.June 30, 1996.
The Bank's positionBank is well positioned with regard to
interest rate sensitivity consists of the matching of itswith assets and
liabilities matched for repricing within a year. There is some
exposure to rising rates out beyond a year,
with $10,000,000 more assets than liabilities
repricing within the Bank
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 be repricable
withinnext twelve months. If rates were to drop by 200 basis
points, simulations based on a static balance sheet indicate
that the Bank's net interest income could rise by
approximately $193,000 during the first year of the drop,
while increasing its income in the second year by $135,000. If rates
were to rise by 200 basis points, simulations
indicate that the Bank could
experience a drop inBank's net interest income
incould decrease by approximately $124,000 and
$172,000 during the first and second years of the
rise. Should rates fall by 200 basis points, the
Bank's net interest income would increase by
approximately $166,000 the first year by
$77,000, and drop additional interest earnings inby
$233,000 the second year by $400,000.year.
The Bank has maintained itsratio for the reserve for possible loan
losses at better thanhas been over 2% of total loans outstanding for a number of years,
and continues with a ratio of 2.2%2.06% as of March 31,June
30, 1998. While maintaining the 2% ratio between
the reserve for possible losses and total loans
outstanding, the Bank has been able to reduce the
amount of funds allocated to the reserve based on
the slowing growth of the loan portfolio overall.
The Bank reviewscontinues to review its allocation to
the reserve on a monthly basis and funds the
reserve as deemed necessary. This 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 114/118. Reference is made to the notes included in
this filing that outlines the impaired loan figures. Losses in the loan portfolio arewere estimated at
$500,000 for both 1998 with first quarterand 1997. As of June 30,
1998, charge offs totaling $110,000the Bank had charged off $292,000 in loans
compared to $133,000 during$270,000 for the first quarter ofsame period in 1997.
The amounts represented below are shown in
thousands and represent the total dollars past
due for the first threesix months of each year listed.
Included in loans that were 90 days or more past
due and still accruing in 1997 were approximately
$900,000 in outstanding loans for which the
customers had commitments from other banks to pay
the Bank out for the loans.
Category 1998 1997
Category 1998 1997 1996
90-day past due and $1,528
$1,990
still $1,102,919 $1,302,437 $1,247,941 accruing
Non-accruing $3,438,992 $3,207,492 $3,289,461
$4,541,911 $4,509,929 $4,537,4022,682
$3,503
$4,210
$5,493
Gross loans $216,113,8 $214,687,01 $201,502,68
53 6 2Loans $229,226
$221,521
Percentage of gross 1.83% 2.48%
loans 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 ofIn reviewing non-interest income and non-interest expense. As stated earlier,for 1998, the
Bank has maintained a reserve for possible loan losses in excess
of 2% when comparedearned $250,000 or approximately 12%
more than twelve months ago, with the increase
attributable 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 ofTrust Department's earnings
before expenses, which have exceeded last year's
first quarter income and includesby $158,000. Additionally, the Trust Department income, which is $52,000
ahead of last year's income. No other major category in
other income can be singled outaccounting
for substantial growth from
year to year.
Other non-interest expense is $252,000 moremortgage servicing rights was approximately
$70,000 higher as of March
31,June 30, 1998 when compared
to June 30, 1997.
During the same periodfirst six months of 1997, non-interest
income grew by $81,000 over 1996. This growth was
attributed to the Trust Department's earnings
before expenses growing by $210,000 more than the
first six months of 1996. Additionally, as of
January 1, 1996, when the Bank implemented FASB
Statement No. 122, "Accounting for Mortgage
Servicing Rights", the allocation positively
impacted the earnings of the Bank by $106,000. As
of June 30, 1997, that allocation was
approximately $30,000 less than in 1996 and
additionally, fees generated from the origination
and sale of mortgages were less than the previous
year. In the spring of 1997, the Bank ran a
promotion for mortgages choosing to keep them in
its own portfolio instead of selling them in the
secondary market, thus reducing its income from
origination and sold loan fees.
Other expenses, the category on the earnings
statement that encompasses the majority of
accounts that are not interest or human resource
related, are 17% higher in 1998 than in 1997.
Included in the expenses for 1998 are increased
maintenance contracts and depreciation expenses
incurred as the Bank has continued to strengthen
its technology capabilities. Additionally, the
Bank has been more active in the media in 1998,
through the introduction of a new money market
product and numerous loan promotions. The Bank
has hired a consultant to assist in the selection
process for a new banking software vendor. The
Trust Department has also incurred expenses in
anticipation of its conversion of software in
September of this year. Lastly, the amortization
of mortgage servicing rights has impacted the
Bank's earnings by approximately $30,000.
Comparing 1997 to 1996, salaries and benefits
exceeded 1996 by 4.7% and included merit
increases granted as of January 1, 1997,
increases in the cost of benefits for employees,
and additional time worked and additional staff
required in connection with the conversion of the
Bank's software which took place in late November
of 1996.
Other expense for June 30, 1997 was $307,000 for
13% higher than twelve months prior and was
attributable to enhancements started in 1996.
During 1996, the Bank implemented new software
and hardware for its banking applications,
including document and check imaging and servers
to run these applications. With the installation
of new banking software, individual personal
computers were upgraded. Each of these
installations increased not only the bank's
assets, but also its depreciation expense, which
was $152,000 more in 1997 than in 1996. The
upgrade in the communication lines, which
increased the speed of transmitting information
to all locations, increased the Bank's telephone
charges by $50,000 more in 1997.
The introductionBank's Year 2000 global assessment and action
plan has been approved by its Board of Directors.
Individual project plans for mission critical
systems are in progress with testing and proxy
testing plans included. Solicitations of vendors
have been mailed and responses have been received
from over 30%. Follow up with other mission
critical vendors continues. Testing of parts of
the bank's call center, interactive voice
response systemhardware 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.software has begun. The
assessment of customers' preparedness and the
resulting impact on the institutionBank should be
substantially completed by September 30, 1998.
Testing of partsLetters have been sent to all major borrowers and
lenders are following up with their customers.
The Bank has redesigned its loan application that
incorporates a question regarding the
preparedness of the bank's hardware and software has
already begun.
In reviewing non-interest income and non-
interest expenseborrower for the periodmillennium.
Over 5,200 business customers have received a
brochure entitled "Is your business Prepared for
Year 2000". Employee and customer awareness
continues with flyers sent to all consumer
customers. The Bank will be participating in a
Bank Business Customer Seminar being developed by
the Maine Bankers Association. This program will
run between March 31, 1996mid-September and 1997, there are no categories showing significant changes
with dollars exceeding $60,000mid-November.
The costs incurred so far have primarily been for
supplies and more than 4% forcustomer awareness information.
Since the Bank has stayed very current in its
technology, it does not anticipate any major
category.expenditures directly related to the Year 2000
issues. The budget has not been finalized to
date. The Bank's banking software vendor is
presently working on a proxy test with a target
completion date of mid-November. The Bank will be
installing an upgrade in August this year. All
users will move from this upgrade to Release 10
of the banking software in the first quarter of
1999. The Bank will not incur any material costs
to install either of these upgrades.
Looking at some of the standard bank ratios, the
Bank's efficiency ratio remains below national
averages at just under 57%, which has remained
comparable for the past three years. The Bank's
capital to asset ratio is 12.4% andof 12.1% has increased
from 11.5% over the past twelve months. The Bank
far exceeds the required risk based capital ratio
of 8% with its Tier 1I ratio of 20.3% and19.95%, total
capital ratio of 21.5% or
additional21.20% and leverage ratio of
12.14%. These ratios represent capital of $28.7 million. These ratios compare
favorably$29
million in excess of the requirement for a well
capitalized bank.
SFAS No. 125 and No. 127 relate to March 31, 1997 when the capitalaccounting
for transfers and servicing of financial assets
and extinguishment of certain liabilities and
were adopted effective January 1, 1997. The
adoption of these standards has had no material
effect on the financial statements.
SFAS No. 128 relates 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.the computation for
earnings per share. The adoption of SFAS No. 128
has had no material effect on the financial
statements.
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
/s/ Sheldon F.
Goldthwait, Jr.
Date: May 15,August 14, 1998 Sheldon F.
Goldthwait, Jr.
Chief
Executive Officer
/s/ Virginia
M. Vendrell
Date: May 15,August 14, 1998 Virginia M.
Vendrell
Treasurer and
Chief
Financial Officer