17
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, 1999 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) 288-3314
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 of shares outstanding of each of
the issuer's classes of common stock as of March 31,
1998:June 30,
1999:
Common Stock: 3,643,614
TABLE OF CONTENTS
Financial Information Page
Item 1. Financial Statements
Consolidated Balance Sheets 3
December 31, 1998 and March 31, 1999
Consolidated Statements of Earnings 4
Three months ended March 31, 1998 and 1999
Consolidated Statements of Changes in 5
Stockholders' Equity
Three months ended March 31, 1998 and 1999
Consolidated Statement of Cash Flows 6-7
Three months ended March 31, 1998 and 1999
Rate Volume Analysis 8
Three months ended March 31, 1998 and 1999
Notes to Financial Statements 9-12
Item II. Management's Discussion and Analysis 13-
Financial Information Page
Item 1. Financial Statements
Consolidated Balance Sheets 3
June 30, 1999 and December 31, 1998
Consolidated Statements of Earnings 4
Three months and six months ended June 30,
1998 and 1999
Consolidated Statements of Changes in 5
Stockholders' Equity
Six months ended June 30, 1998 and 1999
Consolidated Statement of Cash Flows 6
Six months ended June 30, 1998 and 1999
Rate Volume Analysis 7
Six months ended June 30, 1998 and 1999
Notes to Financial Statements 8-10
Item II. Management's Discussion and Analysis 11-15
of Financial 15
Condition and Results of
Operations
Signature Page 16
BAR HARBOR BANKSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
MARCH 31,JUNE 30, 1999 andAND DECEMBER 31, 1998
(in thousands, except number of shares and per share
data)
(Unaudited)
March Decembe
31, rJUNE DECEMBE
30, R 31,
1999 19991998
ASSETS
Cash and Due from Banks $6,841$ 9,054 $11,511
Federal Funds Sold 3,200 0
Securities Available for Sale, 20,76527,618 17,844
at market
Securities Held to Maturity
(Market Value 116,275120,549 113,162
$116,306$118,433 at 3/31/99;6/30/99 and
$114,177 at 12/31/98)
Other Securities 6,105 6,133
Loans Held for Sale 381236 1,018
Loans, net of allowance for
possible loan 231,668losses 246,881 224,980
losses of $4,638$4,912 in 1999 and $4,455
in 1998)1998
Premises and Equipment 7,7477,589 7,951
Other Assets 11,86212,588 9,448
Total Assets $401,64$433,82 $392,04
40 7
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand Deposits $35,015$44,031 $42,323
NowNOW Accounts 40,90742,181 43,319
Savings Deposits 70,57075,469 67,619
Time Deposits 111,770108,791 113,187
Total Deposits 258,262270,472 266,448
Securities sold under Repurchase 6,4266,927 8,092
Agreements
Advances from Federal Home Loan 84,665103,958 66,120
Bank
Other Liabilities 4,7614,231 4,526
Total Liabilities 354,114385,588 345,186
Commitments and Contingent
Liabilities
Capital Stock, par value $2
Authorized 10,000,000 shares
7,287 7,287
Issued 3,643,614 in 19991998 and 19987,287 7,287
1999
Surplus 4,002 4,002
Retained Earnings 37,59238,534 36,862
Net unrealized appreciation on
securities (11)available (251) 50
available
for sale, net of tax benefit
Less: Cost of 200,000 shares of (1,340) (1,340)
Treasury Stock (1,340) (1,340)
TOTAL STOCKHOLDERS' EQUITY 47,530 46,86148,232 39,574
TOTAL LIIABILITIES AND $401,64STOCKHOLDERS' $433,82 $392,04
STOCKHOLDERS' EQUITY 40 7
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-MONTHS SIX-MONTH
MONTHS MONTHS ENDING ENDING
3/31/ENDING ENDING 6/30/99 3/31/6/30/98
6/30/99 06/30/98
Interest & Fees on $5,340 $5,277 $10,482 $10,335
Loans $5,141 $5,059
Interest and
Dividends on
Investment 2,235 1,686 4,282 3,315
Securities:
Taxable Interest
Income
2,046 1,629
Non-taxable 81 116 164 240
Interest 83 124 Income
Dividends 113 100101 226 201
Federal Funds 5 15 28 30
Sold 23 15
Total Interest 7,774 7,195 15,182 14,121
Income 7,406 6,927
Interest on 2,024 2,071 4,073 4,212
Deposits
2,048 2,142
Interest onin Short
Term 1,301 912 2,451 1,602
Borrowings 1,150 690
Total Interest 3,325 2,983 6,524 5,815
Expense 3,198 2,832
Net Interest Income 4,208 4,0954,449 4,212 8,658 8,307
Provision for Loan 269 84 537 168
Losses
Net Interest Income
after 4,180 4,128 8,121 8,139
Provision for
Loan Losses
269 84
Net Interest Income after
Provision for Loan Losses 3,939 4,011
Other Income 1,186 1,1261,226 1,263 2,412 2,389
Investment 0 6 0 63
Securities Gains
0 57
(Losses)
Other Expenses::
Salaries & 1,502 1,432 3,042 2,924
Employee 1,540 1,491 Benefits
Other 1,626 1,3071,598 1,681 3,224 2,987
Investment 0 0 0 0
Securities Losses
Income Before 2,306 2,284 4,267 4,680
Income Taxes 1,959 2,396
Income Tax Expense 644 772779 729 1,423 1,501
Net Income 1,315 1,624
PER COMMON SHAE DATA, BASED
ON $0.38 $0.47$1,527 $1,555 $2,844 $3,179
Earnings per Share:
Based on
3,443,614 shares
for 19991998 and 1998$0.44 $0.45 $0.83 $0.92
1999,
Dividends Per Share 0.17 $0.17 $0.160.34 $0.33
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 MARCH 31,JUNE 30, 1998 AND 1999
(in thousands, except number of shares and per share data)
(UNAUDITED)
ACCUMU NET
UNREALIZELATED STO
CAPITAL RETAINE OTHER TREASURY CKH
STOCK SURPLUS D DEPRECIAT NET
CAPIT RETAIN ION ON TREASU STOCKHOLD
AL SUIRP ED SECURITIE RY ERS'COMPRE STOCK LUS EARNINOLD
EARNING NSIVE ERS
S STOCK EQUITY
GS AVAILABLE
FOR SALEINCOME '
EQU
ITY
Balance, 12/31/97 3,636 7,489 $28,20 ($104)$7,284 $3,932 $32,5 $24 ($1,34 $37,887
5$42,462
62 0)
Net Earnings 1,575 $1,575
Net unrealized
depreciation3,179 3,179
Other comprehensive
income,
net of tax:
Unrealized (5) (5)
gains/losses on
Securities
(161) ($161)
available for sale
Net of tax
benefit of $6
Total 1,575 (161) 1,413Other comprehensive
income
Comprehensive income 3,174
Cash dividends
declaredDividends Declared
($0.16 (482) ($482).33 (1,13 (1,135)
per share) 5)
Sale of Stock 5 85 $902 70 73
Balance, 3/31/6/30/98 $3,64 $7,57 $29,29 ($265)$7,286 $4,002 $34,6 $19 ($1,34 $38,908
1 4 8$44,573
06 0)
Balance, 12/31/98 $7,28 $4,00 $36,86$7,287 $4,002 $36,8 $50 ($1,34 $46,861
7 2 2$46,860
61 0)
Net Earnings 1,315 $1,315
Net unrealized
depreciation2,844 2,844
Other comprehensive
income,
net of tax:
Unrealized (301) (301)
gains/losses
on Securities
available for (61)Other comprehensive
Income
Comprehensive income 2,543
Cash Dividends Declared
($61)
sale,
Net of tax
benefit of $20
Total 1,315 (61) 1,254
comprehensive
income
Cash dividends
declared ($0.17 (585) ($585).34 per share) (1,17 (1,171)
1)
Balance, 3/31/6/30/99 $7,28 $4,00 $37,59 ($11)$7,287 $4,002 $38,5 $(251 ($1,34 $47,530
7 2 2$48,232
34 ) 0)
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 31, MARCHJune 30, 1999 31,JUNE 30,
1998
Cash Flows from Operating Activities:
$1,315 $1,624
Net Income $2,844 3,179
Adjustments to reconcile net
earnings to net cash
provided by operating 245 225491 454
Operating activities:
Depreciation
Provision for Loss Losses 268 84537 168
Provision for Losses on Other 0 0
Real Estate 2 0 Owned
New Loans Originated for Sale (4,227) (4,423)(7,120) (9,053)
Proceeds from Sale of Mortgages 8,092 8,920
Held 4,961 4,210
Forfor Sale
Gain on Sale of Mortgages (58) (76)
Originated (64) (31)
Forfor Sale
Net Amortization of Bond 55 49132 111
Premium
(Gain) Loss on sale of (0)
premises 25 2
and 0 equipment
Net Change in Other Assets (2,280) (337)(2,974) (589)
Net Change in Other 235 322(295) (461)
Liabilities
Net Cash Provided by Operating 510 1,7231,674 2,655
Activities
Cash Flows from Investing Activities:
Net decrease (increase) in Federal
Funds Sold
Purchases of Securities Heldsecurities held to (11,523) (17,121
Maturity )(26,066) (24,770)
maturity
Proceeds from Maturity and
Principal Paydowns 1,250 4,830
of Securities held2,750 11,025
Held to maturityMaturity
Proceeds from Call of Securities 7,101 7,50015,788 10,145
Held to Maturity
Purchases of Securities (7,980) (4,000)
Available (15,215) (6,000)
for Sale
Proceeds from Maturity and
Principal Paydowns 1,471 209
of availableSecurities 1,493 239
Available for saleSale
Proceeds from saleSale and callsCalls of
securities 3,500 1,000
availableSecurities Available for saleSale
Net decrease (increase)Decrease (Increase) in otherOther 28 (38)
securitiesSecurities
Net Loans Made to Customers (7,094) 915(22,660) (12,378)
Capital Expenditures (41) (148)(160) (545)
Proceeds from sale of other realOther Real 80 0
estate ownedOwned
Proceeds from Sale of Fixed Assets 6 0 0
Assets
Net Cash Used in Investing (13,288) (6,853)(40,456) (21,322)
Activities
Cash Flows from Financing Activities:
(6,769) (3,547)
Net Change in Savings, NOW and 8,420 627
Demand Deposits
Net Change in Time Deposits (1,417) (3,263)(4,396) (7,343)
Net Change in securities sold (1,165) (158)
under (1,666) (137) Repurchase Agreements
Purchase of AdvancesProceeds from FHLB 25,000 18,500Federal Home Loan 60,000 36,500
Bank
Repayment of Advances from FHLB (3,500) (9,500)(22,000) (17,500)
Net Change in Short Term Other (2,955) 4,806(162) 11,610
Borrowed Funds
Proceeds from Sale of Capital 0 7374
Stock
Payment of Dividends (585) (551)(1,171) (1,136)
Net Cash Provided by Financing 8,108 6,38139,526 22,674
Activities
Net Increase (Decrease) in Cash and (4,670) 1,251743 4,007
Cash Equivalents
Cash and Cash Equivalents at 11,511 7,537
Beginning of Year
Cash and Cash Equivalents at End of $6,841 $8,788$12,254 $11,544
Quarter
Supplemental Disclosures of Cash Flow
Information:
Cash Paid during the Year for: Interest $3,186 $2,877$5,860
Interest
Income Taxes, Net of Refunds $0 $500 $1,675
Non-Cash Transactions:;
Transfers from Loans to Real $49 $143
Estate Owned $49 $0 (Other Assets)
Transfer of Securities from Held
to Maturity to $0 $0
to
Available for Sale
The accompanying notes are an integral part of these
consolidatedConsolidated financial statementsstatements.
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, 1999
COMPARED TO MARCH 31,JUNE 30, 1998
(in thousands, except number of shares and per share
data)
INCREASES (DECREASES) DUE TO:
VOLUME RATE NET
Loans $364$402 ($282) $8225 $147
5)
Taxable Securities 556 (126) 4301,155 (164 991
)
Tax Exempt Securities (31) (10) (41)(57) (20) (77)
Federal Funds Sold and 10Money 1 (2) 8
Money(1)
Market Funds
TOTAL EARNING ASSETS $899 ($420) $4791,501 (441 1,060
)
Deposits 80 (174)257 (397 (
) 140)
Borrowings 942 (93) Borrowings 501 (41) 459849
Total Interest Bearing $581 ($215) $3661,199 (490 709
Liabilities )
NET CHANGE IN INTEREST $318 ($205) $113$302 $49 $351
YEAR-TO-DATE FIGURES AS OF MARCH 31,JUNE 30, 1998
COMPARED TO MARCH 31,JUNE 30, 1997
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 16
Market 5 1 6 Funds
TOTAL EARNING ASSETS $132$813 ($111) $21660 $153
)
Deposits 15 (12) 3$38 ($107 ($69)
)
Borrowings (58) 22 (36)25 6 31
Total Interest ($43) $10 ($33)
Bearing 63 (101) (38)
Liabilities
NET CHANGE IN $175INTEREST $750 ($121) $54
INTEREST559 ($191)
)
NOTES TO FINANCIAL STATEMENTS DATED MARCH 31, 1999JUNE 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 1998 Annual Report.
During 1998, the Company adopted Statements of
Accounting Standards (SFAS) 130, 131, and 132. The
adoption of SFAS 130, Reporting of Comprehensive
Income, Requiredrequired that certain items be reported under a
new category of income "Other Comprehensive Income".
Unrealized gains and losses on securities available for
sale is the only item included in Other Comprehensive
Income. SFAS 131 and 132 relate to disclosures about
segments and employee benefits, respectively. The
Company, through the branch network of the Bank,
provides a broad range of financial services to
individuals and companies in eastern Maine. Operations
are managed and financial performance is evaluated on a
corporate-wide basis. Accordingly, all of the Company's
banking operations are considered to be aggregated in
one reportable operating segment. The financial
statements for 1998 and 1999 include the required
additional disclosures for SFAS No. 130 and 132.
In addition, the Financial
Accounting Standards Board issuedfor Derivative Instruments and Hedging
Activities and SFAS No. 133, 134, "Accounting for Mortgage-BackedMortgage-
Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise", which are. SFAS No. 133 will be effective for fiscal
years beginning after June 15, 19992000 and SFAS No. 134 is
effective the first fiscal quarter beginning July 1,
1999 respectively.1999. Management hasdoes not determinedexpect the impactadoption of SFAS No. 133 or SFAS No. 134these
standards to have a material effect on the financial
statements.
March 31,JUNE 30, 1999
2. INVESTMENT SECURITIES CARRYING FAIRCARRYIN MARKET
AVAILABLE FOR SALE G VALUE
VALUE
a: U. S. Treasury and other 19,481 $19,433$26,699 $26,34
government agencies 5
b: Marketable equity securities 1,300 1,332
securities1,273
Total Securities Available $20,781 $20,765
For $27,999 $27,61
Sale 8
HELD TO MATURITY:
a: U. S. Treasury and other $96,119 $94,30
government agencies $97,678 $97,6614
b: States of the U.S. and other 5,245 5,292
political subdivisions 5,640 5,741
c: Corporate bonds 12,958 12,90419,185 18,837
Total Securities Held to $116,276 $116,306$120,54 $118,4
Maturity 9 33
OTHER SECURITIES $6,105 $6,105
TOTAL SECURITIES $143,162 $143,176$154,65 $152,1
3 56
The Bank does not hold any securities for a single
issuer which exceed 10% of the Bank's stockholders'
equity.
MarchJUNE DECEMBE
30, R 31,
December
1999 31,1998
3. LOANS1998
3. LOANS
a: Commercial, agricultural $33,567and $38,588 $33,224
and
other loans
b: Real Estate - Construction 13,37415,276 11,366
c: Real Estate - Mortgage 173,555181,490 168,307
d: Installment Loans 15,81016,439 16,538
Total Loans $236,306 $229,435$251,79 $229,43
3 5
4. CHANGES IN ALLOWANCE FOR March MarchJUNE JUNE
POSSIBLE LOAN LOSSES: 31, 31,30, 30,
1999 1998
Balance, beginning January 1 $4,455 $4,7434,743
Provision charged to income 268 84537 168
Recoveries of amounts 89 33
charged 173 85
Losses charged to provision 174 110253 292
Balance, ending March 31 $4,638 $4,750June 30 $4,912 $4,70
4
Information regarding March Decembe impaired loans:
31, r 31,
June June
30, 30,
1999 1998
Average investment in $775impaired loans $ $1,576
impaired loans776
Interest income recognized on
impaired loans including interest 18 35
income $4 $35 recognized on cash basis
Balance of impaired loans $775 $1,073777 1,073
Portion of impaired loan balance for
which an $775 $1,073
allowance for credit losses 777 1,073
is allocated
Portion of allowance for loan losses
allocated to the $31 $42
impaired loan 55 42
balance
5. CHANGES IN ALLOWANCE FOR OTHER REAL ESTATE:
5. CHANGES IN ALLOWANCE FOR OTHER
REAL ESTATE:
3/31/9 3/31/ 3/31/
6/30/99 6/30/ 6/30/9
98 977
Balance, beginning January $16 $17 $23$22
January 1
Provision charged to 0 0 0
income
Losses charged to 1 0 0 05
provision
Balance, ending March 31 $16June 30 $15 $17 $23$17
6. The aggregate dollar amount of loans made to
directors, executive officers or principal holders of
equity securities as of March 31,June 30, 1999 and December 31,
1998 respectively, were:
Aggregate amount, beginning 1/1 $7,243 $3,952
1/1
New loans 3451,062 5,393
Repayments 377747 2,102
Aggregate amount, ending $7,211
3/31/$7,558
6/30/99
Aggregate amount, ending $7,243
12/31/98
7. OTHER ASSETS March DecemberJUNE 30, DECEMBER
1999 31, 1999 31,19981998
a: Interest earned but not
paid on: $2,413 $1,494
Loans
$1,924 $1,924
Investments 1,2511,442 1,264
b: Other Real Estate Owned 17597 98
8. INCOME TAXES:
Components of income tax expense for the period ended
March 31,June 30, 1999 are as follows:
Current
Federal $1,179$2,069
State 2348
Deferred (558)
$644(694)
$1,423
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, 1999ended June 30, 1999.
Computed tax $1,451
expense $660
Tax exempt (63)
interest
(32)
Other 16
$64435
$1,423
At March 31,June 30, 1999, 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 $1,416$1,509 0
Deferred and accrued employee 1,0011,018 0
benefits
Deferred mortgage servicing $1310 133
rights
Deferred loan origination fees 327329 0
Securities losses not currently 2325 0
deductible
Core deposit intangibles 4643 0
Depreciation 0 5941
Other 9
$2,822 $19017 0
$2,941 $174
No valuation allowance is deemed necessary for the
deferred tax asset.
9. INCOME TAX EXPENSE March March 31,
31,June 30, June 30,
1999 1998
1999
Federal Income Tax $622 $747$1,374 1,453
State Income Tax 22 2549 48
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following is thea review of the results of the
operations of Bar Harbor Banking & Trust Company for
March 31,June 30, 1999 as compared to March
31,June 30, 1998. The bank
has focused on growth in its balance sheet through both
loans and investments, funding the growth with deposits
and borrowings. While the first quartersix-month earnings for 1999
are down $309,00010% or $335,000 compared to first quartersix months
of 1998, the bank is involved in several major projects
that are described below. The expectation is that
these projects will enhance customer service,
efficiencies and profitability.
Overall, the bank's balance sheet grewhas grown by 14%$65
million or 18%, compared to a 6%5.7% growth of $20
million between 19981999 and 1997.1998.
Total loans grew $20have grown by $22.8 million or 9.6%10%
when compared to 1998's outstanding loans. This
validates the growth concept mentioned earlierabove compared
to outstandingloan growth in 1998 over 1997 of $7.8 million. Loan
growth for 1999 has come from consumer mortgages
(approximately $18 million or 18% growth from year to
year). Commercial loans remaining flat between the periods ending March 31,
1998 and March 31, 1997.increased by $4 million or 4%
over last year. The balance between consumer and
commercial loans remains similar to last year's
relationshipthe past two years'
mix with consumer loans approximating 55% of the
portfolio.
The loan growth from June 30, 1997 to June 30,
1998, totaling $7.8 million, was 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 commercial loan portfolio
of $5.5 million. While local competition remains
strong, 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.
The investment portfolio grewhas grown by approximately
$30$40 million
or 26%35% over the past year. Purchases in the Bank's
investment portfolio totaled $99 million. Included in
excess of
$87 million; however, maturities and principal
paydowns from the Bank's mortgage backed securities
portfoliospurchases were $58.3$51.3 million forin mortgage-backed
pools sponsored by the same period.
PurchasesUS Government. Government agency
debentures totaling $69 million$26.2 were made of US
government-sponsored debentures or mortgage backed
pools.also purchased over the
past twelve months. Of thethese debentures purchased,
$17.5$24.7 million are callable securities and some have
supported the bank's earnings in lieu of selling fed
funds. These purchases in part replaced $23.8$24.2 million
of called government-sponsored securities, and $25.6
million in principal reductions in mortgage backed
pools.pools and $8.7 million in maturing securities.
Unrealized losses did not deterioratein the available for sale portfolio
as represented on the Bank's Statement of Condition
increased over the past twelve months, ending the
quarter at $11,000.$251,000 and is indicative of the current
national interest rate structure, including Federal
Reserve increases in rates. This unrealized loss is
also visible in the total market value of the portfolio
that is virtually flatin comparison with the book value. The Bank's posture
traditionally has been to purchase securities with the
intent to hold to maturity and potential sales in the
portfolio are not imminent.
In comparison, the investment portfolio grew by
$12 million between June 30, 1997 and June 30, 1998 and
included the purchase of $54.5 million in securities,
of which $50.7 million were government agency
debentures. Principal payments, maturities and called
securities for the same period totaled $43 million.
Unrealized gains totaling $810,000 were shown in the
portfolio as of June 30, 1998 compared to unrealized
losses of $134,000 as of June 30, 1997. These gains
were indicative of the national economic interest rate
structure for that time. The gains in the market value
of the held to maturity portfolio were $783,000 above
book value as of June 30, 1998.
Funding for the asset growth has come from strong
growth in the Bank's deposits totaling $25 million. In
early 1997, the Bank introduced the Investor's Choice
account, an account that competes favorably with
national money market accounts with respect to interest
rate offerings. This product has been quite successful
for the Bank in new deposit growth as well as deposit
retention. In addition to the deposit growth, funding
for the growth in the balance sheet has come from
increases in advances from the Federal Home Loan Bank
totaling $34 million. Short-term borrowings
traditionally drop during the third quarter through
seasonal deposit growth, investment maturities and
principal paydowns from the Bank's mortgage backed
securities portfolio.
Funding for the asset growth between 1997 and 1998
came from increases in advances from the Federal Home
Loan Bank totaling $14.7 million. Deposits decreased
overall by $2 million during that same period. The
drop in deposits was in time deposits, mostly
certificates of deposit.
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-day90-
day time horizon. The relationship between liquid
assets and short-term liabilities that are vulnerable
to non-replacement within a 30-day period are examined.
The Bank's policy 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
18%16% for the past twelve months. Liquidity as measured
by the Basic Surplus/Deficit model was 22.1%22.8% as of March 31,June
30, 1999 for the 30-day horizon and 20.1%25.2% 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, 1998 and 1999. The Bank's
net earnings for the first six months of 1999 are
$335,000 below earnings for the same period in 1998.
As mentioned above, growth in earning assets was
strong, but competition and shrinking margins affected
the earnings. Additionally, the provision for possible
loan losses and non-interest expenses were considerably
higher in the first quarterhalf of 1999 than 1998. The comparison
will be discussed below. The Bank's net income for the
first six months of 1998 was $190,000 ahead of the six-
month earnings as of June 30, 1997.
Rates, volumes and the mix of earning assets and
interest bearing liabilities directly affect interest
income. For the first threesix months of 1999, net interest
income increased by $113,000,more than $350,000, which is
twice$160,000 more than the increase between 1998 and 1997.
The increase was a
factorthe result of the growth in the
balance sheet within both loans and investments. However,
the competition for loans requiringequates to narrowing margins,
while increased investments, withalthough producing strong
yields earningin comparison to peer bank interest yields,
still yield considerably less than loans, andloans.
Additionally, funding costs are not decreasing as
quickly as the asset yields. Funding costs dropped several
years ago, affording greater spreads at the time.
Between June 30, 1998 and June 30, 1999, interest
bearing liability costs decreased by only 22 basis
points. As mentioned above, total loans increased by
$22 million between June 30, 1998 and June 30, 1999.
Interest earned on loans increased by more than
$360,000$400,000 but was reduced by $280,000$255,000 due to decreases
in interest rates charged on portions of the loan
portfolio. Overall, the loan portfolio yield dropped
by 6456 basis points. This compares with a drop of 2364
basis points between 1997 and 1998.
In comparison, increases in loan volume of $7.8
million in 1998 compared to 1997 afforded increased
interest income of approximately $675,000; however,
decreases in rate reduced interest income by over
$540,000, thereby netting an overall increase for loan
interest of $132,000.
Interest on investments increased due to $30based on $40
million increase in volumes. The $535,000$1.1 million increase
in interest earned on investments was offset by
$138,000$186,000 decrease in interest rates. The entire
portfolio is currently earning 6.43%6.51% and 4047 basis
points less than it was a year ago. Year to date, the
taxable portion of the portfolio decreased in yield on
average by 32 basis points to 6.79%. The investment
yields for 1998 were 810 basis points lower than 1997.
As of June 30, 1998, on the investment side,
interest and dividend income grew by only $20,000 when
compared to June 30, 1997. Increases were made based
on volumes ($139,000) with offsetting decreases in
rates ($118,000) for the total investment portfolio.
Yields in the overall portfolio decreased by 10 basis
points from 1997 to 1998.
Interest bearing liabilities increased by
approximately $13$55 million or 5%19.6%, butand the cost of
those liabilities actually decreasedincreased by more than 4%.12% or more
than $700,000. Interest expense from deposits
increased by $580,000$257,000 based on increased volume and
decreased by $215,000almost $400,000 based on interest rates. The bank introduced a money market
account that competes favorably with non-bank funds
available. This product, the Investor's Choice, has
been well received and has retained as well as added
new deposits for the bank.
Reductions in interest bearing costs have come from the
decline in interest rates for time deposits, including
certificates of deposit and Individual Retirement
Accounts, which have dropped approximately 4059 basis
points from year to year. The
overall costWhile the interest expense
created from other borrowings has increased $940,00
based on increased volumes of interest bearing liabilities went down$34 million, the average
rate has dropped by 1334 basis point between March 31, 1999 and March 31,
1998, again less than the reduction in interest yields
from the earning assets.points. As a comparison, 1998's
overall interest bearing liability costs as of June 30,
1998 were 17 basis
points lower than for the comparable periodalmost flat in 1997.comparison to June 30, 1997's
rates.
The Bank's position with regard to interest rate
sensitivity consists of the matching of its assets and
liabilities for repricing within a year. There is some
exposure to rising rates out beyond a year as the Bank
has almost $20.4$26.2 million invested in callable
securities with final maturities of ten years or less.
The exposure lies with the possibility that these
securities would not be called. The gap analysis in
today's interest rate environment shows the Bank with
approximately $42With $20.6 million
more liabilities than assets that would be repricablerepricing within the next
twelve months. Ifmonths, if rates were to droprise by 200 basis
points, simulations
based on a static balance sheet indicate that the Bank's net
interest income could risedecrease by approximately
$48,000$577,000 and $1,519,000 during the first yearand second
years of the drop, while
increasing its income in the second year by $158,000.
Ifrise. Should rates were to risefall by 200 basis
points, the Bank
could experience a drop inBank's net interest income inwould increase
by approximately $456,000 the first year and by
$103,000, and drop additional interest
earnings in$547,000 the second year
by $197,000. At March 31,
1998,The ratio for the potential reduction for net interest income
in the second year was approaching $400,000.
The Bank has maintained its reserve for possible loan losses
athas been approximately 2% of total loans
outstanding for a number of years, and
continues with a ratio of 1.96%1.95% at March 31,June 30, 1999 and
2.2%2.06% as of March 31,June 30, 1998. This ratio represents a
conservative approach to possible losses, especially in light of thelosses. The bank's
delinquency ratio summarized below.has continued to drop over the years
and is at a record low. The Bank reviews 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,Additionally,
the Bank addedallocation contains 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
are estimated at $750,000 for 1999, with first quarter 1999year to date
net charge offs totaling $85,000$80,000 compared to $77,000$207,000
during the first quartersix months of 1998.
The amounts represented below are shown in
thousands and represent the total dollars past due for
the first threesix months of each year listed.
Category 1999 1998
1997
90-day past due and $1,579 $1,103 $1,302
still $ 1,206 $1,528
accruing
Non-accruing 1,664 3,439 3,207
$3,243 $4,542 $4,5101,814 2,682
$3,020 $4,210
Gross loans $236,3 $216,1 $214,68
07 14 7$251,793 $229,226
Percentage of gross 1.37% 2.10% 2.10%
loans 1.20% 1.83%
With earnings asNon-interest income for 1999 is virtually flat (1%
increase) with the first six months of March 31,1998. Although
fee income generated from the bank's various cardholder
programs (VISA, ATM, debit cards) has increased from
year to year, the FASB entry for mortgage servicing
rights income was $60,000 less in 1999 $309,000 less
than March 31, 1998, 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 of approximately 2% when compared to
total loans for a number of years. During 1998,
the provision for possible loan losses was reduced,
based on the recovery of a large loan charged off in a
previous year. The bank continued to maintain a 2%
ratio between the reserve for possible losses and the
total loan portfolio. Beginning in 1999, the
provision has returned to previous years' allocation
and is currently $185,000 more than last year in order
to retain the high ratio between the reserve and the
loan portfolio. As of March 31, 1998, the provision
for possible loan losses was $96,000 less than for the
comparable period in 1997. Other income is $60,000
ahead of last year's first quarter income. No single
major category in other income can be singled out for
substantial growth from year to year. Other1998.
In comparison, non-interest income for 1998 exceeded 1997 by $100,000 and included Trust
Department earnings that were $52,000 more in 1998
when compared to 1997.
Other non-interest expenses for the first quarter
of 1999 are $320,000was
$250,000 or approximately 12% more than for the same
period in 1997, with the increase attributable to the
Trust Department's earnings before expenses, which have
exceeded last year's income by $158,000. Additionally,
the accounting for mortgage servicing rights was
approximately $70,000 higher as of June 30, 1998 when
compared to June 30, 1997.
Salaries and employee benefits are $118,000 (4%)
higher as of June 30, 1999 when compared to the same
period for 1998. The majorThis includes merit increases,
are foundincreased premiums for employee insurance plans, and an
increase of 13 people in the full time equivalent work
force.
Other expenses, the category on the earnings
statement that encompasses the majority of accounts
that are not interest or human resource related, are
$237,000 (8%) higher in 1999 than in 1998. This
increase is much smaller than the 17% increased
incurred between June 30, 1997 and June 30, 1998, which
is described below. As of June 30, 1999, expenses
incurred by the bank's card programs (including VISA
cardholders, merchant processing, operationsATM, debit cards) are
$107,000 more than for the bank's merchant and
customer card processing. In the spring of 1998,comparable period in 1998.
Additionally, the bank beganhas signed a contract to
convert its banking software to Information Technology,
Inc. (ITI). The conversion is scheduled for second
quarter 2000 and, in preparation, the searchbank has begun to
upgrade some of its personal computers, writing off
$25,000 in depreciation from its existing PCs. These
PCs give all Bar Harbor Banking and Trust tellers
faster PCs needed for a new software banking
solution. Consultant fees,the conversion, but also allow
for more efficient service to their customers during
the busy summer season. Additional PCs will be
replaced before the conversion transpires next spring.
Bank employees will be traveling to Nebraska, the home
office for ITI, early this fall for initial training in
connectionmapping of bank products. Expenses incurred with this
search and subsequently in connection with conversion assistance, were not material duringalso include the first quarter
of 1998. The bank is committed to a successful
conversion and as part of that commitment has engaged
the serviceshiring of a third party who has had extensive
experience in conversionsto
assist with the chosen vendor. The
bank will continue to experience consultant charges
throughout 1999,conversion, including project
management and individual employee training.
As mentioned above, other expenses for June 30,
1998 were 17% higher than in 1997. Included in the
expenses for 1998 were increased maintenance contracts
and depreciation expenses incurred as it plans to convertthe Bank
strengthened its technology capabilities.
Additionally, the Bank was more active in early 2000.
Other non-recurring charges make up the difference
between non-interest expense for the two years,
including reconciling entries for loan origination
feesmedia in
1998, and losses incurred fromthrough the check
clearing operation of the bank.
In looking at March 31, 1998 as compared to 1997,
other non-interest expense was $252,000 more in 1998.
The introduction of the Investor's Choice
deposit account and numerous loan promotions. The Bank
hired a consultant to assist in the selection process
for a new banking software vendor. The Trust
Department also incurred expenses during its conversion
of accounting software to InfoVisa in September of
1998. Lastly, the amortization of mortgage servicing
rights impacted the Bank's earnings by approximately
$30,000.
As a financial summary, the following ratios
indicate the bank's call center,
interactive voice response system and several loan
promotions created media opportunities for the bank.status. The Bank's year to date
efficiency ratio is 60%. The Bank's year to date
capital to asset ratio is 11.8% and
the11.1%. The Bank far exceeds
the required risk based capital ratio of 8% with its
Tier 1I ratio of 19% and18.33%, total capital ratio of 20.4% or additional19.58%
and leverage ratio of 12.18%. These ratios represent
capital of $30.6
million. These ratios compare$30 million in excess of the requirement for
a well-capitalized bank.
As an update for Year 2000, the Assessment Phase
is complete and the Renovation Phase is substantially
complete. The bank has identified and contacted third
party vendors (operating partners, plastic card
networks, public utilities, etc.) that are critical to
Marchits operations and success. The bank has not
independently verified the Year 2000 readiness
statements of these third party vendors. Based on the
assessment of system readiness, the bank has repaired
or replaced systems as required. The Validation Phase
is substantially complete with all mission critical
systems tested either internally or by proxy with the
exception of the bank's item processing application.
All equipment for the item processing application has
been upgraded and deemed Year 2000 compliant. Testing
of the interface between the item processing
application and the banking software will be completed
before August 31, 1999.
As the bank monitors on-going systems, it has also
developed a contingency plan in case of unanticipated
failures in any of the bank's systems. The plan has
identified seven core business processes that would be
critical for continued service to its customers.
Business resumption plans for each of these processes
are being refined and specific procedures are being
developed to ensure the bank prepares for and operates
through any possible Year 2000 related interruptions.
The bank's contingency plan has been approved by its
Board of Directors and will be validated before August
31, 1999.
The bank has joined with four other local banks to
create an Interbank Working Group for the Year 2000.
This group is assessing liquidity, security and
customer awareness issues. The CEOs of the five banks
have sent letters to all major employers and clubs in
our two-county area offering a bank panel consisting of
representatives of each of the five banks to speak at
their organization. A number of these sessions have
already occurred and will continue into the late fall.
The five CEOs have also met with local media
representatives to reiterate the message that banks
have done their Year 2000 compliance work and that
funds maintained within banks are safe, sound and
insured.
The costs incurred thus far in 1999 for the Year
2000 initiative total $48,500 and are not expected to
exceed $100,000 by year end.
The financial statements for 1998 whenand 1999 include
the capitalrequired additional disclosures for SFAS No. 130
and 132. In addition, the Financial Accounting
Standards Board issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities and SFAS
No. 134, "Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise". SFAS
No. 133 will be effective for fiscal years beginning
after June 15, 2000 and SFAS No. 134 is effective the
first fiscal quarter beginning July 1, 1999.
Management does not expect the adoption of these
standards to average asset ratio was 12.4%, Tier 1
and total capital ratios compared to risk weighted
assets were 20.3% and 21.5% respectively.have a 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 14,August 12, 1999 Sheldon F.
Goldthwait, Jr.
Chief Executive
Officer
/s/ Virginia M.
Vendrell
Date: May 14,August 12, 1999 Virginia M. Vendrell
Treasurer and
Chief Financial
Officer