1718
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 JuneSeptember 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 JuneSeptember 30, 1999:
Common Stock: 3,643,614
TABLE OF CONTENTS
Financial Information
Page
Item 1. Financial Statements
Consolidated Balance Sheets
3
JuneSeptember 30, 1999 and December 31, 1998
Consolidated Statements of Earnings
4
Three months and sixnine months ended
JuneSeptember 30, 1998 and 1999
Consolidated Statements of Changes in 5
Stockholders' Equity
SixNine months ended JuneSeptember 30, 1998
and
1999
Consolidated Statement of Cash Flows 6
SixNine months ended JuneSeptember 30, 1998
and
1999
Rate Volume Analysis
7
SixNine months ended JuneSeptember 30, 1998 and
1999
Notes to Financial Statements
8-10
Item II. Management's Discussion and
Analysis 11-15 of Financial
Condition and Results of
Operations
Signature Page
16
BAR HARBOR BANKSHARES AND
SUBSIDIARY CONSOLIDATED STATEMENT OF
FINANCIAL CONDITION
JUNESEPTEMBER 30, 1999 AND DECEMBER 31,
1998
JUNE DECEMBESEPT. 30,
RDECEMBER 1999
31, 1999 1998
ASSETS
ASSETS
Cash and Due from Banks $ 9,05414,646
$11,511
Federal Funds Sold 3,200-
0
Securities Available for Sale, 27,61831,827
17,844
at market
Securities Held to Maturity
(Market Value 120,549130,641
113,162
$118,433$127,759 at 6/30/930/99 and
$114,177 at 12/31/98)
Other Securities 6,1056,108
6,133
Loans Held for Sale 2360
1,018
Loans, net of allowance for
possible loan losses 246,881255,871
224,980
of $4,912 in 1999 and $4,455
in 1998
Premises and Equipment 7,5898,082
7,951
Other Assets 12,58811,871
9,448
Total Assets $433,82 $392,04
0 7$459,046
$392,047
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand Deposits $44,031$52,031
$42,323
NOW Accounts 42,18145,153
43,319
Savings Deposits 75,46986,294
67,619
Time Deposits 108,791109,105
113,187
Total Deposits 270,472292,583
266,448
Securities sold under Repurchase 6,9279,621
8,092
Agreements
Advances from Federal Home Loan 103,958103,248
66,120
Bank
Other Liabilities 4,2314,622
4,526
Total Liabilities 385,588410,074
345,186
Commitments and Contingent
Liabilities
Capital Stock, par value $2
Authorized 10,000,000 shares
Issued 3,643,614 in 1998 and 7,287
7,287
1999
Surplus 4,002
4,002
Retained Earnings 38,53439,620
36,862
Net unrealized appreciation on
securities available (251)(597)
50
for sale, net of tax benefit
Less: Cost of 200,000 shares of (1,340)
(1,340) Treasury Stock
TOTAL STOCKHOLDERS' EQUITY 48,23248,972
39,574
TOTAL LIIABILITIES AND STOCKHOLDERS' $433,82 $392,04$459,046
$392,047 EQUITY 0 7
The accompanying notes are an integral part of these
consolidated financial statements.
BAR HARBOR BANKSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
THREE THREE SIX-MONTHS SIX-MONTHNINE- NINE
MONTHS MONTHS MONTHS MONTH
ENDING ENDING ENDING
ENDING 6/9/30/99 6/9/30/98 6/9/30/99
06/9/30/98
Interest & Fees on $5,340 $5,277 $10,482 $10,335$5,631 $5,409 $16,114
$15,744
Loans
Interest and
Dividends on
Investment 2,235 1,686 4,282 3,3152,445 1,790 6,726
5,105
Securities:
Taxable
Interest Income
Non-taxable 81 116 164 24078 95 242
335
Interest Income
Dividends 113 101 226 201116 109 341
310
Federal Funds 5 15 28 3018 26 46
56
Sold
Total Interest 7,774 7,195 15,182 14,1218,288 7,429 23,469
21,550
Income
Interest on 2,024 2,071 4,073 4,2122,077 2,147 6,150
6,360
Deposits
Interest in Short
Term 1,301 912 2,451 1,6021,438 898 3,888
2,500
Borrowings
Total Interest 3,325 2,983 6,524 5,8153,515 3,045 10,038
8,860
Expense
Net Interest 4,773 4,384 13,431
12,690
Income 4,449 4,212 8,658 8,307
Provision for Loan 269119 84 537 168656
252
Losses
Net Interest
Income after 4,180 4,128 8,121 8,1394,654 4,300 12,775
12,438
Provision for
Loan Losses
Other Income 1,226 1,263 2,412 2,3891,803 1,624 4,215
4,013
Investment 0 6 0 631 65 1
128
Securities Gains
Other Expenses::
Salaries & 1,502 1,432 3,042 2,9241,786 1,605 4,827
4,529
Employee Benefits
Other 1,598 1,681 3,224 2,9872,069 1,930 5,293
4,918
Investment 0 4 0
0 04
Securities Losses
Income Before 2,306 2,284 4,267 4,6802,603 2,450 6,871
7,129
Income Taxes
Income Tax Expense 779 729 1,423 1,501865 826 2,288
2,327
Net Income $1,527 $1,555 $2,844 $3,179$1,738 $1,624 $4,583
$4,801
Earnings per
Share:
Based on
3,443,614 shares $0.50 $0.47 $1.33
$1.39
for 1998 and
$0.44 $0.45 $0.83 $0.92
1999,
Dividends Per Share 0.170.19 $0.17 0.34 $0.33$0.53
$0.50
Share
BAR HARBOR BANKSHARES AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY QUARTERS ENDED
JUNESEPEMBER 30, 1998 AND 1999
(in thousands, except number of shares and per share data)
ACCUMUAccumulat
ed Other NET
LATED STO
CAPITAL RETAINE OTHERComprehen TREASURY
CKHSTOCKHOLD
STOCK SURPLUSSUIRPLU D COMPREsive STOCK OLDERS'
S EARNING NSIVE ERSIncome
EQUITY
S INCOME '
EQU
ITY
Balance, 12/31/97 $7,284 $3,932 $32,5$32,562 $24 ($1,341,340) $42,462
62 0)
Net Earnings 3,179 3,1794,801 4,801
Other
comprehensive
income,
net of tax: 56 56
Unrealized (5) (5)
gains/losses
onOn Securities
Other
comprehensive
income
Comprehensive 4,857
income 3,174
Cash Dividends
Declared ($.33 (1,13 (1,135).50 (1,722) (1,722)
per share) 5)
Sale of Stock 23 70 73
Balance, 6/9/30/98 $7,286$7,287 $4,002 $34,6 $19$35,640 $80 ($1,34 $44,573
06 0)1,340) $45,670
Balance, 12/31/98 $7,287 $4,002 $36,8$36,862 $50 ($1,34 $46,860
61 0)1,340) $46,861
Net Earnings 2,844 2,8444,583 4,583
Other
comprehensive
income,
net of tax: (647) (647)
Unrealized (301) (301)
gains/losses
onOn Securities
Other
comprehensive
Incomeincome
Comprehensive 3,936
income 2,543
Cash Dividends
Declared ($.34.53 (1,825) (1,825)
per share)
(1,17 (1,171)
1)
Balance, 6/9/30/99 $7,287 $4,002 $38,5 $(251$39,620 $(597) ($1,34 $48,232
34 ) 0)1,340) $48,972
The accompanying notes are an integral part of these Consolidatedconsolidated financial
statements.
BAR HARBOR BANKSHARES
AND SUBSIDIARY
COLSOLIDATED STATEMENT
OF CASH FLOWS
(UNAUDITED)
JuneSeptem
b
Septem
be er
30,
r 30,
1999 JUNE 30, 1998
Cash Flows from Operating Activities:
Net Income
$2,844 3,179$4,583 4,801
Adjustments to reconcile net earnings
to net cash provided by
491 454
Operatingoperating activities:
733 691
Depreciation
Provision for Loss Losses
537 168656 252
Provision for Losses on Other Real
(1) 0 0
Real
Estate Owned
New Loans Originated for Sale
(7,120) (9,053)(7,796) (12,509)
Proceeds from Sale of Mortgages
8,092 8,9209,042 12,474
Held for Sale
Gain on Sale of Mortgages
(58) (76)(85) (117)
Originated for Sale
Net Amortization of Bond 132 111
Premium
154 (17)
(Gain) Loss on sale of premises 25 2
and
62 1
equipment
Net Change in Other Assets
(2,974) (589)(2,025) (333)
Net Change in Other (295) (461)
Liabilities
96 (66)
Net Cash Provided by Operating
1,674 2,6555,419 5,178
Activities
Cash Flows from Investing Activities:
Net decrease (increase) in Federal
Funds Sold
Purchases of securities held to
(26,066) (24,770)(42,518 (45,734)
maturity )
Proceeds from Maturity and Principal
Paydowns of Securities
2,750 11,0253,250 22,213
Held to Maturity
Proceeds from Call of Securities 15,788 10,145
Held
21,619 12,347
to Maturity
Purchases of Securities Available (15,215) (6,000)
for
(19,965 (15,745)
Sale )
Proceeds from Maturity and Principal
Paydowns of Securities
1,493 2391,517 271
Available for Sale
Proceeds from Sale and Calls of
3,500 1,0009,500
Securities Available for Sale
Net Decrease (Increase) in Other
2825 (38)
Securities
Net Loans Made to Customers
(22,660) (12,378)(31,836 (13,482)
)
Capital Expenditures
(160) (545)(932) (985)
Proceeds from sale of Other Real
80 081 437
estate Owned
Proceeds from Sale of Fixed Assets 67 0
Net Cash Used in Investing (40,456) (21,322)
Activities
(65,252 (31,216)
)
Cash Flows from Financing Activities:
Net Change in Savings, NOW and 8,420 627
Demand
30,216 22,963
Deposits
Net Change in Time Deposits
(4,396) (7,343)(4,081) (9,824)
Net Change in securities sold (1,165) (158)
under
1,529 4,241
Repurchase Agreements
Proceeds from Federal Home Loan 60,000 36,500
Bank
66,000 44,000
Repayment of Advances from FHLB (22,000) (17,500)(35,000
(
3
0
,
5
0
0
)
)
Net Change in Short Term Other
(162) 11,6106,128 1,912 Borrowed Funds
Proceeds from Sale of Capital 0Stock
(0) 74
Stock Payment of Dividends
(1,171) (1,136)(1,824) (1,917)
Net Cash Provided by Financing
39,526 22,67462,968 30,949 Activities
Net Increase (Decrease) in Cash and 743 4,007
Cash
3,135 4,911 Equivalents
Cash and Cash Equivalents at Beginning of
11,511 7,537
Beginning of Year
Cash and Cash Equivalents at End of
$12,254 $11,544$14,646 $12,448 Quarter
Supplemental Disclosures of Cash Flow
Information:
Cash Paid during the Year for:
$3,186 $5,860$10,064 $8,886 Interest
Income Taxes, Net of Refunds
0 $1,675$2,102 $2,405 Non-Cash Transactions:;
Transfers from Loans to Real $49 $143
Estate
$82 $564 Owned (Other Assets)
Transfer of Securities from Held to
$0 $0 Maturity to $0 $0 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 Consolidatedconsolidated 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 JUNESEPTEMBER
30, 1999 COMPARED TO JUNESEPTEMBER
30, 1998
INCREASES (DECREASES) DUE
TO:
VOLUME
RATE NET
Loans $402$1,470 ($25 $147
5)1,102 $368
)
Taxable Securities 1,155 (164 991
)1,865 (211) 1,654
Tax Exempt Securities (57) (20) (77)(66) (26) (92)
Federal Funds Sold and (5) (5) (10)
Money 1 (2) (1) Market Funds
TOTAL EARNING ASSETS 1,501 (441 1,060
)3,264 (1,344) 1,920
Deposits 257 (397 (
) 140)469 (679) (210)
Borrowings 942 (93) 8491,518 (129) 1,389
Total Interest Bearing 1,199 (490 7091,987 (808) 1,179
Liabilities )
NET CHANGE IN INTEREST $302 $49 $351$1,277 $(536) $741
YEAR-TO-DATE FIGURES AS OF JUNESEPTEMBER
30, 1998 COMPARED TO JUNESEPTEMBER
30, 1997
INCREASES (DECREASES) DUE TO:
VOLUME RATE
NET
Loans $674$417
($542 $132
)382) $ 35
Taxable Securities 257 (146) 111553
(227) 326
Tax Exempt Securities (131) 25 (106)(203)
31 (172)
Federal Funds Sold and 10 9 19
Money 13 3 16 Market Funds
TOTAL EARNING ASSETS $813$777
($660 $153
)569) $208
Deposits $38 ($107 ($69)
)56 (
232) (176)
Borrowings 25 6 31237
(5) 232
Total Interest Bearing 63 (101) (38)293
(237) 56
Liabilities
NET CHANGE IN INTEREST $750$484
($559 ($191)
)332) $152
NOTES TO FINANCIAL STATEMENTS DATED
JUNESEPTEMBER 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,
required 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 Boards issued SFAS No. 133,
Accounting for Derivative Instruments and
Hedging Activities and SFAS No. 134,
"AccountingAccounting for Mortgage-
BackedMortgageBacked Securities
Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise". SFASSFAX No. 133 will be
effective for fiscal years beginning after
June 15, 200015,2000 and SFAS No. 134 is effective
the first fiscal quarter beginning July
1, 1999. Management does not expect the
adoption of these standards to have a
material effect on the financial
statements.
JUNESEPTEMBER 30, 1999 2. INVESTMENT
SECURITIES
CARRYINCARRYING MARKET
AVAILABLE FOR SALE G
VALUE VALUE
a: U. S. Treasury and other
$26,699 $26,34$31,432 $30,563
government agencies 5
b: Marketable equity securities
1,300 1,2731,264
Total Securities Available
$32,732 $31,827
For $27,999 $27,61
Sale 8
HELD TO MATURITY:
a: U. S. Treasury and other
$96,119 $94,30$98,272 $96,013
government agencies 4
b: States of the U.S. and other
5,245 5,2925,251 5,166
political subdivisions
c: Corporate bonds
19,185 18,83727,118 26,580
Total Securities Held to
$120,54 $118,4$130,641 $127,759
Maturity 9 33
OTHER SECURITIES
$6,105 $6,105$6,108 $6,108
TOTAL SECURITIES
$154,65 $152,1
3 56$169,481 $165,694
The Bank does not hold any securities for
a single issuer which exceed 10% of the
Bank's stockholders' equity.
JUNE DECEMBESEPTEMBER DECEMBER
30,
R1999 31,
1999 1998
3. LOANS
a: Commercial, agricultural
$39,353 $33,224
and $38,588 $33,224 other loans
b: Real Estate - Construction
15,27615,521 11,366
c: Real Estate - Mortgage
181,490190,091 168,307
d: Installment Loans
16,43915,809 16,538
Total Loans
$251,79 $229,43
3 5$260,774 $229,435
4. CHANGES IN ALLOWANCE SEPTEMBER
30, SEPTEMBER FOR JUNE JUNE POSSIBLE LOAN LOSSES: 1999 30, 30,
1999
1998
Balance, beginning January
1 $4,455 4,743
1
Provision charged to
656 252
income 537 168
Recoveries of amounts
208 131
charged 173 85
Losses charged to
415 591
provision 253 292
Balance, ending JuneSeptember
$4,903 $4,535
30 $4,912 $4,70
4
Information regarding impaired loans:
June JuneSEPTEMBER
SEP
TEM
BER
3
30,
30,0,
1999
1998
Average investment in impaired loans $$736
$1,576
776loans
Interest income recognized on
impaired loans including 14
35
interest 18 35
income recognized on cash
basis
Balance of impaired loans 777656
1,073
Portion of impaired loan
balance for which an allowance 656
1,073
for
credit losses 777 1,073 is allocated
Portion of allowance for loan
losses allocated to the 39
42
impaired
loan 55 42
balance
5. CHANGES IN ALLOWANCE FOR OTHER REAL ESTATE:
6/5. CHANGES IN ALLOWANCE FOR
OTHER REAL ESTATE:
9/30/99
6/9/30/ 6/30/9
98
7
Balance, beginning January 1 $16
$17 $22
January 1
Provision charged to income 0
0 0
income
Losses charged to provision 1
0 5
provision1
Balance, ending JuneSeptember 30 $15
$17 $17$16
6. The aggregate dollar amount of loans
made to directors, executive officers or
principal holders of equity securities as
of JuneSeptember 30, 1999 and December 31,
1998 respectively, were:
Aggregate amount, beginning $7,243
$3,952
1/1
New loans 1,0621,175
5,393
Repayments 7471,565
2,102
Aggregate amount, ending $7,558
6/$6,853
9/30/99
Aggregate amount, ending
$7,243
12/31/98
7. OTHER ASSETS JUNE 30, DECEMBER
1999 31, 1998SEPTEMBER
DECEMBE
3
0
,
R
3
1
,
1
9
9
9
1
9
9
8
a: Interest earned but not
paid on:
$2,413$1,515 $1,494
Loans
Investments
1,4421,473 1,264
b: Other Real Estate Owned
97100 98
8. INCOME TAXES:
Components of income tax expense for the
period ended JuneSeptember 30, 1999 are as
follows:
Current
Current
Federal $2,069$2,983
State 4876
Deferred (694)
$1,423(771
$2,288
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 sixnine-
months ended JuneSeptember 30, 1999.
Computed tax $1,451$2,330
expense
Tax exempt (63)(98)
interest
Other 35
$1,42356
$2,288
At JuneSeptember 30, 1999, items giving rise
to the
deferred income tax assets and
liabilities, using a tax rate of 34%, are
as follows:
ASSET
LIABILIT
YLIABILITY
Allowance for possible losses
on loans and real estate owned $1,509$1,506
0
Deferred and accrued employee 1,0181,034
0
benefits
Deferred mortgage servicing 0
133141
rights
Deferred loan origination fees 329353
0
Securities losses not currently 2549
0
deductible
Core deposit intangibles 4341
0
Depreciation 0
4123
Other 1726
0
$2,941 $174$3,009
$164
No valuation allowance is deemed necessary
for the deferred tax asset.
9. INCOME TAX EXPENSE JuneSeptember
September 30, June
30, 1999
1998
Federal Income Tax $1,374 1,453$2,211
2,254 State Income Tax 49 4876
73
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following is a review of
results of the operations of Bar Harbor
Banking & Trust Company for JuneSeptember 30,
1999 as compared to JuneSeptember 30, 1998.
The bank has focused on growth in its
balance sheet through both loans and
investments, funding the growth with
deposits and borrowings. Overall, the
bank's balance sheet has grown by $80
million or 21%, compared to a 7%
growth of $25 million between 1999 and
1998. While the six-monthnine-month earnings for
1999 are down 10%4.6% or $335,000$218,000 compared to
first sixnine 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 has grown by $65
million or 18%, compared to a 5.7% growth of $20
million between 1999 and 1998.
Total loans have grown by $22.8 million or 10%
when compared to 1998's outstanding loans. This
validates the growth concept mentioned above compared
to loanThe investment portfolio net growth
in 1998 over 1997excess of $7.8 million. Loan
growth for 1999$45 million has come from consumer mortgages
(approximately $18 million or 18% growth from year to
year). Commercial loans increased by $4 million or 4%
over last year. The balance between consumer and
commercial loans remains similar topredominantly
been in the area of US Government agency
debentures. Purchases in the past two years'
mix with consumer loans approximating 55%twelve
months have totaled $90 million, including
$46 million in government sponsored
mortgage backed securities and $19.7
million in callable agencies. Of the
$13.8 million in securities called in the
past twelve months, $7.1 million had given
the bank a minimum of the
portfolio.
The loan growtha year's call
protection. In addition, $28.3 million
cash flow was received in principal
paydowns from Junemortgage backed securities.
As a comparison, from September 30,
1997 to JuneSeptember 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 has grown by $40 million
or 35% over the past year. Purchases in the Bank's
investment portfoliopurchases
totaled $99 million. Included in
the purchases were $51.3 million in mortgage-backed
pools sponsored by the US Government. Government agency
debentures totaling $26.2 were also purchased over the
past twelve months. Of these debentures purchased,
$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 $24.2$73 million, of called government-sponsored securities, $25.6which $28.7
million in principal reductions inwere callable agencies, $34
million were government sponsored
mortgage backed pools and $8.7purchases of
corporate bonds totaled $10 million.
During this twelve month period, the bank
had securities totaling $26 million
called, $14 million of which had a minimum
of one year's call protection, $18 million
in principal paydowns from mortgage backed
securities, $3.3 million in maturing securities.tax-
exempt securities and $8.5 million in
corporate bond maturities. The Bank's
other securities portfolio includes $5.8
million in Federal Home Loan Bank (FHLB)
stock. Ownership of stock is required by
the FHLB for participation in its funding
programs.
Unrealized losses in the available
for sale
portfolio as represented on the Bank's
Statement of Condition increased over the
past twelve months, ending the quarter at
$251,000$597,000 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 in 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 JuneAt September 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 heldentire investment portfolio was $1.7
million greater than book value.
The Bank does not hold any securities
(such as
structured debt tied to maturitymultiple 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. The taxable
portions of the Bank's securities have
been earning 6.75% for the first nine
months of 1998. Although this represents
a decrease of 14 basis points since
September 30, 1998, the Bank exceeds its
peer group average by approximately 35
basis points as recorded by the Uniform
Bank Performance Report. The Bank's peer
group includes banks throughout the
country with assets totaling between $250
and $500 million.
In the loan portfolio, which has grown by
$30 million (13%) in the past twelve
months, the Bank's concentration has been
through the extension of loans secured by
real estate to its customers totaling $26
million more than one year ago. This
compares to 1998's growth of $9.6 million
in loan growth, with $12.9 million of the
loan growth being secured by real estate
and granted to the Bank's consumer
customers. Reductions in the loan
portfolio in 1998 were $783,000 above
book value as of June 30, 1998.found in the
commercial loan portfolio ($2.9 million).
Funding for the asset growth has come
from strong growth in the Bank's deposits
totaling $25 million.$27.5 million or more than 10% in
growth. 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 beencontinues to be 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$48.6
million. Short-term borrowings
traditionally drop duringThe Bank monitors the third quartercost of
funds through seasonal deposit growth, investment maturities and
principal paydowns from the Bank's mortgage backed
securities portfolio.
Funding for the asset growth betweenliability management
processes.
From September 30, 1997 andto September
30, 1998,
came from increases in advancesfunding from the Federal Home Loan Bank
totaling $14.7was the primary source of funding for the
bank's earning assets. While deposits
increased by $2.2 million, advances
through the Federal Home Loan Bank
increased by $15.2 million. Deposits decreased
overall by $2 million during that same period. The drop in deposits was in time deposits, mostly
certificatesBank
monitors the cost of deposit.funds through asset
liability management processes. 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 Bank examines the
relationship between liquid assets and
short-term liabilities that are vulnerable
to non-replacement within a 30-day period are examined.period.
The 90-day analysis extends to include a
projection of subsequent cash flow funding
needs over an additional 60-day time
horizon. The Bank's policy is to maintain
its liquidity position at a minimum of 5%
of total assets. TheFor the past twelve
months, the Bank has maintained liquidity
in its balance sheet in excess of 16% for the past twelve months.14.9%.
Liquidity as measured by the Basic
Surplus/Deficit model was 22.8%19.5% for the 30-
day horizon and 14.9% for the 90-day
horizon as of JuneSeptember 30, 1999 for1999. How the 30-day horizon and 25.2% for the 90-
day horizon.
How
changes in the balance sheet have affected
the Bank may be viewed through net
interest income in the earnings statement
for the periods ending JuneSeptember 30, 19981999
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 half of 1999 than 1998. The comparison
will be discussed below. The Bank's netNet interest income for the
first six months of 1998 was $190,000 ahead of the six-
month earnings as of
JuneSeptember 30, 1997.
Rates,1999, affected by rates,
volumes and the mix of earning assets and
interest bearing liabilities, directly affect interest
income. For the first six monthsis ahead of
1999,September 1998's net interest income by
$741,000. Interest income earned from
loans increased in 1999 by more than $350,000, which$1.5 million
due to volumes of loans with an offsetting
reduction in earnings of $1.1 million due
to changes in rates. This is $160,000 more than the increase between 1998 and 1997.
The increase was the resultindicative
of the growthcompetitive market in the
balance sheet in both loans and investments. However,
the competition for loans equates to narrowing margins,
while increased investments, although producing strongDowneast
Maine. Overall yields in comparison to peer bank interest yields,
still yield considerably less than loans.
Additionally, funding costs are not decreasing as
quickly as 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
$400,000 but was reduced by $255,000 due to decreases
in interest rates charged on portions of the loan
portfolio. Overall,from the loan
portfolio yield droppeddecreased by 56 basis points. This compares with a drop of 64approximately 70
basis points between 1997 and 1998.
In comparison, increases in loan volume of $7.8
million in 1998 compared to 1997 afforded increasedfrom 1998's yields. Net
interest income for the first nine months
of approximately $675,000; however,
decreases in rate reduced interest income1998 added earnings of $153,000.
Overall yields from the loan portfolio
decreased by over
$540,000, thereby netting an overall increase for loan
interest of $132,000.
Interest on investments increased based on $40
million increase in volumes. The $1.1 million increase
in interest earned on investments was offset by
$186,000 decrease in interest rates. The entire
portfolio is currently earning 6.51% and 475 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 10 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 made1997's yields.
The investment portfolio, with
net growth in assets of $45 million, has
shown increases in interest income due to
volumes ($1.8 million) and decreases due
to rates ($242,000) for a net increase
derived from investments of $1.5 million.
The overall yield on the entire investment
portfolio has decreased by 16 basis points
during the past twelve months. Looking at
1998, the investment interest increased by
$360,000 based on volumes ($139,000) with offsetting decreases in
rates ($118,000) for the total investment portfolio.
Yields in the overall portfoliovolume and decreased by
10$187,000 due to rates. Overall, the
yield on investments decreased by 24 basis
points from 1997 to 1998.
Interest bearingWhile interest-bearing liabilities
increased by approximately $55 million or 19.6%, and8% from September 30, 1998 to
September 30, 1999, the cost of those
liabilities decreased by 3%. The interest
paid on deposits decreased primarily due
to rates (679,000) and costs increased by
more than 12% or more
than $700,000. Interest expense from$469,000 based on the 8% growth. The cost
of borrowings increased due to volumes
($1.5 million). The overall cost of
funding the bank's assets has decreased by
19 basis points over the past twelve
months. In 1998, the cost of deposits
increased by $257,000only $56,000 based on increased volumevolumes
and decreased by almost $400,000 based on interest$238,000 as a result of
rates. Reductions inThe cost of 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 59decreased by 8 basis points from year to year. While the interest expense
created from other borrowings has increased $940,00
based on increased volumes of $34 million, the average
rate has dropped by 34 basis points. As a comparison,
overall interest bearing liability costs as of Junewhen
comparing September 30, 1998 were almost flat in comparison to JuneSeptember
30, 1997's
rates.1997.
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
$26.2$19.7 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 bank has
decreased the amount of callable
agencies it is purchasing as well as
shortening the final maturities it is
purchasing. With $20.6$55 million more
liabilities than assets repricing within
the next twelve months, if rates were to
rise by 200 basis points and the Bank did
not change its posture at all,
simulations indicate that the Bank's net
interest income could decrease by
approximately $577,000 and $1,519,000$835,000 during the first
and second
yearsyear of the rise. Should rates fall by
200 basis points, the Bank's net
interest income would increase by
approximately $456,000$688,000 the first year andyear.
The potential reduction in net interest
income should rates rise by $547,000 the second year
The ratio for the reserve for possible loan losses
has been approximately 2% for200 basis
points equates to a number of years, and
continues with a ratio of 1.95% at June 30, 1999 and
2.06% as of June 30, 1998. This ratio represents a
conservative approach to possible losses. The bank's
delinquency ratio has continued topotential 4.5% drop over the years
and is at a record low.in
net interest income.
The Bank reviews its
allocation to the reserve on a monthly
basis and funds the reserve as deemed
necessary. ThisThe 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.
Additionally, the allocation 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. The ratio for the
reserve for possible loan losses has
been approximately 2% for a number of
years, and continues with a ratio of
1.9% at September 30, 1999 and 2.05% as
of September 30, 1998. The bank's
delinquency ratio has continued to drop
over the years and is at a record low.
Losses in the loan portfolio arewere
estimated at $750,000 for 1999, with year
to date net charge offs totaling
$80,000$207,000 compared to $207,000$460,000 during
the first sixnine months of 1998. Losses
for calendar year 1998 were estimated to
be $500,000.
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. 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 $656,000
and $1.7 million at September 30, 1999 and
1998, respectively. Reference is made to
the notes included with this filing that
outline the impaired loan figures.
The bank retains a conservative posture
with
regard to non-accruing loans, placing
loans onto nonaccrual status once they
become past due 90 days or more. The
amounts represented below are shown in
thousands and represent the total dollars
past due for the first sixnine months of each
year listed.
Category 1999 1998
90-day past due and still $ 1,206 $1,528
accruing
Non-accruing 1,814 2,682
$3,020 $4,210
Gross loans $251,793 $229,226
Percentage of gross loans 1.20% 1.83%
Non-interestCategory 1999
1998
90-day past due and still $ 1,547
$1,300 accruing
Non-accruing 1,737
2,023
$3,284 $3,323 Gross loans
$260,774 $230,030 Percentage of gross
loans 1.26% 1.44%
Other income for 1999 is virtually flat (1%
increase) with the first
sixnine months of 1999 was $4,215,000 and
$200,000 or 5% more than the same period
in 1998. AlthoughCard program fees (including
credit cardholder fees, merchant
processing fees and check card fees)
surpassed 1998's fee income generated fromby
$183,000 and constituted the bank's various cardholder
programs (VISA, ATM, debit cards) has increased from
year to year,majority of
the FASB entry for mortgage servicing
rights incomeincrease in other income.
Other expense was $60,000 less7.6% (or $376,000)
more in 1999 when compared to 1998.
In comparison, non-interest income1998, and
included $250,000 for 1998 was
$250,000 or approximately 12% more thanincreased costs
for the same
periodcard programs described above. As
mentioned earlier, the Bank has been
involved in 1997,a number of projects in the
past twelve months, one of which is the
conversion of its banking software to
Information Technology, Inc. (ITI). The
conversion is scheduled for second
quarter 2000 and some of the
expenses incurred include upgrades of
equipment and the hiring of a third
party vendor to assist with the
increase attributableconversion, including project
management and
individual employee training.
Another major endeavor is the
announcement that Bar Harbor Bankshares
has agreed to acquire Dirigo
Investments, Inc., an NASD Registered
Broker Dealer firm based in Ellsworth,
Maine, subject to regulatory approval.
Under a restructuring plan, Bar Harbor
Bankshares will form a new financial
services holding company to be known
as BTI Financial Group. Following
its acquisition, Dirigo Investments,
Inc. would become a subsidiary of BTI
Financial Group and would continue to
operate as a full-service discount
brokerage firm. BTI Financial Group
would also own and operate a Maine
chartered, non-depository trust company
to be known as Bar Harbor Trust Services
and a newly formed SEC
registered investment advisor
offering portfolio management services to
be known as Block Capital Management.
Bar Harbor Bankshares is seeking
regulatory approval for each of these
three operating entities over the Trust Department's earnings before expenses, which have
exceeded last year's income by $158,000. Additionally,next 90
days. Expenses
incurred in the accounting for mortgage servicing rights was
approximately $70,000 higher asformation of June 30, 1998 when
compared to June 30, 1997.BTI
Financial Group are included in the Other
Expense category.
Salaries and employee benefits are
$118,000 (4%$202,000 (5%) higher as of JuneSeptember 30,
1999 when compared to the same period
for 1998. This includes merit increases,
increased premiums for employee
insurance plans, incentive accruals and
an increase of 138 people in the full time
equivalent work force.
Non-interest income (other
income) as of September 30, 1998 was
$432,000 ahead of September 30, 1997. Trust income,
based on market value of trust
portfolios, was $190,000 ahead of the
previous year's income. Additionally,
mortgage servicing rights
(implemented in January of 1996) were
ahead of 1997 by $132,000, while the
expense pertaining to mortgage servicing
rights was also more in 1998
($27,000). Income generated from charges
to merchants for credit card processing
was $80,000 more than the previous year. The cost of the
merchant credit card program
for the twelve months ending September
30, 1998 was $150,000 more than the
previous year.
Other expenses, the category on the earnings
statement that encompasses the majority of accountsthose expenses
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. Asas of June 30, 1999, expenses
incurred by the bank's card programs (including VISA
cardholders, merchant processing, ATM, debit cards) are
$107,000 more than for the comparable period in 1998.
Additionally, the bank has 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 bank 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 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
mapping of bank products. Expenses incurred with this
conversion also include the hiring of a third party to
assist with the conversion, including project
management and individual employee training.
As mentioned above, other expenses for JuneSeptember 30,
1998 were 17%13% higher than in 1997. Included in the
expenses for 1998at September
30,1997. The cost of processing merchant
credit card work and mortgage servicing
rights were increased maintenance contracts
and depreciation expenses incurred as the Bank
strengthened its technology capabilities.mentioned earlier.
Additionally, the Bank was more active in
the media in 1998, throughpromoting the
introduction of the Investor's Choice
deposit account andnew money market
product, numerous loan promotions. Thepromotions and
several new TV spots. Postage was
almost $50,000 more at September 30,
1999 and included additional mailings for
tax purposes and the conversion of the
Trust Department to a new software vendor,
which took place in early September of
1998. In the spring of 1998, the Bank
hired a consultant to assist in the
selection process for a new banking
software vendor.software. The Trust
Department also incurred expenses during itsselection process
continued throughout 1998 and is mentioned
in the 1999 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 status. The Bank's year to date
efficiency ratio is 60%. The Bank's year to date
capital to asset ratio is 11.1%. The Bank far exceeds
the required risk based capital ratio of 8% with its
Tier I ratio of 18.33%, total capital ratio of 19.58%
and leverage ratio of 12.18%. These ratios represent
capital of $30 million in excess of the requirement for
a well-capitalized bank.information above.
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 its 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.proxy.
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 beis being validated before August
31, 1999.by an independent
party.
The bank has joined with four other local banks
to create an Interbank Working Group for
the Year 2000. This group is assessingcontinues to
meet and assess 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 offeringpresented 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.local businesses or civic
organizations. 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$53,000
and are not expected to exceed $100,000
by year end.
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 issued SFAS
No. 133,
Accounting for Derivative Instruments
and Hedging Activities and SFAS No. 134,
"Accounting for Mortgage-BackedMortgageBacked 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 iswas effective the first
fiscal quarter
beginning July 1, 1999. Management does
not expect the adoption of these
standardsSFAS No. 133
to have a material effect on the
financial statements. The adoption of
the remaining standards has had no
material effect on the financial
statements.
As a financial summary, the
following ratios indicate the bank's
status. The Bank's year to date
efficiency ratio is 60%. The Bank's
year to date capital to asset ratio is
11.3%. The Bank far exceeds the required
risk based capital ratio of 8% with its
Tier I ratio of 17.7%, total capital ratio
of 19% and leverage ratio of 12.5%.
These ratios represent capital of $30
million in excess of the requirement for
a well-capitalized bank.
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: August 12,November 5, 1999
Sheldon F.
Goldthwait, Jr.
Chief Executive Officer
/s/
Virginia M. Vendrell
Date: August 12,November 5, 1999
Virginia M.
Vendrell
TreasurerTre
asu
rer
and
Chief FinancialChi
ef
Fin
anc
ial
Officer