16 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarter ended September 30, 2000 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 September 30, 2000: Common Stock: 3,339,614 TABLE OF CONTENTS PART I FINANCIAL INFORMATION Page No. Item 1. Independent Accountants' Report 3 Item 2. Financial Statements Consolidated Statements of Financial Condition at 4 September 30, 2000 and December 31, 1999 Consolidated Statements of Income for the Three and Nine Months ended 5 September 30, 2000 and September 30, 1999 Consolidated Statements of Stockholders' Equity for the Nine months ended 6 September 30, 2000 and September 30, 1999 Consolidated Statements of Cash Flow for the Nine months ended 7 September 30, 2000 and September 30, 1999 Item 3. Notes to Financial Statements 8-9 Item 4. Rate Volume Analysis 10 Item 5. Management's Discussion and Analysis of Financial 11-15 Condition and Results of Operations PART II FINANCIAL INFORMATION Page No. Item 1. Legal Proceedings 16 Item 2. Changes in Securities and Use of 16 Proceeds Item 3. Defaults Upon Senior Securities 16 Item 4. Submission of Matters to a Vote 16 of Security Holders Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 16 Signature Page 17 INDEPENDENT ACCOUNTANTS' REPORT The Board of Directors Bar Harbor Bankshares We have reviewed the accompanying interim consolidated financial information of Bar Harbor Bankshares and Subsidiaries as of September 30, 2000, and for the three- and nine-month periods then ended. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is to express an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with generally accepted accounting principles. /s/ BERRY, DUNN, McNEIL & PARKER Portland, Maine November 9, 2000 BAR HARBOR BANKSHARES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION SEPTEMBER 30, 2000 and DECEMBER 31, 1999 (dollars in thousands, except per share data) Septemb December er 30, 31, 1999 2000 (Unaudi ted) ASSETS Cash and Due from Banks $10,984 $12,852 Securities Available for Sale 39,402 31,690 Securities Held to Maturity 118,226 128,831 Other Securities 8,068 6,118 Loans, net of allowance for possible loan losses of $4,000 at 9/30/00; 272,526 256,896 and $4,293 as of 12/31/99) Premises and Equipment 11,509 8,440 Other Assets 12,580 11,982 TOTAL ASSETS $473,29 $456,809 5 LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits Demand Deposits $51,164 $41,904 Now Accounts 45,668 45,107 Savings Deposits 79,452 78,511 Time Deposits 114,733 116,186 Total Deposits 291,017 281,708 Securities sold under Repurchase 9,377 8,807 Agreements Advances from Federal Home Loan 118,377 113,035 Bank Other Liabilities 4,798 4,114 TOTAL LIABILITIES 423,569 407,664 STOCKHOLDERS' EQUITY Capital Stock, par value $2 Authorized 10,000,000 shares Issued 3,643,614 shares 7,287 7,287 Surplus 4,002 4,002 Retained Earnings 42,073 40,611 Unrealized depreciation on securities available for sale, net of tax (579) (1,015) of ($298) and ($523) in 2000 and 1999 respectively Less: Cost of Treasury Stock 304,000 shares in 2000 and 222,100 shares (3,057) (1,740) in 1999 TOTAL STOCKHOLDERS' EQUITY 49,726 49,145 TOTAL LIABILITIES AND $473,29 $456,809 STOCKHOLDERS' EQUITY 5 The accompanying notes are an integral part of these consolidated financial statements. BAR HARBOR BANKSHARES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except per share data) (UNAUDITED) Three months Nine months ended ended September 30 September 30 2000 1999 2000 1999 Interest and Dividend Income: Interest and Fees on Loans 6,086 5,631 17,86 16,1 8 14 Interest and Dividends on Taxable Interest Income 2,629 2,445 7,966 6,72 6 Non-taxable 45 78 145 242 Interest Income Dividends 185 116 432 341 Federal Funds 17 18 36 46 Sold Total Interest & Dividend 8,962 8,288 26,447 23,4 Income 69 Interest on Deposits 2,329 2,077 6,626 6,15 0 Interest on Borrowings 2,220 1,438 6,420 3,88 8 Total Interest Expense 4,549 3,515 13,046 10,0 38 Net Interest Income 4,413 4,773 13,401 13,4 31 Provision for Loan Losses 163 119 489 656 Net Interest Income after Provision for Loan Losses 4,250 4,654 12,912 12,7 75 Other Income 2,119 1,804 4,927 4,21 6 Other Expenses: Salaries & Employee 2,049 1,786 6,232 4,82 Benefits 7 Other 2,577 2,069 6,499 5,29 3 Earnings Before Income 1,743 2,603 5,108 6,87 Taxes 1 Income Tax 598 865 1,720 2,28 8 Net Earnings $1,145 $1,73 $3,388 $4,5 8 83 Net earnings per share $0.34 $0.50 $1.00 $1.3 Weighted average 3 number of common Shares outstanding 3,346, 3,443 3,375, 614 ,614 264 3,44 3,61 4 Dividends Per Share $0.19 $0.19 $0.57 $0.5 3 The accompanying notes are an integral part of these consolidated financial statements. BAR HARBOR BANKSHARES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 and 1999 (dollars in thousands, except per share data) (UNAUDITED) NET UNREALIZED NET RETAINED (DEPRECIATI TREASURY STOCKHOLDERS CAPITAL SURPLUS EARNINGS ON) STOCK ' STOCK APPRECIATIO EQUITY N ON SECURITIES AVAILABLE FOR SALE Balance, December $7,287 $4,002 $36,862 $50 ($1,340) $46,861 31, 1998 Net Earnings 4,583 4,583 Net unrealized depreciation on Securities available for (647) ($647) sale, Net of tax benefit of $333 Total 4,583 (647) 3,936 comprehensive income Cash Dividends Declared ($.53 (1,825) (1,825) per share) Balance, September $7,287 $4,002 $39,620 ($597) ($1,340) $48,972 30, 1999 Balance, December $7,287 $4,002 $40,611 ($1,015) ($1,740) $49,145 31, 1999 Net Earnings 3,388 3,388 Net unrealized appreciation on Securities available for 436 436 sale, net of tax of $225 Total comprehensive income Comprehensive income Cash Dividends 3,388 436 0 $3,824 Declared ($0.57 (1,926) per share) Purchase of (1,926) (1,317) (1,317) Treasury Stock 81,900 shares Balance, September $7,287 $4,002 $42,073 $(579) ($3,057) $49,726 30, 2000 The accompanying notes are an integral part of these consolidated financial statements. BAR HARBOR BANKSHARES AND SUBSIDIARIES COLSOLIDATED STATEMENT OF CASH FLOW FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (dollars in thousands) (UNAUDITED) 2000 1999 Cash Flows from Operating Activities: Net Income $3,388 $4,58 3 Adjustments to reconcile net earnings to net cash provided by operating 985 733 activities: Depreciation Provision for Loan Losses 489 656 Gain on Other Real Estate (7) (1) Owned New Loans Originated for Sale (912) (7,79 6) Proceeds from Sale of 913 9,042 Mortgages Held for Sale Gain (Loss) on sale of 51 (85) Mortgages Originated for Sale Net Amortization of Bond 82 154 Premium Loss on Sale of Premises and 94 62 Equipment Net Change in Other Assets (815) (2,02 5) Net Change in Other 684 96 Liabilities Net Cash Provided by Operating 4,952 5,419 Activities Cash Flows from Investing Activities: Purchases of Securities Held to (5,313 (42,5 Maturity ) 18) Proceeds from Maturity and Principal Paydowns 15,858 3,250 of Securities held to maturity Proceeds from Call of Securities 0 21,61 Held to Maturity 9 Purchases of Securities Available (8,147 (19,9 for Sale ) 65) Proceeds from Maturity and Principal Paydowns 74 1,517 of available for sale Proceeds from sale and calls of securities 1,000 3,500 available for sale Net decrease (increase) in other (1,950 25 securities ) Net Loans Made to Customers (16,21 (31,8 1) 36) Capital Expenditures (4,224 (932) ) Proceeds from Sale of Other Real 39 81 Estate Owned Proceeds from Sale of Premises and 76 7 Equipment Net Cash Used in Investing (18,79 (65,2 Activities 8) 52) Cash Flows from Financing Activities: Net Change in Savings, NOW and 10,762 30,21 Demand Deposits 6 Net Change in Time Deposits (1,453 (4,08 ) 1) Net Change in securities sold under Repurchase Agreements 570 1,529 Purchase of Advances from FHLB 115,00 66,00 0 0 Repayment of Advances from FHLB (125,7 (35,0 22) 00) Net Change in Short Term Other 16,064 6,128 Borrowed Funds Purchase of Treasury Stock (1,317 0 ) Payment of Dividends (1,926 (1,82 ) 4) Net Cash Provided by Financing 11,978 62,96 Activities 8 Net Increase (Decrease) in Cash and (1,868 3,135 Cash Equivalents ) Cash and Cash Equivalents at Beginning 12,852 11,51 of Year 1 Cash and Cash Equivalents at End of $10,98 $14,6 Quarter 4 46 Supplemental Disclosures of Cash Flow Information: $13,16 $10,0 Cash Paid for Interest 6 64 Transfers from Loans to Other Real $92 $82 Estate Owned Income tax paid $1,500 $2,10 1 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All significant intercompany transactions and balances are eliminated in consolidation. The income reported for the 2000 period is not necessarily indicative of the results that may be expected for the year ending December 31, 2000. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1999. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and the carrying value of real estate owned, management obtains independent appraisals for significant properties. The allowance for possible loan losses is maintained at a level adequate to absorb probable losses. Management determines the adequacy of the allowance based upon reviews of individual credits, recent loss experience, current economic conditions, the risk characteristics of the various categories of loans and other pertinent factors. Credits deemed uncollectible are charged to the allowance. Provisions for credit losses and recoveries on loans previously charged off are added to the allowance. 2. Effect of Recent Accounting Pronouncements Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," are effective for years beginning after June 15, 2000. These statements set accounting and reporting standards for derivative instruments and hedging activities. They require an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. These statements are expected to have no impact on the Company, as it has not engaged in any derivative transactions. 3. Line of Business Reporting The Company manages and operates two major lines of business: Community Banking and Financial Services. Community Banking includes lending and deposit- gathering activities and related services to businesses and consumers. Financial Services consists of broker/deal operations, trust services, and investment portfolio management. The business lines are identified by the entities through which the product or service is delivered. The reported lines of business results reflect the underlying core operating performance within the business units. Other is comprised of intercompany eliminations. Information is not presented for prior periods as the Financial Services segment was not formed until January 2000 and it is impractical to restate corresponding information for the prior periods. Substantially all of the Company's assets are part of the community banking line of business. Selected segment information is included in the following table. Nine Months Ended Commun Financ Consolid September 30, 2000 ity ial Other ated Bankin Servic Totals g es Net Interest Income $13,38 $14 $0 $13,401 7 Provision for loan 489 0 0 489 losses Net interest income after 12,898 14 0 12,912 provision Other income 4,523 2,364 (1,960 4,927 ) Other expense 10,036 2,793 (98) 12,731 Earnings (loss) before 7,385 (415) (1,862 5,108 income taxes ) Income taxes 2,472 (138) (614) 1,720 (benefit) Net earnings (loss) $4,913 ($277) ($1,24 $3,388 8) <TABLE [CAPTION] Three Months Ended Commun Financ Consolid September 30, 2000 ity ial Other ated Bankin Servic Totals g es [S] [C] [C] [C] [C] Net Interest Income $4,408 $5 $0 $4,413 Provision for loan 163 0 0 163 losses Net interest income after 4,245 5 0 4,250 provision Other income 1,337 782 0 2,119 Other expense 3,731 928 (33) 4,626 Earnings (loss) before 1,851 (141) 33 1,743 income taxes Income taxes 632 (45) 11 598 (benefit) Net earnings (loss) $1,219 ($96) $22 $1,145 [/TABLE] 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 relationship of the dollar amount of the change in each. YEAR-TO-DATE FIGURES AS OF SEPTEMBER 30, 2000 COMPARED TO SEPTEMBER 30, 1999 (dollars in thousands) INCREASES (DECREASES) DUE TO: VOLUME RATE NET Loans $1,720 $34 1,754 Taxable Securities 1,053 278 1,331 Tax Exempt Securities (101) 4 (97) Federal Funds Sold and Money (16) 6 (10) Market Funds TOTAL EARNING ASSETS 2,656 322 2,978 Deposits 205 271 476 Borrowings 1,833 699 2,532 Total Interest Bearing 2,038 970 3,008 Liabilities CHANGE IN NET INTEREST INCOME $618 ($648 ($30) ) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain matters discussed in this Report on Form 10-Q are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include, but are not limited to, those described in Management's Discussion and Analysis of Financial Condition and Results of Operations. Changes to such risks and uncertainties, which could impact future financial performance, include, among other things, (1) competitive pressures in the banking industry; (2) changes in the interest rate environment; (3) general economic conditions, either nationally or regionally; (4) changes in the regulatory environment; (5) changes in business conditions and inflation; and (6) changes in security markets. Therefore, the information set forth therein should be carefully considered when evaluating the business prospects of the Company. The following is the review of Bar Harbor Bankshares (the Company) and its subsidiaries, Bar Harbor Banking and Trust Company and BTI Financial Group, for the nine months ended September 30, 2000. REVIEW OF FINANCIAL CONDITION AT SEPTEMBER 30, 2000 AND DECEMBER 31, 1999 Total assets for the Company of $473 million at September 30, 2000 has increased by $17 million since December 31, 1999. Earnings of $3,388,000 were achieved for the first nine months of 2000, but are $1,195,000 below the earnings for the same period in 1999. Two projects, the formation of BTI Financial Group and its three subsidiary companies and the conversion of the banking software for Bar Harbor Banking and Trust Company (the Bank) and the non-bank subsidiaries, were the primary focus of the Company over the past twelve months and contributed to the decrease in net income between periods. The impact of these projects on the Company's earnings is discussed below. BTI Financial Group (BTI), a wholly owned financial services subsidiary of Bar Harbor Bankshares, was formed in the fall of 1999. BTI Financial Group's subsidiaries, Dirigo Investments, Inc., Bar Harbor Trust Services and Block Capital Management began operations in January of 2000. As a result of the formation of BTI, the Company has implemented segment reporting as required by Statement of Accounting Standard (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information." The formation of these three companies will position BTI to more fully participate in various segments of the financial services industry with the potential for significant growth. During the latter part of June of 2000, a branch office of Dirigo Investments, Inc. was established in the Bangor, Maine, area including an office manager and a broker, expanding the potential market area. The total asset growth of $17 million from December 31, 1999 to September 30, 2000 has come almost totally from loan growth of $16 million. Investments have remained stable while increases in premises owned by the Company were $3 million, while cash and due from banks decreased $2 million. Loan growth has come principally from $9 million in consumer real estate loans, $2 million from commercial real estate loans and $4 million from other commercial loans. The balance between consumer and commercial loans remains similar to the last several years' relationship with consumer loans approximating 56% of the portfolio. The Bank's reserve for possible loan losses as of September 30, 2000 is 1.47% of total loans compared to 1.64% at December 31, 1999. The reduction in the reserve ratio is attributed to management's continuing analysis of the loss exposure inherent in the loan portfolio. Management reviews the allocation to the reserve on a quarterly basis and funds the reserve as deemed necessary. This review includes a provision for specific accounts and impaired loans, provisions due to historic loan loss experience by loan type and reserves reflecting industry and credit concentrations, current local and national economic conditions, and underwriting standards. During the first nine months of 2000, net charge offs totaled $782,000 compared to $207,000 during the first nine months of 1999. The amounts represented below are the total dollars past due as of September 30, 2000 and December 31, 1999. September December Category 30, 2000 31, 1999 90-days past due and $3,465 $ 709 still accruing Non-accruing 3,647 2,016 $7,112 $2,725 Gross Loans $276,526 $261,188 Percentage of Gross 2.57% 1.04% Loans Premises and equipment growth included the purchase of the future headquarters of BTI in Ellsworth, Maine and properties adjacent to the Ellsworth branch office of the Bank and in front of the future headquarters of BTI. Projections for renovation of the BTI headquarters approximate $2.5 million. Completion of this project is expected in the spring of 2001. The bank experiences a seasonal decline in its deposit base through late fall and the winter months. Between December 31, 1999 and September 30, 2000 deposits increased by $9.3 million or 3.3%. Increased advances of $5.3 million from the Federal Home Loan Bank increased primarily to fund the growth in loans. RESULTS OF OPERATIONS FOR THE PERIODS ENDING SEPTEMBER 30, 2000 AND 1999 Rates, volumes and the mix of earning assets and interest bearing liabilities affect interest income. Comparing the first nine months of 2000 with the same period for 1999, net interest income was essentially flat, decreasing by $30,000. While average earning assets of the Bank have increased 11% during the two periods, increased competition reflected in loan pricing, reduced opportunity for attractive yields in high quality investments, and rapidly rising funding costs, have narrowed average net interest margins. In some instances, the Bank has added fixed rate and, traditionally, longer term assets to its Statement of Financial Condition, but it has funded those assets with shorter-term (one year or less) liabilities. Interest earned on loans for the first nine months of 2000 when compared to the first nine months of 1999 increased by more than $1.7 million due to increases in volumes but by only $34,000 due to overall increases in interest rates charged on the loan portfolio. Since December 31, 1999, the loan portfolio yield has increased by 8 basis points. Interest on loans for the quarter ended September 30, 2000 was $455,000 or 8% more than for the quarter ended September 30, 1999 and is attributable to increased volumes in the loan portfolio. Interest derived from growth in the investment portfolio was $936,000 more during the nine months ended September 30, 2000 as compared to September 30, 1999 while increases in interest rates created an additional $288,000 in income. The entire portfolio earned 6.76% as of September 30, 2000, which is 25 basis points higher than a year ago and 16 basis points higher than the overall yield at December 31, 1999. Interest on investments for the quarter ended September 30, 2000 was $219,000 more than for the quarter ended September 30, 1999 and is attributable primarily to increased volumes in the investment portfolio. Interest expense for the nine months ended September 30, 2000 increased by approximately $3.0 million compared to the same period in 1999. Interest expense increased by $2 million based on increased volume and by $1.0 million based on interest rates. The overall cost of interest bearing liabilities increased 53 basis points between the nine month periods ending September 30, 2000 and September 30, 1999. The cost of these liabilities has increased by 50 basis points since 1999 and has contributed to the decrease in the interest margin. The overall cost of interest bearing liabilities for the quarter ended September 30, 2000 was $1.0 million more than for the quarter ended September 30, 1999 and represents the cost of the increased volumes in advances through the Federal Home Loan Bank as well as increases in the rates charged on those advances. NON-INTEREST INCOME Non-interest income for the nine months ended September 30, 2000 totaled $4.9 million and was $711,000 more than the first nine months in 1999. BTI Financial Group's gross income of $2.4 million surpassed the Trust Department's income for the nine months ended September 30, 1999 by $370,000. Additionally, service charges on the bank's deposit accounts exceeded the first nine months of last year by $366,000, and represents increased fees implemented in the third quarter of 1999. When comparing non-interest income for the quarter ending September 30, 2000, BTI's revenue is $222,000 greater than the income generated by the Bank's Trust Department for the same period in 1999. Also, for the same comparison periods, service charges on deposit accounts in the Bank have contributed $188,000 more for the quarter ended September 30, 2000. NON-INTEREST EXPENSE Non-interest expenses for the nine months ended September 30, 2000 totaled $12.7 million and exceeded the first nine months of 1999's non-interest expenses by $2.6 million. Salaries and benefits make up $1.4 million of the increase over 1999. The formation of BTI Financial Group, and the subsequent purchase of Dirigo Investments, Inc., contribute to the increase in salary and benefits as positions have been added as the three subsidiary companies have been formed. BTI's salaries and benefits totaling $1,175,000 exceed the Bank's Trust Department salaries and benefits for the nine months ended September 30, 1999 by $565,000. In addition, the Bank has added a senior credit administrator and an experienced collector to enhance the credit administration function of the Bank. Additionally, the banking software conversion to Information Technology, Inc. (ITI) required additional human resources, including temporary staffing and extensive overtime. The ITI conversion was substantially completed in April 2000, although supplemental applications and completion of maintenance issues continue through the third quarter of 2000. Increases in salary and benefit costs for the quarter ended September 30, 2000 exceeded the costs for the same period in 1999 by $263,000. As mentioned earlier, the start up of a Bangor location for BTI subsidiary, Dirigo Investments, Inc., commenced during the second quarter of 2000, increasing salary and benefit costs. In total, BTI's salary costs have been approximately $200,000 more for the quarter ended September 30, 2000 when compared to the Bank's Trust Department salary costs for the quarter ended September 30, 1999. Additional staffing in the credit administration area, financial administration, and banking software conversion increased salary expenses for the quarter ended September 30, 2000. Other non-compensation expenses are $1,206,000 more in the nine months ended September 30, 2000 as compared to the same period in 1999. Start up costs incurred during the first quarter of 2000 for BTI Financial Group represent a portion of this increase. BTI's expenses for the first nine months of 2000, exclusive of salary and benefit costs but including the start up costs and $54,700 in amortization, total $1.5 million. This amount exceeds the Bank's Trust Department expenses for the first nine months of 1999 by $878,000. Other expenses for the quarter ended September 30, 2000 were $484,000 more than for the comparable period in 1999. The increase in BTI expenses accounted for about one-third of this total while the remainder is in various other accounts. The Company is proceeding with measures to reduce its cost structure. The Company has not incurred any additional costs or any losses due to the Year 2000 rollover. All internal and third party provided software has been performing satisfactorily since January 1, 2000. The Company continues to monitor all systems for any potential Year 2000 issues. LIQUIDITY AND INTEREST RISK MANAGEMENT Liquidity is measured by the Bank's ability to meet short-term 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 uses 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-term liabilities that are vulnerable to non-replacement within a 30-day period is examined. The Bank's policy is to maintain its liquidity position at a minimum of 5% of total assets. Liquidity as measured by the Basic Surplus/Deficit model was 14.0% as of September 30, 2000 for the 30-day horizon and 13.5% for the 90-day horizon. The Bank's position with regard to interest rate sensitivity consists of the matching of its assets and liabilities for repricing within a year. The exposure is to rising rates out beyond a year as the Bank has approximately $38 million invested in callable securities with final maturities of ten years or less funded by short-term liabilities. Because of financial advantages to the issuer in a rising rate environment, the exposure lies with the possibility that these securities will not be called. The gap analysis in the current interest rate environment shows the Bank with approximately $90 million more liabilities than assets that would be repriced within twelve months. Assuming rates were to drop by 200 basis points and utilizing a steepening yield curve shift in rates, simulations based on a static balance sheet indicate that the Bank's net interest income could rise by approximately $518,000 during the first year of the drop, while increasing its income in the second year by $765,000. If rates were to rise by 200 basis points, net interest income could decrease by $683,000 in the first year, and decrease by $1.7 million during the second year. CAPITAL The Company's capital to asset ratio is 10.5% at September 30, 2000, and the Bank exceeds the required risk based capital ratio of 8% with its Tier 1 ratio of 15.3% and total capital ratio of 16.6%. These ratios compare to December 31, 1999 when the capital to asset ratio was 10.8%, Tier 1 and total risk weighted capital ratios were 17.8% and 19.1% respectively. > PART II OTHER INFORMATION Item 1 Legal None Proceedings Item 2 Changes in None Securities and Use of Proceeds Item 3 Defaults Upon None Senior Securities Item 4 Submission of None Matters to a Vote of Security Holders Item 5 Other None Information Item 6 Exhibits and See Exh. 27 - Financial Reports on Form 8-K Data Schedule* *Filed in electronic format only 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/ Dean S. Read Date: November 10, 2000 Dean S. Read Chief Executive Officer /s/ Edward B. Grimball Edward B. Grimball Date: November 10, 2000 Chief Financial Officer