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 and
Exchange Act of 1934
For the quarter ended June 30, 2001 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.)
PO 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 June 30, 2001:
Common Stock: 3,276,114
TABLE OF CONTENTS
PART 1
FINANCIAL INFORMATION
Page No.
<s>
<c>
<c>
Item 1.
FINANCIAL STATEMENTS
Independent Accountants' Report
2
Financial Statements
4-7
Consolidated Balance Sheets at June 30, 2001
and December 31, 2000
4
Consolidated Statements of Income for the Three and
Six
Months ended June 30, 2001 and 2000
5
Consolidated Statements of Changes in Shareholders'
Equity for the Six Months ended June 30, 2001
and 2000
6
Consolidated Statements of Cash Flow for the Six
Months ended June 30, 2001 and 2000
7
Notes to Consolidated Financial Statements
8-9
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
10-14
Item 3.
Quantitative and Qualitative Disclosure About
Market Risk
14
PART II
OTHER INFORMATION
Item 1.
Legal Proceedings
15
Item 2.
Changes in Securities and Use of Proceeds
15
Item 3.
Defaults Upon Senior Securities
15
Item 4.
Submission of Matters to a Vote of Security Holders
15
Item 5
Other Information
15
Item 6
Exhibits and Reports on Form 8-K
15
Signature
Page
16
2
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 June 30, 2001, and for the
three- and six-month periods ended June 30, 2001 and 2000. These financial
statements are the responsibility of the Company's management.
We conducted our reviews 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 U.S. 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 reviews, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with U.S. generally accepted accounting principles.
/s/ BERRY, DUNN, McNEIL & PARKER
Portland, Maine
August 10, 2001
3
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001 AND DECEMBER 31, 2000
(in thousands, except number of shares and per share data)
June 30,
2001
(Unaudited)
December 31, 2000
<s>
<c>
<c>
Assets
Cash and due from banks
$ 11,125
$ 10,580
Federal funds sold
2,000
0
Securities:
Available for sale, at market
121,353
37,844
Held to maturity (market value
$2,186 and $116,245 at
June 30, 2001 and December 31,
2000, respectively)
2,188
116,306
Other securities
8,168
8,068
Total securities
131,709
162,218
Loans
283,588
271,381
Allowance for possible loan losses
(4,068)
(4,236)
Loans, net of allowance
279,520
267,145
Premises and equipment
13,440
11,996
Other assets
13,429
14,286
TOTAL ASSETS
$451,223
$466,225
Liabilities
Deposits
Demand deposits
$ 40,439
$ 42, 527
NOW accounts
44,529
41,039
Savings deposits
71,851
73,776
Time deposits
119,080
120,734
Total deposits
275,899
278,076
Securities sold under repurchase
agreements
10,888
12,166
Borrowings from Federal Home Loan
Bank
108,000
119,152
Other liabilities
5,385
6,324
TOTAL LIABILITIES
$400,172
$ 415,718
Shareholders' equity
Capital stock, par value $2.00;
authorized
10,000,000 shares; issued
3,643,614 shares
$ 7,287
$ 7,287
Surplus
4,002
4,002
Retained earnings
43,067
42,854
Accumulated other comprehensive
income
Unrealized appreciation
(depreciation) on securities
available for sale, net of
taxes of $362 and ($39) at
June 30, 2001 and December 31,
2000, respectively
704
(76)
Less: cost of 367,500 shares and
337,500 shares
of treasury stock at June 30,
2001, and
December 31, 2000 respectively.
(4,009)
(3,560)
TOTAL SHAREHOLDERS' EQUITY
51,051
50,507
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY
$451,223
$466,225
See accountant's review report. The accompanying notes are an integral part
of these consolidated
financial statements.
4
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(in thousands, except number of shares and per share data)
(UNAUDITED)
Three Months Ended
June 30
Six Months Ended
June 30
<s>
<c>
<c>
<c>
<c>
2001
2000
2001
2000
Interest and dividend income:
Interest and fees on loans
$ 6,028
$ 6,082
$11,945
$11,782
Interest and dividends on
securities and federal funds
2,437
2,859
5,192
5,703
Total interest and dividend income
8,465
8,941
17,137
17,485
Interest expense
4,279
4,456
8,756
8,497
Net interest income
4,186
4,485
8,381
8,988
Provision for possible loan losses
1,200
163
1,400
326
Net interest income after provision
for possible loan losses
2,986
4,322
6,981
8,662
Noninterest income:
Trust and other financial
services.
787
760
1,752
1,556
Service charges on deposit
accounts
507
396
1,065
643
Other service charges,
commissions, and fees
212
270
436
434
Other operating income
186
33
287
175
Total noninterest income
1,692
1,459
3,540
2,808
Noninterest expenses:
Salaries and employee benefits
2,049
2,225
4,143
4,182
Occupancy expense
233
275
496
446
Furniture and equipment expense
326
415
729
740
Other operating expense
1,536
1,422
2,971
2,737
Total noninterest expenses
4,144
4,337
8,339
8,105
Income before income taxes
534
1,444
2,182
3,365
Income taxes
157
487
715
1,122
NET INCOME
$ 377
$ 957
$ 1,467
$ 2,243
NET INCOME PER SHARE
Basic
$0.12
$0.28
$0.45
$0.66
Diluted
$0.12
$0.28
$0.45
$0.66
Weighted average number of capital
stock
shares outstanding
Basic
3,276,114
3,372,278
3,288,2
13
3,387,4
95
Effect of dilutive employee
stock options
3,402
- -
3,402
- -
Diluted
3,279,516
3,372,278
3,288,2
13
3,387,4
95
Dividends per share
$0.19
$0.19
$0.38
$0.38
See accountant's review report. The accompanying notes are an
integral part of these
consolidated financial statements.
5
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(in thousands, except number of shares and per share data)
(UNAUDITED)
CAPITA
L
STOCK
SURPL
US
RETAIN
ED
EARNIN
GS
NET
UNREALIZED
APPRECIATION
(DEPRECIATIO
N) ON
SECURITIES
AVAILABLE
FOR SALE
TREASUR
Y STOCK
TOTAL
SHAREHOLDE
RS'
EQUITY
<s>
<c>
<c>
<c>
<c>
<c>
<c>
Balance, December
31, 1999
$7,287
$4,00
2
$40,61
1
($1,015)
($1,740
)
$49,145
Net Income
2,243
2,243
Change in
unrealized
apprecia-
tion on
securities
available
for sale, net
of tax of $67
130
130
Total
comprehensive
income
2,243
130
0
2,373
Cash dividends
declared
($0.38 per
share)
(1,291
)
(1,291)
Purchase of
treasury stock of
66,700 shares
(1,086)
(1,086)
Balance, June 30,
2000
$7,287
$4,00
2
$41,56
3
($885)
($2,826
)
$49,141
Balance, December
31, 2000
$7,287
$4,00
2
$42,85
4
($76)
($3,560
)
$50,507
Net Income
1,467
1,467
Cumulative effect
to record
unrealized
depreciation on
securities
held to maturity
transferred
to securities
available for
sale, net of tax
benefit of
$14
(28)
(28)
Change in
unrealized
apprecia-
tion on
securities
available for
sale, net of
tax of $416
808
808
Total
comprehensive
income
1,467
780
2,247
Cash dividends
declared
($0.38 per
share)
(1,254
)
(1,254)
Purchase of
treasury stock of
30,000 shares
(449)
(449)
Balance, June 30,
2001
$7,287
$4,00
2
$43,06
7
$704
($4,009
)
$51,051
See accountant's review report. The accompanying notes are an
integral part of these consolidated financial statements.
6
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
2001
2000
<s>
<c>
<c>
Cash flows from operating activities:
Net income
$1,467
$2,243
Adjustments to reconcile net income to
net cash
provided by operating activities:
Depreciation
604
616
Provision for loan losses
1,400
326
Gain on sale of other real estate
owned
- -
(7)
Net change in loans held for sale
- -
52
Net amortization of bond premium
8
46
Loss on sale of premises and
equipment
- -
111
Net change in other assets
(7,189)
(1,658)
Net change in other liabilities
(939)
1,015
Net cash provided (used) by operating
activities
(4,649)
2,744
Cash flows from investing activities:
Net change in federal funds sold
(2,000)
- -
Purchases of securities held to
maturity
- -
(5,313)
Proceeds from maturity and principal
paydowns
of securities held to maturity
270
9,272
Purchases of securities available for
sale
- -
(6,807)
Proceeds from maturity and principal
paydowns
available for sale
7,524
49
Proceeds from sale and call of
securities
available for sale
23,879
- -
Net (increase) decrease in other
securities
7,654
(1,950)
Net loans made to customers
(13,775)
(16,367)
Capital expenditures
(2,048)
(3,811)
Proceeds from sale of other real
estate owned
- -
39
Proceeds from sale of premises and
equipment
- -
59
Net cash provided (used) by investing
activities
21,504
(24,829)
Cash flows from financing activities:
Net change in deposits
(2,177)
(9,750)
Net change in securities sold under
repurchase agreements
(1,279)
(2,465)
Proceeds from Federal Home Loan Bank
advances
20,000
86,000
Repayment of advances from Federal
Home Loan Bank
(47,304)
(71,500)
Net change in short term other
borrowed funds
16,152
23,064
Proceeds from sale of capital stock
- -
(1,086)
Purchase of treasury stock
(449)
- -
Payments of dividends
(1,253)
(1,291)
Net cash provided (used) by financing
activities
(16,310)
22,972
Net increase in cash and cash
equivalents
545
887
Cash and cash equivalents at beginning
of year
10,580
12,852
Cash and cash equivalents at end of
quarter
$11,125
$13,739
Non-cash transactions
Transfer from loans to other real
estate owned
- -
92
Transfer of securities from held to
maturity to available for sale
113,864
- -
See accountant's review report. The accompanying notes are an
integral part of these consolidated financial statements.
7
BAR HARBOR BANKSHARES AND SUBSIDIARIES
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 and with the instructions to Form 10-Q, and therefore,
they do not include all of the information and footnotes required
by generally accepted accounting principles for complete
presentation of 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 2001
period is not necessarily indicative of the results that may be
expected for the year ending December 31, 2001. 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, 2000.
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 possible 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.
Diluted net income per share reflects the effect of stock options
outstanding at the end of the period.
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 have had no impact on the Company, as it has not
engaged in any derivative transactions.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities", is effective for
transfers occurring after June 30, 2001. SFAS No. 140 replaces
SFAS No. 125. This statement is expected to have no material
impact to the Company's consolidated financial condition and
results of operations.
8
During 2001, the Financial Accounting Standards Board ("FASB")
issued Statement No. 141, "Business Combinations," and Statement
No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 141 improves the transparency of the accounting and
reporting for business combinations by requiring that all business
combinations be accounted for under a single method - the purchase
method. Use of the pooling-of-interests method is no longer
permitted. SFAS No. 141 requires that the purchase method be used
for business combinations initiated after June 30, 2001.
SFAS No. 142 requires that goodwill no longer be amortized to
earnings, but instead be reviewed for impairment. The
amortization of goodwill ceases upon adoption of the Statement,
which will be January 1, 2002. The Company has not determined the
impact of adopting SFAS No. 142.
3. Line of Business Reporting
The Company manages and operates two major lines of business:
Community Banking and Financial Services. Community Banking,
through the wholly owned subsidiary Bar Harbor Banking and Trust
Company, includes lending and deposit-gathering activities and
related services to businesses and consumers. Financial Services
through BTI Financial Group and its three operating subsidiaries
includes Dirigo Investments, Inc., a NASD registered broker-
dealer; Block Capital Management, an SEC registered investment
advisor; and Bar Harbor Trust Services, a Maine chartered trust
company. 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 and parent company only
items. Selected segment information is included in the following
table.
SIX MONTHS ENDED JUNE 30
(UNAUDITED)
Community
Banking
Financial
Services
Other
Consolidate
d Totals
<s>
<c>
<c>
<c>
<c>
<c>
<c>
<c>
<c>
2001
2000
2001
2000
2001
2000
2001
2000
Net Interest
Income
$8,370
$8,979
$11
$9
$0
$0
$8,3
81
$8,9
88
Provision for loan
losses
1,400
326
0
0
0
0
1,40
0
326
Net interest
income after
provision
for loan losses
6,970
8,653
11
9
0
0
6,98
1
8,66
2
Non-interest
income
1,775
3,186
1,757
1,582
8
(1,96
0)
3,54
0
2,80
8
Non-interest
expense
6,139
6,305
2,117
1,865
83
65
8,33
9
8,10
5
Income (loss)
before income tax
2,606
5,534
(349)
(274)
(75)
(1,89
5)
2,18
2
3,36
5
Income tax
(benefit)
868
1,840
(128)
(93)
(25)
(625)
715
1,12
2
Net income (loss)
$1,738
$3,694
($221)
($181
)
($50
)
($1,2
70)
$1,4
67
$2,2
43
9
THREE MONTHS ENDED JUNE 30
(UNAUDITED)
Community
Banking
Financial
Services
Other
Consolidate
d Totals
<s>
<c>
<c>
<c>
<c>
<c>
<c>
<c>
<c>
2001
2000
2001
2000
2001
2000
2001
2000
Net Interest
Income
$4,181
$4,478
$5
$7
$0
$0
$4,1
86
$4,4
85
Provision for loan
losses
1,200
163
0
0
0
0
1,20
0
163
Net interest
income after
provision
for loan losses
2,981
4,315
5
7
0
0
2.98
6
4,32
2
Non-interest
income
867
673
792
786
33
1,69
2
1,45
9
Non-interest
expense
3,068
3,390
1,000
979
76
(32)
4,14
4
4,33
7
Income (loss)
before income tax
780
1,598
(203)
(186)
(43)
32
534
1,44
4
Income tax
(benefit)
250
538
(79)
(63)
(14)
12
157
487
Net income (loss)
$530
$1,060
($124)
($123
)
($29
)
$20
$377
$957
Item 2. 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. Accordingly, 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 six months ended June 30, 2001.
SUMMARY
Total assets for the Company of $451.2 million at June 30, 2001,
have decreased by $15.0 million from December 31, 2000. Earnings
were $1,467,000 for the first six months of 2001, and $776,000
below the earnings for the same period in 2000. The principal
reason for the decrease in earnings is the additional provision of
$1 million, or $660,000 after taxes, that the Bank added to its
allowance for possible loan losses. This additional provision
establishes the allowance for possible loan losses at a level that
management feels is adequate to absorb possible future losses.
Total assets declined due to called securities and prepayments of
mortgage backed securities that were not replaced. These
reductions occurred in large measure because the lower interest
rate environment made early pay-offs and refinancings attractive
to borrowers.
10
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. In mid-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. This office was further expanded with
additional brokers in late 2000. At the end of the first quarter
2001, BTI moved into its newly renovated centralized facilities in
Ellsworth, Maine.
REVIEW OF FINANCIAL CONDITION AT JUNE 30, 2001 AND
DECEMBER 31, 2000
Total assets declined $15.0 million from December 31, 2000, to
June 30, 2001, primarily because investment securities decreased
$30.5 from 2000 year end due to maturities, called issues, and
paydowns of mortgage backed securities. Lower interest rates,
precipitated by the Federal Reserve reducing the
targeted federal funds rate by 275 basis points during the first
six months of 2001, have contributed to an
acceleration of called securities, refinancings, and payoffs of
securitized mortgages. The principal
application of this incoming cash flow from the investment
portfolio has been to reduce borrowings from the Federal Home Loan
Bank and to fund loan growth. These borrowings have decreased
$11.1 million since December 31, 2000, while loan growth has
increased $12.2 million. At the end of the second quarter 2001,
consumer loans represented 59% of the portfolio, which is
consistent with year end 2000. The ratio of commercial loans
tends to increase modestly in the second and third calendar
quarters that are more seasonally active for commercial lending.
The Bank's reserve for possible loan losses as of June 30, 2001,
is 1.43% of total loans compared to 1.56% at December 31, 2000.
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, underwriting standards,
and regulatory guidelines. During the first six months of 2001,
net charge offs totaled $1,769,000 compared to $475,000 during the
first six months of 2000. Included in the 2001 net charge-off
total is an amount of $1,063,000 related to one credit engaged in
the fishing industry. During the second quarter 2001, an
additional provision to the allowance was recognized to establish
the reserve at a level management feels is adequate to absorb
possible future loan losses. The amounts below represent the
total loan dollars past due as of June 30, 2001, and December 31,
2000.
Category
June 30, 2001
December 31,
2000
<s>
<c>
<c>
90-days past due and still
accruing
$ 320
$ 1,206
Non-accruing
5,493
6,907
$ 5,813
$ 8,113
Gross Loans
$283,588
$271,381
Percentage of Gross Loans
2.05%
2.99%
11
Effective January 1, 2001, a substantial portion of the securities
portfolio was reclassified from held to maturity to available for
sale, as allowed by SFAS No. 133, as amended. This
reclassification will permit more active management of the
investment portfolio.
Premises and equipment growth includes the purchase and renovation
costs of the headquarters of BTI in Ellsworth, Maine, as well as
properties adjacent to the Ellsworth branch office of the Bank and
in front of BTI. At the end of the first quarter 2001, the
building was substantially complete and occupancy by the BTI
subsidiaries had begun.
The Bank experiences a seasonal decline in its deposit base
through late fall and the winter months through the spring.
Deposits generally increase during the second and third quarters
when economic activity in the Company's market area is more
seasonally active. While deposits are $2.2 million below year
end, they have increased $5.8 million, or 2.2%, during the second
quarter 2001.
NET INTEREST INCOME
Rates, volumes and the mix of earning assets and interest bearing
liabilities and the level of non-interest bearing deposits affect
net interest income. Comparing the first six months of 2001 with
the same period
for 2000, net interest income decreased by $607,000. Average
earning assets of the Bank decreased slightly, by $7.5 million
between the two periods. More significantly, a declining
interest rate
environment, increased competition reflected in loan pricing,
reduced opportunity for attractive yields in high quality
investments, and some residual of rapidly rising funding costs in
2000, have narrowed average net interest margins. In some
instances, in the first half of 2000, the Bank added fixed rate,
longer-term assets to its Balance Sheet, but these assets were
funded with shorter-term (one year or less) liabilities. As
funding rates increased, the net interest income spread on these
investments decreased because of the increasingly higher funding
costs. While this compression has abated somewhat during the
first half of 2001, average funding costs from the Federal Home
Loan Bank were still 22 basis points more in the first half of
2001 than in the first half of 2000, which contributes to the
decrease in net interest income between quarters.
Interest earned on loans for the first six months of 2001 when
compared to the first six months of 2000,
increased by $656,000 primarily due to increases in average
volumes of $15.2 million but overall by only $163,000 due to
declining yields in the loan portfolio which declined
approximately 37 basis points between the first half of 2000 and
the first half of 2001. Because of declining interest rates in
the first six months of 2001 and the repricing attributes of the
mix of loans, the overall yield on the loan portfolio at the end
of the second quarter 2001 has decreased approximately 31 basis
points from the fourth quarter of 2000.
Interest income from the securities portfolio was $724,000 less in
the first six months of 2001 than the same period in 2000
principally because of a $30.5 million reduction in the overall
portfolio between periods. This decrease was caused by
maturities, pay downs on mortgage backed securities, and the
exercise by issuers of callable features because of the declining
interest rate environment. The overall average yield of the
portfolio was 6.73% in 2001, a slight increase of 2 basis points
over a yield of 6.71% in the first six months of 2000.
Interest expense for the six months ended June 30, 2001, increased
$259,000 compared to the same period in 2000. Virtually all of
this increase was attributed to rate increases, particularly
related to certificates of deposit and term borrowings, contracted
during the higher interest rate environment in 2000. Average
deposit rates in the first six months of 2001 were 3.42% compared
to an average rate of
12
3.18% the same period last year. Borrowings from the Federal Home
Loan Bank, which in large measure were used to fund the leverage
in the securities portfolio, increased 22 basis points to a 6.28%
average cost in the first half of 2001 compared to the previous
year's period. As these funding sources continue to reprice,
primarily through maturities, the Company should realize lower
funding costs in the near future.
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 dollar amounts of the change in
each.
RATE VOLUME ANALYSIS
SIX MONTHS ENDED JUNE 30, 2001
COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
(dollars in thousands)
INCREASES (DECREASES) DUE TO
<s>
<c>
<c>
<c>
VOLUME
RATE
NET
Loans
$656
($ 493)
$163
Investment securities
(741)
17
(724)
Federal funds sold and money market
funds
214
(1)
213
TOTAL EARNING ASSETS
129
(477)
(348)
Deposits
(26)
331
305
Borrowings
(178)
132
(46)
TOTAL INTEREST BEARING LIABILITIES
(204)
463
259
NET CHANGE IN INTEREST
$333
($940)
($607)
NON-INTEREST INCOME
Non-interest income for the six months ended June 30, 2001,
totaled $3,540,000 which is $732,000 more than the first six
months in 2000. This 26% increase is due principally to fee
enhancements implemented by the Bank in late 2000, improved
management of customer charges, and a 13% increase in BTI revenues
from its three financial services subsidiaries.
NON-INTEREST EXPENSE
Non-interest expenses for the six months ended June 30, 2001,
totaled $8,339,000, an increase of $234,000, or 2.9% from the
first six months of 2000. Over the past several months, the
Company has
13
made additions to staff in critical customer related and
operational areas, has implemented technological improvements
throughout the Company, and has expanded the BTI network,
particularly in the Bangor market. In the category of salaries
and related benefits, in 2000 the Company added a senior credit
administrator and a related staff for analysis and collections
that has enhanced significantly the credit function of the Bank.
Throughout the second quarter of 2000, the banking software
conversion to Information Technology, Inc. (ITI) was completed.
At that time, the Company began expense recognition of capitalized
costs related to this system. This increase in technology
expenses is included in the first half of 2001, but had been only
partially incurred in the first half of 2000. During the second
quarter of 2001, the Company began depreciation of the new BTI
headquarters building and the related furniture, fixtures, and
equipment.
The Company did not incur 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.
CAPITAL
At June 30, 2001, the Company's capital to asset ratio is 11.3%,
while the Bank has a leverage ratio of 9.35%, a risk-weighted Tier
1 ratio of 15.1% and a Total Capital ratio of 16.4%, all in the
well capitalized categories. These ratios compare to December 31,
2000, when the capital to asset ratio was 10.5% for the Company,
and the Bank had a leverage ratio, risk-based Tier 1 ratio, and
Total Capital ratio of 9.4%, 15.1%, and 16.4% respectively.
Regulatory minimums for these risk based measures are 4% for
leverage, 4% for Tier 1, and 8% for Total Capital.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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 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 9.0% as of June 30, 2001, for the
30-day horizon and 10.4% 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 gap analysis in the current interest
rate environment shows the Bank with approximately $26 million
more liabilities than assets that would be repriced within twelve
months, although the mix of these assets and liabilities suggests
that the company is structurally asset sensitive. If rates were
to rise by 200 basis points, net interest income could increase by
$263,000 in the first year, and increase by $689,000 during the
second year. If 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 decrease by approximately $146,000 during
the first year of the drop, and decrease its income in the second
year by $1.6 million. As interest rates are currently at
comparatively low levels, a continued drop of 200 basis points may
be unlikely.
14
PART II OTHER INFORMATION
Item 1 Legal Proceedings
None
Item 2 Changes in Securities and Use of Proceeds
None
Item 3 Defaults Upon Senior Securities
None
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
None
15
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: August 10, 2001 Dean S. Read
Chief Executive Officer
/S/ Gerald Shencavitz
Date: August 10, 2001 Gerald Shencavitz
Chief Financial Officer
16