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, 1996 C ommission 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)
Registrants'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, 1996:
Common Stock: 1,818,237
PAGE
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Financial Information Page
Item I. Financial Statements
Consolidated Balance Sheets 2
December 31, 1995 and September 30, 1996
Consolidated Statements of Earnings 3
Three months and nine months ended September 30,
1994, 1995 and 1996
Consolidated Statements of Changes in Stockholders Equity 4
Nine months ended September 30, 1995 and 1996
Consolidated Statements of Cash Flows 5
Nine months ended September 30, 1995 and 1996
Rate Volume Analysis 6
Nine months ended September 30, 1995 and 1996
Rate Sensitivity Report 7
As of September 30, 1996
Notes to Financial Statements 8-10
Item II. Management s Discussion and Analysis of Financial
Condition and Results of Operations 11-14
Signature Page 15
</TABLE>
PAGE
<PAGE>
BAR HARBOR BANKSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1996 1995
<S> <C> <C> <C> <C>
ASSETS
Cash and Due from Banks $10,697,921 $ 8,759,797
Federal Funds Sold 0 3,800,000
Investment Securities
Securities Available for Sale,
At market 24,357,033 19,885,555
Securities Held to Maturity
(Market Value $83,312,478 in
1996 and $83,180,706 in 1995) 83,771,708 82,209,062
Total Investment Securities 108,128,141 102,094,617
Loans Held for Sale 163,151 68,326
Gross Loans 211,360,948 201,765,717
Allowance for possible
Loan losses (4,287,650) (4,047,883)
Net Loans 207,073,298 197,717,834
Premises and Equipment 7,547,748 6,219,569
Other Assets 8,423,844 7,948,556
TOTAL ASSETS 342,034,103 326,608,699
LIABILITIES AND STOCKHOLDERS EQUITY
LIABILITIES
Deposits
Demand Deposits 40,093,949 32,394,610
NOW Accounts 39,541,940 38,300,119
Savings Deposits 55,907,356 53,660,526
Time, $100,000 and over 14,311,191 14,005,187
Other Time 107,127,970 113,110,959
TOTAL DEPOSITS 256,982,406 251,471,401
Securities sold under
Repurchase Agreements 6,862,376 5,791,193
Advances from Federal Home
Loan Bank 36,589,485 32,700,000
Other Liabilities 4,442,483 3,403,281
TOTAL LIABILITIES 304,876,750 293,365,875
Capital Stock, par value $2
Authorized 10,000,000 shares
issued 1,818,237 in 1996
and 1,813,605 in 1995 3,636,474 3,627,210
Surplus 7,489,127 7,368,695
Retained Earnings 27,527,907 23,523,626
Net unrealized appreciation
(Depreciation) on securities
available for sale, net of tax,
Benefit of $80,712 in 1996 and
tax of $32,606 in 1995 (156,155) 63,293
Less: Cost of 100,000 shares
Of Treasury Stock (1,340,000) (1,340,000)
TOTAL STOCKHOLDERS EQUITY 37,157,353 33,242,824
TOTAL LIABILITIES AND STOCKHOLDERS
EQUITY 342,034,103 326,608,699<PAGE>
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
PAGE
<PAGE>
BAR HARBOR BANKSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS NINE MONTHS
ENDING ENDING ENDING ENDING ENDING ENDING
09-30-96 09-30-95 09-30-94 09-30-96 09-30-95 09-30-94
Interest & Fees on Loans $5,150-807 $5,121,406 $4,205,264 $25,147,611 $14,330,622 $11,742,788
Interest & Dividends on
Investment Securities:
Taxable Interest Income 1,581,668 1,445,337 1,172,225 4,498,022 4,057,080 3,312,142
Non-taxable Interest Inc. 191,830 215,313 208,013 581,432 647,061 618,545
Dividends 88,910 77,982 116,949 260,781 286,046 265,482
Federal Funds Sold 5,933 41,790 3,706 22,916 91,141 31,159
Total Interest Income 7,019,148 6,901,828 5,706,157 20,510,762 19,411,950 15,970,116
Interest on Deposits 2,161,816 2,233,392 1,615,156 6,718,418 6,077,427 4,347,566
Interest in Short Term
Borrowings 624,714 533,699 359,700 1,754,156 1,719,723 1,185,198
Total Interest Expense 2,786,530 2,767,091 1,974,856 8,472,571 7,797,150 5,533,764
Net Interest Income 4,232,618 4,134,737 3,731,301 12,038,191 11,614,800 10,436,352
Provision for Loan Losses 120,000 240,000 240,000 600,000 720,000 720,000
Net Interest Income after
Provision for Loan
Losses 4,112,618 3,894,737 3,491,301 11,438,191 10,894,800 9,716,352
Other Income 1,684,273 1,362,041 1,251,090 3,741,703 3,183,547 3,059,539
Investment Securities Gains 0 0 32,532 16,934 0
58,494
Other Expenses:
Salaries & Emp. Benefits 1,467,981 1,245,330 1,321,864 4,265,530 3,639,676 3,749,390
Other 1,512,297 1,305,752 974,447 3,759,334 3,698,848 3,276,061
Investment Securities Losses 0 0 0 0 0 0
Income Before Income
Taxes 2,816,613 2,705,696 2,478,612 7,171,964 6,739,813 5,808,934
Income Tax Expense 726,837 859,275 677,957 2,050,829 2,084,741 1,688,471
Net Income 2,089,776 1,846,421 1,800,655 5,121,135 4,655,082 4,120,463
Earnings per Share:
Based on 1,709,835 Shares for
1994, 1,713,605 for 1995 and
<S> <C> <C> <C> <C> <C> <C>
1,718,237 Shares for 1996* $1.22 $1.08 $1.05 $2.98 $2.72 $2.41
Dividends per Share $0.25 $0.00 $0.00 $0.65 $0.36 $0.30
</TABLE>
*Earnings per share have been restated in 1994
to reflect a five-for-one stock split declared
July 11, 1995.
PAGE
<PAGE>
BAR HARBOR BANKSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
QUARTERS ENDED SEPTEMBER 30, 1995 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
NET UNREA- NET
LIZED LOSS STOCK-
CAPITAL RETAINED TREASURY ON EQUITY HOLDERS
STOCK SURPLUS EARNINGS STOCK SECURITIES EQUITY
Balance, 12/31/94 $3,619,670 $7,314,408 $19,118,678 ($1,340,000) 48,027 $28,760,783
Net Earnings 4,655,082 4,655,082
Cash Dividends Declared (616,897) (616,897)
Net Unrealized appreciation
on securities available for
sale, net of tax of $44,067 37,516 37,516
Sale of Stock (3,770 Shares) 7,540 54,288 61,828
Balance, 9/30/95 $3,627,210 $7,368,696 $23,156,863 ($1,340,000) $85,543 $32,898,312
Balance, 12/31/95 3,627,210 7,368,695 23,523,626 (1,340,000) 63,293 33,242,824
Net Earnings 5,121,135 5,121,135
Cash Dividends Declared (1,116,854) (1,116,854)
Net Unrealized Depreciation
on Securities Available for
Sale, Net of Tax benefit of $80,712 37,516 37,516
Sale of Stock (4,632 Shares) 9,264 120,432 0 0 0 129,696
Balance, 9/30/96 $3,636,474 $7,489,127 $27,527,907 ($1,340,000) ($156,155) $37,157,353
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE
<PAGE>
BAR HARBOR BANKSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
SEPTEMBER 30, SEPTEMBER 30
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 5,121,135 $ 4,655,082
ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION 566,161 436,354
PROVISION FOR LOAN LOSSES 600,000 720,000
PROVISION FOR LOSSES ON OTHER REAL ESTATE OWNED (4,664) 9,778
NEW LOANS ORIGINATED FOR SALE (7,108,320) (5,422,883)
PROCEEDS FROM SALE OF MORTGAGES HELD FOR SALE 7,028,603 5,442,126
GAIN ON SALE OF MORTGAGES ORIGINATED FOR SALE (15,108) (19,243)
NET SECURITIES GAINS (16,934) 0
NET AMORTIZATION OF BOND PREMIUM 224,207 137,185
NET CHANGE IN OTHER ASSETS (287,745) (556,533)
NET CHANGE IN OTHER LIABILITIES 1,039,202 53,020
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,146,537 5,454,886
CASH FLOWS FROM INVESTING ACTIVITIES:
PURCHASES OF SECURITIES HELD TO MATURITY (13,636,697) (20,927,848)
PROCEEDS FROM MATURITY & PRINCIPAL PAYDOWNS OF
SECURITIES HELD TO MATURITY 6,481,601 6,276,134
PROCEEDS FROM CALL OF SECURITIES HELD TO MATURITY 5,420,608 5,750,000
PURCHASES OF SECURITIES AVAILABLE FOR SALE (5,503,125) (1,997,188)
PROCEEDS FROM MATURITY & PRINCIPAL PAYDOWNS OF
SECURITIES AVAILABLE FOR SALE 148,128 4,549
PROCEEDS FROM CALL OF SECURITIES AVAILABLE FOR SALE 500,000 0
NET LOANS MADE TO CUSTOMERS (10,009,102) (13,582,338)
CAPITAL EXPENDITURES (1,894,340) (1,043,719)
NET CASH USED IN INVESTING ACTIVITIES (18,492,928) (25,520,410)
CASH FLOWS FROM FINANCING ACTIVITIES:
NET CHANGE IN SAVINGS, NOW AND DEMAND DEPOSITS 11,187,990 2,224,501
NET CHANGE IN TIME DEPOSITS (5,676,985) 28,215,467
NET CHANGE IN REPURCHASE AGREEMENTS 1,071,183 9,403,755
PURCHASE OF ADVANCES FROM FHLB 33,000,000 19,000,000
REPAYMENT OF ADVANCES FROM FHLB (13,000,000) (20,000,000)
NET CHANGE IN OTHER SHORT TERM BORROWED FUNDS (16,110,515) (16,000,000)
PROCEEDS FROM SALE OF CAPITAL STOCK 129,696 61,828
PAYMENT OF DIVIDENDS (1,116,854) (616,898)
NET CASH PROVIDED BY FINANCING ACTIVITIES 9,484,515 22,288,653
NET INCREASE IN CASH AND CASH EQUIVALENTS (1,861,876) 2,223,129
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 12,559,797 9,714,713
CASH AND CASH EQUIVALENTS AT END OF QUARTER 10,6977921 11,937,842<PAGE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR
INTEREST 8,533,008 7,708,377
INCOME TAXES 1,450,000 2,026,679
NON-CASH TRANSACTIONS:
TRANSFER FROM LOANS TO REAL ESTATE OWNED (OTHER A 193,000 186,000
</TABLE>
See accompanying notes to Consolidated Financial Statements
PAGE
<PAGE>
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 absolute dollar amounts
of the change in each.
YEAR-TO-DATE FIGURES AS OF SEPTEMBER 30, 1996
COMPARED TO SEPTEMBER 30, 1995
INCREASES (DECREASES) DUE TO:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
VOLUME RATE NET
LOANS $ 853,768 ($36,779) $816,989
TAXABLE SECURITIES 545,049 (129,372) 415,677
TAX EXEMPT SECURITIES (57,057) (8,572) (65,629)
FEDERAL FUNDS SOLD AND
MONEY MARKET FUNDS (58,848) (9,377) (68,225)
TOTAL EARNING ASSETS $1,282,912 (184,100) $1,098,812
DEPOSITS $357,112 283,876 640,988
BORROWINGS $116,955 (82,522) 34,433
TOTAL INTEREST
BEARING LIABILITIES $474,067 $201,354 $675,421
NET CHANGE IN INTEREST $808,845 ($385,454) $423,391
</TABLE>
YEAR-TO-DATE FIGURES AS OF SEPTEMBER 30, 1995
COMPARED TO SEPTEMBER 30, 1994
INCREASES (DECREASES) DUE TO:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
VOLUME RATE NET
LOANS $1,588,681 $ 999,153 $2,587,834
TAXABLE SECURITIES $ 411,623 $ 353,879 765,502
TAX EXEMPT SECURITIES $ 900 $ 27,616 28,516
FEDERAL FUNDS SOLD AND
MONEY MARKET FUNDS $ 38,677 $ 21,305 59,982
TOTAL EARNING ASSETS $2,039,881 $1,401,953 $3,441,834
DEPOSITS $ 574,059 $1,155,802 1,729,861
BORROWINGS $ 49,653 $ 483,872 533,525
TOTAL INTEREST
BEARING LIABILITIES $ 623,712 $1,639,674 $2,263,386
NET CHANGE IN INTEREST $1,416,169 ($237,721) $1,178,448 <PAGE>
</TABLE>
PAGE
<PAGE>
INTEREST RATE SENSITIVITY ANALYSIS
AS OF SEPTEMBER 30, 1996
(UNAUDITED)
Amounts in Thousands
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1996 which are
anticipated by the Bank, based upon certain assumptions, to reprice or
mature in each of the future time periods shown.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
ONE TO GREATER
TOTAL TO FIVE THAN FIVE
ONE YEAR YEARS YEARS TOTAL
Loans - Fixed Rate $ 10,064 $ 30,346 $ 22,885 $ 63,295
Loans - Variable Rate 120,941 22,110 2,036 145,087
Investments 42,025 41,622 24,479 108,126
Federal Funds Sold 0 0 0 0
Interest Rate Swap/Floor 0 15,000 0 15,000
Total Earning Assets $173,030 $109,078 $ 49,400 $331,508
Deposits $139,010 $ 18,867 $ 99,026 $256,903
Repurchase Agreements 6,789 0 1,135 7,924
Borrowings 25,681 10,908 0 36,589
Interest Rate Swap/Floor 5,000 10,000 0 15,000
Total Sources $176,480 $ 39,775 $100,161 $316,416
Net Gap Position ($3,450) $ 69,303 ($50,761) $ 15,092
Cumulative Gap ($3,450) $ 65,853 $15,092 $ 15,092
</TABLE>
Except as stated below, the amounts of assets and liabilities shown which
reprice or mature during a particular period were determined in accordance
with the earlier of term to repricing or the contractual terms of the
asset or liability. The Bank has assumed that 4% of its savings is
more rate sensitive and will react to rate changes, and has therefore
categorized it in the 3-12 month time horizon. The remainder is stable and
is listed in the greater than five year category. NOW accounts, other than
seasonal fluctuations approximating $4,000,000, are stable and are listed
in the greater than five year category. Money market accounts are assumed
to reprice in three months or less. Certificates of deposit are assumed
to reprice at the date of contractual maturity. Fixed rate mortgages,
totaling $40,000,000 are amortized using the weighted average maturity
of 143 months, with an additional prepayment rate of 9%, which
approximates the Bank s prior experience.
PAGE
<PAGE>
NOTES TO FINANCIAL STATEMENTS DATED SEPTEMBER 30, 1996
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 1995 Annual Report.
<TABLE>
<CAPTION>
<S> <C> <C>
SEPTEMBER 30, 1996
CARRYING MARKET
VALUE VALUE
2. INVESTMENT SECURITIES:
a. U.S. Treasury and other
Government agencies $ 79,180,491 $ 78,065,735
b. States of the U.S. and other
Political subdivisions 12,771,113 13,142,754
c. Other securities 16,412,392 16,461,022
Total Securities $108,363,996 $107,669,511
Securities held to
maturity 83,771,108 83,312,478
Securities available
For sale 24,592,888 24,357,033
</TABLE>
The Bank does not hold any securities for a single
Issuer which exceed 10% of the Bank s stockholders
equity.
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, December 31,
1996 1995
3. LOANS
a. Commercial, agricultural
And other loans $43,914,307 $40,190,313
b. Real Estate - Construction 8,750,023 8,072,230
c. Real Estate - Mortgage 141,926,931 135,862,776
d. Installment loans 16,769,687 17,640,398
Total Loans $211,360,948 $201,765,717
</TABLE>
4. CHANGES IN ALLOWANCE FOR POSSIBLE LOAN LOSSES:
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, September 30
1996 1995
Balance, beginning January 1: $ 4,047,883 $ 3,891,835
Provision charged to income 600,000 720,000
Recoveries of amounts charged 100,840 78,144<PAGE>
Losses charged to provision 461,073 464,264
Balance, ending September 30: $ 4,287,650 $ 4,225,715
</TABLE>
PAGE
<PAGE>
Information regarding impaired loans is as follows for September 30, 1996:
<TABLE>
<CAPTION>
<S> <C>
Average investment in impaired loans $ 1,375,683
Interest income recognized on impaired loans,
including interest income recognized on
cash basis 107,730
Interest income recognized on impaired loans
on cash basis 107,730
Balance of impaired loans` 1,604,919
Less portion for which no allowance for
loan losses is allowed 0
Portion of impaired loan balance for which
An allowance for credit losses is allocated 1,604,919
Portion of allowance for loan losses allocated
to the impaired loan balance 124,598
</TABLE>
5. CHANGES IN ALLOWANCE FOR OTHER REAL ESTATE:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
9/30/96 9/30/95 9/30/94
Balance, beginning Jan. 1 $26,000 $30,486 $ 53,286
Provision charged to income (4,664) 9,778 1,800
Losses charged to provision 21,336 15,110 24,600
Balance, ending Sept. 30 $ 0 $25,154 $ 30,486
</TABLE>
6. The aggregate dollar amount of loans made to directors, executive
officers or principal holders of equity securities as of September 30,
1996 and December 31, 1995 respectively were:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Aggregate amount, beginning 1-1 $3,279,479 $ 3,409,868
New Loans 294,012 349,935
Repayments 63,576 480,324
Aggregate amount, ending 9-30-96 $3,509,915
Aggregate amount, ending 12-31-95 $ 3,279,479
7. OTHER ASSETS:
September 30, December 31
1996 1995
a. Interest earned but
Not paid on:
Loans $ 1,513,648 $ 1,471,216
Investments 1,253,210 1,008,678
b. Other Real Estate Owned 275,744 443,652
</TABLE>
PAGE
<PAGE>
8. INCOME TAXES:
The Company adopted Financial Accounting Standards No. 109
Accounting for Income Taxes effective January 1, 1993. The
standard requires adoption of a liability method of accounting for
income taxes. The accounting change had no effect on the company s
net income or retained earnings.
Components of income tax expense for the period ended September 30,
1996 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Current
Federal $2,215,053
State 68,036
$2,283,089
Deferred (232,260)
$2,050,829
</TABLE>
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 nine months ended September 30, 1996:
<TABLE>
<CAPTION>
<S> <C> <C>
Computed tax expense $2,240,987
Tax exempt interest (240,264)
Other 50,106
$2,050,829
</TABLE>
At September 30, 1996, items giving rise to the deferred income tax
assets and liabilities, using a tax rate of 34%, are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
ASSET LIABILITY
Allowance for possible loan losses
On loans and real estate owned $1,295,759
Deferred and accrued
employee benefits 916,960
Deferred loan origination fees 78,123
Securities losses not currently
Deductible 0
Core deposit intangibles 92,439
Depreciation 51,244
Other 25,935
$2,460,460 $0
</TABLE>
No valuation allowance is deemed necessary for the deferred tax asset.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
9. INCOME TAX EXPENSE: 1996 1995<PAGE>
Federal Income Tax $1,982,793 $2,018,482
State Income Tax 68,036 66,259
</TABLE>
PAGE
<PAGE>
<PAGE>
MANAGEMENT S DISCUSSION AND ANALYSIS
The results of operations for September 30, 1996 are reflected
through the growth in the balance sheet. Total assets grew by more than
$18,000,000 in 1996 and $30,000,000 in 1995 each compared to the
previous year s third quarter end. The major changes are found in the
investment and loan portfolios.
The investment portfolio growth of just under $6,000,000 has
predominantly been in the area of US Government agency debentures. The
most recent purchases totaling $2,500,000, have been callable securities
with two or three years of call protection and final maturities of 10
years. These, like other longer term government sponsored securities
have been placed in the available for sale portion of the portfolio. In
addition, when comparing September 30, 1996 to September 30, 1995, the
Bank s available for sale portfolio has changed by the one-time transfer
of securities at market value totaling $5,600,000 in accordance with the
Financial Accounting Standards Board implementation guidance issued in
November of 1995. The Bank s available for sale portfolio also includes
$5,400,000 in Federal Home Loan Bank stock. Ownership of stock is
required by the FHLB for participation in their funding programs.
The market value of the held to maturity portion of the portfolio
is $460,000 less than the book value, with the AFS portfolio market
value at $226,000 less than the book value. The potential for loss, if
the entire investment portfolio of the Bank were sold as of September
30, 1996, would be a loss of less than one-half of one percent of the
book value of the portfolio. The appreciation of net unrealized gains to
$85,500 as of September 30, 1995 was gradual in line with the increase
in the market. The market value of the entire portfolio, which was
approximately $470,000 greater than the book value, had risen in 1995,
following national economic trends including lower interest rates. The
Bank does not hold any securities (such as structured debt tied to
multiple 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. It does hold one structured note, a 10-year step-up
government agency debenture, which steps annually by 1/8 of 1% after 3
years during which time it is earning 7%. The taxable portion of the
Bank s securities have been earning 7.10 for the first nine months of
1996, a reduction of only 7 basis points since September 30, 1995.
In the loan portfolio, which has grown by $12,000,000 (6.2%) in
the past twelve months, the Bank s concentration has been through the
extension of loans secured by real estate to its consumer customers
totaling $8,000,000 more than one year ago. This compares to 1995's
growth of $16,000,000 (8.8%) in loan growth, with $11,000,000 being
secured by real estate and granted to the Bank s consumer customers. The
Bank continues to experience strong competition from other financial
institutions in its market area.
During 1996, the funding for the asset growth has come from
borrowings primarily through the Federal Home Loan Bank. Total advances
increased by $28,000,000 and include $12,000,000 in longer term<PAGE>
borrowings as funding for certain specific commercial credits. The Bank
had found it cheaper to solicit deposits in 1995 as competitive deposit
rates were below other options of funding sources. The Bank increased
i t s deposit by $23,000,000, predominantly in interest bearing
certificates of deposit promotions. Likewise, as opportunities surfaced
to attract lower cost deposits and repurchase agreements, advances from
the Federal Home Loan Bank decreased in 1995 by $7,000,000. During both
years, short term borrowings were reduced through seasonal deposit
growth, investment maturities and/or calls and principal paydowns from
the Bank s mortgage backed securities portfolio.
Liquidity is measured by the Bank s ability to meet cash needs at a
reasonable cost or minimum loss to the Bank. Liquidity management
involves the ability to meet cash flow requirements of its customers,
which may come from depositors withdrawing funds or borrowers requiring
funds to meet credit needs. Without adequate liquidity management, the
Bank would not be able to meet the needs of the individuals and
communities it serves. The Bank utilizes a Basic Surplus/Deficit model
to measure its liquidity over a 30-day and a 90-day time horizon. We
e x a mine the relationship between liquid assets and short term
liabilities which are vulnerable to non-replacement within a 30-day
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. For the past twelve months, the Bank has
maintained liquidity in its balance sheet in excess of 9.9%. Liquidity
as measured by the Basic Surplus/Deficit model was 15% for the 30-day
horizon and 10.8% for the 90-day horizon as of September 30, 1996.
How the changes in the balance sheet have affected the Bank may be
viewed through the earnings statement for the periods ending September
30, 1994, 1995 and 1996. Overall, the net earnings for the Bank are
$466,000 ahead of last year s first nine months earnings which
represents a 10% increase. Net interest income for the first nine months
of 1996 has added strong earnings and is affected by rates, volumes and
the mix of earning assets and interest bearing liabilities. Interest
income earned from loans increased in 1996 by $850,000 due to volumes of
loans with a small reduction in earnings of $37,000 due to changes in
rates. Overall yields from the loan portfolio remained within 5 basis
points of 1995's yields. In 1995, increases in the loan portfolio
afforded the Bank additional interest income of $1,590,000 due to
increases in volumes, with further increases of $1,000,000 due to
changes in rates. The Bank had increased its base lending rate by 75
basis points between September 30, 1994 and September 30, 1995. Although
only a portion of loans are immediately affected by changes in the
Bank s base rate, the effect of the increase has over time increased the
yields in the portfolio. The commercial real estate rate for variable
rate mortgages increased as well in 1995 and by 100 basis points since
September 30, 1994. As the loans in that portion of the portfolio,
totaling over $50,000,000 in mortgages, reached their annual anniversary
dates, the yield improved the overall yield for loans. Loan yields
increased by 99 basis points between September 30, 1995 and 1994 and
represented the first increase in several years.<PAGE>
Similar to the loan portfolio for 1996, the investment interest
increased by virtue of purchases (totaling $429,000); however, as rates
remained flat and with larger coupons maturing the portfolio experienced
decreases due to rate changes totaling $147,000. Overall the yield on
investments has dropped the same as the loan yield, 5 basis points from
year to year. For 1995, interest on investments increased both due to
volumes ($451,000) and to increased rates ($403,000). Similar to the
loan yields, 1995 was the first year in several in which the overall
investment yield increased rather than decreased. Yields on investments
increased by 24 basis points during 1995 compared with 43 basis point
drops in 1994.
With the Bank well matched in the repricing of its balance sheet,
the funding costs followed a similar pattern as is described above for
loans and investments. In 1996, the cost of deposits rose based on
volumes ($357,000) and rates ($284,000) while the cost of borrowed funds
increased due to volumes $117,000) but decreased by $82,500 because of
rate changes. Reference is made to the earlier discussion that the Bank
elected to fund its asset growth through borrowings instead of deposits.
The cost of deposits increased by 21 basis points whereas the cost of
borrowings decreased by 26 basis points. The overall net interest income
for 1996 is $423,000 more than for the first nine months of 1995.
Looking at 1995, however, the cost of deposited funds increased
from September 1994 to 1995 by 78 basis points. Additionally rates rose
on borrowed funds during the same period by over 117 basis points. These
two factors increased the cost of interest bearing liabilities by
$2,263,000 in 1995. Due to the increase in borrowed funds costs, the
Bank elected to promote certificates of deposit early in 1995, locking
in acceptable rates for the Bank which were lower than alternative
sources of funding. With increases on both sides of the balance sheet,
the net effect on the Bank s earnings remained strong with its net
interest income totaling $1,178,000 more in 1995 than in 1994.
With regard to interest rate sensitivity, the Bank is positioned
favorably for the current interest rate cycle with $3,500,000 more of
its liabilities repricing within a year when compared to its assets.
Based on simulations, if interest rates were to rise by 200 basis points
and if the Bank were to maintain the balance sheet as it today, the Bank
would experience virtually no change in its net interest income ($88,000
increase) in the next two years. If rates were to drop by 200 basis
points, the Bank would only see a reduction in its net interest income
of $193,000. Neither change in rates (up or down) would indicate
interest rate risk concerns for the Bank.
Due to changes in the methodology used for computing the reserve
for possible loan losses and due to the recessionary nature of the
economy in the early 1990's, the Bank increased its ratio to gross loans
to over 2% and has maintained that reserve to loan ratio through
September 30, 1996. The Bank reviews its allocation to the reserve on a
monthly basis and funds the reserve as deemed necessary. The review
includes a provision for specific credits, provisions due to historic
l o a n l osses by loan types and reserved reflecting industry
concentrations, credit concentrations, current economic conditions and<PAGE>
underwriting standards.
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 $1,604,919 and $1,041,882 at
September 30, 1996 and 1995, respectively. Reference is made to the
notes included with this filing that outline the impaired loan figures.
Losses in the loan portfolio were estimated at $840,000 for 1996,
with charged off loans totaling $461,000 for the first nine months of
this year. Losses for 1995 were originally estimated at $950,000 with
$464,000 charged off through September 30, 1995, compared to $337,000
charged off in the first nine months of 1995. The amounts represented
below are the total dollars outstanding for the first nine months of
each year listed.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Category 1996 1995 1994
90-day past due and
still accruing $ 830,532 $ 711,943 $ 645,920
Non-accruing 3,557,518 2,584,343 2,627,314
Gross loans 211,360,948 199,190,024 175,399,428
Percentage of gross
loans 2.08% 1.65% 1.87%
A review of the Bank s non-interest income shows the first nine
months of 1996 ahead of the same period for 1995 by $558,000. $2300,000
of that pertains to the Trust Department s charge to its customers of
scheduled fees. These fees are based on increased book assets of almost
$25,000,000 and are based on the market value of total assets per
account. In addition, as of January 1, 1996, the Bank implemented FASB
Statement No. 122, Accounting for Mortgage Servicing Rights that has
positively impacted the Bank s earnings by $126,000 year to date. A non-
recurring entry of $278,000 in the form of an insurance payoff from a
policy written on certain key persons in the Bank. Robert Avery,
director and former president of the Bank, passed away in August of 1995
resulting in this one-time tax deductible payment. In 1995, non-interest
earnings were $124,000 ahead of the same period in 1994, which was<PAGE>
attributable to the Trust Department s scheduled fees based on increased
book assets of more than $18,000,000. In 1994, the Bank experienced a
modest increase in non-interest income of $70,000 more than the previous
year.
Accruing for an incentive program reflects the increase in salary and
benefit costs in 1996 over 1995. Although the program is not new to the
Bank in 1996, this is the first year that the dollars have been
allocated prior to year end. Excluding the accrual, salary and benefits
would be 1.6% higher than the first nine months of 1995. Salary and
employee benefits for 1995 are actually three percent below 1994's
expense and compare favorably with 1994 which shows a $435,000 (or 13%)
increase over 1993. The increase in 1994 represents merit increases in
compensation of 5% and costs incurred with the addition of a deferred
plan for certain senior officers (Messrs. Reeves, Eaton, Goldthwait and
MacDonald) in light of the termination of the defined benefit pension
plan.
Other expense for the first nine months of 1996 is above the
comparable period in 1996 by $60,000 or 1.6%. A portion of that
containment of costs is attributable to the temporary relief from FDIC
insurance premiums. As a well-capitalized bank, Bar Harbor Banking and
trust Company has not been required to pay premiums this year. As of
September 30, 1995, the bank had incurred $240,000 in FDIC premiums. In
the fourth quarter of 1995, the Bank sought the services of a consulting
firm to review existing procedures, seeking greater efficiencies while
maintaining quality customer service. The Bank incurred approximately
$120,000 in expenses for these services during the first nine months of
1996 as the project was being completed. Additionally, the Bank is
involved in numerous project, including item and document imaging, the
conversion of its banking software to a client server model created by
its current software vendor, the building of an operations center to
house the loan, deposit, credit card and item processing operations of
the Bank. Startup and non-recurring costs for these projects are
included in the other expenses through September 30, 1996.
W i th regard to other expense for 1995, expenses totaling
$3,700,000 compared more with 1993's expenses of $3,560,000 than those
of 1994. 1994 marked a year in which other expenses actually went down
by $285,000 when compared to 1993. During 1993, the Bank took losses on
properties owned which resulted from loan problems totaling $264,000.
There were no comparable losses in either 1994 or 1995. There was no one
category of expense which exceeded $50,000 in increased expenditures in
1995. The Trust Department had recently outsourced its tax preparation
f o r customers and the initial outlay for that operation was
approximately $44,000. Fees are now being generated from Trust customers
and are reflected in the income earned by the Trust Department as
discussed earlier. The Bank s year-to-date efficiency ratio is 55%
remains consistent with the 1995 ratio and is well under the national
average.
Subsequent to September 30, 1996, the Bank was examined by the
Bureau of Banking for the Sate of Maine with a safety and soundness
audit and there were no recommendations made which would have a material<PAGE>
effect on the registrant s capital resources, liquidity or operating
earnings. The Bank s capital to asset ratio is 10.86% and the Bank far
exceeds the required risk based capitol ratio of 8% with its Tier I
ratio of 17.0%, total capital ratio of 18.25% and leverage ratio of
10.63%. Using the risk based capital formula, the Bank has capital in
excess of requirements of $21,757,000.<PAGE>
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
Sheldon F. Goldthwait, Jr. /s/
Date: November 12, 1996 Sheldon F. Goldthwait, Jr.
President
Virginia M. Vendrell /s/
Date: November 12, 1996 Virginia M. Vendrell
S e n ior Vice President,
Treasurer
and Chief Accounting Officer
PAGE
<PAGE>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 10,697,921
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 24,357,033
<INVESTMENTS-CARRYING> 83,771,108
<INVESTMENTS-MARKET> 83,312,478
<LOANS> 211,360,948
<ALLOWANCE> (4,287,650)
<TOTAL-ASSETS> 342,034,103
<DEPOSITS> 256,982,406
<SHORT-TERM> 31,451,861
<LIABILITIES-OTHER> 4,442,483
<LONG-TERM> 0
0
0
<COMMON> 3,636,474
<OTHER-SE> 33,520,879
<TOTAL-LIABILITIES-AND-EQUITY> 342,034,103
<INTEREST-LOAN> 15,147,611
<INTEREST-INVEST> 5,340,235
<INTEREST-OTHER> 22,916
<INTEREST-TOTAL> 20,510,762
<INTEREST-DEPOSIT> 6,718,415
<INTEREST-EXPENSE> 8,472,571
<INTEREST-INCOME-NET> 12,038,191
<LOAN-LOSSES> 600,000
<SECURITIES-GAINS> 16,934
<EXPENSE-OTHER> 8,024,864
<INCOME-PRETAX> 7,171,964
<INCOME-PRE-EXTRAORDINARY> 7,171,964
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,121,135
<EPS-PRIMARY> 2.98
<EPS-DILUTED> 2.98
<YIELD-ACTUAL> 8.58
<LOANS-NON> 3,557,518
<LOANS-PAST> 830,532
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,047,883
<CHARGE-OFFS> 461,073
<RECOVERIES> 100,840
<ALLOWANCE-CLOSE> 4,287,650
<ALLOWANCE-DOMESTIC> 4,287,650
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,394,000
</TABLE>
