UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FOR 10-K
Annual Report pursuant to Section 13 or 15(D) of the Securities Exchange Act
of 1934 (fee required).
For the fiscal year ended December 31, 1996. Commission File No. 0-13666
BAR HARBOR BANKSHARES
State or Other jurisdiction of incorporation or organization: Maine
IRS Employer Identification Number: 01-0393663
Address: P O Box 400, 82 Main Street, Bar Harbor, ME Zip Code: 04609
Registrant s telephone number, including area code: 207 288-3314
Securities registered pursuant to Section 12(g) of the Act:
Title of Class: Common stock, par value $2.00 per share
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant s knowledge, in definite
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of January 31, 1997 is:
Common stock, $2.00 par - $66,242,446
The number of shares outstanding of each of the registrant s classes of
common stock, as of January 31, 1997 is:
Common stock, 1,820,583
Documents incorporated by Reference:
(1) Portions of the Annual Report to Stockholders for the year ended December
31, 1996 are incorporated by reference into Part II, Items 7 and 8 and Part
IV, Item 14 of the Form 10-K.
PAGE
<PAGE>
INDEX
[CAPTION]
<TABLE>
<S> <C> <C>
# ITEM PAGE
1. Business 3 - 5
2. Properties 6 - 7
3. Pending Legal Proceedings 7
4 Submission of Matters to a Vote
of Security Holders 7
5 Market for Registrant s Common Equity
and Related Stockholders Matters 7
6 Selected Financial Data 8 - 28
7 Management s Discussion and Analysis 29
8 Consolidated Financial Statements and
Supplementary Data 29
9 Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure 29
10 Directors and Executive Officers 29-31
11 Executive Compensation 32-35
12 Security Ownership of Certain Beneficial
Owners and Management 36-37
13 Certain Relationships and Related
Transactions 37
14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K 38-39
PAGE
<PAGE>
PART I
ITEM 1. BUSINESS
Bar Harbor Bankshares, ( the Company ), was incorporated January 19, 1984. As
of December 31, 1996, the Company s securities consisted of one class of
common stock ( the Common Stock ), par value of $2.00 per share, of which
there are 1,718,237 shares outstanding held of record by approximately 1040
stockholders.
The accompanying consolidated financial statements include the accounts of
the company and its wholly-owned subsidiary, Bar Harbor Banking and Trust
Company ( the Bank ). All intercompany balances and transactions have been
eliminated in the accompanying financial statements.
The Bank conducts substantially the same business operations as a typical
full service, independent, community commercial bank. It has ten offices in
coastal Maine, including its principal office located at 82 Main Street, Bar
Harbor, Hancock County and adjacent Washington County. The Hancock County
offices are located at Main Street, Northeast Harbor; Main Street, Southwest
Harbor; Main Street, Blue Hill; Route #15, Deer Isle; corner of High and
Washington Streets, Ellsworth; and Main Street, Winter Harbor. The Washington
County offices are located at the corner of Route 1 and 1A, Milbridge; Main
Street, Machias; and Washington Street, Lubec. In January of 1997, the Bank
moved its operations, check clearing, technology and mail staff to a newly
constructed Operations Center located on Avery Lane in Ellsworth, Maine.
The Mt. Desert Block Company ( the Block Company ), a wholly owned subsidiary
of the Bank, owns and manages the real estate upon which all of the Bank s
offices are located. The Block Company also owns a parcel of real estate
which is not related to the Bank s operations and which is leased for
commercial purposes in Lubec; and land adjacent to the Blue Hill bank
property. In early 1997, the Block Company will be dissolved with the
transfer of real estate made to the Bank.
The Bank is a retail bank serving primarily individual customers, small
retail establishments, seasonal lodging, campgrounds and restaurants. As a
coastal bank it serves the lobstering, fishing and aquaculture industries. It
also serves Maine s wild blueberry industry through its Washington County
offices. The Bank has not made any material changes in its mode of conducting
business during the past five years.
The Bank operates in a highly competitive market. Competition among banks in
Maine has increased in recent years as a result of aggressive acquisition
programs by statewide holding companies and by completely open interstate
banking. The bank continues to be one of the largest independent commercial
banks in the State of Maine.
PAGE
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In the Bank s immediate service area there are two other independent
commercial banks, one Savings and Loan Association, three savings bank branch
offices and three commercial banks which are offices owned by holding
companies based outside the state.
The Bank has a broad deposit base and loss of any one depositor or closely
aligned group of depositors would not have a materially adverse effect on its
business. Approximately 86% of the Bank s deposits are in interest bearing
accounts. The Bank has paid, and anticipates that it will continue to pay,
current competitive rates on certificates of deposit, IRAs, NOW and money
market accounts and does not anticipate loss of these deposits.
The Bank provides the normal banking services offered by a commercial bank
including checking accounts, NOW accounts, all forms of savings and time
deposit accounts, individual retirement accounts and KEOGH plans, safe
deposit boxes, collections, travelers checks, night depository services,
direct deposit payroll services, credit cards, personal money orders, bank-
by-mail and club accounts and drive-up facilities at all offices. The Bank
also has arrangements with other institutions for the provision of certain
services which it does not provide directly, such as computerized payroll
services. In addition, the Bank operates a large Trust Department, including
an office in Bangor, Maine. The Trust Department handles book assets for
clients totaling $258,700,000 and offers professionally managed investment
accounts.
The Bank has Automated Teller Machines (ATMs) located in each of its ten
branch locations. These ATMS access major networks for use of the Bank s
cards throughout the United States including the Plus and NYCE systems as
well as the major credit card networks.
In addition to the foregoing, the Bank offers lending services including
consumer credit in the form of installment loans, stand-by credit, VISA
credit card accounts and student loans; residential mortgage loans; home
equity loans; and business loans to individuals, partnerships and
corporations for capital construction, the purchase of real estate and
working capital. Business loans are provided primarily to organizations and
individuals in the tourist, health care, blueberry, shipbuilding and fishing
and aquaculture industries as well as to the usual small businesses
associated with small coastal communities. Certain larger loans which would
exceed the Bank s lending limits are written on a participation basis with
correspondent banks, with the Bank retaining only such portions of those
loans as are within its lending limits. The Bank also provides trust and
estate planning services to its customers. The principal market areas for all
of the Bank s
PAGE
<PAGE>
services consist of Hancock and Washington Counties. The Bank s policy for
lending limits is up to 20% of capital and surplus to any borrower provided
that the loans are secured and approved by the Executive Loan Committee,
which includes members of the Bank s Board of Directors.
As a state chartered bank, the Bank has the Bureau of Banking of the State of
Maine and the Federal Deposit Insurance Corporation as bank regulatory
agencies responsible for its supervision. In addition, the Company is
supervised by the Federal Reserve Bank.
The Bank is not engaged in any material research activities relating to the
development of new services or the improvement of existing services except in
the normal course of business activities. As of December 31, 1996 the Bank
employed 157 persons in a full or part time basis. The President, Executive
Vice President, Senior Vice Presidents and Vice President in charge of Human
Resources are employed by the Bank as well as serve as officers of the
Company. They are not compensated by the Company for their services. There
are no employees of the Company.
Since the Bank is located in a summer resort area, a portion of the Bank s
business is seasonal in nature. In addition, employment in the sardine and
blueberry industries of Washington County is seasonal. As a result of these
factors, the Bank has had an annual deposit swing which has been declining in
the last several years from swings of more than 20% in the late 1980s, to
under 6% for both 1995 and 1996. The reduction in outflow may be attributable
to increasing interest rates and to safety and soundness issues as customers
choose to have their funds insured by maintaining their deposits in the
banking system. Deposits generally peak in late September with the low point
in February. This deposit swing is predictable and does not have a materially
adverse effect on the Bank. Should the Bank need additional funds for
liquidity needs, it may utilize short term borrowing lines set up through the
Federal Home Loan Bank of Boston, seek repurchase agreements through a
primary securities dealer or draw on its seasonal line at the Federal Reserve
Bank of Boston.
On July 11, 1995, the Board of Directors declared a five-for-one stock split
to all shareholders of record as of that date and which took effect on August
7, 1995. All share and per data share included in this Form 10-K have been
restated to reflect the stock split.
PAGE
<PAGE>
ITEM 2. PROPERTIES
The eleven parcels of real estate utilized by the Bank for its operations are
owned by the Mt. Desert Block Company ( the Block Company ), a wholly owned
subsidiary of the Bank, and are leased to the Bank. These properties are
described below:
1. The principal office of the Bank is located at 82 Main Street, Bar
Harbor, Maine and includes a building housing banking facilities and
administrative offices and an adjacent 35 car parking lot. The building was
renovated and expanded in 1987 and 1988. A portion of the expanded building
was completed in 1990 offering space for operational personnel.
2. An office is located at Main Street, Northeast Harbor, Maine. This
property consists of a building constructed in 1974 which is adequate for the
Bank s current needs at that location.
3. An office is located on Main Street, Southwest Harbor, Maine. This
property consists of a building constructed in 1975 which was added to and
renovated in 1989 to better meet the needs at that location.
4. An office is located at Church Street, Deer Isle, Maine. This property
consists of a building constructed in 1974 which was added to and renovated
in 1994 to better meet the needs at that location.
5. An office is located on Main Street, Blue Hill, Maine. This property
consists of a building constructed in 1960 which was renovated in 1989 to
better meet the needs at that location.
6. An office is located at Main Street, Milbridge, Maine. This property
consists of a building constructed in 1974 to which a vestibule was added in
1994 to house an ATM which helps to better meet the needs at that location.
7. An office is located at Washington Street, Lubec, Maine. This branch
consists of a building constructed in 1990 and is adequate for the Bank s
needs at that location.
8. An office is located at High Street, Ellsworth, Maine. This branch
consists of a building constructed in 1982 which is adequate for the Bank s
current needs at that location.
9. An office is located at Main Street, Winter Harbor, Maine. This branch
consists of a building constructed in 1995 and is adequate for the Bank s
needs at that location.
10. An office is located on Main Street, Machias, Maine. This branch was
purchased from Key Bank of Maine in May, 1990, and was renovated in 1995 to
better meet the Bank s needs at that location.
11. An Operations Center is located on Avery Lane, Ellsworth, Maine and was
occupied by the Bank s operations, check clearing, technology, training and
mail departments in January of 1997.
PAGE
<PAGE>
The Block Company owns real estate located on Washington Street in Lubec,
Maine which is adjacent to the Lubec branch office of the Bank and is
presently unoccupied and available for sale.
A parcel of land adjacent to the Blue Hill branch was purchased in 1981.
Aggregate annual rentals paid by the Bank during its last fiscal year for its
operating properties did not exceed 5% of its operating expenses.
ITEM 3. PENDING LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Bar Harbor Bankshares stock is not listed on any national exchange and there
is no established trading market for the stock. Since the Company is not
aware of the price of all trades, the price is established by determining
what a willing buyer will pay a willing seller. The stock prices shown below
are based upon quotes received from The Bangor Daily News, and represent a
range of the high and low bids for each quarter of 1995 and 1996:
</TABLE>
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
High Low High Low High Low High Low
<S> <C> <C> <C> <C>
1996 37.50 to 26.125 44.00 to 37.00 42.00 to 38.00 39.50 to 36.25
1995 17.00 to 16.40 20.00 to 17.00 25.50 to 20.00 28.00 to 25.50
</TABLE>
PAGE
<PAGE>
AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST EARNINGS
[CAPTION]
1996
<TABLE>
<CAPTION>
AVERAGE YIELD/
BALANCE INTEREST RATE
<S> <C> <C> <C>
ASSETS
Loans $207,188,449 $ 20,303,252 9.80%
Taxable Investment Securities 93,606,754 6,421,615 6.86%
Non-Taxable Investment Securities 12,940,087 767,161 5.93%
Fed. Funds Sold & Money Market
Funds 556,555 30,447 5.47%
Total Interest-Earning Assets $314,291,845 $ 27,522,475 8.76%
Non-Interest Earning Assets:
Total Cash and Due from 8,877,912
Less: Allowance for Losses (4,261,505)
Bank Premises and Equipment 6,880,463
Other Assets 6,182,539
TOTAL ASSETS $331,971,254
LIABILITIES AND STOCKHOLDERS EQUITY
Interest Bearing Demand Deposits $ 38,036,466 $ 618,043 1.62%
Savings Deposits 54,503,408 1,370,782 2.52%
Time Deposits 124,426,589 6,898,950 5.54%
Repurchase Agreements and
Short Term Borrowings 37,519,384 2,030,030 5.41%
Long Term Borrowings 6,767,760 363,198 5.37%
TOTAL INTEREST BEARING LIABILITIES $261,253,607 $ 11,281,003 4.27%
Non-Interest Bearing Liabilities:
Non-Interest Bearing Demand
Deposits 33,407,813
Other Liabilities 1,735,263
Stockholders Equity 35,574,571
TOTAL LIABILITIES &
STOCKHOLDERS EQUITY $331,971,254
NET EARNING ASSETS $ 53,038,238
NET INTEREST INCOME/NET INTEREST
SPREAD $ 16,241,472 4.44%
NET INTEREST MARGIN 5.17%
PAGE
<PAGE>
<CAPTION>
1995
AVERAGE YIELD/
BALANCE INTEREST RATE
<S> <C> <C> <C>
ASSETS
Loans $195,178,495 $ 19,298,629 9.89%
Taxable Investment Securities 84,364,335 5,877,065 6.97%
Non-Taxable Investment Securities 14,138,613 852,051 6.03%
Fed. Funds Sold & Money Market
Funds 2,097,962 124,242 5.92%
Total Interest-Earning Assets $295,779,405 $ 26,151,987 8.84%
Non-Interest Earning Assets:
Total Cash and Due from 7,727,672
Less: Allowance for Losses (4,142,571)
Bank Premises and Equipment 5,720,449
Other Assets 6,027,318
TOTAL ASSETS $311,112,273
LIABILITIES AND STOCKHOLDERS EQUITY
Interest Bearing Demand Deposits $ 37,109,957 $ 606,437 1.63%
Savings Deposits 57,521,058 1,408,916 2.45%
Time Deposits 115,118,182 6,412,766 5.57%
Repurchase Agreements and
Short Term Borrowings 38,440,663 2,175,597 5.66%
Long Term Borrowings 580,132 20,677 3.56%
TOTAL INTEREST BEARING LIABILITIES $248,769,992 $ 10,624,393 4.27%
Non-Interest Bearing Liabilities:
Non-Interest Bearing Demand
Deposits 30,083,671
Other Liabilities 1,272,847
Stockholders Equity 30,985,763
TOTAL LIABILITIES &
STOCKHOLDERS EQUITY $311,112,273
NET EARNING ASSETS $ 47,009,413
NET INTEREST INCOME/NET INTEREST
SPREAD $ 15,527,594 4.57%
NET INTEREST MARGIN 5.25%
PAGE
<PAGE>
<CAPTION>
1994
AVERAGE YIELD/
BALANCE INTEREST RATE
<S> <C> <C> <C>
ASSETS
Loans $174,550,402 $ 16,006,536 9.17%
Taxable Investment Securities 75,333,849 4,911,599 6.52%
Non-Taxable Investment Securities 14,296,651 828,998 5.80%
Fed. Funds Sold & Money Market
Funds 1,192,601 48,457 4.06%
Total Interest-Earning Assets $265,373,503 $ 21,795,590 8.21%
Non-Interest Earning Assets:
Total Cash and Due from 7,664,386
Less: Allowance for Losses (3,720,244)
Bank Premises and Equipment 5,684,033
Other Assets 6,166,864
TOTAL ASSETS $281,168,542
LIABILITIES AND STOCKHOLDERS EQUITY
Interest Bearing Demand Deposits $ 38,591,994 $ 633,346 1.64%
Savings Deposits 63,106,980 1,621,651 2.57%
Time Deposits 84,786,001 3,812,734 4.50%
Repurchase Agreements and
Short Term Borrowings 37,686,124 1,608,404 4.27%
Long Term Borrowings 0 0 0%
TOTAL INTEREST BEARING LIABILITIES $224,171,099 $ 7,676,135 3.42%
Non-Interest Bearing Liabilities:
Non-Interest Bearing Demand
Deposits 28,559,472
Other Liabilities 1,033,450
Stockholders Equity 27,404,521
TOTAL LIABILITIES &
STOCKHOLDERS EQUITY $281,168,542
NET EARNING ASSETS $ 41,202,404
NET INTEREST INCOME/NET INTEREST
SPREAD $ 14,119,455 4.79%
NET INTEREST MARGIN 5.32%
<CAPTION>
</TABLE>
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<PAGE>
NOTES TO AVERAGE BALANCE SHEET
1. Tax-exempt income is calculated at coupon rate, not adjusted on a tax
equivalent basis.
2. At December 31, 1996, loans on non-accrual status totaled $3,541,000.
These loans are included in the loan category on the preceding Average
Balance Sheet. If interest had been accrued on such loans, interest income on
loans would have been $314,000 higher in 1996.
3. Interest on loans includes loan fees pursuant to FASB91 in the following
amounts:
<TABLE>
<CAPTION>
<C> <C> <C>
1996 1995 1994
$66,353 $103,788 $176,032
</TABLE>
4. The Bank s net interest margin remains above the national average, but
has remained at higher than average levels for a number of years. The
Bank is a community bank which focuses its efforts on customer
relationships and good service while remaining competitive in the demand
for loans both in the commercial and consumer sectors. The spread and
margin for the Bank have been decreasing gradually over the past three
years, as competition for the same customers within the Bank s market
area continues to grow. The average rate on the bank s earning assets
decreased in 1996 by 35 basis points and the cost of interest bearing
liabilities decreased by 17 basis points. This compares with the average
rate on earning assets increasing by 63 basis points in 1995 when
compared to 1994; and the average rate on interest bearing liabilities
increasing by 85 basis points. Although the net interest spread dropped
from 1995 to 1996, the drop was not as significant as the drop between
1994 and 1995. The Bank continues to seek quality loans, broadening its
customer base as the spread tightens. The effect of rates and volumes is
exemplified further in the Rate Volume Analysis found on page 12 of this
report.
PAGE
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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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
COMPARED TO DECEMBER 31, 1995
INCREASES (DECREASES) DUE TO:
VOLUME RATE NET
<S> <C> <C> <C>
Loans $1,178,248 $ (173,625) $1,004,623
Taxable Investment Securities 654,084 (109,534) 544,550
Non-Taxable Investment
Securities (71,244) (13,646) (84,890)
Federal Funds Sold and
Money Market Funds (84,979) (8,816) (93,795)
TOTAL INTEREST EARNING ASSETS $1,676,109 $ (305,622) $1,370,488
Deposits $ 373,494 $ 86,161 $ 459,655
Repurchase Agreements and
Short Term Borrowings (55,225) (90,342) (145,567)
Long Term Borrowings 344,202 (1,681) 342,521
TOTAL INTEREST BEARING
LIABILITIES $ 662,471 $ (5,862) $ 656,609
NET CHANGE IN INTEREST $1,013,638 $ (299,759) $ 713,879
<CAPTION>
</TABLE>
PAGE
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
COMPARED TO DECEMBER 31, 1994
INCREASES (DECREASES) DUE TO:
VOLUME RATE NET
<S> <C> <C> <C>
Loans $1,980,684 $1,311,410 $3,292,093
Taxable Investment Securities 604,581 360,885 965,466
Non-Taxable Investment
Securities (9,243) 32,296 23,053
Federal Funds Sold and
Money Market Funds 47,287 28,498 75,785
TOTAL INTEREST EARNING ASSETS $2,623,309 $1,733,088 $4,356,397
Deposits $ 728,282 $1,632,106 $2,360,388
Repurchase Agreements and
Short Term Borrowings 41,548 525,645 567,193
Long Term Borrowings 20,677 0 20,677
TOTAL INTEREST BEARING
LIABILITIES $ 790,507 $2,157,751 $2,948,258
NET CHANGE IN INTEREST $1,832,802 ($424,663) $1,408,139
<CAPTION>
</TABLE>
PAGE
<PAGE>
INTEREST RATE SENSITIVITY ANALYSIS
AS OF DECEMBER 31, 1996
(Unaudited)
Amounts in Thousands
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 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>
ONE TO GREATER
TOTAL TO FIVE THAN FIVE
ONE YEAR YEARS YEARS TOTAL
<S> <C> <C> <C> <C>
Loans
Fixed Rate $ 17,650 $ 18,435 $ 32,123 $ 68,208
Variable Rate 106,506 37,246 0 143,752
Investments 45,541 37,396 24,788 107,725
Federal Funds Sold 2,000 0 0 2,000
Interest Rate Swap 0 15,000 0 15,000
TOTAL EARNING ASSETS $171,697 $108,077 $ 56,911 $336,685
Deposits $130,790 $ 19,277 $101,608 $251,675
Repurchase Agreements 8,246 0 0 8,246
Borrowings 31,187 12,721 0 43,908
Interest Rate Swap 5,000 5,000 5,000 15,000
TOTAL SOURCES $175,223 $ 36,998 $106,608 $318,829
Net Gap Position $ (3,526) $ 71,079 $(49,697) $ 17,856
Cumulative Gap (3,526) 67,553 17,856 17,856
Rate Sensitive Assets/
Rate Sensitive Liabilities 97.99% 292.12% 53.38% 105.60%
</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 1/2% of its savings is more rate
sensitive and will react to rate changes, and has therefore categorized it in
the one-year 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 $42,000,000
are amortized using the weighted average maturity of 145 months, with an
additional prepayment rate of 10%,which approximates the Bank s prior
experience.
<PAGE>
SUMMARY OF INVESTMENT PORTFOLIO<PAGE>
The information presented below is to facilitate the analysis and comparison
of sources of income and exposure to risks.
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
U.S. Treasury Securities $ 0 $ 1,000,470 $ 3,007,997
Obligations of Other U.S.
Government Agencies 11,749,820 13,278,651 13,322,895
Mortgage Backed Securities:
U.S. Government Agencies 49,255,463 42,764,250 46,739,125
Other 6,811,600 8,210,646 4,086,750
Obligations of State and
Political Subdivision 12,391,860 13,240,946 14,401,790
Other Bonds 2,508,093 3,714,099 3,521,514
SECURITIES HELD TO MATURITY $82,716,836 $82,209,062 $85,080,071
Obligations of Other U.S.
Government Agencies $13,337,031 8,145,160 0
Mortgage Backed Securities--
U.S. Government Agencies 5,430,506 5,578,826 0
Other Bonds 0 500,000 487,500
Marketable Equity Securities 616,896 0 0
SECURITIES AVAILABLE FOR SALE $19,384,433 $ 14,223,986 $ 487,500
</TABLE>
PAGE
<PAGE>
MATURITY SCHEDULE FOR INVESTMENTS HELD TO MATURITY
AT DECEMBER, 1996
<TABLE>
<CAPTION>
Greater than Greater than Greater
One Year One Year to Five Years to than
or Less Five Years Ten Years Ten Years
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities $ 0 $ 0 $ 0 $ 0
Average Yield
Obligations of other U.S.
Government Agencies 2,000,000 5,750,000 3,999,820 0
Average Yield 6.00 7.30 7.16
Mortgage-backed Securities:
U.S. Government Agencies 0 9,284,892 4,678,079 35,292,492
Average Yield 7.37 7.81 7.25
Mortgage-Backed Securities:
Other 0 0 1,858,973 4,952,627
Average Yield 5.29 7.35
Obligations of State and
Political Subdivisions 4,144,784 6,422,076 0 1,825,000
Average Yield 5.57 6.47 6.88
Other Bonds 1,498,970 1,009,123 0 0
Average Yield 6.59 7.56
TOTAL $7,643,754 $22,466,091 $10,536,872 $42,070,119
</TABLE>
MATURITY SCHEDULE FOR INVESTMENTS
AVAILABLE FOR SALE AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
Greater than Greater
Five Years to than
Ten Years Ten Years
<S> <C> <C> <C>
Obligations of Other U. S.
Government Agencies $ 11,500,733 $ 2,000,000
Average Yield 7.18 7.18
Mortgage Backed Securities --
U.S. Government Agencies $ 0 $ 5,430,506
Average Yield 7.49
Other Bonds 0 0
Average Yield
$ 11,500,733 $ 7,430,506
</TABLE>
Mortgage-backed securities are included based upon the final maturity date
of the security.
PAGE
<PAGE>
he maturity schedule for securities available for sale excludes marketable
equity securities totaling $616,896.
Yield on tax exempt bonds were not computed on a tax equivalent basis
The bank does not hold any securities for a single issuer where the
aggregate book value of the securities exceed 10% of the Bank s
stockholders equity.
The maturities for the mortgage-backed securities are shown at the stated
maturity. If the Bank presented mortgage-backed securities by average
expected life, the breakdown would be:
<TABLE>
<CAPTION>
Greater than Greater than Greater
One Year One Year to Five Years to than
or Less Five Years Ten Years Ten Years
<S> <C> <C> <C> <C> <C>
Mortgage-backed Securities Held
To Maturity $ 2,707,209 $33,183,344 $20,176,510 $ 0
Mortgage-backed Securities Available
For Sale 3,633,172 1,797,334 0 0
</TABLE>
Changes in the market value of the investment portfolio follow national
interest rate fluctuations. As national interest rates remained level for
1996, the value of the portfolio also remained level with the total unrealized
gain approximately $300,000 over book value. The Bank does not hold any
interest only or principal only bonds, nor does it hold any securities whose
market value could change to a greater degree than traditional debt. The Bank
does hold one 10-year step up debenture that is backed by the U. S.
government. The step up has a fixed rate of interest for the first three years
and which then increases incrementally each year until maturity. This
debenture is callable at its semi-annual coupon date.
PAGE
<PAGE>
SUMMARY OF LOAN PORTFOLIO
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
Real estate Loans:
Construction & Development $ 8,905,823 $ 8,072,230 $ 4,594,803
Mortgage 146,041,165 135,068,891 124,620,343
Loans to finance agricultural
production and other loans
to farmers 10,092,214 10,377,194 9,369,651
Commercial and industrial loans 29,040,315 29,806,328 31,791,148
Loans to individuals for
household, family and other
personal expenditures 17,241,472 17,640,397 15,301,322
All other loans 318,911 6,790 21,635
Real Estate Under Foreclosure 320,147 793,887 294,904
TOTAL LOANS $211,960,047 $201,765,717 $185,993,806
Less: Allowance for
possible loan loss (4,292,995) 4,047,883 3,891,835
NET LOANS $207,667,052 $197,717,834 $182,101,971
<CAPTION>
1993 1992
Real estate Loans:
Construction & Development $ 4,606,935 $ 5,642,294
Mortgage 107,9338,202 94,906,632
Loans to finance agricultural
production and other loans
to farmers 8,217,183 7,174,262
Commercial and industrial loans 27,533,900 25,621,342
Loans to individuals for
household, family and other
personal expenditures 14,621,364 12,248,539
All other loans 269,371 182,397
Real Estate Under Foreclosure 328,703 434,384
TOTAL LOANS $163,525,658 $146,209,850
Less: Allowance for
possible loan loss 3,369,387 3,205,868
NET LOANS $160,156,271 $143,003,982
</TABLE>
PAGE
<PAGE>
PAST DUE LOANS
(Amounts in Thousands)
The figures below represent loans past due 30 days or more
(% is percentage of loans outstanding for a specific category of loans).
<TABLE>
<CAPTION>
1996 % 1995 % 1994 %
<S> <C> <C> <C> <C> <C> <C>
Construction & Development 247 2.8 214 2.7 77 1.7
Real Estate 4,100 2.8 3,009 2.2 1,713 1.4
Commercial, Industrial
and other 1,479 3.8 517 1.3 559 1.4
Loans to individuals 462 2.7 434 2.5 324 2.1
Loans past due 90 days or
more and still accruing* 733 0.4 849 .4 892 .5
Non-Accruing Loans 3,541 1.7 3,360 1.7 3,139 1.7
<CAPTION>
<S> <C> <C> <C> <C>
1993 % 1992 %
Construction & Development 0 0.0 377 6.7
Real Estate 2,177 2.0 4,889 5.2
Commercial, Industrial
and other 615 1.7 1,524 5.9
Loans to individuals 238 1.6 296 2.4
Loans past due 90 days or
more and still accruing* 513 .3 593 .4
Non-Accruing Loans 2,645 1.6 3,683 2.5
<FN>
<F1> *The percentage for loans past due 90 days or more and still accruing
and non-accruing loans relate to total loans outstanding.
Each loan in these categories is also included in its past due
loan category.
</TABLE>
Loans which were non-performing as of December 31, 1995 and for
which the real estate was acquired by the Bank in 1996 totaled
$215,000.
PAGE
<PAGE>
MATURITY SCHEDULE - LOAN PORTFOLIO
As of December 31, 1996
<TABLE>
<CAPTION> After one
One Year Year through After five
or Less five years years
<S> <C> <C> <C>
Commercial, Financial
and Agricultural $21,097,055 $ 9,004,059 $ 9,031,415
Real estate Construction
and Land Development $ 7,561,028 $ 1,344,795
</TABLE>
The Bank makes construction loans on the basis of: a) permanent financing from
another financial institution, or b)approval at the time of origination for
permanent financing by our own Bank. In addition, a number of large commercial
real estate loans are written and priced on the basis of fixed rates with a
three to five year balloon payment. It is generally the intent of the Bank to
renegotiate the rate and term of the loan at the balloon maturity. Lines of
credit are renewed annually. There are consumer construction loans that will
either be sold to the secondary market upon completion of construction or
rolled into permanent portfolio residential mortgage loans on the Bank s
books.
The total amount of commercial, financial and agricultural, construction, and
land development loans with adjustable interest rates and maturities of
greater than one year is $9,882,139 and with fixed interest rates and
maturities of greater than one year is $9,498,130.
RISK ELEMENTS
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-
accrual basis $3,541,296 $3,359,857 $3,139,465 $2,644,678 $3,683,185
Accruing loans contractually past
due 90-days or more $ 732,791 $ 849,127 $ 891,986 $ 512,784 $ 593,237
</TABLE>
It is the policy of management to review past due loans on a monthly basis.
Those loans 90 days or more past due which are not well secured or in the
process of collection are designated as non-accruing. This includes government
guaranteed loans unless the guaranteed portion has been sold. If interest had
been accruing on such loans, interest income on loans would have been $313,584
higher in 1996. Interest collected on these loans totaled $307,645 in 1996 and
was included in net income. Non-accrual loans represent 1.7% of average loans
for 1996 and 1995.
Management is not aware of any potential problems loans which are not included
in the above table.
PAGE
<PAGE>
The Bank makes single-family residential loans, commercial real estate loans,
commercial loans, and a variety of consumer loans. The Bank s lending
activities are conducted in north coastal Maine. Because of the Bank s
proximity to Acadia National Park, a large part of the economic activity in
the area is generated from the hospitality business associated with tourism.
At December 31, 1996, approximately $27,800,000 of loans were made to
companies in the hospitality industry. Of this total indebtedness, 2.8% were
30 days or more delinquent as of December 31, 1996. Loans to real estate
investors and developers totaled $14,300,000 in 1996. In the fishing industry
in 1996, loans returned to the $10,000,000 found previously in
From the standpoint of large loans to single borrowers, loans of $700,000 or
more to one borrower remained constant at 95% as a percentage of stockholders
equity for years ended December 31, 1996 and 1995. As most loans granted by
the Bank are collateralized by real estate, the ability of the Bank s
borrowers to repay is dependent on the level of economic activity and the
level of real estate values in the Bank s market area. Because of the
increasing health of the tourist industry and other industries in its market
area, the Bank has benefited from the economic well-being of its customers.
SUMMARY OF LOAN LOSSES
Delinquencies are reviewed on a monthly and quarterly basis by senior
management as well as the Board of Directors. Information reviewed is used in
determining if and when loans represent potential losses to the Bank. A
determination of a potential loss could result in a charge to the provision
for loan losses, with an increase to the reserve for possible loans so that
risks in the portfolio can be identified on a timely basis and an appropriate
reserve can be maintained.
Since 1991, the Bank has utilized the methodology for the review of the
allowance for loan losses to be in accordance with the approach suggested by
bank regulators through the Interagency Policy Statement on Allowance for Loan
and Lease Losses dated December, 1993. The reserve includes specific reserves
based on the review of specific credits, a pool of reserves based on
historical charge offs by loan types and supplementary reserves reflecting
concerns and loan concentrations by industry, by customer and by general
economic conditions. The allocation has changed based on concentration of
loans in the fishing and tourist related industries.
In 1992, the Bank continued to concentrate on resolving loan problems,
focusing on the reduction of non-earning assets and resolution of troubled
debt situations. With continued softness in the economy, the Bank aggressively
charged off problem loans, and, at the same time provided more reserves for
possible loan losses in the future. Building on the prior year s program of
measuring adequacy, the Bank continued to build reserves to ensure that future
earnings were not hurt by unforseen problems in the loan area.
Charged off loans have decreased over the past five years both in dollars
(from $1,123,000 in 1992 to $711,000 in 1996) and as a percentage of the
average loan portfolio with the exception in 1995. The percentage of charge
off to average loans in 1996 represents the lowest percentage (.23%) in the
five years presented. For the years ended 1992 through 1995, the majority of
PAGE
<PAGE>
charge offs have been commercial loans secured by real estate. However, in
1996, the majority of charge offs were loans to individuals and included many
small loans and credit card debt. In 1992, increases in charge offs were
attributable to an account where faulty documentation resulted in loss of
collateral. The Bank real estate charge offs in 1993 represent charge down of
loan balances on troubled loans based on updated fair value appraisals, or
highest third party bids at auction.
In 1993 there were two writedowns of REO charged directly to earnings. A
property in Northeast Harbor was sold at a loss of $74,000 after paying all
expenses, and property on Main Street in Ellsworth was written down by
$100,000 to more closely reflect a liquidation. In 1994, the same property
in Ellsworth was written down by additional $23,500. This property was sold in
1995 for $120,000. Additionally in 1994, three residential properties owned by
the Bank were written down by a total of $58,000 to more closely reflect their
market values.
Approximately 28% of the chargeoffs in 1995 represented loans secured by real
estate, and 39% represented commercial credits. The increase in commercial
loan chargeoffs in 1995 included a chargedown of a large commercial loan.
Recoveries offset losses totaling $97,000, $141,000 and $264,900 for the years
ended 1995, 1994 and 1993, respectively.
Softness in the economy in the early 1990's, reduction of collateral value,
and, in some cases, poor management by the owners of the business have caused
the major losses in the commercial area in the early 1990's.
Based on past experience and management s assessment of the present loan
portfolio, it is expected that loan charge offs for 1997 will not exceed
$500,000.
<TABLE>
<S> <C>
Commercial $ 44,000
Real estate mortgages 382,000
Installments to individuals 74,000
</TABLE>
A breakdown of the allowance for possible loan losses is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
Percent of Percent of Percent of
Loans in each loans in each loans in each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
<S> <C> <C> <C> <C> <C> <C>
Real Estate Mortgages $1,053,500 73.26% $ 915,168 71.34% $ 1,665,363 69.63%
Installments to individuals 470,100 8.13% 503,777 8.74% 404,942 8.23%
Commercial, financial
And agricultural 629,000 18.46% 277,775 19.92% 1,220,253 22.13%
Other 987,250 .15% 965,391 0.00% 80,337 .01%
Unallocated 1,153,145 0.00% 1,385,772 0.00% 520,940 .00%
TOTAL $4,292,995 100.00% $ 4,047,883 100.00% $ 3,891,835 100.00%
</TABLE>
PAGE
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE
(In thousands)
% = Percentage of Loans Outstanding for a Specific Category of Loans
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $4,048 $3,892 $3,369 $3,206 $2,121
Charge offs:
Commercial, Financial,
Agricultural, Others 195 377 122 386 302
Real Estate Mortgages 131 256 267 505 633
Installments to individuals 385 268 189 290 188
Total Charge Offs 711 901 578 1,181 1,123
Recoveries:
Commercial, Financial,
Agricultural, Others 73 20 47 101 55
Real Estate Mortgages 94 20 54 118 49
Installments to individuals 69 57 40 45 39
Total Recoveries 236 97 141 264 143
Net Charge Offs 475 804 437 917 980
Provision Charge to Operations 720 960 960 1,080 2,065
Balance at End of Period $4,293 $ 4,048 $3,892 $3,369 $3,206
Average loans outstanding
during period $ 207,188 $195,178 $174,550 $153,232 $146,257
Net Charge Offs to Average
Loans Outstanding during
Period .23 .41 .25 .60 .67
</TABLE>
PAGE
<PAGE>
SUMMARY OF DEPOSIT PORTFOLIO
(In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
<S> <C> <C> <C> <C> <C> <C>
Demand Deposits 33,408 30,084 28,559
NOW Accounts 38,036 1.62% 37,110 1.63% 38,592 1.64%
Savings Accounts 54,503 2.52% 57,521 2.45% 63,107 2.57%
Time Deposits 124,427 5.54% 115,118 5.57% 84,786 4.50%
Total Deposits 250,374 239,833 215,044
</TABLE>
MATURITY SCHEDULE FOR TIME DEPOSITS
$100,000 OR MORE
<TABLE>
<CAPTION>
Over Three Over Six
Three Months Months Through Months Through Over
or Less Six Months Twelve Months Twelve Months
<C> <C> <C> <C>
$ 5,579,061 $ 3,837,764 $ 3,462,260 $ 1,965,303
</TABLE>
RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION> 1996 1995 1994
<S> <C> <C> <C>
Return on Average Assets 2.02 1.89 1.75
Return on Average Equity 18.86 18.97 17.93
Dividend Payout Ratio 30.22 25.07 25.75
Average Equity Capital to
Average Assets Ratio 10.71 9.96 9.75
</TABLE>
PAGE
<PAGE>
As of January 1, 1997, there were approximately 1040 holders of record of Bar
Harbor Bankshares common stock.
Dividends have been paid by the company during 1996 and 1995, as follows:
<TABLE>
<CAPTION>
March June September December
<S> <C> <C> <C> <C>
1996 $ 0.20 $ 0.20 $ 0.25 $ 0.53
1995 N/A $ 0.36 N/A $ 0.50
</TABLE>
PAGE
<PAGE>
SHORT TERM BORROWINGS
(In thousands)
<TABLE>
<CAPTION>
Average Weighted
Weighted Maximum Amount Average
Balance Average Outstanding Outstanding Interest
at end Interest During During Rate During
of Period Rate Period Period Period
<S> <C> <C> <C> <C> <C>
1996
FHLB Advances $ 43,908 5.62% $ 41,000 $ 30,811 5.68%
Wholesale Repurchase Agreements $ 0 .00 % $ 10,000 $ 583 5.47%
1995
FHLB Advances $ 26,700 5.85% $ 29,000 $ 17,058 5.84%
Wholesale Repurchase Agreements $ 0 0.00% $ 18,250 $ 4,338 6.16%
1994
FHLB Advances $ 25,000 5.54% $ 50,000 $ 28,904 4.28%
Wholesale Repurchase Agreements $ 0 0.00% $ 11,000 $ 4,810 4.22%
</TABLE>
The terms for short-term FHLB advances taken in 1996 ranged from 2 days to
340 days and averaged 49 days. The terms for wholesale repurchase agreements
taken in 1996 ranged from 7 days to 14 days and averaged 8 days.
The terms for short-term FHLB advances taken in 1995 ranged from 5 days to
200 days and averaged 49 days. The terms for wholesale repurchase agreements
taken in 1995 ranged from 4 days to 90 days and averaged 24 days.
The terms for short-term FHLB advances taken in 1994 ranged from 14 days to
257 days and averaged 82 days. The terms for wholesale repurchase agreements
taken in 1994 ranged from four days to 90 days and averaged 25 days.
PAGE
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following data represents selected year end financial information for
the past five years. All information is unaudited.
(In thousands, except per share data)
<TABLE>
<CAPTION>
BALANCE SHEET TOTALS 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Total Assets $345,143 $326,609 $296,687 $257,347 $247,149
Net Loans 207,667 197,718 182,102 160,156 143,004
Total Deposits 251,675 251,471 225,545 203,523 195,723
Total Equity 37,887 33,243 28,761 24,987 23,558
Average Assets 331,971 311,112 281,169 249,773 231,114
Average Equity 35,575 30,986 27,405 25,784 23,563
STATEMENT OF EARNINGS TOTALS
Interest Income $ 27,522 $ 26,152 $ 21,795 $ 19,855 $ 20,283
Interest Expense 11,281 10,624 7,676 6,775 7,997
Net Interest Income 16,241 15,528 14,119 13,080 12,286
Provision for Loan
Losses 720 960 960 1,080 2,065
Net Interest Income
After provision for
Loan Losses 15,521 14,568 13,159 12,000 10,221
Non-interest income
(Includes net security
gains {losses]) 5,000 4,398 4,012 4,153 3,576
Non-interest expense 10,914 10,471 10,161 10,957 9,169
Applicable income
Taxes 2,899 2,616 2,096 1,632 1,254
Net income before Cumulative Effect of
Accounting Change 6,709 5,879 4,914 3,564 3,374
Cumulative Effect of
Accounting Change 0 0 0 (1,058)
Net Income $ 6,709 $ 5,879 $ 4,914 $ 2,506 $ 3,374
PER SHARE DATA:
(Restated for five-for-one stock split in 1995)
Income Before Cumulative Effect of
Accounting Change $3.90 $ 3.43 $ 2.87 $ 2.09 $ 1.87
Cumulative Effect of Change in
Accounting for Postretirement
Benefits, Net of Income
Tax Benefit $ 0.00 $ 0.00 $ 0.00 ($ 0.62) $ 0.00
Net Income $ 3.90 $ 3.43 $ 2.87 $ 1.47 $ 1.87
Dividends $ 1.18 $ 0.86 $ 0.74 $ 0.62 $ 0.42
Weighted average number of
Common shares outstanding,
In thousands 1,718 1,713 1,710 1,707 1,806
Return on total average
Assets/Net Income 2.02% 1.89% 1.75% 1.00% 1.46%
</TABLE> <PAGE>
SUPPLEMENTARY FINANCIAL DATA BY QUARTERS
(In thousands except per share data)
<TABLE>
<CAPTION>
1996 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
<S> <C> <C> <C> <C>
Interest Income $ 6,757 $ 6,735 $ 7,019 $ 7,012
Interest Expense 2,307 2,250 2,162 2,169
Net Interest Income 3,940 3,866 4,233 4,203
Provision for Losses 240 240 120 120
Security Gains
(Losses) 0 17 0 0
Income Before Income
Taxes 2,190 2,165 2,817 2,436
Income Taxes 668 656 727 849
Net Income 1,522 1,509 2,090 1,588
Earnings Per Share $ 0.89 $ 0.88 $ 1.22 $ 0.92
1995 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Interest Income $ 5,992 $ 6,518 $ 6,902 $ 6,740
Interest Expense 2,370 2,660 2,767 2,827
Net Interest Income 3,622 3,858 4,135 3,913
Provision for Losses 240 240 240 240
Security Gains
(Losses) 0 0 0 0
Income Before Income
Taxes 1,884 2,150 2,706 1,755
Income Taxes 576 650 859 531
Net Income 1,308 1,500 1,846 1,225
Earnings Per Share $ 0.76 $ 0.88 $ 1.08 $ 0.71
</TABLE>
PAGE
<PAGE>
ITEM 7. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained in the section captioned Management s Discussion
and Analysis of Financial Condition and Results of Operations in the
Company s Annual Report is incorporated herein by reference.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required are contained on pages 12 through 30 of
the Company s Annual Report for the year ended December 31, 1996 and are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following statements pertain to all individuals listed below:
1. There are no arrangements or understandings between any director or
officer listed below and any other person pursuant to which such director or
officer was selected as an officer or director.
2. There is no family relationship among any of the directors and officers
listed below.
3. None of the directors and officers listed below have been involved in
any bankruptcy, criminal, or other proceeding set forth or described in sub-
section (f) of Item 401 of Regulation S-K as promulgated by the Securities
and Exchange Commission.
4. Each of the directors listed below has been elected to a three year
term, except where the mandatory retirement age of 75 years precluded an
election of a shorter term, with one third of the Board of Directors, as
nearly as may be, standing for election each year. Each director of the
Company also serves as a director of the Bank, and references below to the
year in which an individual was first elected refer to the year in which
s/he was first elected a director of the Bank.
[1] Frederick F. Brown, Director, Age 70. Mr. Brown s principal occupation
during the past five years has been as proprietor and owner of F. T. Brown
Company, which owns and operates a hardware store in Northeast Harbor and as
one-third owner of Island Plumbing & Heating in Northeast Harbor. He also
serves as President of Northeast Harbor Water Company. Mr. Brown first was
elected as a director on October 2, 1979.
PAGE
<PAGE>
[2] Robert C. Carter, Director. Mr. Carter s principal occupation is owner
and operator of the Machias Motor Inn, Machias, Maine. Mr. Carter was first
elected as a director on October 1, 1996.
[3] Thomas A. Colwell, Director. Age 52. Mr. Colwell s principal occupation
during the past five years has been as owner of Colwell Brothers, Inc. He
also serves as a member of the Board of Directors of the Maine Lobster Pound
Association. Mr. Colwell was first elected as a director on October 1, 1991.
[4] Bernard K. Cough, Director, Age 69. Mr. Cough s principal occupation
during the past five years has been owner/operator of several motels,
including the Atlantic Oakes Motel, Atlantic Eyrie Lodge, Inc., Brookside
Motel, Bay View, Inc., and Ocean Gate, Inc. Mr. Cough is also Treasurer of
Cough Bros., Inc. and President of Downeast Inns, Inc. Mr. Cough was first
elected as a director on October 1, 1985.
[5] Peter Dodge, Director, Age 53. Mr. Dodge is President of the Peter Dodge
Agency (a Maine corporation) d/b/a the Merle B. Grindle Insurance Agency in
Blue Hill, Maine. He is also Director and Treasurer of Coastal Holdings,
Inc., Trustee of George Stevens Academy, and Director, Bagaduce Music
Lending Library. He was first elected as a director on October 6, 1987.
[6] Dwight L. Eaton, Senior Vice President and Trust Officer, Age 61. Mr.
Eaton s principal occupation during the past five years has been as Senior
Vice President and Trust Officer of Bar Harbor Banking and Trust Company. He
serves as Chairman and Director of the Acadia Corporation. Mr. Eaton first
was elected as a Director on October 4, 1988.
[7] Ruth S. Foster, Director, Age 67. Mrs. Foster s principal occupation is
the President and principal stockholder of Ruth Foster s, a children s
clothing store in Ellsworth, Maine. Mrs. Foster first was elected as a
director on October 7, 1986.
[8] Robert L. Gilfillan, Chairman of the Board of Directors, Age 69. Mr.
Gilfillan s principal occupation during the past five years has been as the
owner and President of the West End Drug Company in Bar Harbor. Mr.
Gilfillan first was elected as a director on November 5, 1957.
[9] Sheldon F. Goldthwait, Jr., President and Chief Executive Officer, Age
58. He was appointed President and Chief Executive Officer of Bar Harbor
Banking and Trust Company January 1, 1995. Prior to that he served as
Executive Vice President of Bar Harbor Banking and Trust Company. He serves
as Treasurer and Director of the Acadia Corporation. Mr. Goldthwait first
was elected as a director on October 4, 1988.
[10] James C. MacLeod, Director, Age 72. Mr. MacLeod is retired. Mr. MacLeod
served as Vice President of the Bank until his retirement in December of
1987. He was appointed as a Vice president of the Bank in 1972 and was first
elected as a director of the Bank on November 7, 1961.
PAGE
<PAGE>
[11] John P. McCurdy, Director, Age 65. Prior to his retirement in 1991. Mr.
McCurdy s principal occupation was the owner and operator of McCurdy Fish
Company of Lubec, a processor of smoked herring. Mr. McCurdy first was
elected as a director on October 2, 1979.
[12] Jarvis W. Newman, Director, Age 61. Mr. Newman is the owner of Newman
Marine, a boat brokerage in Southwest Harbor. Mr. Newman first was elected
as a Director on October 5, 1971.
[13] Robert M. Phillips, Director, Age 55. Mr. Phillips is an officer of
International Foods Network, an exporter of a variety of food products,
located in Sullivan, Maine. He was first elected as a director on October
5, 1993.
[14] John P. Reeves. Director, Age 62. Mr. Reeves is retired. He was elected
as President and Chief Executive Officer of Bar Harbor Banking and Trust
Company in 1986 and retired in 1994. He first was elected as a director on
October 6, 1970.
[15] Abner L. Sargent, Director, Age 72. Mr. Sargent is former owner and
designated broker of High Street Real Estate and Vice President and
Treasurer of Sargent s Mobile Homes, Inc., of Ellsworth. He first was
elected as a director on October 6, 1981.
[16] Lynda Z. Tyson, Director, Age 41. Mrs. Tyson is Chief Operating Officer
and Marketing Director of Tyson & Partners, Inc., a marketing communications
consulting firm in Bar Harbor. Mrs. Tyson was first elected as a director on
October 5, 1993.
PAGE
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Officers of the Company do not, as such, receive compensation. The following
table sets forth cash compensation received during the Bank s last fiscal
year by the executive officers for whom such compensation exceeded $100,000.
<TABLE>
<CAPTION> SUMMARY COMPENSATION TABLE
<S> <C> <C> <C> <C>
ANNUAL COMPENSATION
Other
Name and Annual
Principal Salary Incentive Compensation
Position Year ($) ($) ($)
John P. Reeves 1994 $ 135,000 $ 17,629 $ 0
Retired President and 1995 0 4,922
Chief Executive Officer 1996 --- --- ---
Sheldon F. Goldthwait, Jr. 1994 $ 92,000 $ 12,084 $ 0
President and 1995 $ 130,000 $ 23,108 $ 0
Chief Executive Officer 1996 $ 135,990 $ 27,428 0
Dwight L. Eaton 1994 $ 92,000 $ 12,084 $ 0
Senior Vice President 1995 $ 94,000 $ 17,637 $ 0
and Trust officer 1996 $ 95,992 $ 19,460 0
Lewis H. Payne 1994 $ N/A $ N/A $ 0
Executive Vice President 1995 $ N/A $ N/a $ 0
1996 $ 88,594 $ 17,634 0
Virginia M. Vendrell 1994 $ N/A $ N/A $ 0
Senior Vice President 1995 $ N/A $ N/A $ 0
and Chief Financial Officer 1996 $ 83,609 $ 16,631 0
LONG TERM COMPENSATION
AWARDS PAYOUT
Restricted
Stock LTIP
Awards Options/ Payouts
Year ($) SARs (#) ($)
John P. Reeves 1994 $ 0 0 $ 0
1995 0 0 0
1996 0 0 0
Sheldon F. Goldthwait, Jr. 1994 0 0 0
1995 $ 0 0 $ 0
1996 0 0 0
Dwight L. Eaton 1994 0 0 0
1995 $ 0 0 $ 0
1996 0 0 0
Lewis H. Payne 1994 0 0 0
1995 $ 0 0 $ 0
1996 0 0 0
Virginia M. Vendrell 1994 0 0 0
1995 $ 0 0 $ 0
1996 0 0 0
PAGE
<PAGE>
ALL OTHER COMPENSATION ($)
John P. Reeves 1994 $ 4,984
1995 $ 0
1996 $ 0
Sheldon F. Goldthwait, Jr. 1994 $ 2,384
1995 $ 3,522
1996 $24,035
Dwight L. Eaton 1994 $ 2,937
1995 $ 3,439
1996 $36,175
Lewis H. Payne 1994 N/A
1995 N/A
1996 1,752
Virginia M. Vendrell 1994 N/A
1995 N/A
1996 570
</TABLE>
The Bank has an incentive plan in which all employees who were on the
payroll as of January 1st of a calendar year and who worked through
December 31st are eligible. The computation is based on earnings per share
growing by 10% each year with 1992 being the base year. Once the 10% growth
is attained, a pool is created in which all eligible employees receive the
same percentage of their salary in the form of an incentive payment.
COMPENSATION OF DIRECTORS
Each of the directors of the Company is a director of the Bank and as such
receives a fee of $250.00 for each committee meeting attended and $300.00
fee for attending the monthly Full Board Meeting. The fee paid for the
Annual Meeting is $500.00 per member of the Board of Directors. Meetings of
the Board of Directors of the Bank are held monthly. No directors fees are
paid to the directors of the Company as such. Those directors of the Bank
who are also officers do not receive directors fees.
EMPLOYEE BENEFIT PLANS
Effective August 31, 1993, the Board of Directors ratified the termination
of the Company s noncontributory defined benefit pension plan, which covered
all eligible employees.
At December 31, 1994, the plan s projected benefit obligation was
essentially equivalent to the plan s net assets available for benefits of
approximately $2,150,000, and such assets were invested in U.S. Government
obligations and cash equivalents. The settlement of the vested benefit
obligation by the purchase of nonparticipating annuity contracts for, or
the lump sum payments to, each covered employee was completed in 1994, upon
receipt of certain regulatory approvals. The Company recognized no
curtailment gain or loss in 1993 as a result of the plan termination and no
gain or loss was recognized when the plan s benefit obligation was settled
in 1994.
PAGE
<PAGE>
Prior to the plan termination, pension benefits were based on years of
service, and the Company s policy was to fund, at a minimum, the amount
required under the Employee Retirement Income Security Act of 1974. Net
pension income of $51,000 in 1993 has been included in operating results.
The weighted average discount rate and increase in salary levels used in
determining the projected benefit obligation were 8% in 1993. The expected
long-term rate of return on assets was 9%.
The Bank offers a 401(k) plan to all employees who have completed one year
of service and who have attained the age of 21. Employees may elect to defer
from 1% to 15% of their salaries subject to a maximum amount determined by a
formula annually, which amount was $9,500 in 1996 and $9,240 in 1995 and
1994. In 1996, the Bank matched employee contributions to the 401(k) plan to
the extent of 25% of the first 6% of salary for a total contribution by the
Bank of $51,979. The Bank match for 1995 and 1994 was $46,637 and $42,590,
respectively. During 1996, the Bank contributed to each participating
employee an additional 3% of the employee s salary. The total contribution
made for the non-contributory plan was $128,014, $122,386, and $113,432 for
years ended December 31, 1996, 1995 and 1994, respectively. This ono-
contributory plan was established in 1994 and any future contributions by
the Bank will be determined annually by the vote of the Board of Directors.
In 1996, 1995, and 1994, the Bank provided a restricted stock purchase plan
through which each employee having one year of service may purchase up to
100 shares of Bar Harbor Bankshares stock at the current fair market price
as of a date determined by the Board of Directors. These shares may be
purchased through a direct purchase or through the employees 401(k)
accounts.
At December 31, 1996, employees exercised their right to purchase 2,346
shares at $38.25 per share, with the actual purchase transpiring in January
of 1996. At December 31, 1995, employees exercised their right to purchase
4,632 shares at $28.00 per share, with the actual purchase transpiring in
January of 1996.
The Bank provides certain of its officers with individual memberships in
local civic organizations and clubs. The aggregate value of these benefits
with respect to any individual officer did not exceed $5,000 during the
Bank s last fiscal year.
The Bank has entered into agreements with Messrs. Avery, Reeves, Goldthwait,
and Eaton whereby those individuals or their beneficiaries will receive upon
death or retirement an annual supplemental pension benefit over a period of
10 years in the amount of $15,000 (in the case of Messrs. Avery and Reeves)
and in the amount of $10,000 (in the case of Messrs. Goldthwait and Eaton).
This plan is unfunded and benefits will be paid out of Bank earnings. Mr.
Avery received his final installment prior to his death in 1996. Mr. Reeves
began drawing his annual installment of $5,300.04 (reduced for early
retirement) as of January 1, 1995.
PAGE
<PAGE>
In 1993, the Company established a non-qualified supplemental retirement
plan for Messrs. Reeves, Eaton, Goldthwait and MacDonald. The agreements
provide supplemental retirement benefits payable in installments over twenty
years upon retirement or death. The Company recognizes the costs associated
with the agreements over the service lives of the participating officers.
The cost relative to the supplemental plan was $106,497, $98,273, and
$368,898, for 1996, 1995, and 1994, respectively. The agreements with
Messrs. Reeves, Eaton, Goldthwait and MacDonald are in the amounts of
$49,020, $22,600, $37,400 and $7,700 respectively. Mr Reeves began drawing
his annual installment of $49,020 as of January 1, 1995.
Officers of the Bank are entitled to participate in certain group insurance
benefits. In accordance with Bank policy, all such benefits are available
generally to employees of the Bank.
PAGE
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of December 31, 1996, to the knowledge of the Company, Bernard K. Cough
was the only beneficial owner of more than five percent of the Company s
common stock. Mr. Cough s address is 117 Eden Street, Bar Harbor, Maine.
The following table lists, as of December 31, 1996, the number of shares of
Common Stock and the percentage of the Common Stock represented thereby,
beneficially owned by each director and nominee for director, and by all
principal officers and directors of the Company as a group.
<TABLE>
<CAPTION>
<S> <C> <C>
Director, Principal Amount of
Officer or Beneficial Percent of
Nominee Ownership Class
Frederick F. Brown 12,570 *
Robert C. Carter 550 *
Thomas A. Colwell 2,700 *
Bernard K. Cough 86,510 5.03
Peter Dodge 2,430 *
Dwight L. Eaton 3,881 *
Ruth S. Foster 1,675 *
Robert L. Gilfillan 39,965 2.33
Sheldon F. Goldthwait, Jr. 11,160 *
James C. MacLeod 20,300 1.18
John P. McCurdy 3,300 *
Jarvis W. Newman 15,050 *
Lewis H. Payne 2,559 *
Robert M. Phillips 550 *
John P. Reeves 12,645 *
Abner L. Sargent 3,500 *
Marsha C. Sawyer 1,050 *
Lynda Z. Tyson 600 *
Virginia M. Vendrell 1,520 *
Total Ownership of all directors and
principal officers of Company as a
group (20 persons) 222,515 12.95
<FN>
<F1> * Less than one percent
</TABLE>
For purposes of this table, beneficial ownership has been determined in
accordance with the provisions of Rule 13-d-3 promulgated under the
Securities Exchange Act of 1934 as amended. Direct beneficial ownership
includes shares held outright or jointly with others. Indirect beneficial
ownership includes shares held in the same name of a director s spouse or
minor children or in trust for the benefit of a director or member of his or
her family. Indirect beneficial ownership does not include, in the case of
each director, one sixteenth (3,043 shares) of the 48,680 shares (2.83%) of
PAGE
<PAGE>
the Common Stock held by two trusts which shares, for purposes of voting,
are allocated equally among the directors of the bank under the terms of the
respective trust instruments. No director has any other beneficial interest
in such shares. Ownership figures for directors and nominees include
directors qualifying shares owned by each person named.
Management is not aware of any arrangement which could, at a subsequent
date, result in a change in control of the company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank retains the firm of Tyson & Partners, Inc. to assist with its
marketing program. Lynda Z. Tyson, who was elected to the Board of the
Company and the Bank on October 4, 1993, serves as that firm s Chief
Operating Officer as well as Director of Marketing. Management believes that
the fees charged by Tyson & Partners, Inc. are at least as favorable as any
which could have been obtained from persons not affiliated with the Bank.
The Bank has had, and expects to have in the future, banking transactions in
the ordinary course of its business with directors, officers, principal
stockholders and their associates upon substantially the same terms,
including interest rates and collateral on the loans, as those prevailing at
the same time for comparable transactions with others. Such loans have not
and will not involve more than normal risk of collectibility or present
other unfavorable features.
PAGE
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following financial statements are incorporated by reference
from Item 8 hereof: [Annual Report to Stockholders included herein as
Exhibit 13].
<TABLE>
<CAPTION>
<S> <C>
PAGE
Independent Auditor s Report 9
Consolidated Statements of Financial Condition
December 31, 1996 and 1995 10
Consolidated Statements of Earnings for the years ended
December 31, 1996, 1995 and 1994 11
Consolidated Statements of changes in the Stockholders
Equity for the years ended
December 31, 1996, 1995 and 1994 12
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 13
Notes to Consolidated Financial Statements 14 - 25
(a) (2) Financial Data Schedule
See Item 14(d)
(a) (3) Listing of Exhibits -- see Item 14
(b) Report on Form 8-K not applicable
Exhibits -- EXHIBIT INDEX
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
EXHIBIT INDEX - 14
NUMBER
2. Plan of Acquisition, reorganization Incorporated by reference
agreement, liquidation or succession to Form S-14 dated
March 14, 1984
3. Articles of Incorporation and Bylaws Incorporated by reference
To Form S-14 dated
March 14, 1984
4. Instruments defining the rights of Not Applicable
security holders, including indentures
9. Voting Trust Agreements Not Applicable
10. Material Contracts Incorporated by reference
to Form 10-K dated
December 31, 1986
11. Statement re: computation of per Not Applicable
share earnings
12. Statement of computation of ratios Not Applicable
13. Annual report to security holders Enclosed herewith
16. Letter re: change in certifying Not Applicable
accountant
PAGE
<PAGE>
18. Letter re: change in accounting Not Applicable
principles
21. Subsidiaries of the registrant Incorporated by reference
to Form 10-K dated
December 31, 1986
22. Published report regarding matters Not Applicable
submitted to vote of security holders
23. Consents of experts and counsel Not Applicable
24. Power of Attorney Not Applicable
27. Financial Data Schedule Enclosed Herewith
28. Information from reports furnished to
State insurance regulatory authorities Not Applicable
<PAGE> <PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
(Registrant)
/S/ Sheldon F. Goldthwait, Jr.
Sheldon F. Goldthwait, Jr.
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/S/ Sheldon F. Goldthwait, Jr. /S/ Virginia M. Vendrell
Sheldon F. Goldthwait, Jr. Virginia M. Vendrell
President and Director Chief Financial Officer
Chief Executive Officer Chief Accounting Officer
March 31, 1997<PAGE>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<CIK> 0000743367
<NAME> BAR HARBOR BANKSHARES
<MULTIPLIER> 1
<CURRENCY> NO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 0.00001
<CASH> 11,298,408
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 19,384,433
<INVESTMENTS-CARRYING> 82,716,836
<INVESTMENTS-MARKET> 83,067,746
<LOANS> 211,960,048
<ALLOWANCE> (4,292,995)
<TOTAL-ASSETS> 345,142,745
<DEPOSITS> 251,675,158
<SHORT-TERM> 38,746,079
<LIABILITIES-OTHER> 3,426,320
<LONG-TERM> 13,408,263
0
0
<COMMON> 3,636,474
<OTHER-SE> 34,250,451
<TOTAL-LIABILITIES-AND-EQUITY> 345,142,745
<INTEREST-LOAN> 20,303,252
<INTEREST-INVEST> 7,219,223
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 27,522,475
<INTEREST-DEPOSIT> 8,887,774
<INTEREST-EXPENSE> 11,281,002
<INTEREST-INCOME-NET> 16,241,473
<LOAN-LOSSES> 720,000
<SECURITIES-GAINS> 16,934
<EXPENSE-OTHER> 10,913,834
<INCOME-PRETAX> 9,608,123
<INCOME-PRE-EXTRAORDINARY> 9,608,123
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,708,723
<EPS-PRIMARY> 3.90
<EPS-DILUTED> 3.90
<YIELD-ACTUAL> 8.76
<LOANS-NON> 3,541,296
<LOANS-PAST> 732,791
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,047,883
<CHARGE-OFFS> 711,443
<RECOVERIES> 236,555
<ALLOWANCE-CLOSE> 4,292,995
<ALLOWANCE-DOMESTIC> 4,292,995
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,153,145
</TABLE>
Bar Harbor Bankshares
1996
Annual Report
A BLUEPRINT FOR THE FUTURE
Cover shows a background of architectural plans and the architects drawing of
the Operations Center for Bar Harbor Banking and Trust Company.
Inside Front Cover:
Photograph: Architect s rendering of entrance to Operations Center.
MISSION STATEMENT
Bar Harbor Banking and Trust Company is an independent, publicly owned,
community Bank pledged to providing innovative, quality financial services to
the people and businesses of eastern Maine.
We take pride in our commitment to deliver our services person-to-person, in a
professional and efficient manner while producing the maximum benefit for our
customers, employees and shareholders.
We are dedicated to providing a quality environment in which employees are
challenged to uphold our pledge to excellence.
We demonstrate our responsibility as a good corporate citizen through our
support of the communities and people we serve.
PAGE
<PAGE>
Photograph:
Caption: Sheldon F. Goldthwait, Jr.
Bar Harbor Bankshares and Subsidiary
Dear Shareholder:
We are proud to present our 1996 Annual Report highlighting the results of an
excellent year. You will note record highs or positive changes in almost all
of the financial figures. It is better than we expected and a tribute to our
unique economy, super customers, an extraordinary staff, our Down East work
ethic and a certain amount of luck.
Our 1997 budget is conservative but forecasts earnings to be slightly ahead of
1996. After a couple of months we seem to be on target. 1996 will be a tough
act to follow and we are somewhat reluctant to take too much credit now or
raise expectations too high.
During 1996 we concentrated on positioning the bank for the future, especially
with technology. We feel that strategy is working. Our employees will have the
tools necessary to provide and deliver financial services to our customers for
the foreseeable future. As we approach interstate branching and the old
regional barriers to competition disappear we will be ready. No longer will it
be necessary to reside in eastern Maine to bank with us. However, the reverse
is also true as our existing customers can bank anywhere. The key is service
and the key to service is technology, properly administered and with the human
touch retained. Our goal is to provide financial services the way our
individual customers want the, by telephone, modem, ATM, or the good old
fashioned way--Person to Person.
Throughout this report you will see profiles of our various project teams and
what they have been working on this past year. They have made great strides in
exploring new territories using new tools and methods. This process will
continue into 1997 and beyond. Our challenge for 1997 will be to perfect the
use of our technology to ensure that we are utilizing it profitably. The
national statistics for the utilization of technology are abysmally low. We
have made a significant financial commitment in the budget process for
testing, education, training and monitoring. Our goal is to attain much higher
statistics.
We thank our customers for sticking with their Independent Community Bank in
the face of so many other opportunities. We do know that sometimes you spread
your business out. Let us know what you expect from us and we will do the best
we can to provide it no matter where you live.
Very truly yours,
/s/ Sheldon F. Goldthwait, Jr.
Sheldon F. Goldthwait, Jr.
President and
Chief Executive Officer
PAGE
<PAGE>
Photograph: Facilities Team:
Caption: L. To R.: Marcia Bender, Sheldon Goldthwait, Jef Geagan, Margaret
Hill, Lew Payne (Leader), Felice Worcester, Gale Abbott
Informational Block:
Blueprints for tomorrow.
In 1995, Sheldon Goldthwait articulated an important goal for the Bank and its
employees: find a way to retain the Bank s traditional person-to-person
approach to doing business while using today s communications and computer
technologies to provide better, faster and more efficient service to customers
as well as operating efficiencies for the Bank. This challenge sparked a
series of blueprints for change in nine separate areas of the Bank.
Employee teams were organized to develop blueprints in: facilities, systems
and procedures, products and services, telecommunications, platform
automation, item imaging, document imaging, customer service, and software
conversion. Each team was comprised of employees representing the various
departments that would be affected by changes, thus ensuring that changes
would be designed in consultation with the very employees who would have to
make those changes work. While the work of some teams is ongoing, other teams
accomplished their missions in 1996. Each team is profiled in the following
pages.
There have been many side benefits for the team members and the Bank. Team
members learned how to manage projects. They learned that they had the
capacity to accept and meet challenges beyond the scope of their normal jobs.
They learned that they could successfully work on team projects. And, perhaps
most significantly, the energy, dedication and positive attitude of team
members was a source of inspiration and pride throughout the Bank.
Financial Condition and Results of Operations
Management's Discussion and Analysis
The following discussion and analysis of Bar Harbor Bankshares' financial
condition and operations should be read in conjunction with the Consolidated
Financial Statements (beginning on page 12) and notes to the Consolidated
Financial Statements (beginning on page 16).
Business
Bar Harbor Bankshares' wholly-owned subsidiary, Bar Harbor Banking and
Trust Company (the Bank), is an independent community bank with ten offices
serving eastern Maine. The Bank is a full-service financial institution
providing deposit, loan and trust services to individuals, businesses, and
organizations. Bar Harbor Banking and Trust Company has built its reputation
on building strong and lasting relationships with its customers involving
the full range of financial services required to meet their individual needs.
The Bank is known for conducting business professionally, efficiently and with
a high degree of person-to-person service.
As a community bank, Bar Harbor Banking and Trust Company cares about
maintaining and improving the quality of life for the people of eastern Maine.
The Bank supports local economies by lending locally. The Bank's charitable
giving program supports local civic and community organizations involved in
PAGE
<PAGE>
education, health and safety, arts and culture, economic development and
environmental protection. As individuals, many of the Bank s officers and
employees volunteer their time and contribute privately to a broad range of
programs and activities in their local communities. Bar Harbor Banking and
Trust Company offers its customers a wide variety of accounts and services,
convenient locations, competitive lending and deposit interest rates, and a
high degree of accessibility during and after regular banking hours. In 1996,
the Bank designed and built a new centrally located Operations Center in
Ellsworth. The building was fully occupied in January of 1997 by the Bank s
operations personnel, the technology staff, the check clearing staff, the
Bank s trainer and the central mailroom staff. Other infrastructure
improvements in 1996 included a new telecommunications system, a new, faster
computer system with upgraded personal computers in all locations, documented
standardized procedures for banking functions, a new reader/sorter for check
processing, item and document imaging software and equipment, and the
reevaluation of all products and services with primary consideration for the
wants and needs of banking customers.
Following are some of the deposit and loan services the Bank offers.
Additional services, modifications of services and linked services are
available which allow the Bank a high degree of flexibility in meeting
customer needs.
Photograph: The Software Conversion Team:
Caption: L. To R.: Marcia Bender, Tristan McKenney, Ken Larrabee, Carla Hall,
Trish Howard, Margie Gray, Karen Tainter, Debbie Sanner. Seated. Cheri
Wentworth, Vicky Vendrell (Leader). (Insert): Barbara Hepburn
Informative Box:
The Facilities Team
Mission: Find a location and get an Operations Center up and running in the
Ellsworth area.
Process: This team, led by Lew Payne, began by identifying 104 deliverables -
- --specific tasks that needed to be accomplished--assigning responsibilities
and deadlines. Perhaps the most important deliverable was the decision whether
to build or buy a facility. Once the decision to build was made, the second
most important deliverable was to design a facility that would work for the
people who would be working in it. The new Operations Center, which opened its
doors in January, 1997, is truly an attractive, workable facility designed for
and by Bank employees in conjunction with the architects and building
contractors. Results: Faster, more accurate, more efficient processing of
customer loan and deposit transactions, and a state of the art, cost efficient
centralized data, phone and voice system for both internal and external
communications.
Informative Box:
The Software Conversion Team
Mission: Convert to a new, more inclusive, more flexible computer software
package that would impact 40,000 Bank customers and 140 Bank employees.
PAGE
<PAGE>
Process: Led by Vicky Vendrell, this was a Herculean effort involving the
eleven-person team and the Bank s software developer. The team created changes
in the software to improve the Bank s loan and deposit systems and coordinated
over 350 hours of individualized training on the new system for all 140 Bank
employees.
Results: The new software puts more information at the fingertips of Bank
employees so that they can set up new accounts, access account information,
and provide better and faster service to customers. The Conversion Team began
its work in December of 1995 with the conversion taking place in November
1996.
Deposit services include:
Checking Accounts Certificates of Deposit (CDS)
Savings Accounts Individual Retirement Accounts
(IRAs)
Gold Wave Checking Money Market Accounts
(a special package for 7-day Investor Accounts
customers 50 years of Debit Cards
age and older)
Loan services include:
Residential Mortgages Home Equity Loans
Installment Loans VISA Credit Cards
Lines of Credit Commercial Business Loans
Student Loans
The Bank s Trust Department is one of the largest among independent
banks in Maine. Like the Bank, it prides itself on the quality and longevity
of its client relationships, many of which go back many generations. In
addition to traditional trust and estate planning services, the Trust
Department offers sophisticated, goal-oriented, professionally-managed
investment services designed to meet the specific financial objectives of its
clients.
In 1996, the Trust Department began converting its physical files to
electronic files, making them accessible by desktop personal computer to
increase internal efficiencies and improve customer service. The Department
also continues to pursue other strategies for improving efficiencies and
service such as the outsourcing of investment advisory and accounting
services.
Trust services include:
Custody Accounts
Professionally Managed Investment Accounts (PMIAs)
Socially Responsible Investing Program
Personal Trusts
Individual Retirement Plans
Estate Planning for Individuals and Businesses
Employee Benefit Plans
Quarterly Informational Seminars<PAGE>
Photograph: Mikey Bannister
Caption: We re dealing with complex automation, but we re focused on a simple
idea: people prefer to do business with people who make it quicker and easier
to do business. Mikey Bannister
Photograph: Platform Automation Team:
Caption: L. to R.: Jane Ramsdell, Mikey Bannister (Leader), Lottie Stevens,
Lisa Parsons, Lolly Ziobro.
Informative Box:
Platform Automation Team
Mission: Implement a platform automation system that will offer consistency
and efficiency in producing deposit and loan documents for better customer
service and internal use.
Process: Leader, Mikey Bannister and her team began by identifying the
numerous and time consuming steps involved in opening accounts and producing
documents such as disclosure statements, signature cards, and certificates.
The team then interviewed vendors and researched the software that would
automate as many functions as possible and be compatible with the Bank s
existing automated systems.
Result: The team anticipates completion of its mission during 1997. When the
system is up and running, customers will realize time savings and the Bank can
be confident that it is in compliance with disclosure requirements and has
accurate and complete customer information.
As a whole, the Bank has been successful by adhering to a single, simple
business philosophy: By serving its customers well, the Bank will be well
served.
Results of Operations
Loans: The Bank's primary source of income is interest generated from loans to
its customers. The competition for loans in the marketplace was apparent
during 1995 and continued in 1996 with more institutions competing for the
same loans. Loans increased $10,200,000 or 5%, following an 8.5% increase in
1995. Following market rates of interest which remained flat throughout the
year, the yields on loans remained consistent with 1995 s yields when looking
at the average balance sheet for both years. The increase in interest income
on loans in 1996 compared to 1995 was $1,000,000. Interest income grew by
$1,180,000 due to increased loan volumes in 1996 and decreased by $174,000 due
to interest rate changes.
In 1995, interest income on loans increased by $1,980,000 because of
increased loans and increased by $1,300,000 due to interest rate changes.
Although interest rates were falling in 1995, the annual repricing of variable
rate loans from relatively low rates from 1994 produced the increase in income
relative to interest rates. The loan portfolio represents 66% of the Bank's
earning assets, and 61% of total assets which is consistent with the past
several years.
PAGE
<PAGE>
Commercial loans represent approximately 50% of total loans and have remained
at that level throughout the past three years. A 10% growth in the consumer
loan portfolio occurred in 1996, predominantly in loans secured by real estate
including home equity loans. Residential mortgage loans of $75,500,000
represent 42% of the Bank s total loan portfolio. These loan balances compare
to $65,800,000 in residential mortgage loans in 1995 and $53,800,000 in 1994.
In the commercial portfolio, the greatest industry concentrations are in the
hospitality industry, real estate investment and development, and the fishing
industry. This is a reflection of the Bank s market, the close proximity to
Acadia National Park, and the importance of the fishing industry to the
eastern Maine economy. Loans attributed to the hospitality industry totaled
$27,800,000 in 1996 which compares to $25,500,000 in 1995 and $24,800,000 in
1994. The Bank's underwriting process uses conservative loan to value ratios
and state and federal government guarantee programs where appropriate. In real
estate investment and development, total loans have remained at approximately
$14,300,000 for the past three years. In the fishing industry for 1996, loans
rose back to the $10,000,000 level found in 1994 after dropping in 1995 to
$7,500,000. The decrease between 1994 and 1995 was attributable to the pay
downs of a number of aquaculture loans and a lower need at year end for Bank
support for the lobster pounding industry. While the ground fishing industry
continues to experience problems due to over fishing and attendant increase in
regulation to restore the ground fish populations, the Bank's portfolio is
well diversified within the fishing industry including fishermen, processors
and wholesalers.
Photograph: The Document Image Team:
Caption: L. to R.: Judy Fuller, Donna Murley, Bonnie Poland, Charlene
Tibbetts, Greg Corra, Felice Worcester (Leader).
Photograph: Felice Worcester
Caption: We began with the goal of streamlining operations. We discovered
just how difficult it is to make things simple, and in the process we
discovered untapped abilities in ourselves. Felice Worcester
Informative Box:
The Document Image Team
Mission: replace the Bank s traditional paper filing system with an electronic
filing system.
Process: Felice Worcester, team leader, and her team worked with the Bank s
consulting firm, John Floyd & Associates, to research, evaluate and select a
vendor that could provide a computerized system that would be reliable, easy
to use, and compatible with the Bank s existing software.
Result: A vendor was selected, software tested, and various departments of the
Bank are in the process of scanning their paper files into the computer,
beginning with the Trust Department, followed by the Mortgage Department, and
so on. The system, centralized in our new Operations Center in Ellsworth, will
give employees instant access via their personal computers to the account
histories of customers, making it faster and more efficient to research
information and provide service to customers.
PAGE
<PAGE>
Credit concentration, the amount of loans to a single borrower, has fluctuated
over the past three years. On a quarterly basis, borrowers with aggregate
loans over $700,000 are reviewed because of the size of the relationships.
The relationship between credit concentration loans and stockholders equity
has been 94%, 90%, and 95% for the years ended December 31, 1996, 1995, and
1994 respectively. The increase in credit concentrations is a result of not
only extending additional funds to existing customers, but also bringing in
new customers. Of the larger credits, over 15% are secured by cash, marketable
securities or government guarantees.
In addition to loans carried on the Bank's books, the Bank originates,
services and sells residential mortgage loans in the secondary market. The
servicing and sale of these loans gives the Bank the opportunity to provide a
service to its customers and earnings for the Bank. In 1996, loans serviced
totaled $61,800,000 compared to $60,300,000 in 1995 and $59,400,000 in 1994.
Reserves for possible loan losses were increased this year as a result of
increased loan volume. For the past three years the Bank's reserve for
possible loan losses has exceeded 2% of total loans. On a quarterly basis, the
loan portfolio is reviewed to be sure there are adequate reserves. In
accordance with the Interagency Policy Statement on Allowance for Loan and
Lease Losses dated December 21, 1993, there are reserves set aside for
specific loans, a pool of reserves based on historical charge offs by loan
types, and supplementary reserves for economic conditions, credit
concentrations, industry concentrations, and loan policy changes. Management
also evaluates loan impairment quarterly according to the Financial Accounting
Standards Board (FASB) 114/118. The provision for loan losses totaled
$720,000 in 1996 and $960,000 in 1995 and 1994.
Loans over 90 days past due, including loans on a non-accrual basis, as a
percentage of total loans declined in 1996 to 2.02% as compared to 2.09% in
1995 and 2.17% in 1994. The higher percentage in 1994 was a result of two
large loans that were resolved favorably in 1995.
On a monthly basis, all loans that become 90 days or more past due at month
end are reviewed for placement on non-accrual. If the loan is not well
secured, and payments are unlikely to be made to restore the loan to current
status in a short time, the loan is placed on non-accrual status. For each of
the past three years, non-accrual loans have represented 1.7% of the total
loan portfolio. At the end of 1996, non-accrual loans totaled $3,541,000 with
loans past due over 90 days and still accruing totaling $733,000. At the end
of 1995, non-accrual loans were $3,360,000 with $849,000 past due over 90 days
and still accruing. At the end of 1994, non-accrual loans were $3,139,000
with $892,000 past due over 90 days and still accruing. If interest had been
accruing on non-accrual loans, interest income on loans would have been
$314,000 higher in 1996. Interest collected on these loans totaled $308,000 in
1996. PAGE
<PAGE>
Photograph: Greg Dalton
Caption: One number to call, one informed person to answer your question or
give you information! It s everyone s ideal; our Call Center Team is making it
a reality. Greg Dalton
Photograph: Customer Service Call Center Team.
Caption: L. to R.: Greg Dalton (Leader), Marlene Haskell, Margie Gray, Marcia
Bender, Lottie Stevens, Felice Worcester. Seated, Rhonda Farnsworth, Gale
Abbott.
Informative Box:
Customer Service Call Center Team
Mission: Create a single customer service call center within the Bank that can
provide fast, convenient, accurate information about accounts and/or Bank
services.
Process: Understanding that this would be one of the most used and most
visible customer services, leader, Greg Dalton, and his Customer Service Call
Center Team studied other banks customer service operations, developed the
strategy for the Customer Service Call Center and an alternative automated
voice response system.
Result: Customers will soon be able to call the Bank during business hours to
speak with a trained customer service representative, and soon thereafter will
be able to call 24 hours a day to get information and conduct routine banking
transactions via an automated system. Customers will receive prompt, courteous
service. Customers will be able to do business with the Bank at their
convenience and in the way that they prefer (person to person or automated).
The automated system puts the technology in place today for the telephone and
computer banking services of tomorrow.
Quarterly, all loans that may be over 90 days past due are reviewed for
possible charge off. Collection efforts continue whether or not the loan is
charged off, but if there is a reasonable doubt about whether the loan is
collectible, it is charged off to ensure that the Bank's assets are not
overstated. If a troubled loan is not well secured, a partial charge off may
be taken. Gross charge offs in 1996 totaling $711,000 were .3% of total loans,
as compared to $901,000 or .4% in 1995 and $579,000 or .3% in 1994. In 1996,
approximately 33% of the charge offs came from the installment loan portfolio,
predominantly in credit cards issued to individuals. The Bank is not an
aggressive issuer of credit cards, but the increase in losses in that
portfolio followed national trends. The commercial loan portfolio generated
27% of the charged off loans in 1996, which is a reduction from 1995 when
commercial credits were responsible for 39% of the total charge offs. The
increase in commercial loan charge offs in 1995 included a charge down of a
large commercial loan. Approximately 28% of the charge offs in 1995
represented loans secured by real estate. Recoveries of $237,000, $97,000 and
$141,000 offset losses for the years ended 1996, 1995 and 1994, respectively.
Recoveries for 1996 resulted in long term work out situations that came to
fruition.
PAGE
<PAGE>
When a real estate loan goes to foreclosure and the Bank buys the property,
the property is transferred from the loan portfolio to the Other Real Estate
Owned (OREO) portfolio at its fair value less estimated selling cost. If the
loan balance is higher than the fair value of the property, the difference is
charged to the allowance for loan losses before the transfer takes place.
Along with using conservative valuations of OREO properties, reserves are
established to allow for selling expenses that can be reasonably forecast.
At the end of 1996, the OREO balance was $293,000 with a reserve of $22,600,
at the end of 1995, $469,700 with a reserve of $26,000 and at the end of 1994,
$641,500 with a reserve of $30,500.
TOTAL ASSETS
DECEMBER 31, 1996
Pie Graph with the following information illustrated:
<TABLE>
<C> <C>
Non-Earning Assets 5.0%
Cash & Due from Banks 3.0%
Investments 32.0%
Loans 60.0%
</TABLE>
Investments: The investment portfolio continues to add liquidity,
diversification, and earnings to the Bank's financial picture. The investment
portfolio represents 31% of the Bank's total assets and 34% of the Bank's
earning assets and has remained at these levels for several years.
As mentioned in the previous section, the Bank s loan portfolio grew by
$10,200,000 in 1996. Loans were partially funded by principal payments from
investments totaling $8,000,000 from the Bank's mortgage-backed securities.
Principal paydowns are generated from consumers nationwide making their
monthly mortgage payments, as well as refinancing existing mortgages.
Principal paydowns can affect the yield on the investment portfolio, but the
yield of the entire portfolio only dropped by 11 basis points during the past
twelve months. Those securities with taxable interest income earned an
average yield of 6.86% for years ending December 31, 1996, and 1995. With
interest rates remaining stable for most of 1996, the drop on the entire
portfolio is less than the average 28 basis point decline between 1994 and
1995.
Photograph: Systems Procedures and Controls Team:
Caption: L. To R.: Faye Geel, Marsha Sawyer, Greg Corra, Doris Williams,
Tuesdi Woodworth (Leader), Margie Gray
Photograph: Tuesdi Woodworth
Caption: Talk about thorough, our team is developing standard
procedures for everything that goes on in the Bank from opening a checking
account to answering the telephone. Tuesdi Woodworth
Informative Box:
Systems Procedures and Controls Team
Mission: Organize and formalize procedures for all internal banking
functions and develop a process for maintaining and updating procedures into
the future.<PAGE>
Process: Leader, Tuesdi Woodworth, and her team identified and analyzed
more than 1,000 tasks that take place daily throughout the Bank. For many of
these tasks, procedures, controls, and standards were lacking and many had
been modified over time.
Result: As of the end of 1996, 50% of the procedures have been written.
In 1997, the procedures will be entered into the Bank s computer system and
networked to all employees for reference and educational purposes. Customers
will benefit from this team s efforts through faster and more efficient
handling of day to day tasks by the Bank s employees.
<PAGE>
There were $8,000,000 in principal paydowns from mortgage-backed securities.
The investment portfolio grew by $5,700,000 when compared to year end 1995.
Purchases in 1996 totaled $24,373,000, 96% of which are guaranteed by the U.
S. Government. Of these purchases, $8,500,000 represent callable debentures
offering from six months to three years of call protection and an average
yield of 7.36%. $3,500,000 of these agency debentures have ten year final
maturities and have been placed in the Bank s available for sale portfolio.
Similar to 1996, many of the bonds purchased in 1995 represent callable U.S.
Government agencies with longer final maturities which were placed in the
Bank s available for sale portfolio. Interest and dividends earned on the
Bank's investments showed an increase of $366,000 of which $498,000 is
attributable to additional securities purchased in 1996 with a reduction in
earnings of $132,000 because of declines in interest rates. In comparison, the
investment portfolio s earnings for 1995 increased over 1994 by $1,064,000, of
which $643,000 was attributable to securities purchased in 1995 totaling
$10,800,000.
The Bank is currently a party to one interest rate swap agreement whereby the
Bank receives a fixed rate of interest and pays a variable rate of interest on
the notional amount of $5,000,000. This exchange is not a funding transaction,
but a stream of interest payments. A second interest rate swap matured in May
of 1996. The net effect on earnings of the interest rate swap agreements for
1996 was a reduction in income of $21,150. In 1995, the net effect of these
interest rate swap agreements was to reduce the Bank's earnings by $60,700. In
1994 when a third interest rate swap was still in effect and short term
interest rates were considerably lower, the net earnings of these interest
rate swap agreements was to add $150,100 to the Bank's income. Additionally,
the Bank has purchased an interest rate floor, where the Bank will receive
interest if the specified index falls below the floor rate, on a notional
amount of $10,000,000. No income has been recognized to date on this
contract. The interest rate risk factor in the swaps and floor is considered
in the overall interest management strategy of the Bank.
The Bank s interest rates on deposits remained stable throughout 1996 with
average deposits growing by more than $10,500,000 and the cost of those
deposits, which were primarily certificates of deposit, increased by $460,000.
The cost of borrowings increased in 1996 by $197,000 based on average growth
in borrowings of $5,000,000. At December 31, 1995, total deposits were
$26,000,000 more than December 31, 1994, and the cost of those deposits
increased by $2,400,000. The cost of borrowings in 1995 increased by $588,000
with short term rates rising to meet longer term rates and flattening the
yield curve. In 1994, as interest rates rose, the Bank's earnings were also
affected by the rise in the cost of liabilities. The Bank's interest-bearing
liabilities increased in 1994 by approximately $23,000,000 with interest paid<PAGE>
on these liabilities increasing by $900,000. PAGE
<PAGE>
Photograph: Marlene Haskell
Caption: Something with long lasting benefits happened. Our group of bankers
put on the customer s hat and took a thorough look at our services from that
perspective. Marlene Haskell
Photograph: Products and Services Team
Caption: L. To R.: Gloria Merrill, Greg Dalton, Mischelle Gehan, Andrea
Leonard, Marcia Bender, Marlene Haskell (Leader), Jack Gibbons, Rhonda
Farnsworth.
Informative Box:
The Products and Services Team
Mission: Determine profitability, competitiveness, and customer appeal of all
of the Bank s products and services, and recommend appropriate changes,
deletions and/or additions.
Process: The team, led by Marlene Haskell, began by making a thorough review
of each Bank product and service considering its features and benefits,
pricing, profitability, competitiveness with other banks offerings, and its
ability to meet the needs of today s customer. The team also reviewed branch
office hours and new banking technologies and measured them against the same
criteria.
Results: After a thorough review and analysis, the team will make
recommendations in 1997 for simplifying the Bank s product menu, making
products themselves simpler and easier to understand for both customers and
Bank personnel, and restructuring service charges to allow for competitive
pricing as well as the ability to meet profitability goals.
Other Operating Income
Other operating income for 1996 grew by $600,000 when compared to 1995
and may be attributed to three specific events. The Trust Department reported
gross income, before expenses, totaling $280,000 more than in 1995.
Additionally, FASB Statement No. 122, Accounting for Mortgage Servicing
Rights was implemented effective January 1, 1996 and increased book income by
$153,000. Finally, an insurance payment totaling $278,000 was received in
1996 after the death of past president and director, Robert H. Avery. Two
events which took place in 1994 explain the difference in other operating
income when comparing 1994 to 1995. Excluding those events, which are
described below, other operating income for 1995 grew by $230,000 more than
1994 and is attributable to income before expenses earned by the Trust
Department in 1995.
In 1994, the Bank chose to sell its holdings in a government agency bond
fund resulting in a principal loss of $388,450. The fund had initially been
purchased in the late 1980's with additional funds invested in 1993. As
interest rates began to rise, the fund began to shorten its maturities, thus
reducing the yield. Management believed it prudent to sell the securities,
absorb the losses, and reinvest the proceeds in short-term higher earning
securities and protect its remaining principal by selling the entire holding.
PAGE
<PAGE>
Trust
The Bank's Trust Department's total revenues before expenses grew to
$2,211,000, compared to $1,931,000 recorded in 1995 and $1,675,000 recorded in
1994. A portion of this increase is attributable to more than $25,000,000 in
new business acquired in 1996 as well as the increase in the results of the
market. The Trust Department continues to utilize a consistent and dedicated
process of selecting opportunities in order to continue providing competitive
results for its customers.
Photograph: Telecommunications Team.
Caption: L. to R.: Paul Ahern, Margaret Hill, P. J. Curtis, Jennifer
Mott, Marsha Truoccolo, Jef Geagan (Leader).
Informative Box:
Telecommunications Team
Mission: Embrace new technologies and phone systems and more fully
utilize existing software capabilities to improve the overall flow of
communications both inside and outside the Bank.
Process: Led by the Bank s electronics and computer specialist, Jef
Geagan, this team quickly realized that better communications would depend on
better access to information. The solution was a centralized server for the
Bank s wide area network (WAN) that would give employees in all offices and
departments of the Bank needed information via their desktop computers. The
team identified the right software for a voice and data network that also
includes voice mail recording as a way to communicate with bank employees who
are not immediately available.
Result: The team s work will allow employees to provide faster, more
accurate and more complete responses to inquiries from customers as well as
from other departments within the Bank.
Other Operating Expenses
In total, other operating expenses for 1996 were $443,000 higher than
for 1995. Included in that category is salaries and benefits that will be
reviewed below, occupancy expense, furniture and equipment expense, and other
expenses. Furniture and equipment expense increased in 1996 due to the
depreciation of equipment purchased in 1996, including item and document
imaging equipment and software, a new telecommunications system, and an
upgrade of personal computers in most areas of the Bank. Salaries and
benefits were 6.7% higher in 1996 and include merit increases, additional
overtime resulting from the implementation of new software technology for the
Bank, and incentive payments made to employees with a minimum of one year s
tenure with the Bank.
In 1995, the Bank began developing several major projects involving
facilities and technology. In order to engineer these changes most
effectively, the Bank sought the services of a consulting firm to review
existing procedures, seeking greater efficiencies while maintaining quality
customer service. Funds spent on this project in 1995 totaled $187,000.
Additionally in 1995, the Trust Department elected to increase its offerings
by adding a tax preparation service for its customers. The cost of this
service was offset in the Trust Department s earnings for 1995.
Salaries and benefits for 1995, including incentive payments, were
actually $27,000 lower than 1994. In 1994, salaries and benefits were 8%
higher than in 1993. The year ended 1994 also included incentives made to<PAGE>
employees who had been with the Bank for more than one year, and included the
implementation of a supplemental retirement plan for certain members of
management.
FDIC insurance premiums paid by the Bank totaled in excess of
$450,000 in 1994. By mid-year, 1995, the FDIC temporarily discontinued the
charge for insurance for well capitalized banks, reducing the cost in that
year to $260,000. As of December 31, 1996, the premium had not been
reinstated; therefor there was no charge for insurance premiums in 1996.
Net Earnings
Net earnings for the Bank of $6,708,723 were very strong. This
represents an increase of 14% or $830,000 over the Bank s earnings for 1995
which reached $5,878,647 or a 19% increase over 1994's earnings. The growth in
earnings for the past several years is attributable primarily to the
successful management of interest rates and increased volumes in the Bank s
balance sheet. Additionally, the continuous efforts of the Bank's Trust
Department add to the Bank's performance. The Bank's earnings translate into a
return on average equity of 18.86%, compared to 18.97% in 1995, an earnings
per share increase from $3.43 to $3.90 and a return on average assets of 2.02%
for 1996 compared to 1.89% for 1995.
NET INCOME FOR YEAR ENDING DECEMBER 31
(in thousands)
Three dimensional Bar Graph with the following information illustrated:
<TABLE>
<C> <C>
Year Net Income
1994 $ 4,914
1995 $ 5,879
1996 $ 6,709
</TABLE>
Liquidity
A primary function of asset/liability management includes assuring
adequate liquidity that reflects the ability of the Bank to meet the cash flow
requirements of its customers without significant loss to the Bank.
Liquidity comes from five sources in the balance sheet
The Bank's Investment Portfolio
Deposits
Borrowings
Loan Repayments
Profits
Liquidity is needed to fund increased loan demand and to cover the
seasonal outflow of deposits during the winter months. The Bank's investment
portfolio not only provides liquidity, but also diversification in managed
assets. The Bank maintains adequate liquidity without having to sell portions
of its investment portfolio by pledging portions of its portfolio as
collateral for borrowings. The December 31, 1996 investment summary indicates
a net unrealized gain of $351,000 on the Bank's held to maturity portfolio.
The Bank's portfolio which is available for sale has an unrealized loss of
$157,000 as of December 31, 1996. The portion of the Bank's portfolio which is<PAGE>
taxable has an average yield of 6.86%. At year-end, the Bank's large mortgage-
backed security portfolio had a net unrealized loss of $152,000. This compares
to an unrealized gain on the mortgage-backed securities portfolio in 1995 of
$179,000. Both years remain very close to the par values for the securities
and are an indication of the stability in interest rates over the past several
years. Although premiums were paid on portions of the mortgage-backed
securities, many of those pools were seasoned at the time of purchase and have
not prepaid as fast as expected. The mortgage-backed securities portfolio has
an average life of 4.4 years, an average duration of 2.5 years and is yielding
an average of 6.91%, which is more favorable than comparable securities with
similar average lives in the current market.
Photograph: Item Image Team.
Caption: L. to R.: Felice Worcester (Leader), Margie Gray, Wendyl
Pedrone, Linda Stratton, Tristan McKenney, Donna Murley.
Informative Box:
The Item Image Team
Mission: Streamline the checking account record keeping process by
replacing the traditional handling and sorting of checks with an automated
check imaging system.
Process: In conjunction with the Bank s consulting firm, John Floyd &
Associates, Felice Worcester and ter Item Image Team researched vendors who
supply check imaging equipment, evaluated them based on actual in-Bank
demonstrations, and selected the one best suited to the operations of the
Bank.
Results: In July, 1996, the Bank introduced Check Imaging to its
customers via a multi-media advertising campaign. Reports from customers are
positive about the new product. It provides images of checks in numerical
order on easy to read monthly statements, and a convenient 3-ring binder
storage system. Check Imaging has affected operating economies for the Bank,
and better, faster and more convenient checking account record keeping for
customers.
Deposits represent the Bank's primary source of funds. Average deposits
in 1996 grew by over $10,000,000; however, comparing year end balances for
1996 and 1995, they remained flat. As mentioned earlier, loans grew by
$10,200,000. Some of that growth was funded by the principal pay-downs on
mortgage-backed securities and part was funded through borrowings. The Bank
had promoted certificates of deposit in 1995 as described below, and chose to
let those deposits renew at the Bank s existing rates in 1996, replacing the
funds with borrowings at a less expensive interest rate.
In 1995, total deposits increased by $26,000,000 or 11.5% over 1994.
Changes in the Bank's market and the local economy in general were reflected
in the liability mix and growth during 1995. As interest rates flattened,
depositors sought higher yields through the purchase of certificates of
deposit. Four separate campaigns for certificates of deposits were promoted
during 1995, three of which were offered for terms of less than one year. The
shorter offerings were indicative of the Bank s posture that long term
interest rates were continuing, although slowly, downward. Time deposits of
$100,000 or more totaling $14,600,000 in 1996 and $14,000,000 in 1995 remain a
small portion of the Bank's deposit base. Bar Harbor Banking and Trust
Company does not purchase brokered deposits.<PAGE>
Traditionally, the Bank has relied on such sources as cash on hand, loan
repayments, investment maturities and principal paydowns on mortgage-backed
securities to fund liquidity needs. Over the past five years, the Bank has
expanded its sources to include advances available through the Federal Home
Loan Bank of Boston, as well as repurchase agreements secured through several
wholesale firms and a seasonal borrowing line with the Federal Reserve Bank of
Boston. Through the above options, additional funds available to the Bank at
December 31, 1996 totaled $56,000,000; however, the Bank does not intend to
borrow funds to its maximum availability. These funds have been used, in
accordance with asset/liability management objectives of the Bank, to purchase
investment securities and to fund deposit outflow.
The Bank's primary approach to measuring liquidity is utilizing a Basic
Surplus/Deficit model. It is used to calculate liquidity over a 30-day and a
90-day time horizon, by examining 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 horizon. The Bank's minimum
policy level of liquidity under this model is 5% of total assets for both time
horizons. At December 31, 1996, the 30-day and 90-day ratios were 19.9% and
18.7%, respectively. As of December 31, 1995, the ratios are 17.6% and 14.5%,
respectively.
Asset/liability management has the role of maintaining a balance between
interest-sensitive earning assets and interest-bearing liabilities. Effective
management of interest rate risk can protect the Bank against adverse changes
in interest rates and can enhance the Bank's interest margins and earnings
through periods of changing interest rates. In times of rising interest rates,
Bar Harbor Banking and Trust Company will maximize earnings if more loans
and/or investments are subject to rate changes than interest bearing
liabilities. As interest rates rise, the Bank monitors its rate sensitivity
seeking to ensure that both assets and liabilities respond to changes in
interest rates to minimize the effect of those changes on net interest income.
As of December 31, 1996, Bar Harbor Banking and Trust Company had $167,000,000
in assets and $175,000,000 in liabilities that were repricable within one
year. Management continues to watch economic trends with respect to interest
rates. With interest rates remaining flat in 1996 and with expectations of
little change in 1997, the Bank is well situated with assets and liabilities
repricing concurrently.
Loan repayments and maturing investments are set forth in the Statements
of Cash Flows. Profits, the final source of liquidity, also are detailed on
the preceding pages.
Photograph: Jef Geagan
Caption: Most members of the Telecommunications Team started with no
technical knowledge, yet they quickly gained the knowledge and competently
applied it to meet the Bank s needs. Jef Geagan
Capital Resources
Regulatory standards for bank capital adequacy require that capital be
at least 8% of risk-adjusted assets. Bar Harbor Banking and Trust Company's
total capital ratio of 19% far exceeds the guidelines. In dollars, this means
that the Bank has the ability to pay dividends subject to the minimum capital
requirement.
Bar Harbor Banking and Trust Company had a very profitable year in 1996.
Stockholders' equity at December 31, 1996 increased by $4,600,000 and in 1995<PAGE>
equity increased by $4,480,000.
Dividends of $2,027,520 were declared on the Company s common stock
which represented a 38% increase over 1995, represented a 30.2% dividend
payout ratio and contributed to a total return to shareholders of 37%. This
total return was, in part, due to a five-for-one stock split which was
declared by the Board of Directors of the Company on July 11, 1995 and took
effect on August 7, 1995.
A strong capital position, which is vital to the continued profitability
of the Bank, also promotes customer confidence and provides a solid foundation
for future growth. Continued growth in stockholders' equity has been achieved
through reinvested earnings.
There are no known trends, events or uncertainties nor any
recommendations by any regulatory authority that are reasonably likely to have
a material effect on the Company s liquidity, capital resources or operating
results.
Photograph: Lew Payne
Caption: In a pressure cooker atmosphere you find out what people can really
do. Our beautiful and efficient new Operations Center speaks volumes for the
work of the Facilities Team. Lew Payne
Impact of Recently Issued Accounting Standards
Effective January 1, 1995, the Bank adopted FASB Statement No. 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 collectible. 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 $2,196,000 at December 31, 1996 and
$1,665,000 in 1995.
The Bank implemented FASB Statement No. 122, "Accounting for Mortgage
Servicing Rights" effective January 1, 1996. Adoption of the standard
increased the Bank s book income by a minimal amount.
In June 1996, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities, effective for financial statements for the fiscal year beginning
after December 31, 1996 (excluding those sections identified in SFAS No. 127,
Deferral of the Effective Date of Certain Provisions of SFAS No. 125"). SFAS
No. 125 provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings.
The Company has not determined the impact of adopting SFAS No. 125.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and related notes, presented
elsewhere herein, have been prepared in accordance with generally accepted
accounting principles. These principles require the measurement of financial
position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to<PAGE>
inflation.
Unlike many industrial companies, substantially all of the assets and
virtually all of the liabilities of Bar Harbor Banking and Trust Company are
monetary in nature. As a result, interest rates have a more significant impact
on Bar Harbor Banking and Trust Company's performance than the general level
of inflation. Over short periods of time, interest rates may not necessarily
move in the same direction or in the same magnitude as inflation.<PAGE>
Photograph: Vicky Vendrell
Caption: Change and the challenge of learning new ways of doing things--I m
proud to say that each member of the Software Conversion Team e\rose
enthusiastically to the occasion. Vicky Vendrell
Market for Common Stock
Bar Harbor Bankshares is not listed on any national exchange.
High and low bids for each quarter of 1996 and 1995 are listed below (per
quotes from The Bangor Daily News). These prices have been restated to
reflect the five-for-one stock split declared in July of 1995.
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
<S> <C> <C> <C> <C>
1996 37.50 to 26.125 44.00 to 37.00 42.00 to 38.00 39.50 to 36.25
1995 17.00 to 16.40 20.00 to 17.00 25.50 to 20.002 8.00 to 25.50
</TABLE>
As of January 1, 1997, there were 1,040 holders of record of Bar Harbor
Bankshares common stock.
Dividends paid by the Company in 1996 and 1995 are set forth below:
<TABLE>
<S> <C> <C> <C> <C>
1996 $0.20 $0.20 $0.25 $0.53
1995 N/A $0.36 N/A $0.50
</TABLE>
MARKET PRICE OF BAR HARBOR BANKSHARES AS OF YEAR ENDED
DECEMBER 31
Three dimensional Bar Graph with the following information illustrated:
<TABLE>
<C> <C>
Year Market Price
1992 $13.40
1993 $15.20
1994 $16.40
1995 $27.50
1996 $36.50
</TABLE>
PAGE
<PAGE>
INDEPENDENT AUDITORS REPORT
The Board of Directors
Bar Harbor Bankshares and Subsidiary
We have audited the accompanying consolidated statements of financial
condition of Bar Harbor Bankshares and Subsidiary as of December 31, 1996, and
1995, and the related consolidated statements of earnings, changes in
stockholders equity, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Bar Harbor
Bankshares and Subsidiary as of December 31, 1996 and 1995, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
Berry, Dunn, McNeil and Parker
Portland, Maine
March 7, 1997
PAGE
<PAGE>
Bar Harbor Bankshares and Subsidiary
Consolidated Statements of Financial Condition
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Assets
Cash and Due from Banks $ 11,298,408 $ 8,759,797
Federal Funds Sold 2,000,000 3,800,000
Securities Available for Sale, at Market 19,384,433 14,223,986
Securities to be Held to Maturity (Market
Value $83,067,746 in 1996; $83,180,706
in 1995) 82,716,836 82,209,062
Other Securities 5,623,639 5,661,569
Loans Held for Sale 336,540 68,326
Loans, net of Allowance for Possible
Loan Losses of $4,292,995 in 1996
and $4,047,883 in 1995 207,667,053 197,717,834
Premises and Equipment 7,498,046 6,219,569
Other Assets 8,617,790 7,948,556
Total Assets $345,142,745 $326,608,699
Liabilities and Stockholders Equity
Liabilities
Deposits
Demand Deposits $ 35,918,779 $ 32,394,610
Now Accounts 40,529,509 38,300,119
Savings Deposits 53,085,062 53,660,526
Time 122,141,808 127,116,146
Total Deposits 251,675,158 251,471,401
Securities Sold Under Repurchase Agreements 8,246,079 5,791,193
Advances from Federal
Home Loan Bank 43,908,263 32,700,000
Other Liabilities 3,426,320 3,403,281
Total Liabilities 307,255,820 293,365,875
Commitments (Note 16)
Stockholders Equity
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 28,204,829 23,523,626
Net Unrealized Appreciation
(depreciation) on Securities Available
for sale, net of Tax (103,505) 63,293
Treasury stock, at cost, 100,000 shares (1,340,000) (1,340,000)
Total Stockholders Equity 37,886,925 33,242,824
Total Liabilities and
Stockholders Equity $345,142,745 $326,608,699
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements. PAGE
<PAGE>
Bar Harbor Bankshares and Subsidiary
CONSOLIDATED STATEMENTS OF EARNINGS
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans $20,303,252 $19,298,629 $16,006,536
Other interest and Dividends on:
Taxable securities 6,099,169 5,623,391 4,572,719
Tax exempt securities 767,161 852,051 828,998
Equity securities 352,893 377,916 387,337
Total interest and dividends 27,522,475 26,151,987 21,795,590
INTEREST EXPENSE:
Deposits 8,887,774 8,428,119 6,067,731
Short-term Borrowings 2,030,030 2,175,597 1,608,404
Long-term Borrowings 363,198 20,677 0
Total interest expense 11,281,002 10,624,393 7,676,135
Net interest income 16,241,473 15,527,594 14,119,455
Provision for loan losses 720,000 960,000 960,000
Net interest income after provision
For loan losses 15,521,473 14,567,594 13,159,455
OTHER OPERATING INCOME
Trust department income 2,211,446 1,931,500 1,675,043
Service charges on deposit accounts 797,238 788,778 776,468
Other service charges, commissions and fees 1,776,184 1,628,729 1,640,019
Other operating income
198,682 49,301 286,529
Net securities gains (losses) 16,934 0 (365,769)
5,000,484 4,398,308 4,012,290
OTHER OPERATING EXPENSES:
Salaries and employee benefits 5,689,250 5,333,183 5,360,227
Occupancy expense 596,321 621,627 585,068
Furniture and equipment expense 911,571 737,057 709,619
Other operating expense 3,716,692 3,779,408 3,506,680
10,913,834 10,471,275 10,161,594
Earnings Before Income Taxes 9,608,123 8,494,627 7,010,151
Income Taxes
2,899,400 2,615,980 2,096,000
Net Earnings $ 6,708,723 $ 5,878,647 $ 4,914,151
Per common share data:
Net Earnings $3.90 $3.43 $2.87
Weighted average number of common
shares outstanding 1,718,116 1,713,449 1,709,695
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements. PAGE
<PAGE>
Bar Harbor Bankshares and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
Years ended December 31, 1996, 1995, and 1994
<TABLE>
<CAPTION>
Net
Unrealized
Appreciation
(Dpreciation)
On Securities Net
Capital Retained Available Treasury Stockholders
Stock Surplus Earnings for Sale Stock Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance 12-31-93 $3,614,540 $7,280,550 $15,469,806 ($ 37,566) ($1,340,000) $24,987,330
et earnings 1994 4,914,151 4,914,151
Cumulative effect to record
appreciation on securities
available for sale
Cash dividends declared
($.74 per share) (1,265,278) (1,265,278)
Net unrealized appreciation
On securities available
For sale, net of tax of
$24,742 85,593 85,593
Sale of stock (2,565 shares) 5,130 33,858 38,988
Balance 12-31-94 $3,619,670 7,314,408 $19,118,679 $ 48,027 ($1,340,000) $28,760,784
Net earnings 1995 5,878,647 5,878,647
Cash dividends declared ($.86 per share) (1,473,700) (1,473,700)
Net unrealized appreciation
On securities available
For sale, net of tax of
$7,864 15,266 15,266
Sale of stock (3,770 shares) 7,540 54,287 61,827
Balance 12-31-95 $3,627,210 $7,368,695 $23,523,626 $ 63,293 ($1,340,000) $33,242,824
Net earnings 1996 6,708,723 6,708,723
Cash dividends declared ($1.18 per share) (2,027,520) (2,027,520)
Net unrealized depreciation
On securities available
For sale, net of tax
Benefit of $85,927 (166,798) (166,798)
Sale of stock (4,632 shares) 9,264 120,432 129,696
alance 12-31-96 $3 ,636,474 $ 7,489,127 28,204,829 ($103,505) ($1,340,000) $37,886,925
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
PAGE
<PAGE>
Bar Harbor Bankshares and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995, and 1994
<TABLE>
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities: 1996 1995 1994
Net Income $ 6,708,723 $ 5,878,647 $ 4,914,151
Adjustments to Reconcile Net Earnings to
Net Cash Provided by Operating Activities:
Depreciation
786,456 588,147 543,366
Provision for Loan Losses 720,000 960,000 960,000
Provision for Losses on Other Real Estate Owned 6,720 19,056 1,800
New Loans Originated for Sale (8,264,660) (7,827,560) (12,700,930)
Proceeds from Sale of Mortgages Held for Sale 8,249,507 8,038,770 12,744,005
Gain on Sale of Mortgages Originated for Sale (169,241) (23,578) (43,075)
Net Securities Losses (16,934) 0 365,769
Net Amortization of Bond Premium 268,961 196,043 406,605
(Gain) Loss on Sale of Premises and Equipment 31,060 86,530 (299,508)
Net Change in Other Assets (222,347) (70,199) 462,664
Net Change in Other Liabilities 23,039 25,575 1,010,626
Net Cash Provided by Operating Activities 8,121,284 7,820,281 8,435,473
Cash Flows from Investing Activities:
Purchases of Securities Held to Maturity (18,319,968) (27,026,440) (31,384,542)
Proceeds from the Maturity and Principal Paydowns of Securities
Held to Maturity 12,848,097 10,319,569 13,602,117
Proceeds from the Call of Securities Held to Maturity 4,750,000 13,750,000 4,320,599
Purchases of Securities Available for Sale (6,113,146) (8,053,880) (3,509,100)
Proceeds from the Maturity and Principal Paydowns of Securities
Available for Sale 199,974 62,180 72,337
Proceeds from the Sale of Securities Available for Sale 500,000 0 3,596,827
Purchase of Life Insurance Policy 0 0 (1,875,000)
Purchase of Interest Rate Floor 0 0 (72,000)
Net Loans Made to Customers (11,120,719) (16,756,863) (22,702,049)
Capital Expenditures (2,493,103) (1,345,140) (479,871)
Proceeds from Sale of Fixed Assets 397,110 17,118 245,289
Net Cash Used in Investing Activities (19,351,755) (29,033,456) (38,185,393)
Cash Flows from Financing Activities:
Net Change in Savings, NOW and Demand Deposits 5,178,095 (5,702,217) (1,497,239)
Net Changes in Time Deposits (4,974,338) 31,629,058 23,518,682
Net Change in Repurchase Agreements 2,454,886 (8,156,710) 9,535,109
Proceeds from Federal Home Loan Bank 53,000,000 27,400,000 24,000,000
Repayment of Advances from Federal Home Loan Bank (28,900,000) (24,000,000) (32,000,000)
Net Changes in Short Term Other Borrowed Funds (12,891,737) 4,300,000 11,000,000
Proceeds from Sale of Capital Stock 129,696 61,828 38,988
Payments of Dividends (2,027,520) (1,473,700) (1,058,507)
Net Cash Provided by Financing Activities 11,969,082 24,058,259 33,330,262
PAGE
<PAGE>
Net Increase (Decrease) in Cash and Cash Equivalents 738,611 2,845,084 3,580,342
Cash and Cash Equivalents at Beginning of Year 12,559,797 9,714,713 6,134,371
Cash and Cash Equivalents at End of Year $13,298,408 $12,559,797 $ 9,714,713
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Year for:
Interest $11,322,353 $10,529,084 $ 8,283,462
Income Taxes, Net of Refunds $ 3,347,000 $ 2,596,679 $ 1,908,954
Non-Cash Transactions:
Transfer from Loans to Real Estate Owned (Other Assets) $ 214,945 $ 187,832 $ 434,381
Transfer of Securities from Held to Maturity to
Available for Sale N/A $ 5,578,826 N/A
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
PAGE
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1996, 1995, and 1994
1. Summary of Significant Accounting Policies
Business
Bar Harbor Bankshares, through its wholly owned subsidiary, Bar Harbor
Banking and Trust Company, provides a full range of banking services to
individual and corporate customers throughout eastern Maine. These banking
services are available in each of its ten branch locations. The Bank is
subject to the regulations of certain federal and state agencies and
undergoes periodic examination by those regulatory authorities.
Basis of Financial Statement Presentation
The financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the balance sheet and
revenues and expenses for the period. Actual results could differ
significantly 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 allowances for loan losses and
real estate owned, management obtains independent appraisals for significant
properties. A substantial portion of the Bank's loans are secured by real
estate in eastern Maine. In addition, all of the real estate owned is
located in those same markets. Accordingly, the ultimate ability to collect
on a substantial portion of the Bank's loan portfolio and the recovery of
the carrying amount on real estate owned are susceptible to changes in
market conditions in eastern Maine.
Certain amounts in 1995 and 1994 have been restated to conform with
the presentation in 1996.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Bar Harbor Bankshares and its wholly-owned subsidiary, Bar
Harbor Banking and Trust Company. Bar Harbor Banking and Trust Company has a
wholly-owned subsidiary, Mt. Desert Block Company, which leases premises to
the Bank. All intercompany balances and transactions have been eliminated in
the accompanying consolidated financial statements.
Cash
The Bank is required to comply with various laws and regulations of
the Federal Reserve Bank which require that the Bank maintain certain
amounts of cash on deposit and is restricted from investing those amounts.
The Bank maintains those balances at the Federal Reserve Bank of Boston.
Securities Available for Sale
Securities available for sale consist of certain securities to be held
for indefinite periods of time which are reported at fair value with
unrealized gains and losses reported as a separate component of
stockholders' equity, net of tax effect. Gains and losses on the sale of<PAGE>
securities available for sale are determined using the specific-
identification method and are shown separately in the statement of earnings.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity.
Securities to be Held to Maturity
Debt securities for which the Bank has the positive intent and ability
to hold to maturity are reported at cost, adjusted for amortization of
premiums and accretion of discounts which are recognized in interest income
using the interest method over the period to maturity.
Other Securities
Other securities include Federal Home Loan Bank Stock and Other non-
marketable securities carried at cost.
It is management's policy to acquire securities for long-term
investment purposes, rather than to acquire such securities for purposes of
trading. For this reason, the Bank has not classified any of its securities
as trading.
Loans Held for Sale
Loans held for sale are individual residential mortgage loans which
qualify for sale in the secondary market to the Federal Home Loan Mortgage
Corporation (Freddie Mac). These loans are closed and immediately sold
without recourse to Freddie Mac, with the Bank retaining loan servicing on
said loans. The Bank does not pool mortgages for sale. Because loans are
sold immediately, the cost is considered to approximate market value.
Loans
Interest on loans is accrued and credited to income based on the
principal amount of loans outstanding. The recording of interest income on
problem loan accounts is discontinued when collectibility within a
reasonable period of time becomes doubtful. Interest income on impaired
loans is reported on a cash basis when received.
Loan origination fees and certain direct loan origination costs are
deferred and recognized in interest income as an adjustment to the loan
yield over the life of the related loans. The Bank amortizes these amounts
using a method that approximates the effective yield. The unamortized net
deferred fees and costs are included on the balance sheet with the related
loan balances.
The allowance for loan losses is established through a provision for
loan losses charged to operations. Loan losses are charged against the
allowance when management believes that the collectibility of the loan
principal is unlikely. Recoveries on loans previously charged off are
credited to the allowance.
The allowance is an amount that management believes will be adequate
to absorb possible loan losses based on evaluation of their collectibility
and prior loss experience. The evaluation takes into consideration such
factors as changes in the nature and volume of the portfolio, overall
portfolio quality, specific problem loans, and current and anticipated
economic conditions that may affect the borrower's ability to pay.
While management uses available information to recognize losses on
loans, changing economic conditions and the economic prospects of the
borrowers may necessitate future additions to the allowance. In addition,
various regulatory agencies, as an integral part of their examination<PAGE>
process, periodically review the Bank's allowance for loan losses. Such
agencies may require the Bank to recognize additions to the allowance based
on their judgments about information available to them at the time of their
examination.
Impaired loans, including restructured loans, are measured at the
present value of expected future cash flows discounted at the loan s
effective interest rate, at the loan s observable market price, or the fair
value of the collateral if the loan is collateral dependent. Management
takes into consideration impaired loans in addition to the above mentioned
factors in determining the appropriate level of allowance for loan losses.
Premises and Equipment
Premises and equipment and related improvements are stated at cost
less accumulated depreciation. Depreciation is computed by the straight-line
and accelerated methods over the estimated useful lives of the related
assets. Repairs and maintenance charges are expensed as incurred.
Other Real Estate Owned (OREO)
Real estate acquired in satisfaction of a loan is reported in other
assets. Properties acquired by foreclosure or deed in lieu of foreclosure
are transferred to OREO and recorded at the lower of cost or fair market
value less estimated costs to sell based on appraised value at the date
actually or constructively received. Loan losses arising from the
acquisition of such property are charged against the allowance for loan
losses. OREO is stated at the lower of cost or market. An allowance for
losses on OREO is maintained for subsequent valuation adjustments on a
specific property basis.
Income Taxes
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets
or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.
Financial Instruments with Off-Balance Sheet Risk
The Bank uses off-balance sheet financial instruments as part of its
asset/liability management activities. The Bank does not intend to sell any
of these instruments.
Interest rate exchange agreements (swaps) are accounted for using the
accrual method. Net interest income (expense) resulting from the
differential between exchanging floating and fixed-rate interest payments is
recorded on a current basis.
Interest rate floors are contracts in which a floor is established at
a specified rate and period of time. The premium paid for the contract is
amortized over its life. Any cash payments received are recorded as an
adjustment to net interest income.
Statements of Cash Flows
For purposes of the statements of cash flows, the Bank considers cash
on hand, amounts due from banks, and federal funds purchased and sold for<PAGE>
one-day periods as cash and cash equivalents.
Earnings per Share
Earnings per share is calculated by dividing net earnings by the
number of weighted average shares outstanding for the year. There are no
common stock equivalents.
Fair Value Disclosures
The following methods and assumptions were used by the Bank in
estimating its fair market value disclosures for financial instruments:
Cash and Cash Equivalents: The carrying amounts reported in the
balance sheet for cash and cash equivalents approximate their fair values.
Securities available for sale, securities held to maturity and other
securities: Fair values for investment securities are based on quoted market
prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
Loans Receivable: Fair values are estimated for portfolios of loans
with similar financial characteristics. Loans are segregated by type such as
commercial, commercial real estate, residential mortgage, credit card, and
other consumer. Each loan category is also segmented into fixed and
variable rate interest terms and by performing and non-performing
categories.
Fair value of all performing loans is calculated by discounting
scheduled cash flows through the estimated maturity using estimated discount
market rates. These rates are based on independent market indices adjusted
for administrative costs and credit risk. Estimated maturity is based on the
weighted average of the portfolio. Real estate and installment maturities
are adjusted for estimates of prepayment rates, with high interest, longer
term loans prepaying at a more rapid rate.
Fair value for non-performing loans is determined on an individual
basis, taking into account management's plans regarding potential time to
resolution and subsequent sale of collateral and the borrower's plan for the
continuance of principal and interest payments along with the potential of
the borrower to rebuild equity in the loan collateral.
Deposits: The fair value of demand deposits, NOW accounts, and savings
accounts is the amount payable on demand. The fair value of fixed maturity
certificates of deposit is estimated using the rates currently offered in
the Bank's market for deposits of similar remaining maturities.
Borrowings: The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, and other short-term borrowings
maturing within 90 days approximate their fair values. Fair values of other
short-term borrowings are estimated using discounted cash flow analyses
based on the Bank's current incremental borrowing rates for similar types of
borrowing arrangements.
The fair values of the Bank's long-term borrowings (other than
deposits) are estimated using discounted cash flow analyses, based on quoted
market prices.
Accrued interest: The carrying amounts of accrued interest approximate
their fair values.<PAGE>
Off-Balance Sheet Instruments: The Bank's off-balance sheet
instruments include interest rate swaps, floors and loan commitments. Fair
values for interest rate swaps and floors are based on quoted market prices.
Fair values for loan commitments have not been presented as the future
revenue derived from such financial instruments is not significant.
Recent Accounting Pronouncements.
In October of 1994, FASB issued SFAS No. 119, Disclosure About
Derivative Financial Instruments and Fair Value of Financial Instruments.
SFAS 119 is limited to financial statement disclosures, and does not have an
impact on investments, net income, or retained earnings. The Company
adopted SFAS No. 119 on December 31, 1994.
In 1995, FASB issued SFAS No. 121, Accounting for Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS No. 121
establishes standards for recognizing and measuring impairment of long-lived
assets, certain identifiable intangibles, and goodwill. SFAS No. 121 does
not apply to long-term customer relationships of a financial institution.
The Company adopted the new standard in 1996. This standard did not have an
impact on assets, net income, or retained earnings.
SFAS No. 122, Accounting for Mortgage Servicing Rights, was issued
in May of 1995. Where mortgage loans are sold but the rights to service
those loans are retained by the creditor, the standard requires that the
total cost of such loans be allocated between the mortgage servicing rights
and the loans themselves based on their relative fair values. SFAS No. 122
also addresses measurement of impairment of the capitalized mortgage
servicing rights. The Company adopted SFAS No. 122 for all loans sold after
December 31, 1995, with servicing rights retained. This standard increased
assets, income, and retained earnings by a minimal amount.
SFAS No. 125 and No. 127 relate to the accounting for transfers and
servicing of financial assets and extinguishment of certain liabilities and
are effective for years beginning January 1, 1997. The adoption of these
standards is not expected to have a material effect on the financial
statements.<PAGE>
2. Investment Securities
The amortized cost of investment securities and their approximate
market values at December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION> 1996
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Obligations of U.S.
Gov t Agencies $13,500,733 $ 24,973 $188,675 $13,337,031
Mortgage Backed
Securities-U.S.
Gov t Agencies 5,430,506 0 0 5,430,506
Marketable Equity
Securities 610,021 6,875 0 616,896
Total Securities
Available for Sale $19,541,260 $ 31,848 $188,675 $19,384,433
HELD TO MATURITY:
Obligations of
U.S. Gov t Agencies $11,749,820 $130,493 $ 15,625 $11,864,688
Mortgage Backed
Securities-U.S.
Gov t Agencies 49,255,463 385,622 529,175 49,111,910
Mortgage Backed
Securities-Other 6,811,600 37,285 46,011 6,802,874
Obligations of States of
the U.S. and Political
Subdivisions thereof 12,391,860 373,394 0 12,765,254
Other Bonds 2,508,093 14,927 0 2,523,020
Total Securities
Held to Maturity $82,716,836 $941,721 $590,811 $83,067,746
</TABLE>
PAGE
<PAGE>
<TABLE>
<CAPTION> 1995
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
<S> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Obligations of
U.S. Gov t Agencies $ 7,996,732 $151,268 $ 2,840 $ 8,145,160
Mortgage Backed
Securities-U.S.
Gov t Agencies 5,631,356 0 52,530 5,578,826
Other Bonds 500,000 0 0 500,000
Total Securities
Available for Sale $14,128,088 $151,268 $ 55,370 $14,223,986
HELD TO MATURITY:
U.S. Treasury
Obligations $ 1,000,470 $ 20,155 0 $ 1,020,625
Obligations of other
U.S. Gov t Agencies 13,278,651 124,108 0 13,402,759
Mortgage Backed
Securities-U.S.
Gov t Agencies 42,764,250 501,793 253,174 43,012,869
Mortgage Backed
Securities-Other 8,210,646 43,805 60,941 8,193,510
Obligations of States of
the U.S. and Political
Subdivisions Thereof 13,240,946 535,379 4,850 13,771,475
Other Bonds 3,714,099 65,369 0 3,779,468
Total Securities Held to Maturity $82,209,062 $1,290,609 $318,965 $83,180,706
</TABLE>
At December 31, 1996, the amortized cost and estimated market value of
securities held to maturity and those securities available for sale (other
than marketable equity securities) are shown below. Actual maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
PAGE
<PAGE>
Securities Available for Sale
<TABLE>
<CAPTION>
<S> <C> <C>
Estimated
Amortized Cost Market Value
Due after five years through ten years $11,500,733 $11,406,406
Due after ten years 2,000,000 1,930,625
Mortgage-backed Securities 5,430,506 5,430,506
$18,931,239 $18,767,537
<CAPTION>
Securities Held to Maturity
Estimated
Amortized Cost Market Value
Due in one year or less $ 7,643,755 $ 7,694,670
Due after one year through five years 13,181,198 13,647,823
Due after five years through ten years 3,999,820 3,985,469
Due after ten years 1,825,000 1,825,000
Mortgage-backed Securities 56,067,063 55,914,784
$82,716,836 $83,067,746
</TABLE>
There were no sales of securities available for sale or held to
maturity in 1996 or 1995. In 1994, sales of securities available for sale
resulted in gross losses of $388,450, and the sale of a called security in
the held to maturity portfolio resulted in a gross gain of $7,500.
U.S. Government securities having a carrying value of approximately
$17,300,000 at December 31, 1996, and $14,200,000 at December 31, 1995, are
pledged to secure certain deposits and for other purposes as required by
law. Market values for these securities at December 31,1996 and 1995 were
$17,300,000 and $14,300,000, respectively.
On December 31, 1995, the Bank made a one-time transfer of securities
at market value totaling $5,578,826 in accordance with the Financial
Accounting Standards Board implementation guidance issued in November of
1995. These securities were government sponsored mortgage-backed securities
which had put options. In order for the Bank to exercise its right to put
these securities, they were transferred to the available for sale portion
of the investment portfolio. This transfer resulted in an unrealized loss
of $52,530.
3. Loans
The following table shows the composition of the Bank s loan
portfolio as of December 31, 1996, and 1995:
<TABLE>
<CAPTION> 1996 1995
<S> <C> <C>
Commercial Loans:
Real Estate - Variable Rate $ 49,377,246 $ 51,418,512
Real Estate - Fixed Rate 9,606,828 6,799,363
Other - Variable Rate 33,914,543 31,189,164
Other - Fixed Rate 11,644,027 13,292,822<PAGE>
104,542,644 102,699,861
Tax Exempt:
Variable Rate 712,001 848,796
Fixed Rate 2,117,398 2,568,115
2,829,399 3,416,911
Consumer:
Real Estate - Variable Rate 43,880,585 38,210,273
Real Estate - Fixed Rate 31,590,846 27,569,246
Home Equity 12,619,941 13,003,486
Installment 11,334,568 11,080,331
Other 5,431,805 5,501,279
104,857,745 95,364,615
Real Estate Under Foreclosure 320,147 793,887
Deferred Origination Fees, Net (589,887) (509,557)
Allowance for Loan Losses (4,292,995) (4,047,883)
$207,667,053 $197,717,834
</TABLE>
At December 31, 1996 and 1995, loans on non-accrual status totaled
$3,541,000 and $3,360,000, respectively. Interest income not recognized on
non-accruing loans was $313,584, $416,342, and $367,553, in 1996, 1995, and
1994, respectively. In addition to loans on non-accrual status at December
31, 1996 and 1995, the Bank had loans past due greater than 90 days
totaling $732,791 and $849,127, respectively. The Bank continues to accrue
interest on these loans because it believes collection of the interest due
is reasonably assured.
The Bank makes single-family and multi-family residential loans,
commercial real estate loans, commercial loans, and a variety of consumer
loans. The Bank s lending activities are conducted in eastern Maine.
Because of the Bank s proximity to Acadia National Park, a large part of
the economic activity in the area is generated from the hospitality
business associated with tourism. At December 31, 1996, approximately
$28,000,000 of loans were made to companies in the hospitality industry.
Loans to those in the fishing industry totaled $10,000,000 in 1996. The
loan portfolio at December 31, 1996 and 1995 consisted of 68% and 62%,
respectively, of variable rate loans.
From the standpoint of large loans to single borrowers, loans of
$700,000 or more to one borrower increased as a percentage of stockholders
equity to 94% in 1996 from 90% in 1995. As most loans granted by the Bank
are collateralized by real estate, the ability of the Bank s borrowers to
repay is dependent on the level of economic activity and the level of real
estate values in the Bank s market area.
PAGE
<PAGE>
4. Allowance for Loan Losses
Changes in the allowance for loan losses for each of the three years
ended December 31 were as follows:
<TABLE>
<CAPTION> 1996 1995 1994
<S> <C> <C> <C>
Balance, Beginning of Year $4,047,883 $3,891,835 $3,369,387
Provision for Loan Losses 720,000 960,000 960,000
Loans Charged Off 711,443 900,845 578,776
Less Recoveries on Loans
Previously Charged Off 236,555 96,893 141,224
Net Loans Charged Off 474,888 803,952 437,552
Balance, End of Year $4,292,995 $4,047,883 3,891,835
</TABLE>
Information regarding impaired loans is as follows for December 31,
1996 and 1995:
<TABLE>
<CAPTION> 1996 1995
<S> <C> <C>
Average investment in impaired loans $1,882,000 $1,629,600
Interest income recognized on impaired
loans including interest income
recognized on cash basis $ 108,000 $ 76,300
Balance of impaired loans $2,195,800 $1,664,700
Less portion for which no allowance for
loan losses is allowed $ 0 $ 0
Portion of impaired loan balance for
which an allowance for credit losses
is allocated $2,195,800 $1,664,700
Portion of allowance for loan losses
allocated to the impaired loan balance $ 128,400 156,600
</TABLE>
5. Loans to Related Parties
In the ordinary course of business, the Bank had granted loans to
certain officers and directors and the companies with which they are
associated. All such loans and commitments to lend were made under terms
that are consistent with the Bank s normal lending policies.
Loans to related parties at December 31, 1996 and 1995, which in
aggregate exceed $60,000 were as follows:
<TABLE>
<CAPTION> 1996 1995
<S> <C> <C>
Beginning Balance $3,279,479 $3,409,868
New Loans 912,044 349,935
Less: Repayments 384,968 480,324
Ending Balance $3,806,555 $3,279,479
</TABLE>
PAGE
<PAGE>
6. Premises and Equipment
The detail of premises and equipment is as follows:
<TABLE>
<CAPTION> 1996 1995
<S> <C> <C>
Land $ 561,181 $ 519,136
Buildings and Improvements 6,895,796 6,655,925
Furniture and Equipment 3,506,791 2,365,744
Less: Accumulated Depreciation 3,465,722 3,321,236
$7,498,046 $6,219,569
</TABLE>
7. Other Real Estate
The following table summarizes the composition of other real estate
owned, which is included in other assets:
<TABLE>
<CAPTION> December 31
<S> <C> <C>
1996 1995
Real Estate Properties and Other Assets $ 293,019 $ 469,652
Less: Allowance for Losses 22,589 26,000
$ 270,430 $ 443,652
</TABLE>
Changes in the allowance for other real estate for each of the three
years ended December 31 were as follows:
<TABLE>
<CAPTION> 1996 1995 1994
<S> <C> <C> <C>
Balance, beginning of year $ 26,000 $ 30,486 $ 53,286
Provision charged to income 6,720 19,056 1,800
Losses charged to provision 10,131 23,542 24,600
Balance, end of year $ 22,589 $ 26,000 $ 30,486
</TABLE>
8. Deposits
The aggregate amount of short-term jumbo certificates of deposit,
each with a minimum denomination of $100,000, was $14,611,616 and
$14,005,187 in 1996 and 1995, respectively.
At December 31, 1996, the scheduled maturities of time deposits are
as follows:
<TABLE>
<S> <C>
1997 $ 92,796,475
1998 15,345,658
1999 2,575,260
2000 986,318
2001 and thereafter 440,347
Individual Retirement Accounts
(IRAs), without scheduled maturities 9,997,750
$122,141,808
</TABLE>
PAGE
<PAGE>
9. Repurchase Agreements
Federal funds purchased and securities sold under agreements to
repurchase generally mature within one to four days from the transaction
date.
Information concerning securities sold under agreements to repurchase
is summarized as follows:
<TABLE>
<C> <C>
Average daily balance during the year $ 7,692,790
Average interest rate during the year 3.93%
Maximum month-end balance during the year 15,948,259
Securities underlying the agreements at year
end were under the Bank s control and were
as follows:
Carrying value $14,295,000
Estimated fair value $14,351,000
</TABLE>
10. Borrowings from the Federal Home Loan Bank (FHLB)
A summary of borrowings from the FHLB is as follows:
<TABLE>
<CAPTION>
Total Range of Maturity
Principal Interest Rates
<S> <C> <C>
December 31, 1996
$30,500,000 5.38% to 5.90% 1997
2,000,000 5.26% 1998
5,000,000 5.75% to 6.05% 1999
6,408,263 5.48% to 6.10% 2001
$43,908,263
December 31, 1995
$26,700,000 5.70% to 5.92% 1996
6,000,000 5.59% to 5.78% 1997
$32,700,000
</TABLE>
In addition to the above outstanding borrowings, other FHLB funds
available to the Bank at December 31, 1996, totaled approximately
$41,000,000. Pursuant to collateral agreements with the FHLB, advances are
collateralized by all stock in the FHLB and qualifying first mortgage
loans.
11. Income Taxes
The current and deferred components of income tax expense were as
follows:
<TABLE>
<CAPTION> 1996 1995 1994
<S> <C> <C> <C>
Current
Federal $2,877,100 $2,474,000 $2,327,200
State 94,700 85,400 74,000
2,971,800 2,559,400 2,401,200
Deferred 72,400 56,580 (305,200)
$2,899,400 $2,615,980 $2,096,000<PAGE>
/TABLE
<PAGE>
The actual tax expense differs from the expected tax expense computed
by applying the applicable U.S. Federal corporate income tax rate to
earnings before income taxes as follows:
<TABLE>
<CAPTION> 1996 1995 1994
<S> <C> <C> <C>
Computed Tax Expense $3,266,800 $2,888,200 $2,383,500
Increase (reduction) in income taxes
resulting from:
Officers life insurance (88,300) (33,985)
Tax-Exempt Interest (289,600) (329,300) (330,900)
State Taxes, Net of Federal Benefit 625,000 56,400 48,800
Other (52,000) 34,665 (5,400)
$2,899,400 $2,615,980 $2,096,000
</TABLE>
The tax effect of temporary differences that give rise to deferred income
tax assets and liabilities are as follows:
<TABLE>
<CAPTION> 1996 1995
Asset Liability Asset Liability
<S> <C> <C> <C> <C>
Allowance for possible losses on loans and
other real estate owned $1,140,300 $1,237,700
Capital loss carried forward 124,400
Deferred loan origination fees 89,300 102,700
Deferred compensation 302,700 256,400
Core deposit intangible asset 88,000 105,800
Nonaccrual interest 119,900 49,900
Postretirement benefit obligation 651,400 636,000
Unrealized appreciation (depreciation)
on securities available for sale 53,300 $ 32,600
Depreciation $ 167,700 106,300
Other 22,400 46,200 37,400 58,800
$ 2,591,700 $ 213,900 $2,425,900 $197,700
</TABLE>
As of December 31, 1996 and 1995, the deferred income tax asset
amounted to $2,377,800 and $2,228,200, respectively, and is included in
other assets on the balance sheet. No valuation allowance for deferred
taxes was required at December 31, 1996 or 1995.
12. Stockholders Equity
On July 11, 1995, the Board of Directors declared a five-for-one stock
split to all shareholders of record as of that date and which took effect on
August 7, 1995. All share and per share data included in this annual report
have been restated to reflect the stock split.
Bar Harbor Bankshares subsidiary, Bar Harbor Banking and Trust
Company, has the ability to pay dividends to the parent subject to
regulatory capital requirements. At December 31, 1996, the amount available
for dividends was approximately $23,500,000.<PAGE>
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken could have a direct
material effect on the Bank s financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative
measures of the Bank s assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. The Bank s
capital amounts and classification are also subject to qualitative
judgements by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth
in the table below) of total and Tier I capital to risk weighted assets and
average assets. Management believes, as of December 31, 1996, that the Bank
exceeds all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the federal
regulators categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I risk-
based, and Tier I leverage ratios as set forth in the following table.
There are no conditions or events since that notification that management
believes have changed the institution s category.
The Bank s actual capital amounts and ratios are also presented in the
following table.
<TABLE>
<CAPTION> For Bar Harbor For Bar Harbor To Be Well
Bankshares Banking and Trust Capitalized Under
Consolidated Co. Bank Only For Capital Prompt Corrective
Actual Actual Adequacy Purposes Action Provisions:
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As of December 31, 1996
Total Capital
(To Risk Weighted Assets) $40,653,472 19.1% $39,946,491 18.6% >$17,039,204 8.0% >$21,299,005 10.0%
Tier I Capital
(To Risk Weighted Assets) $37,990,430 17.8% $37,283,799 17.5% >$ 8,519,602 4.0% >$12,779,403 6.0%
Tier I Capital
(To Average Assets) $37,990,430 11.4% $37,283,799 11.2% >$13,278,850 4.0% >$16,598,563 5.0%
As of December 31, 1995:
Total Capital
(To Risk Weighted Assets) $35,981,035 17.0% $35,207,909 16.5% >$16,910,794 8.0% >$21,138,493 10.0%
Tier I Capital
(To Risk Weighted Assets) $33,338,723 15.8% $32,565,597 15.3% >$ 8,455,397 4.0% > 12,683,096 6.0%
Tier I Capital
(To Average Assets) $33,338,723 10.0% $32,565,597 10.5% >$12,444,491 4.0% > 15,555,614 5.0%
</TABLE>
PAGE
<PAGE>
13. Employee Benefit Plans
The Company has two non-qualified supplemental retirement plans for
certain officers. The agreement provides supplemental retirement benefits
payable in installments over a period of years upon retirement or death.
The Company recognizes the costs associated with the agreements over the
service lives of the participating officers. For 1996, 1995 and 1994, the
expense of these supplemental plans was $117,998, $110,177 and $379,811,
respectively.
401(k) Plan
The Bank has a contributory 401(k) plan available to full-time
employees. Employees may contribute between 1% and 15% of their
compensation, to which the Bank will match 25% of the first 6% contributed.
For the years ended December 31, 1996, 1995, and 1994, the Bank contributed
$51,979, $46,637, and $42,590, respectively. In 1994, the Bank established
a non-contributory plan in place of the Bank s contribution to the former
defined benefit plan. The Board of Directors voted to credit each eligible
participant s 401(k) account with 3% of 1996, 1995, and 1994 salary. The
total contribution made for the non-contributory plan was $128,014, $122,486
and $113,432 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Restricted Stock Purchase Plan
In 1996, 1995, and 1994, the Bank provided a restricted stock purchase
plan through which each employee may purchase up to 100 shares of Bar Harbor
Bankshares stock at the current fair market price as of a date determined by
the Board of Directors. These shares may be purchased through direct
purchase or through the employees 401(k) accounts.
At December 31, 1996, employees exercised their right to purchase
2,346 shares at $38.25 per share, with the actual purchase transpiring in
January of 1997. At December 31, 1995, employees exercised their right to
purchase 4,632 shares at $28.00 per share, with the actual purchase
transpiring in January of 1996.
14. Postretirement Benefits
The Company sponsors a postretirement benefit plan which provides
medical and life insurance coverage to all eligible employees. The cost of
providing these benefits is accrued during the active service period of the
employee. Net periodic postretirement benefit cost includes the following
components:
<TABLE>
<CAPTION> 1996 1995 1994
<S> <C> <C> <C>
Service Costs of Benefits Earned $ 18,113 $17,326 $ 38,200
Interest Cost on accumulated
Postretirement Benefit Obligation 100,878 99,693 128,000
Amortization (50,608) (48,198) 0
Net Periodic Postretirement
Benefit Cost $ 68,383 $68,821 $166,200
</TABLE>
It is the Company s policy to fund the cost of postretirement health
care and life insurance plans as claims and premiums are paid.
PAGE
<PAGE>
The accrued postretirement benefit cost recognized in the Company s balance
sheet at December 31, 1996 and 1995, was as follows:
<TABLE>
<CAPTION> 1996 1995
<S> <C> <C> <C>
Retirees $ 698,000 $ 595,000
Fully Eligible Active Plan Participants 416,000 511,000
Other Active Participants 244,000 231,000
Accumulated Postretirement Benefit
Obligation (APBO) 1,358,000 1,337,000
Unamortized gains 529,000 531,000
Accrued Postretirement Benefit Cost $1,887,000 $1,868,000
</TABLE>
The accumulated postretirement benefit obligation was determined using
an 8.0% weighted average discount rate and an assumed compensation increase
of 6.0%. The health care cost trend rates were assumed to be 12% in 1996,
gradually declining to 6% after 10 years and remaining at that level
thereafter. An increase in the health care trend of 1% would increase the
APBO by approximately $115,000 and the net periodic cost by $19,000.
15. Other Operating Expense
Other operating expense includes the following items greater than 1%
of revenues:
<TABLE>
<CAPTION> 1996 1995 1994
<S> <C> <C> <C>
Merchant Credit Card Expenses $534,963 $551,835 $541,874
Financial Services $386,380 $315,020 $110,241
</TABLE>
16. Financial Instruments
The Bank is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to originate loans and
standby letters of credit, interest rate swap agreements and an interest
rate floor. Involved in these instruments, to varying degrees, are elements
of credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheet. The contract or notional amounts of those
instruments reflect the extent of the involvement the Bank has in particular
classes of financial instruments.
Commitments to originate loans are agreements to lend to a customer
provided there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Bank evaluates each
customer s creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management s credit evaluation of the borrower.
The Bank s exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual notional<PAGE>
amount of those instruments. The Bank uses the same credit policies in
making commitments and conditional obligations as it does for its balance
sheet instruments. For interest rate floor and swap transactions, the
contract or notional amounts do not represent exposure to credit loss. The
Bank controls the credit risk of its interest rate swap agreements through
credit approvals, limits, and monitoring procedures. The structure the Bank
had entered into is a fixed versus floating interest rate swap. The Bank
receives interest payments at a fixed rate and makes payments at a variable
rate.
The notional or contract amount for financial instruments with off-
balance sheet risk are:
<TABLE>
<CAPTION> 1996 1995
<S> <C> <C>
Commitments to Originate Loans $14,424,586 $18,651,233
Unused Lines and Standby Letters of Credit 27,228,342 23,819,468
Unadvanced Portions of Construction Loans 5,275,045 3,633,545
Interest Rate Swaps 5,000,000 10,000,000
Interest Rate Floor 10,000,000 10,000,000
</TABLE>
The estimated fair values of the Bank s financial instruments were as
follows:
<TABLE>
<CAPTION> December 31, 1996 December 31, 1995
<S> <C> <C> <C> <C> <C>
Carrying Fair Value Carrying Fair Value
Financial Assets:
Cash & cash equivalents $ 13,298,408 $ 13,298,408 $ 12,559,797 $ 12,559,797
Securities available for sale 19,384,433 19,384,433 14,223,986 14,223,986
Securities held to maturity 82,716,836 83,067,746 82,209,062 83,180,706
Other securities 5,623,639 5,623,639 5,661,569 5,661,569
Loans receivable 207,667,053 216,303,451 197,717,834 207,840,000
Interest receivable 2,663,860 2,663,860 2,479,894 2,479,894
Financial Liabilities:
Deposits 251,675,158 251,695,622 251,471,401 251,962,679
Borrowings 43,908,263 43,678,267 32,700,000 32,720,324
</TABLE>
Off-Balance Sheet Instruments:
<TABLE>
<CAPTION> December 31, 1996
Notional Contract Maturity Market
Principal Date Date Value
<S> <C> <C> <C> <C>
SWAPS $ 5,000,000 May 4, 1993 May 4, 1998 $ 40,028
FLOOR $10,000,000 Sept. 3, 1994 June 3, 1999 ($23,707)
<CAPTION>
December 31, 1995
SWAPS $ 5,000,000 May 4, 1993 May 4, 1998 ($16,392)
5,000,000 May 2, 1994 May 5, 1996 2,504
10,000,000 ($13,888)
FLOOR $10,000,000 Sept. 3, 1994 June 3, 1999 $124,417<PAGE>
</TABLE>>
17. Parent Only Condensed Financial Statements
The condensed financial statements of Bar Harbor Bankshares as of
December 31, 1996, and 1995, and for each of the three years in the period
ended December 31, 1996, are presented below:
<TABLE>
<CAPTION> Balance Sheets December 31, 1996 and 1995
1996 1995
<S> <C> <C>
Cash $ 706,631 $ 575,255
Investment in Subsidiary 37,180,294 32,667,569
Total Assets 37,886,925 $33,242,824
Stockholders Equity 37,886,925 $33,242,824
</TABLE>
<TABLE>
<CAPTION>
Statement of Earnings Years Ended December 31, 1996, 1995, and 1994
1996 1995 1994
<S> <C> <C> <C>
Dividend Income from Subsidiary $ 2,029,200 $1,560,000 $1,389,000
Equity in Undistributed Earnings
of Subsidiary 4,679,523 4,318,647 3,525,151
$ 6,708,723 $5,878,647 $4,914,151
</TABLE>
<TABLE>
<CAPTION> Statements of Cash Flows Years Ended December 31, 1996, 1995, and 1994
<S> <C> <C> <C>
1996 1995 1994
Cash Flows from Operating Activities:
Net Income $ 6,708,723 $5,878,647 $4,914,151
Adjustment to Reconcile Net Earnings to
Net Cash Provided by Operating Activities:
Equity in Undistributed Earnings of
Subsidiary (4,679,523) (4,318,647) (3,525,151)
Net Cash Provided by Operating Activities 2,029,200 1,560,000 1,389,000
Cash Flows from Financing Activities:
Proceeds from Sale of Stock 129,696 61,828 38,988
Dividends Paid
(2,027,520) (1,473,700) (1,265,278)
Net Cash Used in Financing
activities (1,897,824) (1,411,872) (1,226,290)
Net Increase (Decrease) in Cash 131,379 148,128 162,710
Cash, Beginning of Year 575,255 427,127 264,417
Cash, End of Year $ 706,631 $ 575,255 $ 427,127
</TABLE>
PAGE
<PAGE>
Employees
Gale L. Abbott
Paul G. Ahern
Julie A. Archer
Lynn L. Archer
Beverly A. Arsenault
June G. Atherton
Cheryl L. Bagley
Debra L. Baker
Michelle R. Bannister
Wilbur L. Beam
Karen R. Bean
Marcia T. Bender
Terry D. Bickford
Edwin A. Bonenfant
Melanie J. Bowden
Laura A. Bridges
Charlene M. Bucklin
Richard A. Burgess
Eleanor B. Butters
Brenda E. Colwell
Paula S. Colwell
Gregory J. Corra
Jennifer L. Crossman
Sylvia B. Cunningham
Patricia J. Curtis
Stacy L. DaGraca
Gregory W. Dalton
Laura H. Danielson
Angela J. Davis
Charlene G. Davis
Donna L. Day
Tara J. Day
Cynthia M. Delfin
Ann DeLill
Margaret A. Deluca
Richard S. Douglas
Cheryl L. Dow
Marilyn H. Dow
Kathleen S. Driscoll
Hollie A. Dunbar
Dwight L. Eaton
Gary N. Eaton
Julie M. Eaton
Corrie A. Eroh
Pamela J. Farnsworth
Rhonda L. Farnsworth
Robin K. Foskett
Judith W. Fuller
Faye A. Geel
Jeffery R. Geagan
Mischelle E. Gehan
John F. Gibbons, Jr.<PAGE>
Sheldon F. Goldthwait, Jr.
John B. Gooch
Keith N. Goodrich
Marjorie E. Gray
Sharon A. Grindle
Annette J. Guertin
Carla A. Hall
Kelton I. Hallett
Tracy L. Hallett
Marie E. Hardie
Christine L. Harding
Barbara W. Harmon
Karen H. Hartt
Marlene S. Haskell
Elizabeth J. Haynes
Robin L. Hennigan
Barbara F. Hepburn
Kathryn W. Heyner
Margaret K. Hill
Brenda M. Hitchcock
Katherine R. Hollis
Patricia A. Howard
E. Ray Huntley
Jane L. Iverson
Valorie D. Jandreau
Beth A. Jewell
Sandra K. Jones
Kelly M. Jordan
Maureen E. Kane
Michelle A. Kelley
Johanna E. Kenney
Paula M. Lamoureux
Laurie-An Lanpher
Kenneth N. Larrabee
Sandra J. Lawson
Andrea G. Leonard
Marlene A. Lloyd
H. Stanley MacDonald
Jennifer D. Madore
M. Joseph Marshall
Ann C. McCafferty
Diane M. McFeat
Tristan J. McKenney
Mary Anne Merchant
Gloria J. Merrill
Maryjane Miltner
Debra S. Mitchell
Sherry A. Mitchell
Tanya E. Moon
Jennifer G. Mott
Donna C. Murley
Tamera A. Murphy
Dawn B. Nason
Judith L. Newenham<PAGE>
Mary E. Newman
Brenda H. Norwood
Alexandra Orcutt
Jane M. Parker
Lisa L. Parsons
Lewis H. Payne
Lori A. Peakall-Cote
Wendyl J. Pedrone
Carol J. Pelletier
Bonita E. Poitras
Bonnie A. Poland
Jane A. Ramsdell
Mary C. Ratner
Wendy S. Reynolds
Taffy W. Richardson
Wanda S. Ring
Debra R. Sanner
Marsha C. Sawyer
Rhonda L. Sawyer
Theresa M. Sawyer
Jenene J. Schneider
Geddes W. Simpson, Jr.
Marcia L. Slater
Lisa L. Smith
Michael E. Smith
Andrea L. Snow
Stephen H. Sprague
Ellen F. Stanley
Lottie B. Stevens
Wendy S. Stiles
Linda B. Stratton
Brenda G. Strout
Karen M. Tainter
Michael D. Thompson
Rebecca K. Thompson
Charlene H. Tibbetts
Terry E. Tracy
Virginia M. Vendrell
Nancy J. Warner
Dianne L. Watson
Thomas H. Watson
Cheri R. Wentworth
Doris E. Williams
Tuesdi J. Woodworth
Felice D. Worcester
Carolyn A. Wright
Edward P. Wynn, Sr.
J. Christopher Young
Lolly M. Ziobro <PAGE>
Bar Harbor Bankshares
Chairman of the Board Robert L. Gilfillan
President Sheldon F. Goldthwait, Jr.
Executive Vice President Lewis H. Payne
Vice President Dwight L. Eaton
Treasurer Virginia M. Vendrell
Clerk Marsha C. Sawyer<PAGE>
Photograph: Executive Officers
Caption: L. to R.: Margaret K. Hill, Lewis H. Payne, Marsha C. Sawyer,
Marlene S. Haskell, Felice D. Worcester, Sheldon F. Goldthwait, Jr.,
Virginia M. Vendrell, Dwight L. Eaton.
Bar Harbor Banking and Trust Company
Management
President and Chief Executive Officer
Sheldon F. Goldthwait, Jr.*
Executive Vice President
Lewis H. Payne*
Senior Vice President, Treasurer and
Chief Financial Officer
Virginia M. Vendrell*
Vice Presidents
Gregory W. Dalton
Marlene S. Haskell*
Margaret K. Hill*
H. Stanley MacDonald
Marsha C. Sawyer*
Michael E. Smith
Stephen H. Sprague
Felice D. Worcester*
Assistant Vice President
Andrea G. Leonard
Loan Officer
Carla A. Hall
Assistant Treasurer
Tuesdi J. Woodworth
Auditor
Kathleen S. Driscoll
Lottie B. Stevens
Compliance Manager and Underwriter
Jeffery R. Geagan
Technology Operations Manager
Trust Department
Senior Vice President and Trust Officer
Dwight L. Eaton*
Vice Presidents and Trust Investment<PAGE>
Officers
Paul G. Ahern
Edwin A. Bonenfant
Vice Presidents and Trust Officers
Richard S. Douglas
Geddes W. Simpson, Jr.
Trust Officer
Faye A. Geel
Trust Operations Officer
Charlene H. Tibbetts
Assistant Trust Officer
Brenda G. Strout Branch Management
Blue Hill
Patricia J. Curtis
Assistant Vice President
Sharon A. Grindle
Assistant Manager
Deer Isle
Linda B. Stratton
Banking Officer
Ellsworth
E. Ray Huntley
Regional Vice President
Michelle R. Bannister
Assistant Vice President
Lubec
Angela J. Davis
Manager
Machias
Richard A. Burgess
Vice President
Jane A. Ramsdell
Manager
Milbridge
Jenene J. Schneider
Banking Officer
Paula S. Colwell
Assistant Manager
Northeast Harbor
Charlene M. Bucklin<PAGE>
Manager
Southwest Harbor
John F. Gibbons, Jr.
Banking Officer
Dianne L. Watson
Assistant Manager
Winter Harbor
Judith L. Newenham
Manager
*Executive Officers<PAGE>
Photograph: Board of Directors
Caption: Standing L. to R.: Thomas A. Colwell, John P. Reeves, Peter Dodge,
Robert M. Phillips, Robert C. Carter, John P. McCurdy, Dwight L. Eaton,
Jarvis W. Newman, Sheldon F. Goldthwait, Jr. Seated: Abner L. Sargent,
Robert L. Gilfillan, Ruth S. Foster, Bernard K. Cough, Lawrence L. Dorr,
Frederick F. Brown, Lynda Z. Tyson, James C. MacLeod
Bar Harbor Bankshares and Bar Harbor Banking and Trust Company
Board of Directors
Robert L. Gilfillan - Chairman of the Board
Bar Harbor
Frederick F. Brown
Northeast Harbor
Robert C. Carter
Machias
Thomas A. Colwell
Deer Isle
Bernard K. Cough
Bar Harbor
Peter Dodge
Blue Hill<PAGE>
Dwight L. Eaton
Bar Harbor
Ruth S. Foster
Ellsworth
Sheldon F. Goldthwait, Jr.
Bar Harbor
James C. MacLeod
Bar Harbor
John P. McCurdy
Lubec
Jarvis W. Newman
Southwest Harbor
Robert M. Phillips
Milbridge
John P. Reeves
Bar Harbor
Abner L. Sargent
Ellsworth
Lynda Z. Tyson
Bar Harbor
Annual Meeting
Bar Harbor Bankshares
Tuesday, October 7, 1997, 11:00 a.m.
The Bank will provide, without charge, upon written request, a copy of Bar
Harbor Bankshares Annual Report to the Securities and Exchange Commission,
Form 10-K. The Bank will also provide, upon request, Annual Disclosure
Statements for the Bar Harbor Banking and Trust Company as of December 31,
1996.
Please contact:
Marsha C. Sawyer, Clerk
Bar Harbor Bankshares
P O Box 400
Bar Harbor, ME 04609-0400<PAGE>
Inside Back Cover
Artist s drawing of Robert H. Avery
Caption: Robert H. Avery
1928 - 1996
This Annual Report is dedicated to Robert H. Avery with admiration and
appreciation for 43 years of outstanding service to Bar Harbor Banking and
Trust Company, its employees, customers and communities.
Bob joined the Bank in 1953 fresh out of the Marines and with a degree from
Bowdoin College. He held nearly every job in the Bank, from the mail room to
Member of the Board. Bob was a student of banking and the economy, a
defender of individual liberties, and a contrarian who could be counted on
to challenge authority. He was also fiercely proud of his family, his Bank,
and his Lubec heritage.
We wish to thank Bob for inspiring us as individuals and as a Bank to ever
greater achievements, and for his all-consuming interest in the people,
towns and businesses in our service area. In memoriam, the Board of
Directors has established a scholarship in Bob s name to be awarded annually
to a graduate of Lubec High School. We will miss Bob as a banker, motivator
and friend.<PAGE>
Back Cover
Bar Harbor Bankshares
1996
Annual Report
Bar Harbor Bankshares
P. O. Box 400
Bar Harbor, ME 04609-0400<PAGE>
