UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarter ended September 30, 1997 Commission
File No. 841105-D
BAR HARBOR BANKSHARES
Maine 01-0393663
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization
Identification No.)
P. O. Box 400
82 Main Street, Bar Harbor, ME 04609-
0400
(Address of principal executive offices) (Zip
Code)
Registrant's telephone number, including area code: (207) 288-
3314
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES: XX
NO:
Indicate the number f shares outstanding of each of the issuer's
classes of common stock as of September 30, 1997:
Common Stock: 1,820,583
TABLE OF CONTENTS
Financial Information Page
Item 1. Financial Statements
Consolidated Balance Sheets 3-4
December 31, 1996 and September 30, 1997
Consolidated Statements of Earnings 5
Three months and nine months ended September 30,
1996
and 1997
Consolidated Statements of Changes in Stockholders' 6
Equity
Nine months ended September 30, 1996 and 1997
Consolidated Statement of Cash Flows 7-8
Nine months ended September 30, 1996 and 1997
Rate Volume Analysis 9
Nine months ended September 30, 1996 and 1997
Rate Sensitivity Report 10
As of September 30, 1997
Notes to Financial Statements 11-14
Item II. Management's Discussion and Analysis of 15-20
Financial
Condition and Results of Operations
Signature Page 21
BAR HARBOR BANKSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER
1997 31, 1996
<S> <C> <C>
ASSETS
Cash and Due from Banks $11,848,684 $11,298,408
Federal Funds Sold 0 2,000,000
Investment Securities 19,594,802 19,384,433
Securities Available for Sale,
at market
Securities Held to Maturity
(Market Value 84,259,797 82,716,836
$84,937,139 in 1997 and
$85,503,679 in 1996)
Other Securities 5,992,156 5,623,639
Loans Held for Sale 154,600 336,540
Loans, net of allowance for
possible loan losses 215,646,132 207,667,053
of $4,470,196 in 1997 and
$4,249,128 in 1996
Premises and Equipment 7,755,035 7,498,046
Other Assets 8,493,200 8,617,790
Total Assets $353,744,406 $345,142,74
5
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand Deposits $42,184,730 $35,918,779
NOW Accounts 41,893,275 40,529,509
Savings Deposits 54,306,807 53,085,062
Time, $100,000 and over 14,716,135 14,611,616
Other Time 109,696,865 107,530,192
Total Deposits 262,797,812 251,675,158
Securities sold under Repurchase 6,150,441 8,246,079
Agreements
Advances from Federal Home Loan 39,351,495 43,908,263
Bank
Other Liabilities 4,225,978 3,426,320
Total Liabilities 312,525,726 307,255,820
Commitments and Contingent Liabilities
Capital Stock, par value $2
Authorized 10,000,000 shares
Issued 1,820,583 in 1997 and
1,818,237 in 1996 3,641,166 3,636,474
Surplus 7,574,170 7,489,127
Retained Earnings 31,368,973 28,204,829
Net unrealized appreciation on
securities available (25,629) (103,505)
for sale, net of tax benefit
Less: Cost of 100,000 shares of (1,340,000) (1,340,000)
Treasury Stock
TOTAL STOCKHOLDERS' EQUITY 41,218,680 37,886,925
TOTAL LIIABILITIES AND STOCKHOLDERS' $353,744,406 $345,142,74
EQUITY 5
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
BAR HARBOR BANKSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENT OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE THREE NINE NINE
MONTHS MONTHS MONTHS MONTHS
ENDING ENDING ENDING ENDING
09/30/97 09/30/96 09/30/97 09/30/96
<S> <C> <C> <C> <C>
Interest & Fees on $5,506,167 $5,150,807 $15,708,9 $1,147,611
Loans 18
Interest and
Dividends on
Investment 1,577,767 1,581,668 4,788,011 4,498,022
Securities:
Taxable Interest
Income
Non-taxable 159,852 191,830 506,421 581,432
Interest Income
Dividends 104,711 88,910 299,788 260,781
Federal Funds 23,381 5,933 37,507 22,916
Sold
Total Interest 7,371,878 7,019,148 21,340,64 20,510,762
Income 5
Interest on 2,254,863 2,161,816 6,536,644 6,718,415
Deposits
Interest in Short 697,316 624,714 2,267,558 1,754,156
Term Borrowings
Total Interest 2,952,179 2,786,530 8,804,202 8,472,571
Expense
Net Interest Income 4,419,699 4,232,618 12,536,44 12,038,191
3
Provision for Loan 180,000 120,000 540,000 600,000
Losses
Net Interest Income
after 4,239,699 4,112,618 11,996,44 11,438,191
Provision for 3
Loan Losses
Other Income 1,44,644 1,684,273 3,581,247 3,741,703
Investment 140,751 0 140,751 16,934
Securities Gains
Other Expenses::
Salaries & 1,534,273 1,467,981 4,423,730 4,265,530
Employee Benefits
Other 1,788,000 1,512,297 4,341,907 3,759,334
Investment 22,250 0 78,104 0
Securities Losses
Income Before 2,478,571 2,816,613 6,874,700 7,171,964
Income Taxes
Income Tax Expense 789,261 726,837 2,196,445 2,050,829
Net Income 1,689,310 2,089,776 4,678,255 5,121,135
Earnings per Share:
Based on
1,718,237 for 1996
and 1,720,583 $0.98 $1.22 $2.72 $2.98
shares for
1997
Dividends Per Share $0.30 $0.25 $0.88 $0.65
</TABLE>
BAR HARBOR BANKSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
QUARTERS ENDED SEPTEMBER 30, 1996 AND 1997
<TABLE>
<CAPTION>
NET
UNREALIZ
ED NET
CAPITAL RETAINED TREASURY LOSS ON STOCKHOLDER
STOCK SUIRPLU EARNINGS STOCK EQUITY S'
S SECURITI EQUITY
ES
<S> <C> <C> <C> <C> <C> <C>
Balance, 12/31/95 $3,627, $7,368, $23,523, ($1,340, $63,293 $33,242,824
210 695 626 000)
Net Earnings 5,121,13 5,121,135
5
Cash Dividends (1,116,8 (1,116,854)
Declared 54)
Net Unrealized
Depreciation on
Securities
Available for Sale (219,448 (219,448)
Net of Tax )
benefit of
$80,712
Sale of Stock 9,264 120,432 0 0 0 129,696
(4,632 shares)
Balance, 9/30/96 3,636,4 7,489,1 27,527,9 (1,340,0 (156,155 37,157,353
74 27 07 00) )
Balance, 12/31/96 3,636,4 7,489,1 28,204,8 (1,340,0 (103,505 37,886,926
74 27 29 00) )
Net Earnings 4,678,25
5
Cash Dividends (1,514,1 4,678,255
Declared 12)
Net Unrealized
Depreciation on
Securities
Available for 77,876 77,876
Sale,
Net of Tax
benefit of
$47,334
Sale of Stock 4,692 85,043 0 0 0 89,735
(2,346 shares)
Balance, 9/30/97 $3,641, $7,574, $31,368, ($1,340, ($25,629 $41,218,680
166 170 972 000) )
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
BAR HARBOR BANKSHARES AND SUBSIDIARY
COLSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER SEPTEMBER
30, 1997 30, 1996
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $4,678,255 $5,121,135
Adjustments to reconcile net earnings to
net cash provided by
operating activities: 693,083 566,161
Depreciation
Provision for Loss Losses 540,000 600,000
Provision for Losses on Other Real 0 (4,664)
Estate Owned
New Loans Originated for Sale (3,369,340) (7,108,320)
Proceeds from Sale of Mortgages Held 3,651,076 7,028,603
for Sale
Gain on Sale of Mortgages Originated (13,537) (15,108)
for Sale
Net Securities Gains (62,648) (16,934)
Net Amortization of Bond Premium 89,855 224,207
(Gain) Loss on sale of premises and 1,953 0
equipment
Net Change in Other Assets 40,076 (287,745)
Net Change in Other Liabilities 799,658 1,039,202
Net Cash Provided by Operating Activities 7,048,431 7,146,537
Cash Flows from Investing Activities:
Purchases of Securities Held to Maturity (19,843,240) (13,636,697
)
Proceeds from Maturity and Principal
Paydowns of Securities 12,460,509 6,591,798
Held to Maturity
Proceeds from Call of Securities Held to 5,750,000 5,420,608
Maturity
Purchases of Securities Available for Sale (1,250,000) (5,503,125)
Proceeds from Maturity and Principal
Paydowns of Securities 118,741 0
Available for Sale
Proceeds from Sale of Securities Available 1,060,021 500,000
for Sale
Purchase of Other Securities (453,700)
Proceeds from sales of Other Securities 147,831 37,930
Net Loans Made to Customers (8,611,570) (10,009,102
)
Capital Expenditures (938,619) (1,894,340)
Proceeds from Sale of Fixed Assets 16,000 0
Net Cash Used in Investing Activities (11,544,027) (18,492,928
)
Cash Flows from Financing Activities:
Net Change in Savings, NOW and Demand 8,851,462 11,187,990
Deposits
Net Change in Time Deposits 2,271,192 (5,676,985)
Net Change in Repurchase Agreements (2,095,638) 1,071,183
Purchase of Advances from FHLB 24,000,000 33,000,000
Repayment of Advances from FHLB (25,000,000) (13,000,000
)
Net Change in Other Short Term Borrowed (3,556,768) (16,110,515
Funds )
Proceeds from Sale of Capital Stock 89,735 129,696
Payment of Dividends (1,514,111) (1,116,854)
Net Cash Provided by Financing Activities 3,045,872 9,484,515
Net Increase In Cash and Cash Equivalents (1,449,724) (1,861,876)
Cash and Cash Equivalents at Beginning of 13,298,408 12,559,797
Year
Cash and Cash Equivalents at End of Quarter $11,848,684 10,697,921
Supplemental Disclosures of Cash Flow
Information:
Cash Paid during the Year for: $8,797,662 8,533,008
Interest
Income Taxes, Net of Refunds $1,678,000 1,450,000
Non-Cash Transactions:;
Transfers from Loans to Real Estate Owned $0 193,000
(Other Assets)
Transfer of Securities from Held to $0 $0
Maturity to Available for Sale
Available for Sale
The accompanying notes are an integral part of these consolidated
financial statements
</TABLE>
RATE VOLUME ANALYSIS
The following table represents a summary of the changes in
interest earned and interest paid as a result of changes in
rates and changes in volumes.
For each category of earning assets and interest bearing
liabilities, information is provided with respect to changes
attributable to change in rate (change in rate multiplied by old
volume) and change in volume (change in volume multiplied by old
rate). The change in interest due to both volume and rate has
been allocated to volume and rate changes in proportion to the
relationships of the absolute collar amounts of the change in
each.
YEAR-TO-DATE FIGURES AS OF SEPTEMBER 30, 1997
COMPARED TO SEPTEMBER 30, 1996
INCREASES (DECREASES) DUE TO:
<TABLE>
<CAPTION>
VOLUME RATE NET
<S> <C> <C> <C>
Loans $846,105 ($284,798 $561,307
)
Taxable Securities 154,135 174,861 328,996
Tax Exempt Securities (85,893) 10,882 (75,011)
Federal Funds Sold and Money 13,501 1,090 14,591
Market Funds
TOTAL EARNING ASSETS 927,848 (97,965) 829,883
Deposits (4,746) (177,025) (181,771)
Borrowings 416,398 97,004 513,402
Total Interest Bearing 411,651 (80,020) 331,631
Liabilities
NET CHANGE IN INTEREST $516,197 ($17,945) $498,252
</TABLE>
YEAR-TO-DATE FIGURES AS OF SEPTEMBER 30, 1996
COMPARED TO SEPTEMBER 30, 1995
INCREASES (DECREASES) DUE TO:
<TABLE>
<CAPTION>
VOLUME RATE NET
<S> <C> <C> <C>
Loans $853,768 ($36,779) $816,989
Taxable Securities 545,049 (129,372) 415,677
Tax Exempt Securities (57,057) (8,572) (65,629)
Federal Funds Sold and Money (58,848) (9,377) (68,225)
Market Funds
TOTAL EARNING ASSETS $1,282,912 ($184,100 $1,098,812
)
Deposits 357,112 283,876 640,988
Borrowings 116,955 (82,522) 34,433
Total Interest Bearing 474,067 201,354 675,421
Liabilities
NET CHANGE IN INTEREST $808,845 ($385,454 $423,391
)
</TABLE>
INTEREST RATE SENSITIVITY ANALYSIS
AS OF SEPTEMBER 30, 1997
(UNAUDITED)
Amounts in Thousands
The following table sets forth the amounts of interest-earning
assets and interest-bearing liabilities outstanding at September
30, 1997, which are anticipated by the Bank, based upon certain
assumptions, to reprice or mature in each of the future time
periods shown.
<TABLE>
<CAPTION>
TOTAL TO ONE TO FIVE GREATER THAN
ONE YEAR YEARS FIVE YEARS TOTAL
<S> <C> <C> <C> <C>
Loans - Fixed Rate $22,348 $32,197 $16,855 $71,400
Loans - Variable Rate 103,715 38,973 2,058 144,746
Investments 47,394 32,465 30,004 109,863
Federal Funds Sold 0 0 0 0
Interest Rate/Swap 5,000 10,000 0 15,000
Floor
Total Earning Assets $178,457 $113,635 $48,917 $341,009
Deposits $147,446 $10,975 $104,376 $262,797
Repurchase Agreements 6,150 0 281 6,431
Borrowings 29,324 10,028 0 39,352
Interest Rate 5,000 10,000 0 15,000
Swap/Floor
Total Sources $187,920 $31,003 $104,657 $323,580
Net Gap Position ($9,463) $82,632 ($55,740) $17,429
Cumulative Gap (9,462) $73,169 $17,429 $17,429
Rate Sensitive
Asset/Rate Sensitive 94.96% 366.53% 46.74% 105.93%
Liabilities
</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 3-
12 month time horizon. The remainder is stable and is listed in
the greater than five year category. NOW accounts, other than
seasonal fluctuations approximating $2,500,000, 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
147 months, with an additional prepayment rate of 9%, which
approximates the Bank's prior experience.
NOTES TO FINANCIAL STATEMENTS DATED SEPTEMBER 30, 1997
1. Summary of interim financial statement adjustments.
The accompanying unaudited statements reflect all
adjustments (all of which are normal and recurring in nature)
which are, in the opinion of management, necessary to present a
fair statement of the results for the interim periods presented.
The financial statements should be read in conjunction with the
Consolidated Financial Statements and related Notes included in
the Bank's 1996 Annual Report.
<TABLE>
<CAPTION>
September 30, 1997
INVESTMENT SECURITIES CARRYING CARRYING
AVAILABLE FOR SALE VALUE VALUE
<S> <C> <C>
a: U. S. Treasury and other government $19,062,412 $19,029,402
agencies
b: Marketable equity securities 550,000 565,400
Total Securities Available For Sale $19,612,412 $19,594,802
HELD TO MATURITY:
a: U. S. Treasury and other government $65,965,950 $66,365,062
agencies
b: States of the U.S. and other political 10,034,504 10,300,681
subdivisions
c: Corporate bonds 8,259,343 8,271,396
Total Securities Held to Maturity $84,259,797 $84,937,139
OTHER SECURITIES $5,992,156 $5,992,156
TOTAL SECURITIES $109,864,365 $110,524,097
</TABLE>
The Bank does not hold any securities for a single issuer which
exceed 10% of the Bank's stockholders' equity.
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
3. LOANS
<S> <C> <C>
a: Commercial, agricultural and other $40,472,832 $39,451,440
loans
b: Real Estate - Construction 7,002,109 8,905,823
c: Real Estate - Mortgage 156,393,879 146,361,313
d: Installment Loans 16,247,508 17,241,472
Total Loans $220,116,328 $211,960,048
</TABLE>
<TABLE>
<CAPTION>
4. CHANGES IN ALLOWANCE FOR POSSIBLE LOAN September 30, September 30,
LOSSES: 1997 1996
<S> <C> <C>
Balance, beginning January 1 $4,292,995 $4,047,883
Provision charged to income 540,000 600,000
Recoveries of amounts charged 92,491 100,840
Losses charged to provision 455,290 461,073
Balance, ending September 30 $4,470,196 $4,287,650
</TABLE>
Information regarding impaired loans is as follows for September
30, 1997:
<TABLE>
<S> <C>
Average investment in impaired loans $1,837,397
Interest income recognized on impaired loans including
interest income 107,260
recognized on cash basis
Interest income recognized on impaired loans on cash basis 107,260
Balance of impaired loans 2,070,475
Less portion for which no allowance for loan losses is 0
allowed
Portion of impaired loan balance for which an allowance for 2,070,475
credit losses is allocated
Portion of allowance for loan losses allocated to the 122,502
impaired loan balance
</TABLE>
<TABLE>
<CAPTION>
5. CHANGES IN ALLOWANCE FOR OTHER REAL ESTATE:
9/30/97 9/30/96 9/30/95
<S> <C> <C> <C>
Balance, beginning January 1 $22,589 $26,000 $30,486
Provision charged to income 0 (4,664) 9,778
Losses charged to provision 5,124 21,336 15,110
Balance, ending September 30 $17,465 $0 $25,154
</TABLE>
6. The aggregate dollar amount of loans made to directors,
executive officers or principal holders of equity securities as
of September 30, 1997 and December 31, 1996 respectively, were:
<TABLE>
<S> <C> <C>
Aggregate amount, beginning 1/1 $3,806,555 $3,279,479
New loans 1,600,011 912,044
Repayments 1,267,063 384,968
Aggregate amount, ending 9/30/97 $4,139,503
Aggregate amount, ending 12/31/96 $3,806,555
</TABLE>
<TABLE>
<CAPTION>
7. OTHER ASSETS September December
30, 1997 31, 1996
<S> <C> <C>
a: Interest earned but not paid on:
Loans $1,499,649 $1,426,296
Investments 1,105,491 1,237,564
b: Other Real Estate Owned 58,950 270,430
8. INCOME TAXES:
The Company adopted Financial Accounting Standards No. 109
"Accounting for Income Taxes" effective January 1, 1993. The
standard requires adoption of a liability method of accounting
for income taxes. The accounting change had no effect on the
company's net income or retained earnings.
Components of income tax expense for the period ended September
30, 1997 are as follows:
</TABLE>
<TABLE>
<S> <C>
Current
Federal $2,342,974
State 70,277
Deferred (216,806)
$2,196,445
</TABLE>
Actual tax expense differs from the expected tax expense
computed by applying the applicable federal corporate income tax
rate of 34% is as follows for the six months ended September 30,
1997:
<TABLE>
<S> <C>
Computed tax expense $2,330,796
Tax exempt interest (186,532)
Other 52,181
$2,196,445
</TABLE>
At September 30, 1997, items giving rise to the deferred
income tax assets and liabilities, using a tax rate of 34%, are
as follows:
<TABLE>
<CAPTION>
ASSET LIABILITY
<S> <C> <C>
Allowance for possible losses on loans and real $1,363,764
estate owned
Deferred and accrued employee benefits 955,440
Deferred loan origination fees 67,839
Securities losses not currently deductible 0
Core deposit intangibles 76,665
Depreciation 0 44,637
Other 25,935
$2,489,643 $44,637
</TABLE>
No valuation allowance is deemed necessary for the deferred tax
asset.
<TABLE>
<CAPTION>
9. INCOME TAX EXPENSE 1997 1996
<S> <C> <C>
Federal Income Tax $2,126,168 $1,982,793
State Income Tax 70,277 68,036
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
The results of operations for September 30, 1997 are
reflected through changes in the balance sheet. Total assets
grew by $11,700,000 in 1997 and $18,000,000 in 1996, each
compared to the previous year's third quarter end. The major
changes are found in the loan portfolio with small growth
visible through the investment portfolio.
The investment portfolio net growth of $1,700,000 has been
in the area of US Government agency debentures. Purchases in the
past twelve months have totaled $27,000,000, of which
$10,500,000 have been in callable agencies and the majority of
the remaining purchases have been in government sponsored
mortgage backed pools. The bank has had $6,750,000 called in
the past twelve months, $ 11,000,000 in principal paydowns from
mortgage backed securities, $2,500,000 in maturing tax-exempt
securities and $2,500,000 in other security paydowns. As a
comparison, from September 30, 1996 to September 30, 1995, the
Bank's available for sale portfolio changed by the one-time
transfer of securities at market value totaling $5,600,000 in
accordance with the Financial Accounting Standards Board
implementation guidance issued in November of 1995. The Bank's
other securities portfolio includes $5,853,000 in Federal Home
Loan Bank (FHLB) stock. Ownership of stock is required by the
FHLB for participation in their funding programs.
The market value of the held to maturity portion of the
portfolio is $677,000 more than the book value, with the
AFS portfolio market value at $17,600 less than the book
value. At September 30, 1996, the market value of the
entire investment portfolio was $695,000 below book value
and represented a potential loss of less than one-half of
one percent of the book value of the portfolio, had the
entire portfolio been sold at that date.
The Bank does not hold any securities (such as structured debt
tied to multiple indices, interest only or principal only
securities) that may experience considerable change in their
market values by a greater degree than traditional debt and
could materially affect the entire portfolio. It does hold one
structured note, a 10-year step-up government agency debenture
that matures in November of 2005. The structure is to step up
annually by 1/8 of 1% after three years (November 1998). It is
currently earning 7% and is being called as of November of this
year.
The taxable portions of the Bank's securities have been
earning 7.23% for the first nine months of 1997, an
increase of 13 basis points since September 30, 1996.
In the loan portfolio, which has grown by almost
$8,800,000 (4%) in the past twelve months, the Bank's
concentration has been through the extension of loans
secured by real estate to its customers totaling
$14,000,000 more than one year ago. Reductions in the loan
portfolio were found in the commercial loan portfolio
($3,400,000) and the construction portfolio ($1,700,000).
This compares to 1996's growth of $12,000,000 (6.2%) in
loan growth, with $8,000,000 of the loan growth being
secured by real estate and granted to the Bank's consumer
customers. The Bank continues to experience strong
competition from other financial institutions in its market
area.
From September 30, 1996 to September 30, 1997, a mixture of
increased deposits and funding from the Federal Home Loan Bank
funded the bank's assets. Total deposits increased by
$5,800,000 with equal growth in the demand deposit accounts, NOW
accounts and certificates of deposit. Also, for the same
period, advances through the Federal Home Loan Bank increased by
almost $2,800,000. In 1996, the funding for the asset growth
had come from borrowings primarily through the Federal Home Loan
Bank. Total advances increased by $28,000,000 and include
$12,000,000 in longer-term borrowings as funding for certain
specific commercial credits. During both years, short-term
borrowings were reduced through seasonal deposit growth,
investment maturities and/or calls and principal paydowns from
the Bank's mortgage backed securities portfolio.
Liquidity is measured by the Bank's ability to meet cash
needs at a reasonable cost or minimum loss to the Bank.
Liquidity management involves the ability to meet cash flow
requirements of its customers, which may come from depositors
withdrawing funds or borrowers requiring funds to meet credit
needs. Without adequate liquidity management, the Bank would
not be able to meet the needs of the individuals and communities
it serves. The Bank utilizes a Basic Surplus/Deficit model to
measure its liquidity over a 30-day and a 90-day time horizon.
We examine the relationship between liquid assets and short-term
liabilities that are vulnerable to non-replacement within a 30-
day period. The 90-day analysis extends to include a projection
of subsequent cash flow funding needs over an additional 60-day
time horizon. The Bank's policy is to maintain its liquidity
position at a minimum of 5% of total assets. For the past
twelve months, the Bank has maintained liquidity in its balance
sheet in excess of 14%. Liquidity as measured by the Basic
Surplus/Deficit model was 16.7% for the 30-day horizon and 15.7%
for the 90-day horizon as of September 30, 1997.
How the changes in the balance sheet have affected the Bank
may be viewed through net interest income in the earnings
statement for the periods ending September 30, 1996 and 1997.
Net interest income, affected by rates, volumes and the mix of
earning assets and interest bearing liabilities, is ahead of
September 1996's net interest income by almost $500,000.
Interest income earned from loans increased in 1997 by $846,000
due to volumes of loans with an offsetting reduction in earnings
of $285,000 due to changes in rates. This is indicative of the
competitive market in Downeast Maine. Overall yields from the
loan portfolio decreased by 39 basis points of 1996's yields.
Net interest income for the first nine months of 1996 added
earnings of $850,000 due to volumes of loans with a small
reduction in earnings of $37,000 due to changes in rates.
Overall yields from the loan portfolio remained within 5 basis
points of 1995's yields.
The investment portfolio, with net growth in assets of only
$1,700,000, has shown increases in interest income due both
to volumes ($82,000) and rates ($187,000). The overall
yield on the entire investment portfolio has actually
increased by 5 basis points during the past twelve months.
Looking at 1996, the investment interest increased by
virtue of purchases (totaling $429,000); however, as rates
remained flat and with larger coupons maturing the
portfolio experienced decreases due to rate changes
totaling $147,000, similar to the loan portfolio. Overall
the yield on investments dropped the same as the loan
yield, 5 basis points from year to year.
With the Bank well matched in the repricing of its balance
sheet, the funding costs followed a similar pattern as is
described above for loans and investments. The cost of interest
bearing liabilities increased by 4% in 1997 as compared to 1996,
with the interest paid on deposits decreasing primarily due to
rates ($177,000). The cost of borrowings increased
predominantly due to volumes ($416,000), but also by rates
($97,000). The overall cost of funding the bank's assets has
increased by 19 basis points over the past twelve months. In
1996, the cost of deposits rose based on volumes ($357,000) and
rates $284,000) while the cost of borrowed funds increased due
to volumes ($117,000) but decreased by $82,500 because of rate
changes. Reference is made to the earlier discussion that the
Bank elected to fund its asset growth through borrowings instead
of deposits for 1996. The cost of deposits increased by 21
basis points whereas the cost of borrowings decreased by 26
basis points between September 30, 1995 and 1996.
With regard to interest rate sensitivity, the Bank is
somewhat liability sensitive with $9,500,000 more of its
liabilities repricing within a year when compared to its assets.
Based on simulations, if interest rates were to rise by 200
basis points and if the Bank were to maintain the balance sheet
as it stands today, the Bank would reduce its net interest
income by $350,000 during the next two years. If rates were to
drop by 200 basis points the Bank would experience an increase
in its net interest income of $676,000.
Due to changes in the methodology used for computing the
reserve for possible loan losses and due to the recessionary
nature of the economy in the early 1990's, the Bank increased
its ratio to gross loans to over 2% and has maintained that
reserve to loan ratio through September 30, 1997. The Bank
reviews its allocation to the reserve on a monthly basis and
funds the reserve as deemed necessary. The review includes a
provision for specific credits, provisions due to historic loan
losses by loan types and reserves reflecting industry
concentrations, credit concentrations, current economic
conditions and underwriting standards.
In 1995, the Bank added a provision for impaired loans in
accordance with FASB 114, "Accounting By Creditors for
Impairment of a Loan", as amended by Statement No. 118. A
loan is impaired when it is probable that the Bank will not
collect all amounts due according to the contractual terms
of the loan agreement. Impaired loans are loans that are
carried on a non-accrual status. Loans are returned to
accrual status and are no longer considered to be impaired
when they become current as to principal and interest or
demonstrate a period of performance under the contractual
terms, and in management's opinion are fully collectable.
Certain loans are exempt from the provisions including
large groups of smaller balance homogenous loans that are
collectively evaluated for impairment, such as consumer and
residential mortgage loans. Impaired loans totaled
$2,070,475 and $1,604,919 at September 30, 1997 and 1996,
respectively. Reference is made to the notes included with
this filing that outline the impaired loan figures.
Losses in the loan portfolio were estimated at $500,000 for
fiscal year 1997, with charged off loans totaling $455,000
for the first nine months of this year. Losses for 1996
were originally estimated at $840,000 with $461,000 charged
off through September 30, 1996. The amounts represented
below are the total dollars outstanding for the first nine
months of each year listed.
The bank retains a conservative posture with regard to non-
accruing loans, placing loans onto non-accrual status once
they become past due 90 days or more. This is shown
through the figures below, with the bank retaining only
$428,000 in loans that are still accruing and are 90 days
or more past due. This represents two-tenths of one
percent of gross loans outstanding for the bank.
<TABLE>
<CAPTION>
Category 1997 1996 1995
<S> <C> <C> <C>
90-day past due and
still accruing $427,618 $830,532 $711,943
Non-accruing $4,599,245 $3,557,518 $2,584,343
$5,026,863 $4,388,050 $3,296,286
Gross Loans $220,116,328 $211,360,9 $199,190,0
48 24
Percentage of gross 2.28% 2.08% 1.65%
loans
Non-interest income for the first nine months of 1997 is
below the comparable period in 1996 by $160,000. The Trust
Department has produced $320,000 more income in this period,
based on fees structured on market values of total assets per
customer account and an increase in book assets of more than
$8,000,000. However, in September of 1996, the bank received a
non-recurring income entry of $278,000 representing an insurance
payoff from a policy written on certain key persons in the Bank.
Robert Avery, director and former president of the Bank passed
away in August of 1996 resulting in this one-time, tax
deductible payment. The 1996 non-recurring income entry is
creating the variance between the two years.
A review of the Bank's non-interest income shows the first
nine months of 1996 ahead of the same period for 1995 by
$558,000. $200,000 of that pertains to the Trust Department's
charge to its customers of scheduled fees, based on increased
book assets of almost $25,000,000. In addition, as of January
1, 1996, the Bank implemented FASB Statement No. 122,
"Accounting for Mortgage Servicing Rights" that has positively
impacted the Bank's earnings by $126,000 year to date.
Salaries and benefits are 3.7% more than as of September
30, 1996 and include merit increases and accruals for the bank's
incentive plan. Depreciation expense is $100,000 more than a
year ago and includes the addition of the Operations Center,
opened in January of 1997 and the depreciation of technology
that has been purchased over the past twelve months. New
personal computers, networking servers, communication lines,
document and check imaging equipment are some of the investments
made into technology during this period.
The bank has experienced a number of non-recurring charges
including expenses to complete the installation of and
subsequent training in enhancements in technology begun in
1996. Additionally, the bank paid $123,000 to the Internal
Revenue Service for taxes incurred on a loss taken in 1994
from the sale of a bond fund. This fund was taxed as
ordinary income in the 1994 return, but was challenged by
the IRS in a subsequent audit of that year's return. The
bank appealed the decision by the examiner. Ultimately the
appeal was denied. The bank has refiled the tax return for
1994, as well as 1992 and 1993, based on the determination
by the IRS audit of the classification of the loss on the
bond fund. If the amended returns are accepted, a
potential refund totaling $84,000 would be due the bank.
Audit costs are $80,000 higher than in September of 1996
and include the outsourcing of a large portion of the
bank's internal audit function. Furthermore, with the
conversion of the banking software very close to year-end
last year, the bank sought additional help early in 1997
(reconciling accounts and reviewing controls) from the
bank's accounting firm, Berry, Dunn, McNeil and Parker.
These added costs are non-recurring expenses for the bank.
Accruing for an incentive program reflects the increase in
salary and benefit costs in 1996 over 1995. Although the
program was not new to the Bank in 1996, it was the first
year that the dollars have been allocated prior to year-
end. Excluding the accrual, salary and benefits would have
been 1.6% higher than the first nine months of 1995.
Other expense for the first nine months of 1996 is above
the comparable period in 1995 by $60,000 or 1.6%. A portion of
that containment of costs was attributable to the temporary
relief from FDIC insurance premiums. As a well-capitalized
bank, Bar Harbor Banking and Trust Company has not been required
to pay premiums in either 1996 or 1997. As of September 30,
1995 the Bank had incurred $240,000 in FDIC premiums. In the
fourth quarter of 1995, the Bank sought the services of a
consulting firm to review existing procedures, seeking greater
efficiencies while maintaining quality customer service. The
Bank incurred approximately $120,000 in expenses for these
services during the first nine months of 1996 as the project was
being completed. Additionally, the Bank began numerous projects
as mentioned above. Startup and non-recurring costs for these
projects were included in other expenses through September 30,
1996.
The Bank's year-to-date efficiency ratio is 56% remains
consistent with the 1996 ratio and is well under the
national average.
The Bank's capital to asset ratio is 11.65% and the Bank
far exceeds the required risk based capital ratio of 8% with its
Tier I ratio of 19.0%, total capital ratio of 20.39% and
leverage ratio of 11.9%. Using the risk based capital formula,
the Bank has capital in excess of requirements of $6,500,000.
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
BAR HARBOR BANKSHARES
Date: November 14, 1997 Sheldon F. Goldthwait, Jr.
Chief Executive Officer
Date: November 14, 1997 Virginia M. Vendrell
Treasurer and
Chief Financial Officer
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 11848684
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 19,594,802
<INVESTMENTS-CARRYING> 84,259,797
<INVESTMENTS-MARKET> 84,937,139
<LOANS> 220,116,328
<ALLOWANCE> (4,470,196)
<TOTAL-ASSETS> 353,744,406
<DEPOSITS> 262,797,812
<SHORT-TERM> 34,650,441
<LIABILITIES-OTHER> 4,225,978
<LONG-TERM> 0
0
0
<COMMON> 3,641,166
<OTHER-SE> 37,577,514
<TOTAL-LIABILITIES-AND-EQUITY> 353,744,406
<INTEREST-LOAN> 15,708,918
<INTEREST-INVEST> 5,594,220
<INTEREST-OTHER> 37,507
<INTEREST-TOTAL> 21,340,645
<INTEREST-DEPOSIT> 6,536,644
<INTEREST-EXPENSE> 8,804,202
<INTEREST-INCOME-NET> 12,536,443
<LOAN-LOSSES> 540,000
<SECURITIES-GAINS> 62,647
<EXPENSE-OTHER> 8,765,637
<INCOME-PRETAX> 6,874,700
<INCOME-PRE-EXTRAORDINARY> 6,874,700
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,678,255
<EPS-PRIMARY> 2.72
<EPS-DILUTED> 2.72
<YIELD-ACTUAL> 8.50
<LOANS-NON> 4,599,245
<LOANS-PAST> 427,618
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,292,995
<CHARGE-OFFS> 455,290
<RECOVERIES> 92,491
<ALLOWANCE-CLOSE> 4,470,196
<ALLOWANCE-DOMESTIC> 4,470,196
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,091,000
</TABLE>
