20
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 June 30, 1998
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
046090400
(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: 1,821,807
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Financial Information
Page
Item 1. Financial Statements
<S>
<C>
Consolidated Balance Sheets
3 December 31, 1997 and June 30, 1998
Consolidated Statements of Earnings
4 Three months and six months ended June
30, 1997
and 1998
Consolidated Statements of Changes in
5 Stockholders' Equity
Six months ended June 30, 1997 and 1998
Consolidated Statement of Cash Flows 6
Six months ended June 30, 1997 and 1998
Rate Volume Analysis 7
Six months ended June 30, 1997 and 1998
Notes to Financial Statements 8-11
Item II. Management's Discussion and Analysis of 12-15
Financial
Condition and Results of
Operations
Signature Page 16
</TABLE>
<PAGE>
BAR HARBOR BANKSHARES AND SUBSIDIARY
CONSOLIDATED STATEMENT OF FINANCIAL
CONDITION
JUNE 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER
1998
31, 1997
<S> <C>
<C>
ASSETS
Cash and Due from Banks $11,544 $7,537
Federal Funds Sold 0 0
Securities Available for Sale, 19,360 14,608
at market
Securities Held to Maturity
(Market Value 88,841 85,351
$89,623 at 6/30/98 and $86,248
at 12/31/97)
Other Securities 6,050 6,012
Loans Held for Sale 600 365
Loans, net of allowance for
possible loan losses 224,521
212,396
of $4,704 in 1998 and $4,743 in
1997
Premises and Equipment 7,748 7,658
Other Assets 9,449 8,799
Total Assets $368,113
$342,726
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand Deposits $37,342
$36,838
NOW Accounts 39,678 39,536
Savings Deposits 53,359 53,378
Time Deposits 114,809
122,152
Total Deposits 245,188
251,903
Securities sold under Repurchase 4,316 4,474
Agreements
Advances from Federal Home Loan 69,770 39,160
Bank
Other Liabilities 4,266 4,727
Total Liabilities 323,540
300,264
Commitments and Contingent Liabilities
Capital Stock, par value $2
Authorized 10,000,000 shares
Issued 1,821,807 in 1998and
1,820,583 in 1997 3,644 3,641
Surplus 7,645 7,574
Retained Earnings 34,605 32,562
Net unrealized appreciation on
securities available 19 24
for sale, net of tax benefit
Less: Cost of 100,000 shares of (1,340)
(1,340)
Treasury Stock
TOTAL STOCKHOLDERS' EQUITY 44,573
42,461
TOTAL LIIABILITIES AND STOCKHOLDERS' $368,113
$342,726 EQUITY
</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 SIX-
SIX
MONTHS MONTHS MONTHS MONTHS ENDING
ENDING ENDING ENDING
06/30/98 06/30/97 06/30/
9
06/
30/
97
8
<S> <C> <C> <C>
<C>
Interest & Fees on $5,276 $5,176
$10,335 $10,202
Loans
Interest and
Dividends on
Investment 1,686 1,615
3,315 3,210
Securities:
Taxable Interest
Income
Non-taxable 116 167
240 347
Interest Income
Dividends 101 99
201 195
Federal Funds 15 5
30 14
Sold
Total Interest 7,194 7,062
14,121 13,968
Income
Interest on 2,071 2,143
4,213 4,282
Deposits
Interest in Short
Term 912 844
1,602 1,570
Borrowings
Total Interest 2,983 2,987
5,815 5,852
Expense
Net Interest Income 4,211 4,075
8,306 8,116
Provision for Loan 84 180
168 360
Losses
Net Interest Income
after 4,127 3,895
8,138 7,756
Provision for
Loan Losses
Other Income 1,263 1,112
2,389 2,139
Investment
63 0
Securities Gains
Other Expenses::
Salaries & 1,432 1,430
2,924 2,889
Employee Benefits
Other 1,681 1,499
2,986 2,554
Investment 0 0
0 56
Securities Losses
Income Before 2,277 2,078
4,680 4,396
Income Taxes
Income Tax Expense 729 663
1,501 1,407
Net Income $1,548 $1,415
$3,179 $2,989
Earnings per Share:
Based on
1,721,807 shares
for 1998 and $0.90 $ .82
$1.85 $1.74
1,720,583
shares for 1997,
Dividends Per Share $0.34 $0.30
$0.66 $0.58
</TABLE>
BAR HARBOR BANKSHARES AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY QUARTERS ENDED
JUNE 30, 1997 AND 1998
(in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER NET
CAPITAL RETAINED COMPREHENSI TREASURY
STOCKHOLDERS
STOCK SUIRPLUS EARNINGS VE INCOME STOCK '
EQUITY
<S> <C> <C> <C> <C> <C>
<C>
Balance, 12/31/96 $3,636 $7,489 $28,205 ($103) ($1,340) $37,887
Net Earnings 2,989 2,989
Other
comprehensive
income,
net of tax: (31) (31)
Unrealized
gains/losses on
securities
Other
comprehensive
income
Comprehensive 2,958
income
Cash Dividends
Declared ($.58 (998) (998)
per share
Sale of Stock 5 85 0 0 0 90
(2,346 shares)
Balance,6/30/97 $3,641 $7,574 $30,196 ($134) ($1,340) $39,937
Balance, 12/31/97 $3,642 $7,574 $32,562 $24 ($1,340) $42,461
Net Earnings 3,179 3,179
Other
comprehensive
income,
net of tax: (5) (5)
Unrealized
gains/losses on
securities
Other
comprehensive
income
Comprehensive 3,174
income
Cash Dividends
Declared ($.66 (1,135) (1,135)
per share)
Sale of Stock 2 71 0 73
(1,224 shares)
Balance, 6/30/98 $3,644 $7,645 $34,605 $19 ($1,340) $44,573
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
BAR HARBOR BANKSHARES AND
SUBSIDIARY COLSOLIDATED STATEMENT
OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE JUNE
30, 30,
1998 1997
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income
3,179 $2,989
Adjustments to reconcile net earnings
to net cash provided by
operating activities:
454 443
Depreciation
Provision for Loss Losses
168 360
Provision for Losses on Other Real 0 0
Estate Owned
New Loans Originated for Sale
(9,053 (1,738)
)
Proceeds from Sale of Mortgages
8,920 2,153
Held for Sale
Gain on Sale of Mortgages
(76) (50)
Originated for Sale
Net Amortization of Bond Premium
111 54
(Gain) Loss on sale of premises and 2 0
equipment
Net Change in Other Assets
(589) (404)
Net Change in Other Liabilities
(461) 453
Net Cash Provided by Operating
2,656 4,260
Activities
Cash Flows from Investing Activities:
Net decrease (increase) in Federal
Funds Sold
Purchases of securities held to
(24,77 (7,675)
maturity 0)
Proceeds from Maturity and Principal
Paydowns of Securities
11,025 9,264
Held to Maturity
Proceeds from Call of Securities Held
10,145 4,250
to Maturity
Purchases of Securities Available for
(6,000 (1,250)
Sale )
Proceeds from Maturity and Principal
Paydowns of Securities
239 78
Available for Sale
Proceeds from Sale of Securities
1,000 60
Available for Sale
Purchase of Other Securities
(38) (454)
Proceeds from sales of Other 119
Securities
Net Loans Made to Customers
(12,37 (9,831)
8)
Capital Expenditures
(545) (732)
Proceeds from sale of Other Real 0 0
estate Owned
Proceeds from Sale of Fixed Assets 0 0
Net Cash Used in Investing Activities
(21,32 (6,171)
2)
Cash Flows from Financing Activities:
Net Change in Savings, NOW and Demand
627 (3,363)
Deposits
Net Change in Time Deposits
(7,343 (1,080)
)
Net Change in securities sold under
(158) (6,199)
Repurchase Agreements
Proceeds from Federal Home Loan Bank
36,500 13,500
Repayment of Advances from FHLB
(17,50 (15,000
0) ) Net
Change in Short Term Other 12,631
Borrowed Funds
11,610
Proceeds from Sale of Capital Stock 74 90
Payment of Dividends
(1,136 (998)
)
Net Cash Provided by Financing
22,674 (420)
Activities
Net Increase (Decrease) in Cash and Cash
4,007 (2,331)
Equivalents
Cash and Cash Equivalents at Beginning of
7,537 13,298 Year
Cash and Cash Equivalents at End of
$11,54 $10,967
Quarter 4
Supplemental Disclosures of Cash Flow
Information:
Cash Paid during the Year for:
$5,860 $5,854
Interest
Income Taxes, Net of Refunds
$1,675 $1,041
Non-Cash Transactions:;
Transfers from Loans to Real Estate
$143 $0
Owned (Other Assets)
Transfer of Securities from Held to $0 $0
Maturity to Available for Sale
</TABLE>
A
v
a
i
l
a
b
l
e
f
o
r
S
a
l
e
The accompanying notes are an integral part of these
consolidated
financial statements
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 JUNE 30,
1998
COMPARED TO
JUNE 30, 1997
INCREASES
(DECREASES) DUE
TO:
<TABLE>
<CAPTION>
VOLUME
RATE NET
<S> <C>
<C> <C>
Loans $674
($542) $132
Taxable Securities 257
(146) 111
Tax Exempt Securities (131)
25 (106)
Federal Funds Sold and Money 13
3 15
Market Funds
TOTAL EARNING ASSETS $813
($660) $153
Deposits $38
($107) ($69)
Borrowings 25
6 32
Total Interest Bearing 64
(101) (37)
Liabilities
NET CHANGE IN INTEREST $749
($559) $190
</TABLE>
YEAR-TO-DATE FIGURES AS OF JUNE
30, 1997 COMPARED TO
JUNE 30, 1996
INCREASES (DECREASES) DUE TO:
<TABLE>
<CAPTION>
VOLUME RATE
NET
<S> <C> <C>
<C>
Loans $580 ($374)
$206
Taxable Securities 131 186
317
Tax Exempt Securities (45) 2
(43)
Federal Funds Sold and Money (3) 0
(3)
Market Funds
TOTAL EARNING ASSETS $663 ($186)
$477
Deposits ($45) ($230)
($275
) Borrowings
386 55 441
Total Interest Bearing 341 175
166
Liabilities
NET CHANGE IN INTEREST $322 ($11)
$311
</TBLE>
NOTES TO FINANCIAL STATEMENTS DATED JUNE
30, 1998
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 1997 Annual Report.
Effect of recent accounting pronouncements:
During 1997, the Company adopted SFAS No. 125 and
No. 127 which relate to the accounting for
transfers and servicing of financial assets and
extinguishment of certain liabilities. The
adoption of these standards did not have a
material effect of the financial statements.
The Financial Accounting Standards Board (FSAB)
issued the following statements of financial
accounting standards (SFAS) during 1997:
SFAS No. 128 Earnings per share
SFAS No. 129 Disclosure of information about
capital structure
SFAS No. 130 Reporting comprehensive income
SFAS No. 131 Disclosure about Segments of an
enterprise and related information
These four statements do not change the
measurement or recognition methods used in the
financial statements but rather deal with
disclosure and presentation requirements.
At December 31, 1997, the Company adopted SFAS
No. 128 which specifies the computation and
disclosure requirements for earnings per share
for entities with publicly held common stock. The
Company has no potential common stock and
therefore no diluted earnings per share.
At December 31, 1997, the Company adopted SFAS
No. 129. This statement has no effect on the
Company's financial statements as the capital
disclosures meet the requirements of SFAS No.
129.
At March 31, 1998, the Company adopted SFAS No.
130. Comprehensive income may be reviewed in the
Statement of Changes in Stockholders' Equity.
At March 31, 1998, the Company adopted SFAS No.
131. This statement has no effect on the
Company's financial statements.
In February 1998, the FASB issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other
Post Retirement Benefits" effective for financial
statements for the fiscal year beginning after
December 15, 1997. SFAS No. 132, which supersedes
the benefit disclosure requirements in FASB
Statements No's 87, 88 and 106, requires entities
to standardize the disclosure requirements for
pension and other post retirement benefits to the
extent practicable, requires additional
information on changes in the benefit obligations
and fair value of plan assets that will
facilitate financial analysis. The Company
expects no material impact from adopting SFAS No.
143.
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
1998
2. INVESTMENT SECURITIES CARRYIN
MARKET AVAILABLE FOR SALE G
VALUE
VALUE
<S> <C>
<C>
a: U. S. Treasury and other $18,782
$18,782 government agencies
b: Marketable equity securities 550
578
Total Securities Available For $19,332
$19,360 Sale
HELD TO MATURITY:
a: U. S. Treasury and other
$75,429 $76,047 government agencies
b: States of the U.S. and other
6,549 6,722
political subdivisions
c: Corporate bonds
6,863 6,854
Total Securities Held to Maturity
$88,841 $89,623
OTHER SECURITIES
$6,050 $6,050 TOTAL SECURITIES
$114,22 $115,033
3
</TABLE>
The Bank does not hold any securities for a
single issuer which exceed 10% of the Bank's
stockholders' equity.
<TABLE>
<CAPTION>
JUNE DECEMBER
30, 31, 1997
1998
<S> <C> <C>
3. LOANS
a: Commercial, agricultural and other
$39,268
$33,897
loans
b: Real Estate - Construction
8,631
7,925
c: Real Estate - Mortgage
164,352
158,649
d: Installment Loans
16,974
16,668
Total Loans
$229,22
$217,139
6
</TABLE>
<TABLE>
<CAPTION>
4. CHANGES IN ALLOWANCE FOR POSSIBLE
JUNE JUNE 30,
LOAN LOSSES:
30, 1997
1998
<S> <C> <C>
Balance, beginning January 1
$4,743
4,293
Provision charged to income
168 360
Recoveries of amounts charged
85 51
Losses charged to provision
292 270
Balance, ending June 30
$4,704
$4,434
</TABLE>
Information regarding impaired loans is as
follows for JUNE 30, 1998
<TABLE>
<CAPTION>
Ju
n
e
J
u
n
e
3
0
,
3
0
,
1998 1997 <S>
<C> <C>
Average investment in impaired loans
$1,789 $1,721
Interest income recognized on impaired
loans including interest
122 49
income recognized on cash basis
Balance of impaired loans
1,692 1,810
Less portion for which no allowance for
0 0
loan losses is allocated
Portion of impaired loan balance for which
an allowance for
1,692 1,810
credit losses is allocated
Portion of allowance for loan losses
allocated to the impaired
110 75
loan balance
</TABLE>
<TABLE>
<CAPTION>
5. CHANGES IN ALLOWANCE FOR
OTHER REAL ESTATE:
6/30/98 6/30/9
6/30/96
7
<S> <C> <C>
<C>
Balance, beginning January 1 $17 $22
$26
Provision charged to income 0 0
(3)
Losses charged to provision 0 5
0
Balance, ending June 30 $17 $17
$23
</TABLE>
6. The aggregate dollar amount of loans made to
directors,
executive officers or principal holders of equity
securities as of June 30, 1998 and December 31,
1997 respectively, were:
<TABLE>
<S> <C>
<C>
Aggregate amount, beginning 1/1 $3,952
$3,807
New loans 4,706 1,693
Repayments 328 1,548
Aggregate amount, ending 6/30/98 $8,330
Aggregate amount, ending 12/31/97
$3,952
</TABLE>
<TABLE>
<CAPTION>
7. OTHER ASSETS JUNE 30,
DECEMBER
1998
31, 1997 <S>
<C> <C>
a: Interest earned but not paid
on: $2,184 $1,437
Loans
Investments 1,071 1,041
b: Other Real Estate Owned 202 59
</TABLE>
8. INCOME TAXES:
Components of income tax expense for the
period ended June 30, 1998 are as follows:
<TABLE>
<S> <C>
Current
Federal $1,662
State 48
Deferred (209)
$1,501
</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 June 30, 1998.
<TABLE>
<S> <C>
Computed tax expense $1,55
6
Tax exempt (90)
interest
Other 35
$1,50
1
</TABLE>
At June 30, 1998, items giving rise to the
deferred income tax assets and liabilities, using
a tax rate of 34%, are as follows:
<TABLE>
<CAPTION>
ASSET
LIABILIT
Y
<S> <C>
<C>
Allowance for possible losses on
loans and real estate owned
$1,436 0
Deferred and accrued employee
975 0
benefits
Deferred mortgage servicing rights
0 77
Deferred loan origination fees
319 0
Securities losses not currently
38 0
deductible
Core deposit intangibles
53 0
Depreciation
0 52
Other
17 0
$2,840
$129 </TABLE>
No valuation allowance is deemed necessary for
the deferred tax asset.
<TABLE>
<CAPTION>
9. INCOME TAX EXPENSE June 30,
June 30,
1998
1997
<S> <C> <C>
Federal Income Tax $1,453
1,361 State Income Tax 48
46
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following review of results of the operations
of Bar Harbor Banking and Trust Company for June
30, 1998, as compared to June 30, 1997, shows
growth in earnings of $190,000 or six percent
ahead of earnings for the first six months of
1997 and will be discussed below. Total assets
have a 5.7% increase or approximately $20 million
greater than the past twelve months with growth
in both the loan portfolio and the investment
portfolio. The loan growth of $7.8 million since
June 30, 1997 has been predominantly in loans
secured by real estate. The Bank's portfolio of
loans secured by real estate grew by $11.6
million, with an offsetting reduction in the
commercial loan portfolio of $5.5 million. The
overall growth in loans compares to a $12.8
million growth between the periods of June 30,
1996 to June 30, 1997, where again the growth was
predominantly in the real estate portfolio.
The investment portfolio grew by $12 million over
the past twelve months and includes the purchase
of $54.5 million in securities, with $50.7
million in government agency debentures.
Principal payments, maturities and called
securities for the past twelve months total $43
million. Unrealized gains totaling $810,000 were
shown in the portfolio as of June 30, 1998
compared to unrealized losses of $134,000 as of
June 30, 1997. These gains are indicative of the
current national economic interest rate
structure. The gains in the market value of the
held to maturity portfolio are $783,000 above
book value as of June 30, 1998.
Funding for the asset growth has come from
increases in advances from the Federal Home Loan
Bank totaling $14.7 million. Deposits decreased
overall by $2 million over the past twelve
months. This compares with funding in 1997, in
which advances increased by $10 million and
deposits decreased by $2 million. The drop in
deposits for both years has been in time
deposits, mostly certificates of deposit.
Expectations by customers of yields in
certificates of deposit exceed alternative
sources of funding. Short term borrowings will
drop during the next three months through
seasonal deposit growth and investment maturities
as well as 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. The
relationship between liquid assets and the short-
term liabilities that are vulnerable to non-
replacement within a 30-day period are examined.
The Bank's policy is to maintain its liquidity
position at a minimum of 5% of total assets. The
Bank has maintained liquidity in its balance
sheet in excess of 15% for the past twelve
months. Liquidity as measured by the Basic
Surplus/Deficit model was 19.29% as of June 30,
1998 for the 30-day horizon and 22.9% for the 90-
day horizon.
How changes in the balance sheet have affected
the Bank may be viewed through the earnings
statement for the periods ending June 30, 1997
and 1998. The Bank's net earnings for the first
six months of 1998 are $190,000 ahead of earnings
for the same period in 1997. The comparison will
be discussed below. The Bank's net income for the
first six months of 1997 was one percent
($42,000) below the income at June 30, 1996.
Rates, volumes and the mix of earning assets and
interest bearing liabilities affect interest
income. Increases in loan volume of $7.8 million
afforded increased interest income of
approximately $675,000; however, decreases in
rate reduced interest income by over $540,000,
thereby showing an overall increase for loan
interest of $132,000.
For the first six months of 1997, increases in
the loan portfolio afforded the Bank additional
interest income of $206,000 that was achieved
through increases in volumes totaling $580,000
and decreases in rates totaling $374,000. Yields
on loans decreased by 40 basis points from June
1996 to June 1997.
On the investment side, interest and dividend
income as of June 30, 1998 grew by only $20,000
when compared to June 30, 1997. Increases were
made based on volumes ($257,000) with offsetting
decreases in rates ($146,000) for the taxable
portion of the investment portfolio. Much of the
overall decrease came from the maturity of non-
taxable securities that are not being replaced
with similar securities in the portfolio. Yields
in the overall portfolio decreased by 10 basis
points from year to year. The taxable portion of
the portfolio decreased in yield by 20 basis
points from 7.23% to 7.03%. Interest on
investments in 1997 grew by $271,000, with the
increase related to volumes totaling $83,000 and
an increase from yields of $188,000 and an actual
increase in 16 basis points in yields on the
entire investment portfolio between June of 1996
and June of 1997.
With increased interest bearing liabilities of
approximately $15 million, the bank has contained
costs by maintaining rates at existing levels and
utilizing the Federal Home Loan Bank for
advances. Costs have increased by $64,000 based
on volume and decreased by more than $100,000
based on rate decreases. The total cost of
purchased funds decreased by seven basis points
over the past twelve months. This translates to
an overall reduction in interest expense of
$38,000.
In 1997, interest bearing liability costs
increased by $166,000 based on increases in
liabilities of $5.7 million. The increase in the
cost of funds came from increased costs incurred
due to volume increases totaling $341,000 with an
offset in liability costs due to rates creating a
reduction of $175,000. The total cost of
purchased funds increased by 6 basis points
between June 30, 1997 and June 30, 1996.
The Bank is well positioned with regard to
interest rate sensitivity with assets and
liabilities matched for repricing within a year,
with $10,000,000 more assets than liabilities
repricing within the next twelve months. If rates
were to rise by 200 basis points, simulations
indicate that the Bank's net interest income
could decrease by approximately $124,000 and
$172,000 during the first and second years of the
rise. Should rates fall by 200 basis points, the
Bank's net interest income would increase by
approximately $166,000 the first year and drop by
$233,000 the second year.
The ratio for the reserve for possible loan
losses has been over 2% for a number of years,
and continues with a ratio of 2.06% as of June
30, 1998. While maintaining the 2% ratio between
the reserve for possible losses and total loans
outstanding, the Bank has been able to reduce the
amount of funds allocated to the reserve based on
the slowing growth of the loan portfolio overall.
The Bank continues to review its allocation to
the reserve on a monthly basis and funds the
reserve as deemed necessary. This 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.
Losses in the loan portfolio were estimated at
$500,000 for both 1998 and 1997. As of June 30,
1998, the Bank had charged off $292,000 in loans
compared to $270,000 for the same period in 1997.
The amounts represented below are shown in
thousands and represent the total dollars past
due for the first six months of each year listed.
Included in loans that were 90 days or more past
due and still accruing in 1997 were approximately
$900,000 in outstanding loans for which the
customers had commitments from other banks to pay
the Bank out for the loans.
<TABLE>
<CAPTION>
Category 1998 1997
<S> <C> <C>
90-day past due and $1,528
$1,990
still accruing
Non-accruing 2,682
$3,503
$4,210
$5,493
Gross Loans $229,226
$221,521
Percentage of gross 1.83% 2.48%
loans
</TABLE>
In reviewing non-interest income for 1998, the
Bank has earned $250,000 or approximately 12%
more than twelve months ago, with the increase
attributable to the Trust Department's earnings
before expenses, which have exceeded last year's
income by $158,000. Additionally, the accounting
for mortgage servicing rights was approximately
$70,000 higher as of June 30, 1998 when compared
to June 30, 1997.
During the first six months of 1997, non-interest
income grew by $81,000 over 1996. This growth was
attributed to the Trust Department's earnings
before expenses growing by $210,000 more than the
first six months of 1996. Additionally, as of
January 1, 1996, when the Bank implemented FASB
Statement No. 122, "Accounting for Mortgage
Servicing Rights", the allocation positively
impacted the earnings of the Bank by $106,000. As
of June 30, 1997, that allocation was
approximately $30,000 less than in 1996 and
additionally, fees generated from the origination
and sale of mortgages were less than the previous
year. In the spring of 1997, the Bank ran a
promotion for mortgages choosing to keep them in
its own portfolio instead of selling them in the
secondary market, thus reducing its income from
origination and sold loan fees.
Other expenses, the category on the earnings
statement that encompasses the majority of
accounts that are not interest or human resource
related, are 17% higher in 1998 than in 1997.
Included in the expenses for 1998 are increased
maintenance contracts and depreciation expenses
incurred as the Bank has continued to strengthen
its technology capabilities. Additionally, the
Bank has been more active in the media in 1998,
through the introduction of a new money market
product and numerous loan promotions. The Bank
has hired a consultant to assist in the selection
process for a new banking software vendor. The
Trust Department has also incurred expenses in
anticipation of its conversion of software in
September of this year. Lastly, the amortization
of mortgage servicing rights has impacted the
Bank's earnings by approximately $30,000.
Comparing 1997 to 1996, salaries and benefits
exceeded 1996 by 4.7% and included merit
increases granted as of January 1, 1997,
increases in the cost of benefits for employees,
and additional time worked and additional staff
required in connection with the conversion of the
Bank's software which took place in late November
of 1996.
Other expense for June 30, 1997 was $307,000 for
13% higher than twelve months prior and was
attributable to enhancements started in 1996.
During 1996, the Bank implemented new software
and hardware for its banking applications,
including document and check imaging and servers
to run these applications. With the installation
of new banking software, individual personal
computers were upgraded. Each of these
installations increased not only the bank's
assets, but also its depreciation expense, which
was $152,000 more in 1997 than in 1996. The
upgrade in the communication lines, which
increased the speed of transmitting information
to all locations, increased the Bank's telephone
charges by $50,000 more in 1997.
The Bank's Year 2000 global assessment and action
plan has been approved by its Board of Directors.
Individual project plans for mission critical
systems are in progress with testing and proxy
testing plans included. Solicitations of vendors
have been mailed and responses have been received
from over 30%. Follow up with other mission
critical vendors continues. Testing of parts of
the bank's hardware and software has begun. The
assessment of customers' preparedness and the
resulting impact on the Bank should be
substantially completed by September 30, 1998.
Letters have been sent to all major borrowers and
lenders are following up with their customers.
The Bank has redesigned its loan application that
incorporates a question regarding the
preparedness of the borrower for the millennium.
Over 5,200 business customers have received a
brochure entitled "Is your business Prepared for
Year 2000". Employee and customer awareness
continues with flyers sent to all consumer
customers. The Bank will be participating in a
Bank Business Customer Seminar being developed by
the Maine Bankers Association. This program will
run between mid-September and mid-November.
The costs incurred so far have primarily been for
supplies and customer awareness information.
Since the Bank has stayed very current in its
technology, it does not anticipate any major
expenditures directly related to the Year 2000
issues. The budget has not been finalized to
date. The Bank's banking software vendor is
presently working on a proxy test with a target
completion date of mid-November. The Bank will be
installing an upgrade in August this year. All
users will move from this upgrade to Release 10
of the banking software in the first quarter of
1999. The Bank will not incur any material costs
to install either of these upgrades.
Looking at some of the standard bank ratios, the
Bank's efficiency ratio remains below national
averages at just under 57%, which has remained
comparable for the past three years. The Bank's
capital to asset ratio of 12.1% has increased
from 11.5% over the past twelve months. The Bank
far exceeds the required risk based capital ratio
of 8% with its Tier I ratio of 19.95%, total
capital ratio of 21.20% and leverage ratio of
12.14%. These ratios represent capital of $29
million in excess of the requirement for a well
capitalized bank.
SFAS No. 125 and No. 127 relate to the accounting
for transfers and servicing of financial assets
and extinguishment of certain liabilities and
were adopted effective January 1, 1997. The
adoption of these standards has had no material
effect on the financial statements.
SFAS No. 128 relates to the computation for
earnings per share. The adoption of SFAS No. 128
has had no material effect on the financial
statements.
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
BAR HARBOR
BANKSHARES
/s/ Sheldon F.
Goldthwait, Jr.
Date: August 14, 1998 Sheldon F.
Goldthwait, Jr.
Chief
Executive Officer
/s/ Virginia
M. Vendrell
Date: August 14, 1998 Virginia M.
Vendrell
Treasurer and
Chief
Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000743367
<NAME> BAR HARBOR BANKSHARES
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> JUN-30-1998
<CASH> 11,544
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 19,360
<INVESTMENTS-CARRYING> 88,841
<INVESTMENTS-MARKET> 89,623
<LOANS> 229,225
<ALLOWANCE> (4,704)
<TOTAL-ASSETS> 368,113
<DEPOSITS> 245,188
<SHORT-TERM> 74,086
<LIABILITIES-OTHER> 4,266
<LONG-TERM> 0
0
0
<COMMON> 3,644
<OTHER-SE> 40,929
<TOTAL-LIABILITIES-AND-EQUITY> 368,113
<INTEREST-LOAN> 10,335
<INTEREST-INVEST> 3,756
<INTEREST-OTHER> 30
<INTEREST-TOTAL> 14,121
<INTEREST-DEPOSIT> 4,213
<INTEREST-EXPENSE> 5,815
<INTEREST-INCOME-NET> 8,306
<LOAN-LOSSES> 168
<SECURITIES-GAINS> 63
<EXPENSE-OTHER> 5,911
<INCOME-PRETAX> 4,680
<INCOME-PRE-EXTRAORDINARY> 1,501
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,179
<EPS-PRIMARY> 1.85
<EPS-DILUTED> 1.85
<YIELD-ACTUAL> 8.50
<LOANS-NON> 2,682
<LOANS-PAST> 1,582
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 736
<ALLOWANCE-OPEN> 4,743
<CHARGE-OFFS> 292
<RECOVERIES> 85
<ALLOWANCE-CLOSE> 4,704
<ALLOWANCE-DOMESTIC> 4,704
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,185
</TABLE>
