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, 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 04609-0400
(Address of principal executive offices) (Zip
Code)
Registrant's telephone number, including area code: (207) 288-
3314
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. YES: XX NO:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of September 30, 1997:
Common Stock: 1,821,807
TABLE OF
CONTENTS <TABLE>
<CAPTION>
<S>
<C>
Financial Information
Page
Item 1. Financial Statements
3
Consolidated Balance Sheets
December 31, 1997 and September 30,
1998 4 Consolidated Statements of
Earnings
Three months and nine months ended
September
30, 1997
5
and 1998
Consolidated Statements of Changes in
Stockholders' Equity
6
Nine months ended September 30, 1997
and
1998
Consolidated Statement of Cash Flows
Nine months ended September 30, 1997
and 7
1998
Rate Volume Analysis
Nine months ended September 30, 1997
and 8-11 1998
Notes to Financial Statements
Item II. Management's Discussion and
Analysis of Financial
12-17
Condition and Results of
Operations
Signature Page
18
</TABLE>
BAR HARBOR BANKSHARES AND
SUBSIDIARY CONSOLIDATED STATEMENT
OF FINANCIAL CONDITION
SEPTEMBER 30, 1998 AND DECEMBER
31, 1997
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER
30, 1998 31, 1997
<S> <C> <C>
ASSETS
Cash and Due from Banks $
12,448 $ 7,537
Federal Funds Sold
0 0
Investment Securities
Securities Available
20,670 14,608
for Sale, at market
Securities Held to
Maturity (Market Value
96,454 85,351
$98,093 at 9/30/1998,
$86,248 at 12/31/98)
Other Securities
6,050 6,012
Loans Held for Sale
561 365
Loans, net of allowance
for possible loan losses
225,495 212,396
of $4,535 in 1998 and
$4,743 in 1997
Premises and Equipment
7,951 7,658
Other Assets
8,838 8,799
Total Assets
$378,466 $342,726
LIABILITIES AND STOCKHOLDERS'
EQUITY
LIABILITIES
Deposits
Demand Deposits
$43,020 $36,838
NOW Accounts
43,840 39,536
Savings Deposits
65,855 53,378
Time, $100,000 and over
12,560 13,718
Other Time
99,768 108,433
Total Deposits
265,043 251,903
Securities sold under
8,715 4,474
Repurchase Agreements
Advances from Federal Home
54,572 39,160
Loan Bank
Other Liabilities
4,466 4,727
Total Liabilities
332,796 300,264
Commitments and Contingent
Liabilities
Capital Stock, par value $2
Authorized 10,000,000
shares
3,644 3,641
Issued 1,821,807 in 1998
and
1,820,583 in 1997
Surplus
7,645 7,574
Retained Earnings
35,642 32,562
Net unrealized
appreciation on securities
80 24
available
for sale, net of tax
benefit
Less: Cost of 100,000 shares
(1,340) (1,340)
of Treasury Stock
TOTAL STOCKHOLDERS' EQUITY
45,671 42,461
TOTAL LIIABILITIES AND
$378,466 342,726
STOCKHOLDERS' EQUITY
</TABLE>
BAR HARBOR BANKSHARES AND
SUBSIDIARY CONSOLIDATED STATEMENT
OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
THREE THREE NINE NINE
MONTHS MONTHS MONTHS MONTHS
ENDING ENDING ENDING ENDING
09/30/98 09/30/97 09/30/98
09/30/97
<S> <C> <C> <C>
<C>
Interest & Fees on $5,409 $5,506 $15,744
$15,709
Loans
Interest and
Dividends on
Investment 1,790 1,578 5,105 4,788
Securities:
Taxable Interest
Income
Non-taxable 95 160 335 506
Interest Income
Dividends 109 105 310 300
Federal Funds 26 23 56 38
Sold
Total Interest 7,429 7,372 21,550 21,341
Income
Interest on 2,147 2,255 6,360 6,537
Deposits
Interest in Short
Term Borrowings 898 697 2,500 2,268
Total Interest 3,045 2,952 8,860 8,804
Expense
Net Interest Income 4,383 4,420 12,690 12,536
Provision for Loan 84 180 252 540
Losses
Net Interest Income
after 4,299 4,240 12,438 11,996
Provision for
Loan Losses
Other Income 1,624 1,443 4,013 3,581
Investment 65 141 128 141
Securities Gains
Other Expenses:
Salaries & 1,605 1,534 4,529 4,424
Employee Benefits
Other 1,930 1,788 4,918 4,342
Investment 4 22 4 78
Securities Losses
Income Before 2,449 2,479 7,129 6,875
Income Taxes
Income Tax Expense 826 789 2,327 2,196
Net Income $1,623 $1,689 $4,801 $4,678
Earnings per Share:
Based on
1,720,583 shares
for $0.94 $0.98 $2.79
$2.72
1997 and
1,721,807 shares
for 1998
Dividends Per Share $0.34 $0.30 $1.00
$0.88
</TABLE>
BAR HARBOR BANKSHARES AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY QUARTERS ENDED SEPTEMBER 30, 1997 AND
1998
<TABLE>
<CAPTION>
ACCUMULATED
NET CAPITA RETAINED TREASUR OTHER
STOCKHOLDER
L SURPLU EARNINGS Y COMPREHENSI
S'
STOCK S STOCK VE INCOME
EQUITY
<S> <C> <C> <C> <C> <C> <C>
Balance, 12/31/96 $3,636 $7,489 $28,205 ($1,340 (103)
$37,887
)
Net Earnings 4,678
4,678
Other
comprehensive
income,
net of tax: 77
77
Unrealized
4,755
gains/losses on
securities
Other
comprehensive
income
Comprehensive
income
Cash dividends
declared ($.88 (1,514)
(1,514)
per share)
Sale of Stock 5 85 0 0
90
(2,346 shares)
Balance, 9/30/97 3,641 7,574 31,369 (1,340) (26)
41,218
Balance, 12/31/97 3,641 7,574 32,562 (1,340) 24
42,461
Net Earnings 4,801
4,801
Other
comprehensive
income,
net of tax: 56
56
Unrealized
4,857
gains/losses on
securities
Other
comprehensive
income
Comprehensive
income
Cash Dividends
Declared (1,722)
(1,722)
($1.00 per
share)
Sale of Stock 3 71
74
(1,224 shares)
Balance, 9/30/98 $3,644 $7,645 $35,641 ($1,340 $80
$45,671
)
</TABLE>
BAR HARBOR BANKSHARES AND SUBSIDIARY
COLSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMB SEPTEMB
ER
30, ER 30,
1998 1997
<S> <C> <C>
Cash Flows from Operating
Activities:
$4,801 $4,678
Net Income
Adjustments to reconcile net
earnings to net cash provided
by operating expenses:
Depreciation
691 693
Provision for Loss Losses
252 540
Provision for Losses on 0 0
Other Real Estate Owned
New Loans Originated for
(12,509 (3,369)
Sale )
Proceeds from Sale of
12,475 3,651
Mortgages Held for Sale
Gain on Sale of Mortgages
(117) (14)
Originated for Sale
Net Securities (Gains) (63)
Losses
Net Amortization of Bond
(17) 90
Premium
(Gain) Loss on sale of 1 2
premises and equipment
Net Change in Other Assets
(333) 40
Net Change in Other
(66) 800
Liabilities
Net Cash Provided by Operating
5,178 7,048
Activities
Cash Flows from Investing
Activities:
Net Decrease (Increase) in
(45,734 (19,843
Federal Funds Sold ) )
Purchases of Securities Held to
Maturity
Proceeds from Maturity and
Principal Paydowns of Securities
22,213 12,461
Held to Maturity
Proceeds from Call of Securities
12,347 5,750
Held to Maturity
Purchases of Securities Available (15,745
(1,250)
for Sale )
Proceeds from Maturity and
Principal Paydowns of Securities
271 119
Available for Sale
Proceeds from Sale of Securities
9,500 1,060
Available for Sale
Purchase of Other Securities
(38) (454)
Proceeds from sales of Other 148
Securities
Net Loans Made to Customers
(13,482 (8,612)
)
Capital Expenditures
(985) (939)
Proceeds From Sale of Other Real
437 0
Estate Owned
Proceeds from Sale of Fixed 0 16
Assets
Net Cash Used in Investing
(31,216 (11,544
Activities ) )
Cash Flows from Financing
Activities:
22,963 8,852
Net Change in Savings, NOW and
Demand Deposits
Net Change in Time Deposits
(9,824) 2,271
Net Change in Repurchase
4,241 (2,096)
Agreements
Purchase of Advances from FHLB
44,000 24,000 Repayment of Advances
from FHLB (30,500 (25,000
) )
Net Change in Other Short Term 1,912
(3,557)
Borrowed Funds
Proceeds from Sale of Capital
74 90
Stock
Payment of Dividends
(1,917) (1,514)
Net Cash Provided by Financing
30,949 3,046 Activities
Net Increase In Cash and Cash
4,911 (1,450) Equivalents
Cash and Cash Equivalents at
7,537 13,298
Beginning of Year
Cash and Cash Equivalents at End of
$12,448 $11,848 Quarter
Supplemental Disclosures of Cash
Flow Information:
Cash Paid during the Year for:
$8,886 $8,798 Interest
Income Taxes, Net of Refunds
$2,405 $1,678 Non-Cash Transactions:;
Transfers from Loans to Real
$564 $0
Estate Owned (Other Assets)
Transfer of Securities from Held
$0 $0
to 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, 1998 COMPARED TO SEPTEMBER
30, 1997
INCREASES (DECREASES) DUE TO:
<TABLE>
<CAPTION>
VOLUME
RATE NET <S> <C>
<C> <C> <C>
Loans $417
($382) $35
Taxable Securities 553
(227) 327
Tax Exempt Securities (203) 31 (172)
Federal Funds Sold and Money 10 9 18
Market Funds
TOTAL EARNING ASSETS 778
(569) 209
Deposits 56
(232) (177)
Borrowings 237
(5) 232
Total Interest Bearing 293
238 56
Liabilities
NET CHANGE IN INTEREST $485
($331) $153
</TABLE>
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
($285) $561
Taxable Securities 154
175 329
Tax Exempt Securities (86)
11 75
Federal Funds Sold and Money
Market 14
1 15
Funds
TOTAL EARNING ASSETS $928
($98) $830
Deposits (5)
(177) (182)
Borrowings 416
97 513
Total Interest Bearing 412
(80) 322
Liabilities
NET CHANGE IN INTEREST $516
($18) $498
</TABLE>
NOTES TO FINANCIAL STATEMENTS DATED
SEPTEMBER 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 on 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 met 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" after
December 15, 1997. SFAS No. 132, which
supercedes the benefit disclosure
requirements in FASB Statements No. 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. 132.
<TABLE>
<CAPTION>
September 30,
1998
<S> <C>
<C>
INVESTMENT SECURITIES CARRYING
CARRYI
AVAILABLE FOR SALE VALUE NG
VALUE
a: U. S. Treasury and other $19,998
$20,09
government agencies 0
b: Marketable equity securities
550 580
Total Securities Available
$20,548 $20,67
For Sale 0
HELD TO MATURITY:
a: U. S. Treasury and other
$83,872 $85,29
government agencies 3
b: States of the U.S. and other
5,461 5,624
political subdivisions
c: Corporate bonds
7,121 7,176
Total Securities Held to
96,454 $98,09
Maturity 3
OTHER SECURITIES
$6,050 $6,050
TOTAL SECURITIES
$123,052 $124,8
13 </TABLE>
The Bank does not hold any securities for
a single issuer which exceed 10% of the
Bank's stockholders' equity.
<TABLE>
<CAPTION>
Septe
mb
e
De
ce
mb
e
r
30
, r 31,
1998 1997
<S> <C>
<C>
3. LOANS
a: Commercial, agricultural and
$37,546 $33,897
other loans
b: Real Estate - Construction
10,081
7,925
c: Real Estate - Mortgage
166,239 158,649
d: Installment Loans
16,164
16,668
Total Loans
$230,030 $217,13
9
4. CHANGES IN ALLOWANCE FOR
Septembe Septemb
POSSIBLE LOAN LOSSES: r 30,
er 30,
1998
1997 Balance, beginning January 1 $4,743
$4,293
Provision charged to income
252 540
Recoveries of amounts charged
131 92
Losses charged to provision
591 455
Balance, ending September 30
$4,535 $4,470
</TABLE>
Information regarding impaired loans is as
follows: <TABLE>
<CAPTION>
Septembe
r
December
30, 1998
31, 1997
<S> <C>
<C>
Average investment in impaired
$1,744 $2,045
loans
Interest income recognized on
impaired loans
$35 $165
Including interest income
recognized on cash basis
Balance of impaired loans $1,653
$2,670
Less portion for which no
allowance for loan losses 0 0
Is allowed
Portion of impaired loan balance
for which an $1,653
$2,670
Allowance for credit losses is
allocated
Portion of allowance for loan
losses allocated to the $64
$104
impaired loan balance
</TABLE>
5. CHANGES IN ALLOWANCE FOR OTHER REAL
ESTATE:
<TABLE>
<CAPTION>
9/30/9 9/30/97
9/30/96 8
<S> <C> <C>
<C>
$17 $22
$26 Provision charged to 0 0
(5)
income
Losses charged to 1 5 21
provision
Balance, ending $16 $17 $0
September 30
</TABLE>
6. The aggregate dollar amount of loans
made to directors, executive officers or
principal holders of equity securities as
of September 30, 1998 and December 31, 1997
respectively, were:
<TABLE>
<CAPTION>
<S> <C>
<C>
Aggregate amount, beginning $3,952
$3,807
1/1
New loans 5,238
1,693
Repayments 1,908
1,548
Aggregate amount, ending $7,282
9/30/98
Aggregate amount, ending
$3,952
12/31/97
7. OTHER ASSETS September
December
30, 1998
31, 1997
a: Interest earned but not
paid on: $1,311
$1,437
Loans
Investments 997
1,041
b: Other Real Estate Owned 134
59
</TABLE>
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, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Current
Federal $2,414
State 73
Deferred (160)
$2,327
</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, 1998:
<TABLE>
<CAPTION>
<S> <C>
Computed tax $2,404
expense
Tax exempt (131)
interest
Other 54
$2,327
</TABLE>
At September 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
LIABILITY <S> <C>
<C>
Allowance for possible losses
on loans and real estate owned $1,380
Deferred and accrued employee 980
benefits
Deferred mortgage servicing 0
87
rights
Deferred loan origination fees 314
Securities losses not currently 34
deductible
Core deposit intangibles 50
Depreciation 0
35
Other 26
$2,784
$122 </TABLE>
No valuation allowance is deemed necessary
for the deferred tax asset.
<TABLE>
<CAPTION>
<S> <C>
<C>
9. INCOME TAX EXPENSE 1998
1997
Federal Income Tax $2,254
$2,126 State Income Tax $73
$70
</TABLE>
MANAGEMENT'S DISCUSSION
AND ANALYSIS
The results of operations for September 30,
1998
reflect an increase in earnings of 3% based
on balance sheet growth of 7%. Asset growth
of $24.7 million in 1998 and $11.7 million
in 1997 are compared to the previous year's
third quarter ending balance sheet. The
major changes are found in the loan and
investment portfolios and are described
below.
The investment portfolio net growth in
excess of
$13 million has predominantly been in the
area of US Government agency debentures.
Purchases in the past twelve months have
totaled $73 million, of which $28.7 million
have been in callable agencies, $34 million
have been in government sponsored mortgage
backed pools and $10 million have been in
corporate bonds. Of the $26 million in
securities called in the past twelve months,
$14 million had given the bank a minimum of
a year's call protection. In addition,
$18.2 million cash flow was received in
principal paydowns from mortgage backed
securities, $3.3 million in maturing tax-
exempt securities, and $8.5 million in
corporate bond maturities. As a comparison,
from September 30, 1997 to September 30,
1996, purchases totaled $27 million, of
which $10.5 million were callable agencies
and the majority of the remaining purchases
were government sponsored mortgage-backed
pools. During 1997, the bank had securities
totaling $6.7 million called, $11 million in
principal paydowns from mortgage backed
securities, $2.5 million in maturing tax-
exempt securities and $2.5 million in other
security paydowns. The Bank's other
securities portfolio includes $5.8 million
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 securities being
held to
maturity in the bank's investment portfolio
is $1.6 million more than the book value,
with the available for sale portfolio market
value is $121,900 more than the book value.
At September 30, 1997, the market value of
the entire investment portfolio was $660,600
greater than book value. The increase in
the market values is indicative of the
national interest rate curve.
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.The taxable portions of
the Bank's securities have been earning
6.89% for the first nine months of 1998.
Although this represents a decrease of 34
basis points since September 30, 1997, the
Bank exceeds its peers by approximately 50
basis points as recorded by the Uniform Bank
Performance Report. The Bank's peer group
includes banks throughout the country with
assets totaling between $250 and $500
million.
In the loan portfolio, which has grown by
almost $9.6 million (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 $12.9
million more than one year ago. Reductions
in the loan portfolio were found in the
commercial loan portfolio ($2.9 million).
This compares to 1997's growth of 4% or $8.8
million in loan growth, with $14 million of
the loan growth being secured by real estate
and granted to the Bank's consumer
customers. Reductions in the loan portfolio
in 1997 were found in the commercial loan
portfolio ($3.4 million) and the
construction portfolio ($1.7 million). The
Bank continues to experience strong
competition from other financial
institutions in its market area.
From September 30, 1997 to September
30, 1998, funding from the Federal Home Loan
Bank was the primary source of funding for
the bank's earning assets. While deposits
increased by $2.2 million, advances through
the Federal Home Loan Bank increased by
$15.2 million. The Bank monitors the cost
of funds through asset liability management
processes. The Federal Home Loan Bank's
rates for advances continues to be less than
deposit rates.
In 1997, the funding for the asset
growth had come from increased deposits of
$5.8 million with equal growth in demand
deposits, NOW accounts and certificates of
deposit. Borrowings funded primarily
through the Federal Home Loan Bank increased
in 1997 by $2.8 million when compared to
September 30, 1996. During both 1998 and
1997, 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. The Bank
examines the relationship between liquid
assets and short-term liabilities that are
vulnerable to nonreplacement 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 21.4% for the 30-day horizon and
18.2% for the 90-day horizon as of September
30, 1998. 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, 1998 and 1997. Net interest income as
of September 30, 1998, affected by rates,
volumes and the mix of earning assets and
interest bearing liabilities, is ahead of
September 1997's net interest income by
$153,000. Interest income earned from
loans increased in 1998 by $417,000 due to
volumes of loans with an offsetting
reduction in earnings of $382,000 due to
changes in rates. This is indicative of the
competitive
market in Downeast Maine. Overall yields
from the loan portfolio decreased by only 5
basis points from 1997's yields. Net
interest income for the first nine months of
1997 added earnings of $846,000 due to
volumes of loans with a reduction in
earnings of $285,000 due to changes in
rates. Overall yields from the loan
portfolio decreased by 39 basis points of
1996's yields.
The investment portfolio, with
net growth in
assets of $13 million, has shown increases
in interest income due to volumes ($360,000)
and decreases due to rates ($187,000). The
overall yield on the entire investment
portfolio has decreased by 24 basis points
during the past twelve months. Looking at
1997, the investment interest increased by
$82,000 based on volume and increased by
$187,000 due to rates. Overall, the yield
on investments increased by 5 basis points
from 1996 to 1997. While interest-bearing
liabilities increased by 10% from September
30, 1997 to September 30, 1998, the cost of
those liabilities increased by only 3%, with
the interest paid on deposits decreasing
primarily due to rates ($177,000). The cost
of borrowings increased due to volumes
($237,000). The overall cost of funding the
bank's assets has decreased by 8 basis
points over the past twelve months. In
1997, a similar pattern was visible with the
cost of deposits decreasing based on volumes
($177,000) and the cost of borrowed funds
increasing due to volumes ($416,000) and
rates (97,000). The cost of deposits
increased by 19 basis points when comparing
September 30, 1997 to 1996.
With regard to interest rate
sensitivity, the Bank is somewhat liability
sensitive with $6.6 million more of its
liabilities repricing within a year when
compared to its assets. In an economy with
interest rates falling, this scenario
provides potential income for the bank. In
the two-year horizon, however, the Bank
becomes asset sensitive with a cumulative
gap of $16.7 million more assets repricing
than liabilities. Based on simulations, if
interest rates were to rise or fall by 200
basis points and if the Bank were to
maintain the balance sheet as it stands
today, the Bank's net interest income would
be increased in the one-year horizon.
However, in year two, if interest rates were
to rise by 200 basis points, the Bank could
decrease its net interest income by $120,000
if it maintained a static balance sheet.
Likewise, if interest rates were to drop by
200 basis points and if the Bank elected to
maintain its balance sheet static, the Bank
could experience a decrease in its net
interest income of $614,000 during that
second year. This potential reduction in
net interest income equates to a 3.8% drop
in net interest income.
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
approximately 2% and has maintained that
reserve to loan ratio through September 30,
1998. 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 $1.7 million and $2.1
million at September 30, 1998 and 1997,
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 1998,
with net charge offs in the loan portfolio
totaling $460,000 for the first nine months
of this year. Losses for 1997 were
originally estimated at $500,000 with
$455,000 charged off through September 30,
1997. 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. The amounts
represented below are shown in thousands and
represent the total dollars past due for the
first nine months of each year listed. The
reduction in loans past due 90 days or more
stems from the resolution of several loans
that were on non-accrual status at September
30, 1997.
<TABLE>
<CAPTION>
Category 1998
1997
<S>
<C> <C>
90-day past due and
still accruing
$1,300 $428
Non-accruing
$2,023 $4,599
$3,323 $5,027
Gross loans
$230,030 $220,116 Percentage of
gross to 1.44% 2.28%
loan
</TABLE>
Non-interest income (other income) as
of September 30, 1998 was $432,000 ahead of
September 30, 1997.
Trust income, based on market value of trust
portfolios, was $190,000 ahead of last
year's income. Additionally, mortgage
servicing rights (implemented in January of
1996) were ahead of 1997 by $132,000, while
the expense pertaining to mortgage servicing
rights was also more in 1998 ($27,000).
Income generated from charges to merchants
for credit card processing was $80,000 more
than a year ago. The cost of the merchant
credit card program for the twelve months
ending September 30, 1998 was $150,000 more
than the previous year.
In looking at the comparison
between other income for the nine months
ended September 30, 1997 and 1996, 1997 was
below 1996 by $160,000. The Trust
Department produced $320,000 more income in
the first nine months of 1997, based on fees
structured on market values of total assets
per customer account and an increase in book
assets of more than $8 million. 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 created the variance between
the two years.
Salaries and benefits have remained
consistent over the past several years with
the increase in 1998 compared to 1997 of
only 2.4% and 1997 compared to 1996 of 3.7%.
Included in salaries and employee benefits
are merit increases and accruals for the
bank's incentive plan. Other
expenses, those expenses that
are not interest or human resource related,
as of September 30, 1998 are considerably
higher than at September 30, 1997 although
the percentage (13%) has reduced from the
17% variance through June 30, 1998.
The cost of processing merchant credit card
work and mortgage servicing rights were
mentioned earlier. Additionally, the Bank
has been more active in the media in 1998,
through the introduction of a new money
market product, numerous loan promotions and
several new TV spots. Postage is almost
$50,000 more than a year ago and includes
additional mailings for tax purposes and the
conversion of the Trust Department to a new
software vendor, which took place in early
September of 1998. In the spring of 1998,
the Bank hired a consultant to assist in the
selection process for a new banking software
vendor. The Bank expects to choose the
final vendor by December of 1998.
Depreciation expense increased
by $100,000 in 1997 when compared to 1996
and included the addition of the Operations
Center, opened in January of 1997 and the
depreciation of technology that had been
purchased during that twelve month period.
New personal computers, networking servers,
communication lines, document and check
imaging equipment are some of the
investments made into technology between
1996 and 1997.
Additionally, the bank had 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. Ultimately, the
amended returns were accepted, giving the
Bank a refund totaling $84,000. Audit
costs were $80,000 higher than in September
of 1996 and included 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 1996, the bank sought additional help
early in 1997 (predominantly reviewing
controls) from the bank's accounting firm,
Berry, Dunn, McNeil and Parker. These added
costs are non-recurring expenses
for the bank.
The Board of Directors approved the Bank's
Year
2000 global assessment and action plan
earlier this year. Individual project plans
for mission critical systems are written and
testing, including proxy testing of the
banking software is in process. All
computer hardware and operating software has
been tested. The bank has remained current
in its technology enhancements, which has
afforded compliance for this portion of the
overall project with little output of
capital
The assessment of customers' preparedness
and the
resulting impact on the institution began
this summer and follow up continues by the
bank's lenders on some of the larger credit
customers. The Bank redesigned its loan
application to incorporate a question
regarding the preparedness of the borrower
for the millennium. Over 5,200 business
customers received a brochure entitled "Is
your business prepared for Year 2000". The
Bank participated in a Bank Business
Customer Seminar that was developed by the
Maine Bankers Association. This program was
attended by area businesses in October of
this year with a second session being held
in November.
The costs incurred so far by the Bank
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 expenditure
directly related to the Year 2000 issues.
The budget for this project is approximately
$100,000 and includes approximately $30,000
in customer awareness materials and $60,000
in upgrades of ancillary software and the
upgrade of up to ten personal computers that
reside in back room work areas and serve as
spares. The Bank's banking software vendor
is presently working on a proxy test (for
its Year 2000 compliant software-Release 10)
with a target completion date of mid-
November. All user banks will move to
Release 10 of the banking software in the
first quarter of 1999. The Bank will not
incur any material costs to install this
release.
As mentioned earlier, the Bank is in the
process of choosing a new banking software
solution and hopes to implement this
software before mid-1999. Testing of new
software for Year 2000 compliance is part of
the negotiations with the proposed vendor.
The Bank's existing banking software
solution would become the contingent plan.
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.
The Bank's capital to asset ratio is 12.1%
and has
increased from 11.7% as of September 30,
1997. The Bank far exceeds the required
risk based capital ratio of 8% with its Tier
I ratio of 19.5%, total capital ratio of
20.8% and leverage ratio of 12.1%. Using
the risk based capital formula, the Bank has
capital in excess of requirements of $29
million. The Bank's year-to-date efficiency
ratio is 57% remains consistent with the
1997 ratio and is well under the national
average.
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 16,
1998
Sheldon F.
Goldthwait,
Jr. Chief
Executive
Officer
Date: November 16,
1998
Virginia M.
Vendrell
Treasurer and
Chief
Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 12448
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 20670
<INVESTMENTS-CARRYING> 96454
<INVESTMENTS-MARKET> 98093
<LOANS> 230030
<ALLOWANCE> (4535)
<TOTAL-ASSETS> 378466
<DEPOSITS> 265043
<SHORT-TERM> 63287
<LIABILITIES-OTHER> 4466
<LONG-TERM> 0
0
0
<COMMON> 3644
<OTHER-SE> 42027
<TOTAL-LIABILITIES-AND-EQUITY> 378466
<INTEREST-LOAN> 15744
<INTEREST-INVEST> 5750
<INTEREST-OTHER> 56
<INTEREST-TOTAL> 21550
<INTEREST-DEPOSIT> 6360
<INTEREST-EXPENSE> 8860
<INTEREST-INCOME-NET> 12690
<LOAN-LOSSES> 252
<SECURITIES-GAINS> 124
<EXPENSE-OTHER> 9447
<INCOME-PRETAX> 7129
<INCOME-PRE-EXTRAORDINARY> 7129
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4801
<EPS-PRIMARY> 2.79
<EPS-DILUTED> 2.79
<YIELD-ACTUAL> 8.35
<LOANS-NON> 2023
<LOANS-PAST> 1300
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4743
<CHARGE-OFFS> 591
<RECOVERIES> 131
<ALLOWANCE-CLOSE> 4535
<ALLOWANCE-DOMESTIC> 4535
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1200
</TABLE>
