18
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, 1999
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, 1999:
Common Stock: 3,643,614
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Financial Information
Page <S>
<C>
Item 1. Financial Statements
Consolidated Balance Sheets
3
September 30, 1999 and December 31, 1998
Consolidated Statements of Earnings
4
Three months and nine months ended
September 30, 1998 and 1999
Consolidated Statements of Changes in 5
Stockholders' Equity
Nine months ended September 30, 1998
and
1999
Consolidated Statement of Cash Flows 6
Nine months ended September 30, 1998
and
1999
Rate Volume Analysis
7
Nine months ended September 30, 1998 and
1999
Notes to Financial Statements
8-10
Item II. Management's Discussion and
Analysis 11-15 of Financial
Condition and Results of
Operations
Signature Page
16
</TABLE>
BAR HARBOR BANKSHARES AND
SUBSIDIARY CONSOLIDATED STATEMENT OF
FINANCIAL CONDITION
SEPTEMBER 30, 1999 AND DECEMBER 31,
1998
<TABLE>
<CAPTION>
SEPT. 30,
DECEMBER 1999
31, 1998
ASSETS
<S> <C> <C>
Cash and Due from Banks $ 14,646
$11,511
Federal Funds Sold -
0
Securities Available for Sale, 31,827
17,844
at market
Securities Held to Maturity
(Market Value 130,641
113,162
$127,759 at 930/99 and
$114,177 at 12/31/98)
Other Securities 6,108
6,133
Loans Held for Sale 0
1,018
Loans, net of allowance for
possible loan losses 255,871
224,980
of $4,912 in 1999 and $4,455
in 1998
Premises and Equipment 8,082
7,951
Other Assets 11,871
9,448
Total Assets $459,046
$392,047
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand Deposits $52,031
$42,323
NOW Accounts 45,153
43,319
Savings Deposits 86,294
67,619
Time Deposits 109,105
113,187
Total Deposits 292,583
266,448
Securities sold under Repurchase 9,621
8,092
Agreements
Advances from Federal Home Loan 103,248
66,120
Bank
Other Liabilities 4,622
4,526
Total Liabilities 410,074
345,186
Commitments and Contingent
Liabilities
Capital Stock, par value $2
Authorized 10,000,000 shares
Issued 3,643,614 in 1998 and 7,287
7,287
1999
Surplus 4,002
4,002
Retained Earnings 39,620
36,862
Net unrealized appreciation on
securities available (597)
50
for sale, net of tax benefit
Less: Cost of 200,000 shares of (1,340)
(1,340) Treasury Stock
TOTAL STOCKHOLDERS' EQUITY 48,972
39,574
TOTAL LIIABILITIES AND STOCKHOLDERS' $459,046
$392,047 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 NINE- NINE
MONTHS MONTHS MONTHS MONTH
ENDING ENDING ENDING
ENDING 9/30/99 9/30/98 9/30/99
9/30/98
<S> <C> <C> <C> <C>
Interest & Fees on $5,631 $5,409 $16,114
$15,744
Loans
Interest and
Dividends on
Investment 2,445 1,790 6,726
5,105
Securities:
Taxable
Interest Income
Non-taxable 78 95 242
335
Interest Income
Dividends 116 109 341
310
Federal Funds 18 26 46
56
Sold
Total Interest 8,288 7,429 23,469
21,550
Income
Interest on 2,077 2,147 6,150
6,360
Deposits
Interest in Short
Term 1,438 898 3,888
2,500
Borrowings
Total Interest 3,515 3,045 10,038
8,860
Expense
Net Interest 4,773 4,384 13,431
12,690
Income
Provision for Loan 119 84 656
252
Losses
Net Interest
Income after 4,654 4,300 12,775
12,438
Provision for
Loan Losses
Other Income 1,803 1,624 4,215
4,013
Investment 1 65 1
128
Securities Gains
Other Expenses::
Salaries & 1,786 1,605 4,827
4,529
Employee Benefits
Other 2,069 1,930 5,293
4,918
Investment 0 4 0
4
Securities Losses
Income Before 2,603 2,450 6,871
7,129
Income Taxes
Income Tax Expense 865 826 2,288
2,327
Net Income $1,738 $1,624 $4,583
$4,801
Earnings per
Share:
Based on
3,443,614 shares $0.50 $0.47 $1.33
$1.39
for 1998 and
1999,
Dividends Per 0.19 $0.17 $0.53
$0.50
Share
</TABLE>
BAR HARBOR BANKSHARES AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY QUARTERS ENDED
SEPEMBER 30, 1998 AND 1999
(in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Accumulat
ed Other NET
CAPITAL RETAINE Comprehen TREASURY
STOCKHOLD
STOCK SUIRPLU D sive STOCK ERS'
S EARNING Income
EQUITY
S
<S> <C> <C> <C> <C> <C>
<C>
Balance, 12/31/97 $7,284 $3,932 $32,562 $24 ($1,340) $42,462
Net Earnings 4,801 4,801
Other
comprehensive
income,
net of tax: 56 56
Unrealized
gains/losses
On Securities
Other
comprehensive
income
Comprehensive 4,857
income
Cash Dividends
Declared ($.50 (1,722) (1,722)
per share)
Sale of Stock 3 70 73
Balance, 9/30/98 $7,287 $4,002 $35,640 $80 ($1,340) $45,670
Balance, 12/31/98 $7,287 $4,002 $36,862 $50 ($1,340) $46,861
Net Earnings 4,583 4,583
Other
comprehensive
income,
net of tax: (647) (647)
Unrealized
gains/losses
On Securities
Other
comprehensive
income
Comprehensive 3,936
income
Cash Dividends
Declared ($.53 (1,825) (1,825)
per share)
Balance, 9/30/99 $7,287 $4,002 $39,620 $(597) ($1,340) $48,972
</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>
Septem
b
Septem
be er
30,
r 30,
1999 1998
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income
$4,583 4,801
Adjustments to reconcile net earnings
to net cash provided by
operating activities:
733 691
Depreciation
Provision for Loss Losses
656 252
Provision for Losses on Other Real
(1) 0
Estate Owned
New Loans Originated for Sale
(7,796) (12,509)
Proceeds from Sale of Mortgages
9,042 12,474
Held for Sale
Gain on Sale of Mortgages
(85) (117)
Originated for Sale
Net Amortization of Bond Premium
154 (17)
(Gain) Loss on sale of premises and
62 1
equipment
Net Change in Other Assets
(2,025) (333)
Net Change in Other Liabilities
96 (66)
Net Cash Provided by Operating
5,419 5,178
Activities
Cash Flows from Investing Activities:
Net decrease (increase) in Federal
Funds Sold
Purchases of securities held to
(42,518 (45,734)
maturity )
Proceeds from Maturity and Principal
Paydowns of Securities
3,250 22,213
Held to Maturity
Proceeds from Call of Securities Held
21,619 12,347
to Maturity
Purchases of Securities Available for
(19,965 (15,745)
Sale )
Proceeds from Maturity and Principal
Paydowns of Securities
1,517 271
Available for Sale
Proceeds from Sale and Calls of
3,500 9,500
Securities Available for Sale
Net Decrease (Increase) in Other
25 (38)
Securities
Net Loans Made to Customers
(31,836 (13,482)
)
Capital Expenditures
(932) (985)
Proceeds from sale of Other Real
81 437
estate Owned
Proceeds from Sale of Fixed Assets 7 0
Net Cash Used in Investing Activities
(65,252 (31,216)
)
Cash Flows from Financing Activities:
Net Change in Savings, NOW and Demand
30,216 22,963
Deposits
Net Change in Time Deposits
(4,081) (9,824)
Net Change in securities sold under
1,529 4,241
Repurchase Agreements
Proceeds from Federal Home Loan Bank
66,000 44,000
Repayment of Advances from FHLB (35,000
(
3
0
,
5
0
0
)
)
Net Change in Short Term Other
6,128 1,912 Borrowed Funds
Proceeds from Sale of Capital Stock
(0) 74 Payment of Dividends
(1,824) (1,917)
Net Cash Provided by Financing
62,968 30,949 Activities
Net Increase (Decrease) in Cash and Cash
3,135 4,911 Equivalents
Cash and Cash Equivalents at Beginning of
11,511 7,537 Year
Cash and Cash Equivalents at End of
$14,646 $12,448 Quarter
Supplemental Disclosures of Cash Flow
Information:
Cash Paid during the Year for:
$10,064 $8,886 Interest
Income Taxes, Net of Refunds
$2,102 $2,405 Non-Cash Transactions:;
Transfers from Loans to Real Estate
$82 $564 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 SEPTEMBER
30, 1999 COMPARED TO SEPTEMBER
30, 1998
INCREASES (DECREASES) DUE
TO:
<TABLE>
<CAPTION>
VOLUME
RATE NET <S>
<C> <C> <C>
Loans $1,470 ($1,102 $368
)
Taxable Securities 1,865 (211) 1,654
Tax Exempt Securities (66) (26) (92)
Federal Funds Sold and (5) (5) (10)
Money Market Funds
TOTAL EARNING ASSETS 3,264 (1,344) 1,920
Deposits 469 (679) (210)
Borrowings 1,518 (129) 1,389
Total Interest Bearing 1,987 (808) 1,179
Liabilities
NET CHANGE IN INTEREST $1,277 $(536) $741
</TABLE>
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>
Loans $417
($382) $ 35
Taxable Securities 553
(227) 326
Tax Exempt Securities (203)
31 (172)
Federal Funds Sold and 10 9 19
Money Market Funds
TOTAL EARNING ASSETS $777
($569) $208
Deposits 56 (
232) (176)
Borrowings 237
(5) 232
Total Interest Bearing 293
(237) 56
Liabilities
NET CHANGE IN INTEREST $484
($332) $152
</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 1998 Annual Report.
During 1998, the Company adopted
Statements of Accounting Standards (SFAS)
130, 131, and 132. The adoption of SFAS
130, Reporting of Comprehensive Income,
required that certain items be reported
under a new category of income "Other
Comprehensive Income". Unrealized gains
and losses on securities available for
sale is the only item included in Other
Comprehensive Income. SFAS 131 and 132
relate to disclosures about segments and
employee benefits, respectively. The
Company, through the branch network of the
Bank, provides a broad range of financial
services to individuals and companies in
eastern Maine. Operations are managed and
financial performance is evaluated on a
corporate-wide basis. Accordingly, all of
the Company's banking operations are
considered to be aggregated in one
reportable operating segment. The
financial statements for 1998 and 1999
include the required additional
disclosures for SFAS No. 130 and 132. In
addition, the Financial Accounting
Standards Boards issued SFAS No. 133,
Accounting for Derivative Instruments and
Hedging Activities and SFAS No. 134,
Accounting for MortgageBacked Securities
Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise". SFAX No. 133 will be
effective for fiscal years beginning after
June 15,2000 and SFAS No. 134 is effective
the first fiscal quarter beginning July
1, 1999. Management does not expect the
adoption of these standards to have a
material effect on the financial
statements.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 2. INVESTMENT
SECURITIES
CARRYING MARKET
AVAILABLE FOR SALE
VALUE VALUE
<S> <C> <C>
a: U. S. Treasury and other
$31,432 $30,563
government agencies
b: Marketable equity securities
1,300 1,264
Total Securities Available
$32,732 $31,827
For Sale
HELD TO MATURITY:
a: U. S. Treasury and other
$98,272 $96,013
government agencies
b: States of the U.S. and other
5,251 5,166
political subdivisions
c: Corporate bonds
27,118 26,580
Total Securities Held to
$130,641 $127,759
Maturity
OTHER SECURITIES
$6,108 $6,108
TOTAL SECURITIES
$169,481 $165,694
</TABLE>
The Bank does not hold any securities for
a single issuer which exceed 10% of the
Bank's stockholders' equity.
<TABLE>
<CAPTION>
SEPTEMBER DECEMBER
30,
1999 31, 1998
<S> <C>
<C>
3. LOANS
a: Commercial, agricultural
$39,353 $33,224
and other loans
b: Real Estate - Construction
15,521 11,366
c: Real Estate - Mortgage
190,091 168,307
d: Installment Loans
15,809 16,538
Total Loans
$260,774 $229,435
</TABLE>
<TABLE>
<CAPTION>
4. CHANGES IN ALLOWANCE SEPTEMBER
30, SEPTEMBER FOR POSSIBLE LOAN LOSSES: 1999 30,
1998
<S> <C>
<C>
Balance, beginning January
$4,455 4,743
1
Provision charged to
656 252
income
Recoveries of amounts
208 131
charged
Losses charged to
415 591
provision
Balance, ending September
$4,903 $4,535
30
</TABLE>
Information regarding impaired loans:
<TABLE>
<CAPTION>
SEPTEMBER
SEP
TEM
BER
3
30,
0,
1999
1998 <S> <C>
<C>
Average investment in impaired $736
$1,576
loans
Interest income recognized on
impaired loans including 14
35
interest
income recognized on cash
basis
Balance of impaired loans 656
1,073
Portion of impaired loan
balance for which an allowance 656
1,073
for
credit losses is allocated
Portion of allowance for loan
losses allocated to the 39
42
impaired
loan balance
</TABLE>
<TABLE>
<CAPTION>
5. CHANGES IN ALLOWANCE FOR
OTHER REAL ESTATE:
9/30/99
9/30/98
<S> <C>
<C>
Balance, beginning January 1 $16
$17
Provision charged to income 0
0
Losses charged to provision 1
1
Balance, ending September 30 $15
$16
</TABLE>
6. The aggregate dollar amount of loans
made to directors, executive officers or
principal holders of equity securities as
of September 30, 1999 and December 31,
1998 respectively, were:
<TABLE>
<S> <C> <C>
Aggregate amount, beginning $7,243
$3,952
1/1
New loans 1,175
5,393
Repayments 1,565
2,102
Aggregate amount, ending $6,853
9/30/99
Aggregate amount, ending
$7,243
12/31/98
</TABLE>
<TABLE>
<CAPTION>
7. OTHER ASSETS SEPTEMBER
DECEMBE
3
0
,
R
3
1
,
1
9
9
9
1
9
9
8
<S> <C>
<C>
a: Interest earned but not
paid on:
$1,515 $1,494
Loans
Investments
1,473 1,264
b: Other Real Estate Owned
100 98
</TABLE>
8. INCOME TAXES:
Components of income tax expense for the
period ended September 30, 1999 are as
follows:
<TABLE>
<CAPTION>
Current
<S> <C>
Federal $2,983
State 76
Deferred (771
$2,288
</TABLE>
Actual tax expense differs from the
expected tax expense computed by applying
the applicable federal corporate income
tax rate of 34% is as follows for the nine-
months ended September 30, 1999.
<TABLE>
<S> <C>
Computed tax $2,330
expense
Tax exempt (98)
interest
Other 56
$2,288
</TABLE>
At September 30, 1999, 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 $1,506
0
Deferred and accrued employee 1,034
0
benefits
Deferred mortgage servicing 0
141
rights
Deferred loan origination fees 353
0
Securities losses not currently 49
0
deductible
Core deposit intangibles 41
0
Depreciation 0
23
Other 26
0
$3,009
$164 </TABLE>
No valuation allowance is deemed necessary
for the deferred tax asset.
<TABLE>
<CAPTION>
9. INCOME TAX EXPENSE September
September 30,
30, 1999
1998
<S> <C> <C>
Federal Income Tax $2,211
2,254 State Income Tax 76
73
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following is a review of
results of the operations of Bar Harbor
Banking & Trust Company for September 30,
1999 as compared to September 30, 1998.
The bank has focused on growth in its
balance sheet through both loans and
investments, funding the growth with
deposits and borrowings. Overall, the
bank's balance sheet has grown by $80
million or 21%, compared to a 7%
growth of $25 million between 1999 and
1998. While the nine-month earnings for
1999 are down 4.6% or $218,000 compared to
first nine months of 1998, the bank is
involved in several major projects that
are described below. The expectation is
that these projects will enhance
customer service, efficiencies and
profitability.
The investment portfolio net growth
in excess of $45 million has predominantly
been in the area of US Government agency
debentures. Purchases in the past twelve
months have totaled $90 million, including
$46 million in government sponsored
mortgage backed securities and $19.7
million in callable agencies. Of the
$13.8 million in securities called in the
past twelve months, $7.1 million had given
the bank a minimum of a year's call
protection. In addition, $28.3 million
cash flow was received in principal
paydowns from mortgage backed securities.
As a comparison, from September 30,
1997 to September 30, 1998, purchases
totaled $73 million, of which $28.7
million were callable agencies, $34
million were government sponsored
mortgage backed pools and purchases of
corporate bonds totaled $10 million.
During this twelve month period, the bank
had securities totaling $26 million
called, $14 million of which had a minimum
of one year's call protection, $18 million
in principal paydowns from mortgage backed
securities, $3.3 million in maturing tax-
exempt securities and $8.5 million in
corporate bond maturities. 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 its funding
programs.
Unrealized losses in the available
for sale
portfolio as represented on the Bank's
Statement of Condition increased over the
past twelve months, ending the quarter at
$597,000 and is indicative of the current
national interest rate structure,
including Federal Reserve increases in
rates. This unrealized loss is also
visible in the total market value of the
portfolio in comparison with the book
value. The Bank's posture traditionally
has been to purchase securities with the
intent to hold to maturity and potential
sales in the portfolio are not imminent.
At September 30, 1998, the market value of
the entire investment portfolio was $1.7
million greater than book value.
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 6.75% for the first nine
months of 1998. Although this represents
a decrease of 14 basis points since
September 30, 1998, the Bank exceeds its
peer group average by approximately 35
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
$30 million (13%) in the past twelve
months, the Bank's concentration has been
through the extension of loans secured by
real estate to its customers totaling $26
million more than one year ago. This
compares to 1998's growth of $9.6 million
in loan growth, with $12.9 million of the
loan growth being secured by real estate
and granted to the Bank's consumer
customers. Reductions in the loan
portfolio in 1998 were found in the
commercial loan portfolio ($2.9 million).
Funding for the asset growth has come
from strong growth in the Bank's deposits
totaling $27.5 million or more than 10% in
growth. In early 1997, the Bank
introduced the Investor's Choice account,
an account that competes favorably with
national money market accounts with
respect to interest rate offerings.
This product continues to be quite
successful for the Bank in new deposit
growth as well as deposit retention. In
addition to the deposit growth, funding
for the growth in the balance sheet has
come from increases in advances from the
Federal Home Loan Bank totaling $48.6
million. The Bank monitors the cost of
funds through asset liability management
processes.
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. 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 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 14.9%.
Liquidity as measured by the Basic
Surplus/Deficit model was 19.5% for the 30-
day horizon and 14.9% for the 90-day
horizon as of September 30, 1999. 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, 1999
and 1998. Net interest income as of
September 30, 1999, affected by rates,
volumes and the mix of earning assets and
interest bearing liabilities, is ahead of
September 1998's net interest income by
$741,000. Interest income earned from
loans increased in 1999 by $1.5 million
due to volumes of loans with an offsetting
reduction in earnings of $1.1 million due
to changes in rates. This is indicative
of the competitive market in Downeast
Maine. Overall yields from the loan
portfolio decreased by approximately 70
basis points from 1998's yields. Net
interest income for the first nine months
of 1998 added earnings of $153,000.
Overall yields from the loan portfolio
decreased by 5 basis points when compared
to 1997's yields.
The investment portfolio, with
net growth in assets of $45 million, has
shown increases in interest income due to
volumes ($1.8 million) and decreases due
to rates ($242,000) for a net increase
derived from investments of $1.5 million.
The overall yield on the entire investment
portfolio has decreased by 16 basis points
during the past twelve months. Looking at
1998, the investment interest increased by
$360,000 based on volume and decreased by
$187,000 due to rates. Overall, the
yield on investments decreased by 24 basis
points from 1997 to 1998.
While interest-bearing liabilities
increased by 8% from September 30, 1998 to
September 30, 1999, the cost of those
liabilities decreased by 3%. The interest
paid on deposits decreased primarily due
to rates (679,000) and costs increased by
$469,000 based on the 8% growth. The cost
of borrowings increased due to volumes
($1.5 million). The overall cost of
funding the bank's assets has decreased by
19 basis points over the past twelve
months. In 1998, the cost of deposits
increased by only $56,000 based on volumes
and decreased by $238,000 as a result of
rates. The cost of interest bearing
deposits decreased by 8 basis points when
comparing September 30, 1998 to September
30, 1997.
The Bank's position with regard
to interest rate sensitivity consists of
the matching of its assets and
liabilities for repricing within a year.
There is some exposure to rising rates
out beyond a year as the Bank has almost
$19.7 million invested in callable
securities with final maturities of ten
years or less. The exposure lies with
the possibility that these securities
would not be called. The bank has
decreased the amount of callable
agencies it is purchasing as well as
shortening the final maturities it is
purchasing. With $55 million more
liabilities than assets repricing within
the next twelve months, if rates were to
rise by 200 basis points and the Bank did
not change its posture at all,
simulations indicate that the Bank's net
interest income could decrease by
approximately $835,000 during the first
year of the rise. Should rates fall by
200 basis points, the Bank's net
interest income would increase by
approximately $688,000 the first year.
The potential reduction in net interest
income should rates rise by 200 basis
points equates to a potential 4.5% drop in
net interest income.
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.
Additionally, the allocation contains a
provision for impaired loans in
accordance with FASB 114/118.
Reference is made to the notes included in
this filing that outlines the impaired
loan figures. The ratio for the
reserve for possible loan losses has
been approximately 2% for a number of
years, and continues with a ratio of
1.9% at September 30, 1999 and 2.05% as
of September 30, 1998. The bank's
delinquency ratio has continued to drop
over the years and is at a record low.
Losses in the loan portfolio were
estimated at $750,000 for 1999, with year
to date net charge offs totaling
$207,000 compared to $460,000 during
the first nine months of 1998. Losses
for calendar year 1998 were estimated to
be $500,000.
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 $656,000
and $1.7 million at September 30, 1999 and
1998, respectively. Reference is made to
the notes included with this filing that
outline the impaired loan figures.
The bank retains a conservative posture
with
regard to non-accruing loans, placing
loans onto nonaccrual 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.
Category 1999
1998
90-day past due and still $ 1,547
$1,300 accruing
Non-accruing 1,737
2,023
$3,284 $3,323 Gross loans
$260,774 $230,030 Percentage of gross
loans 1.26% 1.44%
Other income for the first
nine months of 1999 was $4,215,000 and
$200,000 or 5% more than the same period
in 1998. Card program fees (including
credit cardholder fees, merchant
processing fees and check card fees)
surpassed 1998's fee income by
$183,000 and constituted the majority of
the increase in other income.
Other expense was 7.6% (or $376,000)
more in 1999 when compared to 1998, and
included $250,000 for increased costs
for the card programs described above. As
mentioned earlier, the Bank has been
involved in a number of projects in the
past twelve months, one of which is the
conversion of its banking software to
Information Technology, Inc. (ITI). The
conversion is scheduled for second
quarter 2000 and some of the
expenses incurred include upgrades of
equipment and the hiring of a third
party vendor to assist with the
conversion, including project
management and
individual employee training.
Another major endeavor is the
announcement that Bar Harbor Bankshares
has agreed to acquire Dirigo
Investments, Inc., an NASD Registered
Broker Dealer firm based in Ellsworth,
Maine, subject to regulatory approval.
Under a restructuring plan, Bar Harbor
Bankshares will form a new financial
services holding company to be known
as BTI Financial Group. Following
its acquisition, Dirigo Investments,
Inc. would become a subsidiary of BTI
Financial Group and would continue to
operate as a full-service discount
brokerage firm. BTI Financial Group
would also own and operate a Maine
chartered, non-depository trust company
to be known as Bar Harbor Trust Services
and a newly formed SEC
registered investment advisor
offering portfolio management services to
be known as Block Capital Management.
Bar Harbor Bankshares is seeking
regulatory approval for each of these
three operating entities over the next 90
days. Expenses
incurred in the formation of BTI
Financial Group are included in the Other
Expense category.
Salaries and employee benefits are
$202,000 (5%) higher as of September 30,
1999 when compared to the same period
for 1998. This includes merit increases,
increased premiums for employee
insurance plans, incentive accruals and
an increase of 8 people in the full time
equivalent work force.
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 the
previous 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 the previous year. The cost of the
merchant credit card program
for the twelve months ending September
30, 1998 was $150,000 more than the
previous year.
Other expenses, those expenses
that are not interest or human
resource related, as of September 30,
1998 were 13% higher than at September
30,1997. The cost of processing merchant
credit card work and mortgage servicing
rights were mentioned earlier.
Additionally, the Bank was more active in
the media in 1998, promoting the
introduction of the new money market
product, numerous loan promotions and
several new TV spots. Postage was
almost $50,000 more at September 30,
1999 and included 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 new banking
software. The selection process
continued throughout 1998 and is mentioned
in the 1999 conversion information above.
As an update for Year 2000, the
Assessment Phase is complete and the
Renovation Phase is substantially
complete. The bank has identified and
contacted third party vendors
(operating partners, plastic card
networks, public utilities, etc.) that are
critical to its operations and
success. The bank has not
independently verified the Year 2000 readiness
statements of these third party vendors.
Based on the assessment of system
readiness, the bank has repaired or
replaced systems as required. The
Validation Phase is substantially
complete with all mission critical
systems tested either internally or by
proxy.
As the bank monitors on-going
systems, it has also developed a
contingency plan in case of
unanticipated failures in any of the
bank's systems. The plan has identified
seven core business processes that would
be critical for continued service to its
customers. Business resumption plans for
each of these processes are being
refined and specific procedures are
being developed to ensure the bank
prepares for and operates through any
possible Year 2000 related interruptions.
The bank's contingency plan has been
approved by its Board of Directors
and is being validated by an independent
party.
The bank joined four other local banks
to create an Interbank Working Group for
the Year 2000. This group continues to
meet and assess liquidity, security and
customer awareness issues. The CEOs of
the five banks have presented a bank
panel consisting of
representatives of each of the five banks
to speak at local businesses or civic
organizations. The five CEOs have also
met with local media representatives to
reiterate the message that banks have done
their Year 2000 compliance work and that
funds maintained within banks are safe,
sound and insured.
The costs incurred thus far in 1999
for the Year 2000 initiative total $53,000
and are not expected to exceed $100,000
by year end.
The financial statements for
1998 and 1999 include the required
additional disclosures for SFAS No. 130 and 132.
In addition, the Financial
Accounting Standards Board issued SFAS
No. 133,
Accounting for Derivative Instruments
and Hedging Activities and SFAS No. 134,
"Accounting for MortgageBacked Securities
Retained after the Securitization of
Mortgage Loans Held for Sale by a
Mortgage Banking Enterprise". SFAS No.
133 will be effective for fiscal years
beginning after June 15, 2000 and SFAS
No. 134 was effective the first
fiscal quarter
beginning July 1, 1999. Management does
not expect the adoption of SFAS No. 133
to have a material effect on the
financial statements. The adoption of
the remaining standards has had no
material effect on the financial
statements.
As a financial summary, the
following ratios indicate the bank's
status. The Bank's year to date
efficiency ratio is 60%. The Bank's
year to date capital to asset ratio is
11.3%. The Bank far exceeds the required
risk based capital ratio of 8% with its
Tier I ratio of 17.7%, total capital ratio
of 19% and leverage ratio of 12.5%.
These ratios represent capital of $30
million in excess of the requirement for
a well-capitalized bank.
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: November 5, 1999
Sheldon F.
Goldthwait, Jr.
Chief Executive Officer
/s/
Virginia M. Vendrell
Date: November 5, 1999
Virginia M.
Vendrell
Tre
asu
rer
and
Chi
ef
Fin
anc
ial
Officer
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 14,646
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
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<INVESTMENTS-HELD-FOR-SALE> 31,827
<INVESTMENTS-CARRYING> 130,641
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<TOTAL-ASSETS> 459,046
<DEPOSITS> 292,584
<SHORT-TERM> 75,621
<LIABILITIES-OTHER> 4,622
<LONG-TERM> 37,248
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<COMMON> 7,287
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<TOTAL-LIABILITIES-AND-EQUITY> 459,046
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<INTEREST-TOTAL> 23,469
<INTEREST-DEPOSIT> 6,150
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<INCOME-PRETAX> 6,871
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<EXTRAORDINARY> 0
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<NET-INCOME> 4,583
<EPS-BASIC> 1.33
<EPS-DILUTED> 1.33
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<LOANS-NON> 1,737
<LOANS-PAST> 1,547
<LOANS-TROUBLED> 0
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