-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OryFhm/tB8GmmqqOw56GjXUhtHt88L/QhxjfU/1baKj++juyn01pWm3jPF9Ub2ck jsuoHpcY0StQrMXWsQQbvw== 0000743367-98-000016.txt : 19981118 0000743367-98-000016.hdr.sgml : 19981118 ACCESSION NUMBER: 0000743367-98-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BAR HARBOR BANKSHARES CENTRAL INDEX KEY: 0000743367 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 010393663 STATE OF INCORPORATION: ME FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13349 FILM NUMBER: 98751571 BUSINESS ADDRESS: STREET 1: 82 MAIN ST STREET 2: P O BOX 400 CITY: BAR HARBOR STATE: ME ZIP: 04609-0400 BUSINESS PHONE: 2072883314 MAIL ADDRESS: STREET 1: 82 MAIN ST STREET 2: P O BOX 400 CITY: BAR HARBOR STATE: ME ZIP: 04609-0400 10-Q 1 10Q FORM 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
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
BAR HARBOR BANKSHARES AND SUBSIDIARY CONSOLIDATED STATEMENT OF FINANCIAL CONDITION SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
SEPTEMBER DECEMBER 30, 1998 31, 1997 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
BAR HARBOR BANKSHARES AND SUBSIDIARY CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)
THREE THREE NINE NINE MONTHS MONTHS MONTHS MONTHS ENDING ENDING ENDING ENDING 09/30/98 09/30/97 09/30/98 09/30/97 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
BAR HARBOR BANKSHARES AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY QUARTERS ENDED SEPTEMBER 30, 1997 AND 1998
ACCUMULATED NET CAPITA RETAINED TREASUR OTHER STOCKHOLDER L SURPLU EARNINGS Y COMPREHENSI S' STOCK S STOCK VE INCOME EQUITY 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 )
BAR HARBOR BANKSHARES AND SUBSIDIARY COLSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
SEPTEMB SEPTEMB ER 30, ER 30, 1998 1997 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
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:
VOLUME RATE NET 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
YEAR-TO-DATE FIGURES AS OF SEPTEMBER 30, 1997 COMPARED TO SEPTEMBER 30, 1996 INCREASES (DECREASES) DUE TO:
VOLUME RATE NET 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
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.
September 30, 1998 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
The Bank does not hold any securities for a single issuer which exceed 10% of the Bank's stockholders' equity.
Septe mb e De ce mb e r 30 , r 31, 1998 1997 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
Information regarding impaired loans is as follows:
Septembe r December 30, 1998 31, 1997 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
5. CHANGES IN ALLOWANCE FOR OTHER REAL ESTATE:
9/30/9 9/30/97 9/30/96 8 $17 $22 $26 Provision charged to 0 0 (5) income Losses charged to 1 5 21 provision Balance, ending $16 $17 $0 September 30
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:
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
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:
Current Federal $2,414 State 73 Deferred (160) $2,327
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:
Computed tax $2,404 expense Tax exempt (131) interest Other 54 $2,327
At September 30, 1998, items giving rise to the deferred income tax assets and liabilities, using a tax rate of 34%, are as follows:
ASSET LIABILITY 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
No valuation allowance is deemed necessary for the deferred tax asset.
9. INCOME TAX EXPENSE 1998 1997 Federal Income Tax $2,254 $2,126 State Income Tax $73 $70
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.
Category 1998 1997 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
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 EX-27 2
9 9-MOS DEC-31-1998 SEP-30-1998 12448 0 0 0 20670 96454 98093 230030 (4535) 378466 265043 63287 4466 0 0 0 3644 42027 378466 15744 5750 56 21550 6360 8860 12690 252 124 9447 7129 7129 0 0 4801 2.79 2.79 8.35 2023 1300 0 0 4743 591 131 4535 4535 0 1200
-----END PRIVACY-ENHANCED MESSAGE-----