-----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, D9pJEF2lwQHky1vE9BYBEMY3e7eds714xeifg/FbT0kS+q7sI1riJ8lviufE9C+V 1PTsrRN2r40o5JIB9ffocw== 0000743367-99-000016.txt : 19991109 0000743367-99-000016.hdr.sgml : 19991109 ACCESSION NUMBER: 0000743367-99-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991108 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: 99742669 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 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
Financial Information Page 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
BAR HARBOR BANKSHARES AND SUBSIDIARY CONSOLIDATED STATEMENT OF FINANCIAL CONDITION SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
SEPT. 30, DECEMBER 1999 31, 1998 ASSETS 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
The accompanying notes are an integral part of these consolidated financial statements. BAR HARBOR BANKSHARES AND SUBSIDIARY CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)
THREE THREE NINE- NINE MONTHS MONTHS MONTHS MONTH ENDING ENDING ENDING ENDING 9/30/99 9/30/98 9/30/99 9/30/98 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
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)
Accumulat ed Other NET CAPITAL RETAINE Comprehen TREASURY STOCKHOLD STOCK SUIRPLU D sive STOCK ERS' S EARNING Income EQUITY S 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
The accompanying notes are an integral part of these consolidated financial statements. BAR HARBOR BANKSHARES AND SUBSIDIARY COLSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Septem b Septem be er 30, r 30, 1999 1998 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
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:
VOLUME RATE NET 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
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) 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
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.
SEPTEMBER 30, 1999 2. INVESTMENT SECURITIES CARRYING MARKET AVAILABLE FOR SALE VALUE VALUE 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
The Bank does not hold any securities for a single issuer which exceed 10% of the Bank's stockholders' equity.
SEPTEMBER DECEMBER 30, 1999 31, 1998 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
4. CHANGES IN ALLOWANCE SEPTEMBER 30, SEPTEMBER FOR POSSIBLE LOAN LOSSES: 1999 30, 1998 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
Information regarding impaired loans:
SEPTEMBER SEP TEM BER 3 30, 0, 1999 1998 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
5. CHANGES IN ALLOWANCE FOR OTHER REAL ESTATE: 9/30/99 9/30/98 Balance, beginning January 1 $16 $17 Provision charged to income 0 0 Losses charged to provision 1 1 Balance, ending September 30 $15 $16
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: 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
7. OTHER ASSETS SEPTEMBER DECEMBE 3 0 , R 3 1 , 1 9 9 9 1 9 9 8 a: Interest earned but not paid on: $1,515 $1,494 Loans Investments 1,473 1,264 b: Other Real Estate Owned 100 98
8. INCOME TAXES: Components of income tax expense for the period ended September 30, 1999 are as follows:
Current Federal $2,983 State 76 Deferred (771 $2,288
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. Computed tax $2,330 expense Tax exempt (98) interest Other 56 $2,288
At September 30, 1999, 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 $1,506 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
No valuation allowance is deemed necessary for the deferred tax asset.
9. INCOME TAX EXPENSE September September 30, 30, 1999 1998 Federal Income Tax $2,211 2,254 State Income Tax 76 73
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 EX-27 2
9 9-MOS DEC-31-1999 SEP-30-1999 14,646 0 0 0 31,827 130,641 127,709 260,774 (4,903) 459,046 292,584 75,621 4,622 37,248 0 0 7,287 41,685 459,046 16,113 7,310 46 23,469 6,150 10,038 13,431 656 1 10,121 6,871 6,871 0 0 4,583 1.33 1.33 7.85 1,737 1,547 0 0 4,455 415 208 4,903 4,903 0 1,290
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