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, 1995 C ommission 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) Registrants'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, 1995: Common Stock: 1,813,605 PAGE
TABLE OF CONTENTS <TABLE> <S> <C> Financial Information Page Item I. Financial Statements Consolidated Balance Sheets 2 December 31, 1994 and September 30, 1995 Consolidated Statements of Earnings 3 Three months and nine months ended September 30, 1993, 1994 and 1995 Consolidated Statements of Changes in Stockholders Equity 4 Nine months ended September 30, 1994 and 1995 Consolidated Statements of Cash Flows 5 Nine months ended September 30, 1994 and 1995 Rate Volume Analysis 6 Nine months ended September 30, 1994 and 1995 Rate Sensitivity Report 7 As of September 30, 1995 Notes to Financial Statements 8-10 Item II. Management s Discussion and Analysis of Financial Condition and Results of Operations 11-14 Signature Page 15 </TABLE> PAGE
BAR HARBOR BANKSHARES AND SUBSIDIARY CONSOLIDATED STATEMENT OF FINANCIAL CONDITION SEPTEMBER 30, 1995 AND DECEMBER 31, 1994 (UNAUDITED) <TABLE> <CAPTION> SEPTEMBER 30 DECEMBER 31 1995 1994 <S> <C> <C> <C> <C> ASSETS Cash and Due from Banks $ 8,162,842 $ 9,714,713 Federal Funds Sold 3,775,000 0 Investment Securities Securities Held to Maturity 93,844,381 85,080,071 Securities Available for Sale 8,288,585 6,238,887 Gross Loans 199,190,025 185,993,806 Allowance for possible Loan losses (4,225,715) (3,891,835) Net Loans 194,964,310 182,101,971 Premises and Equipment 6,173,589 5,566,224 Loans held for sale 264,558 255,958 Other Assets 8,248,456 7,729,626 TOTAL ASSETS 323,721,721 296,687,450 LIABILITIES AND STOCKHOLDERS EQUITY LIABILITIES Deposits Demand Deposits 34,393,596 30,124,536 NOW Accounts 39,536,084 37,951,497 Savings Deposits 58,273,459 61,981,439 Time, $100,000 and over 13,042,310 7,977,495 Other Time 110,739,079 87,509,593 TOTAL DEPOSITS 255,984,528 225,544,560 Securities sold under Repurchase Agreements 23,351,658 13,947,903 Advances from Federal Home Loan Bank 8,000,000 25,000,000 Other Liabilities 3,487,223 3,434,203 TOTAL LIABILITIES 290,823,409 267,926,666 Capital Stock, par value $2 Authorized 10,000,000 shares issued 1,809,835* in 1994 and 1,813,605* in 1995 3,627,210 3,619,670 Surplus 7,368,696 7,314,408 Retained Earnings 23,156,863 19,118,679 Net unrealized appreciation on securities available for sale 85,543 48,027 Net of tax of $44,067 Less: Cost of 100,000 shares (1,340,000) (1,340,000) Of Treasury Stock* TOTAL STOCKHOLDERS EQUITY 32,898,312 28,760,784 TOTAL LIABILITIES AND STOCKHOLDERS EQUITY 323,721,721 296,687,450 </TABLE> *Number of shares of stock have been restated to reflect a five-for-one stock split declared July 11,1995. The accompanying notes are an integral part of these consolidated financial statements PAGE
BAR HARBOR BANKSHARES AND SUBSIDIARY CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED) <TABLE> <CAPTION> <S> <C> <C> <C> <C> <c > <C> THREE MONTHS THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS NINE MONTHS ENDING ENDING ENDING ENDING ENDING ENDING 09-30-95 09-30-94 09-30-93 09-30-95 09-30-94 09-30-93 Interest & Fees on Loans $5,121,406 $4,205,264 $3,594,981 $14,330,622 $11,742,788 $10,747,989 Interest & Dividends on Investment Securities: Taxable Interest Income 1,445,337 1,172,225 870,779 4,057,080 3,312,142 3,252,698 Non-taxable Interest Inc. 215,313 208,013 217,947 647,061 618,545 651,166 Dividends 77,982 116,949 59,266 286,046 265,482 169,634 Total Interest Income 6,901,828 5,706,157 4,751,143 19,411,950 15,970,116 14,835,278 Interest on Deposits 2,233,392 1,615,156 1,391,625 6,077,427 4,347,566 4,219,927 Interest in Short Term Borrowings 533,699 359,700 224,031 1,719,723 1,185,198 881,728 Total Interest Expense 2,767,091 1,974,856 1,615,656 7,797,150 5,533,764 5,101,655 Net Interest Income 4,134,737 3,731,301 3,135,487 11,614,800 10,436,352 9,733,623 Provision for Loan Losses 240,000 240,000 270,000 720,000 720,000 810,000 Net Interest Income after Provision for Loan Losses 3,894,737 3,491,301 2,865,487 10,894,800 9,716,352 8,923,623 Other Income 1,362,041 1,251,090 1,248,916 3,183,547 3,059,539 2,989,798 Investment Securities Gains 0 32,532 0 0 58,494 0 Other Expenses: Salaries & Emp. Benefits 1,245,330 1,321,864 1,086,012 3,639,676 3,749,390 3,313,737 Other 1,305,752 974,447 1,321,879 3,698,848 3,276,061 3,560,589 Investment Securities Losses 0 0 0 0 0 0 Income Before Income Taxes 2,705,696 2,478,612 1,706,512 6,739,813 5,808,934 5,039,095 Income Tax Expense 859,275 677,957 492,473 2,084,741 1,688,471 1,540,000 Net Income 1,846,421 1,800,655 1,214,039 4,655,082 4,120,463 3,499,095 Earnings per Share: Based on 1,707,270 Shares for 1993, 1,709,835 for 1994 and <S> <C> <C> <C> <C> <C> <C> 1,713,605 Shares for 1995* $1.08 $1.05 $0.71 $2.72 $2.41 $2.05 Dividends per Share $0.36 $0.30 $0.25 </TABLE> *Earnings per share have been restated in 1993 and 1994 to reflect a five-for-one stock split declared July 11, 1995. PAGE
BAR HARBOR BANKSHARES AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY QUARTERS ENDED SEPTEMBER 30, 1994 AND 1995 (UNAUDITED) <TABLE> <CAPTION> <S> <C> <C> <C> <C> <C> <C> NET UNREA- NET LIZED LOSS STOCK- CAPITAL RETAINED TREASURY ON EQUITY HOLDERS STOCK SURPLUS EARNINGS STOCK SECURITIES EQUITY Balance, 12/31/93 $3,614,540 $7,280,550 $15,469,806 ($1,340,000) ($37,566) $24,987,440 Net Earnings 4,120,463 4,120,463 Cash Dividends Declared (512,950) (512,950) Net Unrealized Loss on Marketable Equity Securities (177,163) (177,163) Sale of Stock (513 Shares) 5,130 33,858 38,988 Balance, 9/30/94 $3,619,670 $7,314,408 $19,077,319 ($1,340,000) ($214,729) $28,456,668 Balance, 12/31/94 3,619,670 7,314,408 19,118,678 (1,340,000) 48,027 28,760,783 Net Earnings 4,655,082 4,655,082 Cash Dividends Declared (616,897) (616,897) Net Unrealized Appreciation on Securities Available for Sale, Net of Tax of $44,067 37,516 37,516 Sale of Stock (754 Shares) 7,540 54,288 0 0 0 61,828 Balance, 9/30/95 $3,627,210 $7,368,696 $23,156,863 ($1,340,000) $85,543 $32,898,312 </TABLE> PAGE
BAR HARBOR BANKSHARES AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> <S> <C> <C> SEPTEMBER 30 SEPTEMBER 30 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME $ 4,655,082 $4,120,463 ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: DEPRECIATION 436,354 408,159 PROVISION FOR LOAN LOSSES 720,000 720,000 PROCEEDS FROM SALE OF MORTGAGES HELD FOR SALE NET SECURITIES (GAINS) LOSSES 0 (7,500) NET AMORTIZATION OF BOND PREMIUM 137,185 345,175 NET CHANGE IN OTHER ASSETS (546,755) (1,062,272) NET CHANGE IN OTHER LIABILITIES 53,020 785,081 5,454,886 5,309,106 NET CASH PROVIDED BY OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES: PURCHASES OF SECURITIES HELD TO MATURITY (20,927,848) PROCEEDS FROM THE MATURITY & PRINCIPAL PAYDOWNS OF SECURITIES HELD TO MATURITY 6,276,134 10,660,680 PROCEEDS FROM THE SALE (CALL) OF SECURITIES HELD TO MATURITY 5,750,000 PURCHASES OF SECURITIES AVAILABLE FOR SALE (1,997,188) PROCEEDS FROM THE MATURITY & PRINCIPAL PAYDOWNS OF SECURITIES AVAILABLE FOR SALE 4,549 4,320,599 PROCEEDS FROM THE SALE (CALL) OF SECURITIES AVAILABLE FOR SALE 0 NET LOANS MADE TO CUSTOMERS (13,582,338) (19,685,648) CAPITAL EXPENDITURES (1,043,719) (972,543) (25,520,410) (34,796,228) NET CASH USED IN INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES: NET CHANGE IN DEPOSITS 30,439,968 29,260,316 INCREASE IN REPURCHASE AGREEMENTS 9,403,755 9,850,054 NET CHANGE IN OTHER BORROWINGS (17,000,000) (7,000,000) PROCEEDS FROM SALE OF CAPITAL STOCK 61,828 38,988 PAYMENTS OF DIVIDENDS (616,898) (512,950) NET CASH PROVIDED BY FINANCING ACTIVITIES 22,288,653 31,636,408 NET INCREASE IN CASH AND CASH EQUIVALENTS 2,223,129 2,149,286 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 9,714,713 6,134,371 CASH AND CASH EQUIVALENTS AT END OF QUARTER $11,937,842 $8,283,657 CASH AND CASH EQUIVALENTS AT END OF YEAR SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: CASH PAID DURING THE YEAR FOR: INTEREST $7,708,377 $5,686,872 INCOME TAXES $2,026,679 $1,543,681 SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS </TABLE> PAGE
BAR HARBOR BANKSHARES AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> <S> <C> <C> <C> <C> SEPTEMBER 30 SEPTEMBER 30 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME $ 4,655,082 $ 4,120,463 ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: DEPRECIATION 436,354 408,159 PROVISION FOR LOAN LOSSES 720,000 720,000 NEW LOANS ORIGINATED FOR SALE (5,422,883) (10,744,890) PROCEEDS FROM SALE OF MORTGAGES HELD FOR SALE 5,442,126 10,763,176 GAIN ON SALE OF MORTGAGES ORIGINATED FOR SALE (19,243) (18,286) NET SECURITIES GAINS 0 (7,500) NET AMORTIZATION OF BOND PREMIUM 137,185 345,175 GAIN ON SALE OF REAL ESTATE OWNED (4,830) (3,000) NET CHANGE IN OTHER ASSETS (541,925) (1,059,272) NET CHANGE IN OTHER LIABILITIES 53,020 785,081 NET CASH PROVIDED BY OPER. ACTIVITIES 5,454,886 5,309,106 CASH FLOWS FROM INVESTING ACTIVITIES: PURCHASES OF SECURITIES HELD TO MATURITY (20,927,848) (25,610,216) PROCEEDS FROM THE MATURITY & PRIN. PAYDOWNS OF SECURITIES HELD TO MATURITY 6,276,134 10,660,680 PROCEEDS FROM THE CALL OF SECURITIES HELD TO MATURITY 5,750,000 4,320,599 PURCHASES OF SECURITIES AVAILABLE FOR SALE (1,997,188) (3,509,100) PROCEEDS FROM THE MATURITY & PRINCIPAL PAYDOWNS OF SECURITIES AVAILABLE FOR SALE 4,549 0 PROCEEDS FROM THE SALE (CALL) OF SECURITIES AVAILABLE FOR SALE 0 0 NET LOANS MADE TO CUSTOMERS (13,582,338) (19,685,648) CAPITAL EXPENDITURES (1,043,719) (972,543) NET CASH USED IN INVESTING ACTIVITIES (25,520,410 (34,796,228) CASH FLOWS FROM FINANCING ACTIVITIES: NET CHANGE IN DEPOSITS 30,439,968 29,260,316 INCREASE IN REPURCHASE AGREEMENTS 9,403,755 9,850,054 PURCHASE OF ADVANCES FROM FHLB 38,600,000 69,000,000 REPAYMENT OF ADVANCES FROM FHLB (55,500,000) 76,000,000 PROCEEDS FROM SALE OF CAPITAL STOCK 61,828 38,988 PAYMENTS OF DIVIDENDS (616,898) (512,940) NET CASH PROVIDED BY FINANCING ACTIVITIES 22,288,653 31,636,408 NET INCREASE IN CASH AND CASH EQUIVALENTS 2,223,129 2,149,286 CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 9,714,713 6,134,371 CASH AND CASH EQUIVALENTS AT END OF QUARTER 11,937,842 8,283,657 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: CASH PAID DURING THE YEAR FOR: INTEREST 7,708,377 5,686,872 INCOME TAXES 2,026,679 1,543,681 NON-CASH TRANSACTIONS: TRANSFER FROM LOANS TO REAL ESTATE OWNED (OTHER ASSETS) 186,000 317,898 </TABLE> SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
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. F o r 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 relationship of the absolute dollar amounts of the change in each. YEAR-TO-DATE FIGURES AS OF SEPTEMBER 30, 1995 COMPARED TO SEPTEMBER 30, 1994 INCREASES (DECREASES) DUE TO: <TABLE> <CAPTION> <S> <C> <C> <C> VOLUME RATE NET LOANS $1,588,681 $ 999,153 $2,587,834 TAXABLE SECURITIES $ 411,623 $ 353,879 765,502 TAX EXEMPT SECURITIES $ 900 $ 27,616 28,516 FEDERAL FUNDS SOLD AND MONEY MARKET FUNDS $ 38,677 $ 21,305 59,982 TOTAL EARNING ASSETS $2,039,881 $1,401,953 $3,441,834 DEPOSITS $ 574,059 $1,155,802 1,729,861 BORROWINGS $ 49,653 $ 483,872 533,525 TOTAL INTEREST BEARING LIABILITIES $ 623,712 $1,639,674 $2,263,386 NET CHANGE IN INTEREST $1,416,169 ($237,721) $1,178,448 </TABLE> YEAR-TO-DATE FIGURES AS OF SEPTEMBER 30, 1994 COMPARED TO SEPTEMBER 30, 1993 INCREASES (DECREASES) DUE TO: <TABLE> <CAPTION> <S> <C> <C> <C> VOLUME RATE NET LOANS $1,459,304 ($464,505) $994,799 TAXABLE SECURITIES $478,420 ($323,128) 155,292 TAX EXEMPT SECURITIES ($32,107) ($514) (32,621) FEDERAL FUNDS SOLD AND MONEY MARKET FUNDS $12,932 $4,436 17,368 TOTAL EARNING ASSETS $1,918,548 ($783,710) $1,134,838 DEPOSITS $433,109 ($305,470) 127,639 BORROWINGS $228,261 $76,209 304,470 TOTAL INTEREST BEARING LIABILITIES $661,370 ($229,261) $432,109 </TABLE> PAGE
INTEREST RATE SENSITIVITY ANALYSIS AS OF SEPTEMBER 30, 1995 (UNAUDITED) Amounts in Thousands The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at September 30, 1995 which are anticipated by the Bank, based upon certain assumptions, to reprice or mature in each of the future time periods shown. <TABLE> <CAPTION> <S> <C> <C> <C> <C> <C> < c > ONE TO GREATER DAILY TOTAL TO TOTAL TO FIVE THAN FIVE FLOATING 90 DAYS ONE YEAR YEARS YEARS TOTAL Loans - Fixed Rate $ 0 $ 6,924 $ 14,478 $ 28,682 $ 11,104 $ 54,264 - Variable Rate 0 68,341 133,861 11,647 0 142,508 Investments 0 11,986 22,261 56,923 22,816 102,000 Federal Funds Sold 0 0 0 0 0 0 Interest Rate Swap 0 0 5,000 5,000 0 10,000 Total Earning Assets 0 87,251 172,600 102,252 33,920 308,772 Deposits 0 66,272 143,626 15,911 96,515 256,052 Repurchase Agreements 0 24,412 24,412 0 0 24,412 Borrowings 0 5,000 8,000 0 0 8,000 Interest Rate Swap 0 10,000 10,000 0 0 10,000 Total Sources 0 105,684 186,038 15,911 96,515 298,464 Net Gap Position 0 (18,433) (13,348) 86,341 (62,595) 10,308 Cumulative Gap $0 ($18,433) ($13,348) $72,903 $10,308 $10,308 Rate Sensitive Assets/ <S> <C> <C> <C> <C> <C> <C> Rate Sensitive Liabilities 0.0% 82.56% 92.78% 642.65% 35.14% 103.45% </TABLE> Except as stated below, the amounts of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual terms of the asset or liability. The Bank has assumed that 3% of its savings is more rate sensitive and will react to rate changes, and has therefore categorized it in the 3-12 month time horizon. The remainder is stable and is listed in the greater than five year category. NOW accounts, other than seasonal fluctuations approximating $3,000,000, are stable and are listed in the greater than five year category. Money market accounts are assumed to reprice in three months or less. Certificates of deposit are assumed to reprice at the date of contractual maturity. Fixed rate mortgages, totaling $31,000,000 are amortized using a 6% rate, which approximates the Bank s prior experience. PAGE
NOTES TO FINANCIAL STATEMENTS DATED SEPTEMBER 30, 1995 1. Summary of interim financial statement adjustments. The accompanying 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 1994 Annual Report. <TABLE> <CAPTION> <S> <C> <C> SEPTEMBER 30, 1995 CARRYING MARKET VALUE VALUE 2. INVESTMENT SECURITIES: a. U.S. Treasury and other Government agencies $ 70,471,334 $ 70,344,553 b. States of the U.S. and other Political subdivisions 14,081,777 14,589,331 c. Other securities 17,450,245 17,536,082 Total Securities $102,003,356 $102,469,966 Securities held to maturity 93,844,381 94,181,381 Securities available For sale 8,158,975 8,288,585 The Bank does not hold any securities for a single Issuer which exceed 10% of the Bank s stockholders equity. September 30, December 31, 1995 1994 3. LOANS a. Commercial, agricultural And other loans $42,385,582 $41,221,396 b. Real Estate - Construction 5,875,494 7,980,026 c. Real Estate - Mortgage 133,929,729 121,491,062 d. Installment loans 16,999,219 15,301,322 Total Loans $199,190,024 $185,993,806 4. CHANGES IN ALLOWANCE FOR POSSIBLE LOAN LOSSES: September 30, September 30 1995 1994 Balance, beginning January 1: $ 3,891,835 $ 3,369,387 Provision charged to income 720,000 720,000 Recoveries of amounts charged 78,144 112,136 Losses charged to provision 464,264 337,082 Balance, ending September 30: $ 4,225,715 $ 3,864,441 </TABLE> 5. CHANGES IN ALLOWANCE FOR OTHER REAL ESTATE: <TABLE> <CAPTION> <S> <C> <C> <C> <C> 9/30/95 9/30/94 9/30/93 Balance, beginning Jan. 1 $30,486 $53,286 $127,894 Provision charged to income 9,778 1,800 42,765 Losses charged to provision 15,110 24,600 117,373 Balance, ending Sept. 30 $ 25,154 $30,486 $ 53,286 </TABLE> PAGE
6. The aggregate dollar amount of loans made to directors, executive officers or principal holders of equity securities as of September 40, 1995 and December 31, 1994 respectively were: <TABLE> <CAPTION> <S> <C> <C> <C> Aggregate amount, beginning 1-1 $3,409,868 $ 3,482,587 New Loans 269,154 862,194 Repayments 343,764 934,913 Aggregate amount, ending 9-30-95 $3,335,259 Aggregate amount, ending 12-31-94 $ 3,409,868 7. OTHER ASSETS: September 30, December 31 1995 1994 a. Interest earned but Not paid on: Loans $ 1,320,866 $ 1,286,864 Investments 1,243,535 907,931 b. Other Real Estate Owned 460,247 611,054 </TABLE> 8. INCOME TAXES: The Company adopted Financial Accounting Standards No. 109 Accounting for Income Taxes effective January 1, 1993. The standard requires adoption of a liability method of accounting for income taxes. The accounting change had no effect on the company s net income or retained earnings. Components of income tax expense for the period ended September 30, 1995 are as follows: <TABLE> <CAPTION> <S> <C> <C> Current Federal $2,185,625 State 66,259 $2,251,884 Deferred (167,143) $2,084,741 </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, 1995: <TABLE> <CAPTION> <S> <C> <C> Computed tax expense $2,289,898 Tax exempt interest (253,603) Other 48,446 $2,084,741 </TABLE> PAGE
At September 30, 1995, items giving rise to the deferred income tax assets and liabilities, using a tax rate of 34%, are as follows: <TABLE> <CAPTION> <S> <C> <C> <C> ASSET LIABILITY Allowance for possible loan losses On loans and real estate owned $1,285,577 Deferred and accrued employee benefits 911,280 Deferred loan origination fees 114,660 Securities losses not currently Deductible 19,595 Core deposit intangibles 110,987 Depreciation 7,109 Other 25,935 $2,475,143 $0 </TABLE> No valuation allowance is deemed necessary for the deferred tax asset. <TABLE> <CAPTION> <S> <C> <C> <C> 9. INCOME TAX EXPENSE: 1995 1994 Federal Income Tax $2,018,482 $1,615,179 State Income Tax 66,259 73,292 PAGE
MANAGEMENT'S DISCUSSION AND ANALYSIS The results of operations for September 30, 1995 are reflected through the growth in the balance sheet. Total assets grew over $30,000,000 in 1995 and $36,000,000 in l994 each compared to the previous year's third quarter end. The major changes are found in the investment and loan portfolios. The investment portfolio growth of just under $10,000,000, has been in the area of US Government agency debentures which were purchased with the intent to hold to maturity. Some callable agencies with longer maturities have been placed in the available for sale category and the Bank is reviewing the FASB's window to move securities from held to maturity to available for sale before year end. The Bank's available for sale portfolio, totaling $8,300,000 is comprised of $5,400,000 in Federal Home Loan Bank stock. Ownership of stock is required by the FHLB for participation in their funding programs. This stock has earned the Bank in excess of 7.0% for the first three quarters of 1995. The appreciation of net unrealized gains to $85,500 as of September 30, 1995 continues to grow slowly with the increase in the market. The market value of the entire portfolio, which is approximately $470,000 greater than the book value, has risen in the past year, following national economic trends including lower interest rates. 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. In the loan portfolio, which has grown by $16,000,000 in the past twelve months, the Bank's concentration has been through the extension of loans secured by real estate to its consumer customers totalling $11,000,000 more than one year ago. Funding for the asset growth has come from increases in deposits t o talling $23,000,000, predominantly from interest bearing certificates of deposit. As opportunities have surfaced to attract lower cost deposits and repurchase agreements, advances from the Federal Home Loan Bank have decreased by $7,000,000. 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. We examine the relationship between liquid assets and short term liabilities which 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. At September 30,1995 the Bank has liquidity in excess of 10% in its balance sheet. PAGE
How the changes in the balance sheet have affected the Bank may be viewed through the earnings statement for the periods ending September 30, 1993, 1994, and 1995. Overall, the net earnings for the Bank are $535,000 ahead of last year's first nine months' earnings which represents a 13% increase. Net interest income for the first nine months of 1995 has added strong earnings and is affected by rates, volumes and the mix of earning assets and interest bearing liabilities. Increases in the loan portfolio have afforded the Bank additional interest income of $1,590,000 due to increases in volumes, with further increases of $1,000,000 due to changes in rates. The Bank increased its base lending rate by 75 basis points between September 30, 1994 and September 30, 1995. Although only a portion of loans are immediately affected by changes in the Bank's base rate, the effect of the increases has over time increased the yields in the portfolio. The commercial real estate rate for variable rate mortgages has increased 100 basis points since September 30, 1994 and as the loans in that portion of the portfolio totalling over $50,000,000 in mortgages reach their annual anniversary dates, the yield has improved the overall yield for loans. Loan yields have increased by 99 basis points over the past twelve months and represent the first increase in several years. Decreases in yields experienced in 1994 and 1993 were 16 and 77 basis points respectively. Interest on investments has also increased both due to volumes ($451,000) and to increased rates ($403,000). Similar to the loan yields, 1995 is the first year in several in which the overall investment yield increased rather than decreased. Yields on investments have increased by 24 basis points during the past year compared with 43 and 77 basis point drops in 1994 and 1993 respectively. It is the boost from the increases in rates in the Bank's earning assets that have helped to offset the increases seen in liability costs as described below. The cost of deposited funds increased from September 1994 to September 1995 by 78 basis points. Additionally rates rose on borrowed funds during the past twelve months by over 117 basis points. Due to this increase in borrowed funds costs, the Bank elected to promote certificates of deposit early in 1995, locking in acceptable rates for the Bank which were lower than alternative sources of funding. Taking into consideration the increased cost of borrowings and the increased volumes in certificates of deposit, the Bank's overall cost of purchased funds increased by $1,730,000 when compared to September of 1994. With increases on both sides of the balance sheet, the Bank's earnings remain strong with its net interest income totalling $1,178,000 more than one year ago. With regard to interest rate sensitivity, the Bank is positioned favorably for the current interest rate cycle with $13,000,000 more of its liabilities repricing within a year when compared to its assets. On the shorter run (out to 90 days), the Bank has $18,000,000 more in liabilities which are sensitive to rate changes than assets, both of which might prove beneficial if the Federal Reserve responds by lowering the Federal funds rate in either November or December of this year. There will be no adverse interest rate risk should interest rates remain unchanged. PAGE
Due to changes in the methodology used for computing the reserve for possible loan losses, the Bank increased its ratio to gross loans to over 2% beginning in 1993 and through September 30, 1995 has maintained that reserve to loan ratio. The Bank reviews its allocation to the reserve on a monthly basis and funds the reserve as deemed necessary. This review includes a provision for specific credits, provisions due to historic loan losses by loan types and reserves reflecting industry concentrations, credit concentrations, current economic conditions and underwriting standards. In 1995, the Bank has added a provision for impaired loans in accordance with FASB 114/118. Losses for 1995 were originally estimated at $950,000 with $464,000 charged off through September 30, 1995, compared to $337,000 and $820,000 charged off in the first nine months of 1994 and 1993, respectively. The amounts represented below are the total dollars o u t standing for the first nine months of each year listed. </TABLE> <TABLE> <CAPTION> <S> <C> <C> <C> CATEGORY 1995 1994 1993 <S> 90-DAY PAST DUE <C> <C> <C> AND STILL ACCRUING $ 711,943 $ 645,920 $ 1,150,195 NON-ACCRUING 2,584,343 2,627,314 2,984,000 $ 3,296,286 $ 3,273,234 $ 4,134,195 GROSS LOANS $199,190,024 $175,399,428 $154,217,991 PERCENTAGE OF GROSS LOANS 1.65% 1.87% 2.68% </TABLE> A review of the Bank's non-interest income shows the first nine months of 1995 $124,000 ahead of the same period in 1994, which is attributable to the Trust Department's scheduled fees. These fees are based on increased book assets of more than $18,000,000 over the past twelve months and are computed based on market value of total assets. Both 1994 and 1993 showed increases as compared to their respective previous years. 1994 increased by $70,000 whereas 1993 experienced a $390,000 increase over 1992. Throughout 1993, the Bank witnessed the last year of significant growth from its commitment to its customers and communities through its efforts in the residential real estate market. The selling of mortgages in the secondary market has generated fees on sold mortgages as well as servicing fees on these loans. During the first nine months of 1993 the Bank earned almost $297,000 from fees generated by the secondary mortgage program. This compares to $150,000 and $98,800 for 1994 and 1995 respectively. The decline in income generated from the sale of residential mortgages through the secondary market are directly related to the interest rate cycle and as rates have risen, sales and refinances of homes have dropped. The fees generated in the granting of residential mortgages during the falling rate interest cycle of the early 1990's is now translated into earnings through the servicing of those loans which total over $58,000,000 in outstanding balances and totals $198,500 in income thus far in 1995. PAGE
Salary and employee benefits for 1995 are actually three percent below 1994's expense and compare favorably with 1994 which shows a $435,000 (or 13%) increase over 1993. The increase in 1994 represents increases in compensation of 5% and costs incurred with the addition of a deferred plan for certain senior officers (Messrs. Reeves, Eaton, Goldthwait and MacDonald) in light of the termination of the defined benefit pension plan. There was a $205,000 or 6.7% increase between quarter ends in 1993 as compared to 1992. 1993 was the year of adoption of FASB 106 pertaining to postretirement benefits and the expense incurred pertained to future benefits for employees. With regard to other expense, 1995 expenses of $3,700,000 compares more with 1993's expenses of $3,560,000 than those of 1994. 1994 marked a year in which other expenses actually went down by $285,000 when compared to 1993. During 1993, the Bank took losses on properties owned which resulted from loan problems totalling $264,000. There were no comparable losses in either 1994 or 1995. There is no o n e category of expense which exceeds $50,000 in increased expenditures in 1995 and stands out as a significant increase. The Trust Department has recently outsourced its tax preparation for customers and the initial outlay for that operation has been approximately $44,000. Fees will be generated from Trust customers as the 1995 tax preparation season begins. The Bank's year-to-date efficiency ratio is 54% which is well under the national average. Effective January 1, 1995, the Bank adopted FASB No. 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 $1,041,882 at September 30, 1995. The Bank plans to implement SFAS No. 122 effective January 1, 1996 with no negative impact to its earnings. The Bank was examined by the FDIC in September of this year and there were no recommendations made which would have a material effect o n the registrant's capital resources, liquidity or operating earnings. The Bank's capital to asset ratio is 10.16% and the Bank far exceeds the required risk based capital ratio of 8% with its Tier I ratio of 15.54%, total capital ratio of 16.79% and leverage ratio of 10.14%. Using the risk based capital formula, the Bank has capital in excess of requirements of $18,429,000.
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 Sheldon F. Goldthwait, Jr. /s/ Date: November 15, 1995 Sheldon F. Goldthwait, Jr. President Virginia M. Vendrell /s/ Date: November 15, 1995 Virginia M. Vendrell Senior Vice President, Treasurer and Chief Financial Officer PAGE