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 March 31, 1997. 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.) Bar Harbor, Maine 04609-0400 (Address of principal executive (Zip Code) offices) 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 March 31, 1997: Common Stock: 1,820,583 PAGE
TABLE OF CONTENTS <TABLE> <CAPTION> Page <S> <C> Financial Information Item I. Financial Statements Consolidated Balance Sheets December 31, 1996 and March 31, 1997 3-4 Consolidated Statements of Earnings Three months ended March 31, 1995, 1996 and 1997 5 Consolidated Statements of Changes in Stockholders Equity Three months ended March 31, 1996 and 1997 6 Consolidated Statement of Cash Flows Three months ended March 31, 1996 and 1997 7-8 Rate Volume Analysis Three months ended March 31, 1996 and 1997 9 Rate Sensitivity Report As of March 31, 1997 10 Notes to Financial Statements 11-15 Item 2. Management s Discussion and Analysis of Financial Condition and Results of Operations 16-19 Signature Page 20 </TABLE> PAGE
BAR HARBOR BANKSHARES AND SUBSIDIARY CONSOLIDATED STATEMENT OF FINANCIAL CONDITION MARCH 31, 1997 AND December 31, 1996 <TABLE> <CAPTION> <S> <C> <C> March 31 December 31, 1997 1996 ASSETS Cash and Due from Banks $ 9,857,083 $ 11,298,408 Federal Funds Sold 0 2,000,000 Investment Securities Securities available for sale 19,541,404 19,384,433 Securities held to maturity (Market value $82,220,584, in 1997; $83,067,746 in 1996) 82,900,482 82,716,836 Other Securities 5,448,569 5,623,639 Loans held for sale 441,675 336,540 Loans, net of allowance for possible loan losses of $4,366,173 in 1997 And $4,292,995 in 1996 210,320,843 207,667,053 Premises and Equipment 7,621,612 7,498,046 Other Assets 9,050,858 8,617,790 TOTAL ASSETS $345,182,526 $345,142,745 LIABILITIES AND STOCKHOLDERS EQUITY LIABILITIES Deposits Demand Deposits $ 33,418,916 $ 35,918,779 NOW Accounts 37,597,430 40,529,509 Savings Deposits 50,833,577 53,085,062 Time, $100,000 and over 15,748,031 14,611,616 Other Time 106,776,570 107,530,192 Total Deposits 244,374,524 251,675,158 Securities Sold Under Repurchase Agreements 5,393,334 8,246,079 Advances from Federal Home Loan Bank 52,550,129 43,908,263 Other Liabilities 3,956,342 3,426,320 Total Liabilities 306,274,329 307,255,820 Commitments and Contingent Liabilities Capital Stock, Par Value $2 Authorized 10,000,000 shares Issued 1,820,583 in 1997 and 1,818,237 in 1996 3,641,166 3,636,474 Surplus 7,574,170 7,489,127 Retained Earnings 29,297,581 28,204,829 PAGE
Net Unrealized Appreciation on Securities available for sale, Net of Tax Expense (Benefit) of ($136,371)in 1997 and tax of $53,321 in 1996 (264,720) (103,505) Less: Cost of 100,000 shares of Treasury Stock (1,340,000) (1,340,000) TOTAL STOCKHOLDERS EQUITY 38,908,197 37,886,925 TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $345,182,526 $345,142,745 </TABLE> 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> THREE THREE THREE MONTHS MONTHS MONTHS ENDING ENDING ENDING 03/31/97 03/31/96 03/31/95 Interest & Fees on Loans $5,026,419 $5,002,507 $4,413,005 Interest & Dividends on Investment Securities: Taxable Interest Income 1,595,692 1,468,129 1,243,323 Non-taxable Interest Inc. 179,565 195,476 215,370 Dividends 96,008 85,498 104,376 Federal Funds Sold 9,183 5,193 16,074 TOTAL INTEREST INCOME 6,906,867 6,756,803 5,992,148 Interest on Deposits 2,138,874 2,307,076 1,794,598 Interest on Borrowings 726,079 509,942 575,408 TOTAL INTEREST EXPENSE 2,864,953 2,817,018 2,370,006 Net Interest Income 4,041,914 3,939,785 3,622,142 Provision for Loan Losses 180,000 240,000 240,000 Net Interest Income after Provision for Loan Losses 3,861,914 3,699,785 3,382,142 Other Income 1,026,839 1,001,427 883,606 Net Security Gains (Losses) (55,852) 0 0 Other Expenses: Salaries & Employee Ben. 1,459,506 1,401,822 1,208,523 Other 1,054,927 1,109,440 1,173,046 Income Before Income Taxes 2,318,468 2,189,950 1,884,179 Income Tax Expense 743,953 667,700 575,870 NET INCOME $1,574,515 $1,522,250 $1,308,309 PER COMMON SHARE DATA, RESTATED FOR FIVE-FOR-ONE SPLIT IN 1995: BASED ON 1,713,605 SHARES FOR 1995, 1,718,237 FOR 1996 AND 1,720,583 SHARES FOR 1997 $0.92 $0.89 $0.76 DIVIDENDS PER SHARE $0.28 $0.20 $0.00 </TABLE> The accompanying notes are an integral part of these consolidated financial statements. PAGE
BAR HARBOR BANKSHARES AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY QUARTERS ENDED MARCH 31, 1995, 1996 AND 1997 (UNAUDITED) <TABLE> <CAPTION> NET UNREA- NET LIZED LOSS STOCK- CAPITAL RETAINED ON AVAILABLE TREASURY HOLDERS STOCK SURPLUS EARNINGS FOR SALE STOCK EQUITY <S> <C> <C> <C> <C> <C> <C> Balance, 12/31/94 3,619,670 7,314,408 19,118,678 $48,027 (1,340,000) 28,760,783 Net Earnings 1,308,309 1,308,309 Cumulative effect to record appreciate on securities available for sale 0 Cash Dividends Declared 0 Net Unrealized Appreciation on Securities Available for Sale, Net of Tax of $37,388 24,550 24,550 Sale of Stock (3,770* Shares) 7,540 54,288 0 0 0 61,828 Balance, 3/31/95 $3,627,210 $7,368,696 $20,426,987 $ 72,557 ($1,340,000) $72,557 $30,155,470 Balance 12/31/95 $3,627,210 $7,368,695 $23,523,626 $ 63,293 ($1,340,000) 33,242,824 Net earnings 1,574,515 1,574,515 Cash dividends declared (343,647) (343,547) Net unrealized depreciation on securities available for sale, net of tax benefit of $25,383 (112,566) (112,566) Sale of Stock (4,632 shares) 9,264 120,432 129,696 Balance 03/31/96 $3,636,474 $7,489,127 $24,754,494 ($ 49,273) ($1,340,000) $34,490,822 Balance 12/31/96 $3,636,474 $7,489,127 $28,204,829 ($ 103,505) ($1,340,000) $37,886,925 Net earnings 1,574,515 1,574,515 Cash dividends declared (481,763) (481,763) Net unrealized depreciation on securities available for sale, net of tax benefit of $189,692 (161,215) (161,215) Sale of Stock (2,346 shares) 4,692 85,043 89,735 Balance 03/31/97 $3,641,166 $7,574,170 $29,297,581 ($ 264,720) ($1,340,000) $38,908,197 </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 CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> MARCH 31, MARCH 31 1997 1996 <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME $1,574,515 $ 1,522,250 ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET CASH PROVIDED BY OPERATING ACTIVITIES: DEPRECIATION 222,578 156,802 PROVISION FOR LOAN LOSSES 180,000 240,000 PROVISION FOR LOSSES ON OTHER REAL ESTATE OWNED 0 (2,510) NEW LOANS ORIGINATED FOR SALE (925,290) (2,894,790) PROCEEDS FROM SALE OF MORTGAGES HELD FOR SALE 861,267 2,892,941 GAIN ON SALE OF MORTGAGES ORIGINATED FOR SALE (27,569) (6,136) NET SECURITIES LOSSES (GAINS) 55,852 0 NET AMORTIZATION OF BOND PREMIUM 22,985 64,122 (GAIN) LOSS ON SALE OF PREMISES AND EQUIPMENT 0 0 NET CHANGE IN OTHER ASSETS (337,212) (829,220) NET CHANGE IN OTHER LIABILITIES 530,022 753,759 NET CASH PROVIDED BY OPERATING ACTIVITIES 2,113,056 1,897,218 CASH FLOWS FROM INVESTING ACTIVITIES: PURCHASES OF SECURITIES HELD TO MATURITY (5,053,484) ( 7,058,576) PROCEEDS FROM THE MATURITY & PRINCIPAL PAYDOWNS OF SECURITIES HELD TO MATURITY 4,846,744 2,007,718 PROCEEDS FROM SALE OF SECURITIES HELD TO MATURITY 119,218 3,500,000 PURCHASES OF SECURITIES AVAILABLE FOR SALE (500,000) (3,001,875) PROCEEDS FROM THE MATURITY & PRINCIPAL PAYDOWNS OF SECURITIES AVAILABLE FOR SALE 38,853 2,363 PROCEEDS FROM CALL OF SECURITIES AVAILABLE FOR SALE 60,021 500,000 NET LOANS MADE TO CUSTOMERS (2,860,140) 143,572 CAPITAL EXPENDITURES (346,144) (154,462) PROCEEDS FROM SALE OF FIXED ASSETS 0 0 NET CASH USED IN INVESTING ACTIVITIES (3,694,932) (4,061,260) CASH FLOWS FROM FINANCING ACTIVITIES: NET CHANGE IN SAVINGS, NOW AND DEMAND DEPOSITS (7,683,427) (6,686,550) NET CHANGE IN TIME DEPOSITS 382,793 1,005,002 NET CHANGE IN REPURCHASE AGREEMENTS (2,852,745) (464,443) PROCEEDS FROM FEDERAL HOME LOAN BANK 3,000,000 9,000,000 REPAYMENT OF ADVANCES FROM FEDERAL HOME LOAN BANK (5,000,000) (4,000,000) NET CHANGE IN SHORT TERM OTHER BORROWED FUNDS 10,641,866 (1,608,855) PROCEEDS OF SALE FROM CAPITAL STOCK 89,735 129,696 PAYMENTS OF DIVIDENDS (481,763) (343,647)
NET CASH PROVIDED BY FINANCING ACTIVITIES (1,903,541) (2,968,797) NET INCREASE (DECREASE)IN CASH AND CASH EQUIVALENTS (3,441,325) (5,132,839) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 13,298,408 12,559,797 CASH AND CASH EQUIVALENTS AT END OF QUARTER $9,857,083 $ 7,426,958 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: CASH PAID DURING THE YEAR FOR: INTEREST $2,840,619 $2,805,299 INCOME TAXES 279,000 $ 5,000 NON-CASH TRANSACTIONS: TRANSFER FROM LOANS TO REAL ESTATE OWNED (OTHER ASSETS) 0 $ 70,000 TRANSFER OF SECURITIES FROM HELD TO MATURITY TO AVAILABLE FOR SALE 0 0 </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. 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 relationship of the absolute dollar amounts of the change in each. YEAR-TO-DATE FIGURES AS OF MARCH 31, 1997 COMPARED TO MARCH 31, 1996 INCREASES (DECREASES) DUE TO: <TABLE> <CAPTION> <S> <C> <C> <C> VOLUME RATE NET LOANS $ 281,354 $ (257,442) $ 23,912 TAXABLE SECURITIES $ 74,573 $ 63,500 138,073 TAX EXEMPT SECURITIES $ (13,112) $ (2,799) (15,911) FEDERAL FUNDS SOLD AND MONEY MARKET FUNDS $ 3,944 $ 46 3,990 TOTAL EARNING ASSETS $ 346,758 $ (196,694) $ 150,064 DEPOSITS $ ( 65,655) $ (102,547) (168,202) BORROWINGS $ 212,160 $ 3,977 216,137 TOTAL INTEREST BEARING LIABILITIES $ 146,504 $ (98,569) $ 47,935 NET CHANGE IN INTEREST $ 200,254 ($ 98,125) $ 102,129 </TABLE> YEAR-TO-DATE FIGURES AS OF MARCH 31, 1996 COMPARED TO MARCH 31, 1995 INCREASES (DECREASES) DUE TO: <TABLE> <CAPTION> <S> <C> <C> <C> VOLUME RATE NET LOANS $ 315,043 $ 274,459 $ 589,502 TAXABLE SECURITIES $ 226,001 $ ( 20,073) 205,928 TAX EXEMPT SECURITIES $ (19,783) $ (111) (19,894) FEDERAL FUNDS SOLD AND MONEY MARKET FUNDS $ (9,369) $ (1,512) (10,881) TOTAL EARNING ASSETS $ 511,892 $ 252,763 $ 764,655 DEPOSITS $ 224,289 $ 288,189 512,478 BORROWINGS $ (54,199) $ (11,267) (65,466) TOTAL INTEREST BEARING LIABILITIES $ 170,090 $ 276,922 $ 447,012 NET CHANGE IN INTEREST $ 341,802 ($ 24,159) $ 317,643 </TABLE>
INTEREST RATE SENSITIVITY ANALYSIS AS OF MARCH 31, 1997 (UNAUDITED) Amounts in Thousands The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at March 31 1997 which are anticipated by the Bank, based upon certain assumptions, to reprice or mature in each of the future time periods shown. <TABLE> <CAPTION> ONE TO GREATER TOTAL TO FIVE THAN FIVE ONE YEAR YEARS YEARS TOTAL <S> <C> <C> <C> <C> Loans - Fixed Rate $ 13,094 $ 34,085 $ 17,868 $ 65,047 - Variable Rate 117,652 26,616 2,071 146,339 Investments 36,490 37,474 34,328 108,292 Federal Funds Sold 0 0 0 0 Interest Rate Swap 0 15,000 0 15,000 Total Earning Assets 167,236 113,175 54,267 334,678 Deposits 141,486 14,521 88,367 244,374 Repurchase Agreements 5,465 0 725 6,190 Borrowings 40,122 12,428 0 52,550 Interest Rate Swap 5,000 10,000 0 15,000 Total Sources 192,073 36,949 89,092 318,114 Net Gap Position (24.837) 76,226 (34,825) 16,564 Cumulative Gap (24,837) $51,389 $16,564 $16,564 Rate Sensitive Assets/ <S> <C> <C> <C> <C> Rate Sensitive Liabilities 87.07% 306.30% 60.91% 105.21% </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 4 3/4% of its savings is more rate sensitive and will react to rate changes, and has therefore categorized it in the one year time horizon. The remainder is stable and is listed in the greater than five year category. NOW accounts, other than seasonal fluctuations approximating $4,000,000, 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 $44,000,000 are amortized using the weighted average maturity of 147 months, with an additional prepayment rate of 11%, which approximates the Bank s prior experience. PAGE
NOTES TO FINANCIAL STATEMENTS DATED MARCH 31, 1997 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 1996 Annual Report. <TABLE> <CAPTION> March 31, 1997 Carrying Market Value Value <S> <C> <C> <C> 2. INVESTMENT SECURITIES a. U.S. Treasury and other government agencies $ 19,392,495 $ 18,994,154 b. Marketable equity securities 550,000 547,250 Total Securities Available for Sale $ 19,942,495 $ 19,541,404 HELD TO MATURITY a. U.S. Treasury and other political subdivisions 62,001,708 61,072,423 b. States of the U.S. and other political subdivisions 11,857,531 12,138,167 c. Corporate bonds 9,041,242 9,009,995 Total Securities Held to Maturity $82,900,481 $82,220,585 OTHER SECURITIES 5,448,569 $5,448,569 TOTAL SECURITIES $108,291,545 $107,210,558 </TABLE> The Bank does not hold any securities for a single issuer which exceed 10% of the Bank s stockholders equity. <TABLE> <CAPTION> March 31, December 31, 1997 1996 <S> <C> <C> <C> 3. LOANS: a. Commercial, agricultural and other loans $ 42,210,770 $ 39,451,440 b. Real Estate - Construction 7,414,073 8,905,823 c. Real Estate - Mortgage 148,062,406 146,361,313 d. Installment Loans 16,999,767 17,241,472 Total Loans $214,687,016 $211,960,048 </TABLE> PAGE
4. CHANGES IN ALLOWANCE FOR POSSIBLE LOAN LOSSES: <TABLE> <CAPTION> March 31, March 31, 1997 1996 <S> <C> <C> Balance, beginning January 1: $4,292,995 $ 4,047,883 Provision charged to income 180,000 240,000 Recoveries of amounts charged 26,350 29,512 Losses charged to provision 133,172 148,975 Balance, ending March 31 $4,366,173 $ 4,168,420 </TABLE> Information regarding impaired loans is as follows for March 31, 1997: <TABLE> <S> <C> Average investment in impaired loans $ 1,913,664 Interest income recognized on impaired loans, including interest income recognized on cash basis 18,884 Interest income recognized on impaired loans on cash basis 18,884 Balance of impaired loans 1,631,523 Less portion for which no allowance for loan losses is allowed 0 Portion of impaired loan balance for which an allowance for credit losses is allocated 1,631,523 Portion of allowance for loan losses allocated to the impaired loan balance 118,824 </TABLE> 5. CHANGES IN ALLOWANCE FOR OTHER REAL ESTATE: <TABLE> <CAPTION> 3/31/97 3/31/96 3/31/95 <S> <C> <C> <C> Balance, beginning January 1: $22,589 $26,000 $30,486 Provision charged to income 0 (2,510) 9,867 Losses charged to provision 0 0 0 Balance, ending March 31 $22,589 $23,490 $40,353 </TABLE> 6. The aggregate dollar amount of loans made to directors, executive officers or principal holders of equity securities as of March 31, 1997 and December 31, 1996 respectively were: <TABLE> <S> <C> <C> Aggregate amount, beginning 1/1 $3,806,555 $3,279,479 New loans 228,674 912,044 Repayments 83,992 384,968 Aggregate amount, ending 3/31/97 $3,951,237 Aggregate amount, ending 12/31/96 $3,806,555 </TABLE> PAGE
7. OTHER ASSETS: <TABLE> <CAPTION> March 31, December 31, 1997 1996 <S> <C> <C> <C> a: Interest earned but not paid on: Loans $1,726,089 $1,471,216 Investments 1,168,578 1,008,678 b. Other Real Estate Owned 269,954 270,430 </TABLE> 8. INCOME TAXES: Components of income tax expense for the period ended March 31, 1997 are as follows: <TABLE> <S> <C> <C> Current Federal $680,789 State 26,017 Deferred 37,147 $743,953 </TABLE> Actual tax expense differs from the expected tax expense computer by applying the applicable federal corporate income tax rate of 34% is as follows for the three months ended March 31, 1997 <TABLE> <S> <C> Computed tax expense $ 785,552 Tax exempt interest (64,476) Other $ 22,877 $ 743,953 </TABLE> PAGE
At March 31, 1997, items giving rise to the deferred income tax assets and liabilities, using a tax rate of 34%, are as follows: <TABLE> <CAPTION> ASSET LIABILITY <S> <C> <C> Allowance for possible losses on loans And real estate owned $1,330,138 Deferred and accrued employee benefits 936,499 Deferred loan origination fees 60,051 Security losses not currently deductible 0 Core deposit intangibles 84,221 Depreciation 0 78,850 Other 8,595 $2,419,504 $ 78,850 </TABLE> No valuation allowance is deemed necessary for the deferred tax asset. <TABLE> <CAPTION> <S> <C> <C> 9. INCOME TAX EXPENSE: 1997 1996 Federal Income Tax $717,936 $644,549 State Income Tax 26,017 23,151 </TABLE> PAGE
MANAGEMENT S DISCUSSION AND ANALYSIS The following is the review of the results of operations for March 31, 1997, as compared to March 31, 1996, showing earnings with a 3% increase, and changes in the balance sheet of $19,000,000 or approximately 6% over last year. Total loans have grown by almost $13,000,000 over the past twelve months, with the investment portfolio remaining constant over the past year. Purchases in the Bank s investment portfolio totaled in excess of $15,000,000; however, maturities and principal paydowns from the Bank s mortgage backed securities portfolios were comparable for the same period. Purchases were made of US Government sponsored debentures or mortgage backed pools. Unrealized gains and losses showed a negative balance for the second year in a row and continue to be indicative of the current economic marketplace with interest rates rising abruptly and presumed to be temporary. This is also visible in the total market value of the portfolio that is currently $1,080,000 below book value. However, the portfolio is earning in excess of 7%. The Bank holds one structured note, a 10-year step up government agency debenture, which steps annually by 1/8 of 1% after another two years at 7%. The loan growth of almost $13,000,000 from March 31, 1996, has been predominantly in loans secured by real estate. This 6% growth is comparable to the growth between 1995 and 1996, which was also attributable to loans secured by real estate. The Bank continues to experience strong competition from other financial institutions within its marketplace. Its strength lies in the relationships built with our customers and the ability to offer prompt service in response to their needs. Funding for the asset growth has come predominantly from increases in advances from the Federal Home Loan Bank totaling $16,500,000 as those funds became less costly than traditional deposit products. A year ago the bank had increased its deposits by $23,255,000 more than in March of 1995, through CD campaigns that brought in funds for periods of one to two years. Those campaigns offered national market rates and affected only that specific portion of total deposits, thereby not increasing existing deposit costs. As those funds began to mature in mid-1996, which is visible with the reduction in time deposits between March 1996 and 1997 of $6,600,000, the Bank elected to switch to the Federal Home Loan Bank as its source of replacement for some of those funds. Similarly, between March 1995 and 1996, the Bank increased its advances from the Federal Home Loan Bank by $14,000,000 as these funds became less costly than opportunities for wholesale repurchase agreements. Short term borrowings will begin dropping during the next six months through seasonal deposit growth, investment maturities 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 its serves. The Bank PAGE
utilizes a Basic Surplus/Deficit model to measure its liquidity over a 30-day and a 90-day time horizon. The relationship between liquid assets and short term liabilities that are vulnerable to non-replacement within a 30-day period are examined. The Bank s policy is to maintain its liquidity position at a minimum of 5% of total assets. The Bank has maintained liquidity in its balance sheet in excess of 14% for the past twelve months. Liquidity as measured by the Basic Surplus/Deficit model was 17.2% as of March 31, 1996 for the 30-day horizon and 18.8% for the 90-day horizon. How changes in the balance sheet have affected the Bank may be viewed through the earnings statement for the periods ending March 31, 1995, 1996 and 1997. With growth of 6% in the Bank s balance sheet, earnings grew by $52,000. In comparison, the Bank experienced a very strong first quarter in 1996 in comparison to the first quarter of 1995 and which produced a 16% increase over net income earnings during the first three months of 1995. Interest income is affected by rates, volumes and the mix of earning assets and interest bearing liabilities. For the first three months of 1996, net interest income increased by $100,000 and may be broken down as follows. The loan portfolio yielded the Bank additional interest income of $280,000 through increases in volumes, but experienced offsetting decreasing in interest income totaling $257,000 due to decreases in rates, leaving the growth in loan interest income virtually flat over the past twelve months. Yields on loans decreased by 21 basis points from March 1996 to March of 1997, following a year in which they had increased from 1995 to 1996 by 24 basis points. Looking at the comparison in dollars of interest earned from 1995 to 1996, loan interest income was increased by $590,000, achieved through increases in volume totaling $315,000 and increases in rates of $275,000. Although the investment portfolio did not grow between the years ended March 31, 1996 and 1997, the portfolio changed as securities matured or were called. Total investment income grew by $126,000, with increases in both rates and volumes on those securities which are taxable ($142,000) and decreasing in both rates and volumes on tax exempt securities owned by the Bank ($16,000). The yield on the entire securities portfolio went up just slightly (6 basis points) during this period. At March 31, 1996, investment interest and dividend income grew by $175,000, with increases related to volumes and a decrease in yields of $22,000 or a drop of 32 basis points from year to year. Increased costs on the liability side have been contained by the Bank not increasing its rates on savings, NOW and money market funds for the past several years. At March 31, 1997, the Bank s cost of deposits had decreased by $168,000, $65,000 due to reductions in volumes of certificates of deposit and $102,000 due to reductions in rates. The cost of borrowings increased by $216,000, which is comprised of $212,000 due to increased volumes (of $16,500,000 as mentioned earlier) and only $4,000 increase attributed to rate increases. The cost of purchased funds over the past twelve months has increased by 8.5 basis points. As stated previously, during 1995 and 1996, the Bank promoted certificates of deposit at current national market rates and attracted funds, which only increased the cost of funds on those particular CDS. The Bank s cost of interest bearing funds increased by PAGE
$447,000 that was less than the previous year, although deposit balances grew by over $23,000,000. The cost of purchased funds went up 17 basis points during this period. The Bank is positioned well with regard to interest rate sensitivity with assets and liabilities matched for repricing within a year. There is some exposure to falling rates out beyond a year that is primarily driven by the Bank s expectation that core deposit rates should not be lowered. Additionally, with a projected acceleration in prepayments in loans and investments, cash would be reinvested at lower yields. If rates were to drop by 200 basis points, simulations indicate that the Bank s net interest income could drop by approximately $60,000 during the second year of the drop, while increasing its income in the first year by $220,000. This may be seen in the Interest Rate Sensitivity Analysis enclosed showing that during the first year the Bank has almost $25,000,000 fewer assets repricing than liabilities. If rates were to rise by 200 basis points, the Bank could experience a drop in interest income in the first year by $115,000, but pick up additional interest earnings in the second year by $90,000. The Bank has maintained its reserve for possible loan losses over the past several years, reflecting the recessionary nature of the economy in the early 1990s. The ratio for the reserve for possible loan losses has been over 2% for the past three years, with a ratio of 2.03% as of March 31, 1997. 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 under writing standards. In 1995, the Bank added 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. Losses in the loan portfolio are estimated at $500,000 for 1997, with first quarter 1997 charge offs totaling $133,000 compared to $149,000 during the first quarter of 1996. The amounts represented below are the total dollars past due for the first three months of each year listed. Included in the 90-day past due category for 1996 are two loans totaling $820,000, one of which became current in the second quarter of 1996 and the other secured SBA financing. <TABLE> <CAPTION> Category 1997 1996 1995 <S> <C> <C> <C> 90-day past due and still accruing $ 1,302,437 $ 1,247,941 $ 189,904 Non-accruing 3,207,492 3,289,461 4,184,679 Total 4,509,929 4,537,402 4,374,583 Gross loans $214,687,016 $201,502,682 $190,459,413 Percentage of gross loans 2.10% 2.25% 2.30% </TABLE> PAGE
In reviewing non-interest income and non-interest expense for the period between March 31, 1996 and 1997, there are no categories showing significant changes with dollars not exceeding $60,000 or more than 4% for any major category. The following is a discussion of the changes between 1995 and 1996. The first three months of 1996 show a strong start for the year with growth of 13%. This growth is attributed to the Trust Department s earnings growing by $64,000 over the first three months of 1995. In the fall of 1995, the Trust Department converted their tax preparation and began charging customers for the service. The cost of this tax service is shown in other expenses. Additionally, as of January 1, 1996, the Bank implemented FASB Statement No. 122 Accounting for Mortgage Servicing Rights that positively impacted the earnings of the Bank by $57,000. Accruing for an incentive program reflects the increase in salary and benefit costs in 1996 over 1995. Although the program is not new to the Bank in 1996, this is the first year that the dollars have been designated prior to year end. Excluding the accrual, salary and benefits would be 3% higher than the first quarter of 1995. Other expense for the first three months of 1996 is below the comparable period in 1995 due to the elimination of FDIC insurance premiums. As a well-capitalized bank, Bar Harbor Banking and Trust Company has not been required to pay premiums for this coverage. In the fall of 1995, the Bank sought the services of a consulting firm to review existing procedures, seeking greater efficiencies while maintaining quality customer service. The Bank incurred $66,000 in expenses for these services during the first quarter of 1996. The Bank s capital to asset ratio is 11.6% and the Bank far exceeds the required risk based capital ratio of 8% with its Tier 1 ratio of 18.3% and total capital ratio of 19.5% or additional capital of $21,800,000. These ratios compare favorably to March 31, 1996 when the capital to average asset ratio was 10.6%, Tier 1 and total capital ratios compared to risk weighted assets were 16.1% and 17.4% respectively. SFAS No. 125 and 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 effect of adopting SFAS 128 has not been determined as of March 31, 1997.
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: May 15, 1997 Sheldon F. Goldthwait, Jr. President Virginia M. Vendrell /s/ Date: May 15, 1997 Virginia M. Vendrell Senior Vice President, Treasurer and Chief Financial Officer PAGE