10-Q 1 jun0110qbhbt.txt 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 and Exchange Act of 1934 For the quarter ended June 30, 2001 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.) PO 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 June 30, 2001: Common Stock: 3,276,114 TABLE OF CONTENTS
PART 1 FINANCIAL INFORMATION Page No. Item 1. FINANCIAL STATEMENTS Independent Accountants' Report 2 Financial Statements 4-7 Consolidated Balance Sheets at June 30, 2001 and December 31, 2000 4 Consolidated Statements of Income for the Three and Six Months ended June 30, 2001 and 2000 5 Consolidated Statements of Changes in Shareholders' Equity for the Six Months ended June 30, 2001 and 2000 6 Consolidated Statements of Cash Flow for the Six Months ended June 30, 2001 and 2000 7 Notes to Consolidated Financial Statements 8-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-14 Item 3. Quantitative and Qualitative Disclosure About Market Risk 14 PART II OTHER INFORMATION Item 1. Legal Proceedings 15 Item 2. Changes in Securities and Use of Proceeds 15 Item 3. Defaults Upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5 Other Information 15 Item 6 Exhibits and Reports on Form 8-K 15 Signature Page 16
2 INDEPENDENT ACCOUNTANTS' REPORT The Board of Directors Bar Harbor Bankshares We have reviewed the accompanying interim consolidated financial information of Bar Harbor Bankshares and Subsidiaries as of June 30, 2001, and for the three- and six-month periods ended June 30, 2001 and 2000. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with U.S. generally accepted auditing standards, the objective of which is to express an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with U.S. generally accepted accounting principles. /s/ BERRY, DUNN, McNEIL & PARKER Portland, Maine August 10, 2001 3 PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS BAR HARBOR BANKSHARES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 2001 AND DECEMBER 31, 2000 (in thousands, except number of shares and per share data)
June 30, 2001 (Unaudited) December 31, 2000 Assets Cash and due from banks $ 11,125 $ 10,580 Federal funds sold 2,000 0 Securities: Available for sale, at market 121,353 37,844 Held to maturity (market value $2,186 and $116,245 at June 30, 2001 and December 31, 2000, respectively) 2,188 116,306 Other securities 8,168 8,068 Total securities 131,709 162,218 Loans 283,588 271,381 Allowance for possible loan losses (4,068) (4,236) Loans, net of allowance 279,520 267,145 Premises and equipment 13,440 11,996 Other assets 13,429 14,286 TOTAL ASSETS $451,223 $466,225 Liabilities Deposits Demand deposits $ 40,439 $ 42, 527 NOW accounts 44,529 41,039 Savings deposits 71,851 73,776 Time deposits 119,080 120,734 Total deposits 275,899 278,076 Securities sold under repurchase agreements 10,888 12,166 Borrowings from Federal Home Loan Bank 108,000 119,152 Other liabilities 5,385 6,324 TOTAL LIABILITIES $400,172 $ 415,718 Shareholders' equity Capital stock, par value $2.00; authorized 10,000,000 shares; issued 3,643,614 shares $ 7,287 $ 7,287 Surplus 4,002 4,002 Retained earnings 43,067 42,854 Accumulated other comprehensive income Unrealized appreciation (depreciation) on securities available for sale, net of taxes of $362 and ($39) at June 30, 2001 and December 31, 2000, respectively 704 (76) Less: cost of 367,500 shares and 337,500 shares of treasury stock at June 30, 2001, and December 31, 2000 respectively. (4,009) (3,560) TOTAL SHAREHOLDERS' EQUITY 51,051 50,507 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $451,223 $466,225
See accountant's review report. The accompanying notes are an integral part of these consolidated financial statements. 4 BAR HARBOR BANKSHARES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (in thousands, except number of shares and per share data) (UNAUDITED)
Three Months Ended June 30 Six Months Ended June 30 2001 2000 2001 2000 Interest and dividend income: Interest and fees on loans $ 6,028 $ 6,082 $11,945 $11,782 Interest and dividends on securities and federal funds 2,437 2,859 5,192 5,703 Total interest and dividend income 8,465 8,941 17,137 17,485 Interest expense 4,279 4,456 8,756 8,497 Net interest income 4,186 4,485 8,381 8,988 Provision for possible loan losses 1,200 163 1,400 326 Net interest income after provision for possible loan losses 2,986 4,322 6,981 8,662 Noninterest income: Trust and other financial services. 787 760 1,752 1,556 Service charges on deposit accounts 507 396 1,065 643 Other service charges, commissions, and fees 212 270 436 434 Other operating income 186 33 287 175 Total noninterest income 1,692 1,459 3,540 2,808 Noninterest expenses: Salaries and employee benefits 2,049 2,225 4,143 4,182 Occupancy expense 233 275 496 446 Furniture and equipment expense 326 415 729 740 Other operating expense 1,536 1,422 2,971 2,737 Total noninterest expenses 4,144 4,337 8,339 8,105 Income before income taxes 534 1,444 2,182 3,365 Income taxes 157 487 715 1,122 NET INCOME $ 377 $ 957 $ 1,467 $ 2,243 NET INCOME PER SHARE Basic $0.12 $0.28 $0.45 $0.66 Diluted $0.12 $0.28 $0.45 $0.66 Weighted average number of capital stock shares outstanding Basic 3,276,114 3,372,278 3,288,2 13 3,387,4 95 Effect of dilutive employee stock options 3,402 - 3,402 - Diluted 3,279,516 3,372,278 3,288,2 13 3,387,4 95 Dividends per share $0.19 $0.19 $0.38 $0.38
See accountant's review report. The accompanying notes are an integral part of these consolidated financial statements. 5 BAR HARBOR BANKSHARES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (in thousands, except number of shares and per share data) (UNAUDITED)
CAPITA L STOCK SURPL US RETAIN ED EARNIN GS NET UNREALIZED APPRECIATION (DEPRECIATIO N) ON SECURITIES AVAILABLE FOR SALE TREASUR Y STOCK TOTAL SHAREHOLDE RS' EQUITY Balance, December 31, 1999 $7,287 $4,00 2 $40,61 1 ($1,015) ($1,740 ) $49,145 Net Income 2,243 2,243 Change in unrealized apprecia- tion on securities available for sale, net of tax of $67 130 130 Total comprehensive income 2,243 130 0 2,373 Cash dividends declared ($0.38 per share) (1,291 ) (1,291) Purchase of treasury stock of 66,700 shares (1,086) (1,086) Balance, June 30, 2000 $7,287 $4,00 2 $41,56 3 ($885) ($2,826 ) $49,141 Balance, December 31, 2000 $7,287 $4,00 2 $42,85 4 ($76) ($3,560 ) $50,507 Net Income 1,467 1,467 Cumulative effect to record unrealized depreciation on securities held to maturity transferred to securities available for sale, net of tax benefit of $14 (28) (28) Change in unrealized apprecia- tion on securities available for sale, net of tax of $416 808 808 Total comprehensive income 1,467 780 2,247 Cash dividends declared ($0.38 per share) (1,254 ) (1,254) Purchase of treasury stock of 30,000 shares (449) (449) Balance, June 30, 2001 $7,287 $4,00 2 $43,06 7 $704 ($4,009 ) $51,051
See accountant's review report. The accompanying notes are an integral part of these consolidated financial statements. 6 BAR HARBOR BANKSHARES AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (UNAUDITED)
2001 2000 Cash flows from operating activities: Net income $1,467 $2,243 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 604 616 Provision for loan losses 1,400 326 Gain on sale of other real estate owned - (7) Net change in loans held for sale - 52 Net amortization of bond premium 8 46 Loss on sale of premises and equipment - 111 Net change in other assets (7,189) (1,658) Net change in other liabilities (939) 1,015 Net cash provided (used) by operating activities (4,649) 2,744 Cash flows from investing activities: Net change in federal funds sold (2,000) - Purchases of securities held to maturity - (5,313) Proceeds from maturity and principal paydowns of securities held to maturity 270 9,272 Purchases of securities available for sale - (6,807) Proceeds from maturity and principal paydowns available for sale 7,524 49 Proceeds from sale and call of securities available for sale 23,879 - Net (increase) decrease in other securities 7,654 (1,950) Net loans made to customers (13,775) (16,367) Capital expenditures (2,048) (3,811) Proceeds from sale of other real estate owned - 39 Proceeds from sale of premises and equipment - 59 Net cash provided (used) by investing activities 21,504 (24,829) Cash flows from financing activities: Net change in deposits (2,177) (9,750) Net change in securities sold under repurchase agreements (1,279) (2,465) Proceeds from Federal Home Loan Bank advances 20,000 86,000 Repayment of advances from Federal Home Loan Bank (47,304) (71,500) Net change in short term other borrowed funds 16,152 23,064 Proceeds from sale of capital stock - (1,086) Purchase of treasury stock (449) - Payments of dividends (1,253) (1,291) Net cash provided (used) by financing activities (16,310) 22,972 Net increase in cash and cash equivalents 545 887 Cash and cash equivalents at beginning of year 10,580 12,852 Cash and cash equivalents at end of quarter $11,125 $13,739 Non-cash transactions Transfer from loans to other real estate owned - 92 Transfer of securities from held to maturity to available for sale 113,864 -
See accountant's review report. The accompanying notes are an integral part of these consolidated financial statements. 7 BAR HARBOR BANKSHARES AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles and with the instructions to Form 10-Q, and therefore, they do not include all of the information and footnotes required by generally accepted accounting principles for complete presentation of financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All significant intercompany transactions and balances are eliminated in consolidation. The income reported for the 2001 period is not necessarily indicative of the results that may be expected for the year ending December 31, 2001. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2000. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and the carrying value of real estate owned, management obtains independent appraisals for significant properties. The allowance for possible loan losses is maintained at a level adequate to absorb possible losses. Management determines the adequacy of the allowance based upon reviews of individual credits, recent loss experience, current economic conditions, the risk characteristics of the various categories of loans and other pertinent factors. Credits deemed uncollectible are charged to the allowance. Provisions for credit losses and recoveries on loans previously charged off are added to the allowance. Diluted net income per share reflects the effect of stock options outstanding at the end of the period. 2. Effect of Recent Accounting Pronouncements Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", are effective for years beginning after June 15, 2000. These statements set accounting and reporting standards for derivative instruments and hedging activities. They require an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. These statements have had no impact on the Company, as it has not engaged in any derivative transactions. SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", is effective for transfers occurring after June 30, 2001. SFAS No. 140 replaces SFAS No. 125. This statement is expected to have no material impact to the Company's consolidated financial condition and results of operations. 8 During 2001, the Financial Accounting Standards Board ("FASB") issued Statement No. 141, "Business Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 improves the transparency of the accounting and reporting for business combinations by requiring that all business combinations be accounted for under a single method - the purchase method. Use of the pooling-of-interests method is no longer permitted. SFAS No. 141 requires that the purchase method be used for business combinations initiated after June 30, 2001. SFAS No. 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The amortization of goodwill ceases upon adoption of the Statement, which will be January 1, 2002. The Company has not determined the impact of adopting SFAS No. 142. 3. Line of Business Reporting The Company manages and operates two major lines of business: Community Banking and Financial Services. Community Banking, through the wholly owned subsidiary Bar Harbor Banking and Trust Company, includes lending and deposit-gathering activities and related services to businesses and consumers. Financial Services through BTI Financial Group and its three operating subsidiaries includes Dirigo Investments, Inc., a NASD registered broker- dealer; Block Capital Management, an SEC registered investment advisor; and Bar Harbor Trust Services, a Maine chartered trust company. The business lines are identified by the entities through which the product or service is delivered. The reported lines of business results reflect the underlying core operating performance within the business units. Other is comprised of intercompany eliminations and parent company only items. Selected segment information is included in the following table. SIX MONTHS ENDED JUNE 30 (UNAUDITED)
Community Banking Financial Services Other Consolidate d Totals 2001 2000 2001 2000 2001 2000 2001 2000 Net Interest Income $8,370 $8,979 $11 $9 $0 $0 $8,3 81 $8,9 88 Provision for loan losses 1,400 326 0 0 0 0 1,40 0 326 Net interest income after provision for loan losses 6,970 8,653 11 9 0 0 6,98 1 8,66 2 Non-interest income 1,775 3,186 1,757 1,582 8 (1,96 0) 3,54 0 2,80 8 Non-interest expense 6,139 6,305 2,117 1,865 83 65 8,33 9 8,10 5 Income (loss) before income tax 2,606 5,534 (349) (274) (75) (1,89 5) 2,18 2 3,36 5 Income tax (benefit) 868 1,840 (128) (93) (25) (625) 715 1,12 2 Net income (loss) $1,738 $3,694 ($221) ($181 ) ($50 ) ($1,2 70) $1,4 67 $2,2 43
9 THREE MONTHS ENDED JUNE 30 (UNAUDITED)
Community Banking Financial Services Other Consolidate d Totals 2001 2000 2001 2000 2001 2000 2001 2000 Net Interest Income $4,181 $4,478 $5 $7 $0 $0 $4,1 86 $4,4 85 Provision for loan losses 1,200 163 0 0 0 0 1,20 0 163 Net interest income after provision for loan losses 2,981 4,315 5 7 0 0 2.98 6 4,32 2 Non-interest income 867 673 792 786 33 1,69 2 1,45 9 Non-interest expense 3,068 3,390 1,000 979 76 (32) 4,14 4 4,33 7 Income (loss) before income tax 780 1,598 (203) (186) (43) 32 534 1,44 4 Income tax (benefit) 250 538 (79) (63) (14) 12 157 487 Net income (loss) $530 $1,060 ($124) ($123 ) ($29 ) $20 $377 $957
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain matters discussed in this Report on Form 10-Q are forward- looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include, but are not limited to, those described in Management's Discussion and Analysis of Financial Condition and Results of Operations. Changes to such risks and uncertainties, which could impact future financial performance, include, among other things, (1) competitive pressures in the banking industry; (2) changes in the interest rate environment; (3) general economic conditions, either nationally or regionally; (4) changes in the regulatory environment; (5) changes in business conditions and inflation; and (6) changes in security markets. Accordingly, the information set forth therein should be carefully considered when evaluating the business prospects of the Company. The following is the review of Bar Harbor Bankshares (the Company) and its subsidiaries, Bar Harbor Banking and Trust Company and BTI Financial Group, for the six months ended June 30, 2001. SUMMARY Total assets for the Company of $451.2 million at June 30, 2001, have decreased by $15.0 million from December 31, 2000. Earnings were $1,467,000 for the first six months of 2001, and $776,000 below the earnings for the same period in 2000. The principal reason for the decrease in earnings is the additional provision of $1 million, or $660,000 after taxes, that the Bank added to its allowance for possible loan losses. This additional provision establishes the allowance for possible loan losses at a level that management feels is adequate to absorb possible future losses. Total assets declined due to called securities and prepayments of mortgage backed securities that were not replaced. These reductions occurred in large measure because the lower interest rate environment made early pay-offs and refinancings attractive to borrowers. 10 BTI Financial Group (BTI), a wholly owned financial services subsidiary of Bar Harbor Bankshares, was formed in the fall of 1999. BTI Financial Group's subsidiaries, Dirigo Investments, Inc., Bar Harbor Trust Services and Block Capital Management began operations in January of 2000. As a result of the formation of BTI, the Company has implemented segment reporting as required by Statement of Accounting Standard (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information." The formation of these three companies will position BTI to more fully participate in various segments of the financial services industry with the potential for significant growth. In mid-2000, a branch office of Dirigo Investments, Inc. was established in the Bangor, Maine, area including an office manager and a broker, expanding the potential market area. This office was further expanded with additional brokers in late 2000. At the end of the first quarter 2001, BTI moved into its newly renovated centralized facilities in Ellsworth, Maine. REVIEW OF FINANCIAL CONDITION AT JUNE 30, 2001 AND DECEMBER 31, 2000 Total assets declined $15.0 million from December 31, 2000, to June 30, 2001, primarily because investment securities decreased $30.5 from 2000 year end due to maturities, called issues, and paydowns of mortgage backed securities. Lower interest rates, precipitated by the Federal Reserve reducing the targeted federal funds rate by 275 basis points during the first six months of 2001, have contributed to an acceleration of called securities, refinancings, and payoffs of securitized mortgages. The principal application of this incoming cash flow from the investment portfolio has been to reduce borrowings from the Federal Home Loan Bank and to fund loan growth. These borrowings have decreased $11.1 million since December 31, 2000, while loan growth has increased $12.2 million. At the end of the second quarter 2001, consumer loans represented 59% of the portfolio, which is consistent with year end 2000. The ratio of commercial loans tends to increase modestly in the second and third calendar quarters that are more seasonally active for commercial lending. The Bank's reserve for possible loan losses as of June 30, 2001, is 1.43% of total loans compared to 1.56% at December 31, 2000. Management reviews the allocation to the reserve on a quarterly basis and funds the reserve as deemed necessary. This review includes a provision for specific accounts and impaired loans, provisions due to historic loan loss experience by loan type and reserves reflecting industry and credit concentrations, current local and national economic conditions, underwriting standards, and regulatory guidelines. During the first six months of 2001, net charge offs totaled $1,769,000 compared to $475,000 during the first six months of 2000. Included in the 2001 net charge-off total is an amount of $1,063,000 related to one credit engaged in the fishing industry. During the second quarter 2001, an additional provision to the allowance was recognized to establish the reserve at a level management feels is adequate to absorb possible future loan losses. The amounts below represent the total loan dollars past due as of June 30, 2001, and December 31, 2000.
Category June 30, 2001 December 31, 2000 90-days past due and still accruing $ 320 $ 1,206 Non-accruing 5,493 6,907 $ 5,813 $ 8,113 Gross Loans $283,588 $271,381 Percentage of Gross Loans 2.05% 2.99%
11 Effective January 1, 2001, a substantial portion of the securities portfolio was reclassified from held to maturity to available for sale, as allowed by SFAS No. 133, as amended. This reclassification will permit more active management of the investment portfolio. Premises and equipment growth includes the purchase and renovation costs of the headquarters of BTI in Ellsworth, Maine, as well as properties adjacent to the Ellsworth branch office of the Bank and in front of BTI. At the end of the first quarter 2001, the building was substantially complete and occupancy by the BTI subsidiaries had begun. The Bank experiences a seasonal decline in its deposit base through late fall and the winter months through the spring. Deposits generally increase during the second and third quarters when economic activity in the Company's market area is more seasonally active. While deposits are $2.2 million below year end, they have increased $5.8 million, or 2.2%, during the second quarter 2001. NET INTEREST INCOME Rates, volumes and the mix of earning assets and interest bearing liabilities and the level of non-interest bearing deposits affect net interest income. Comparing the first six months of 2001 with the same period for 2000, net interest income decreased by $607,000. Average earning assets of the Bank decreased slightly, by $7.5 million between the two periods. More significantly, a declining interest rate environment, increased competition reflected in loan pricing, reduced opportunity for attractive yields in high quality investments, and some residual of rapidly rising funding costs in 2000, have narrowed average net interest margins. In some instances, in the first half of 2000, the Bank added fixed rate, longer-term assets to its Balance Sheet, but these assets were funded with shorter-term (one year or less) liabilities. As funding rates increased, the net interest income spread on these investments decreased because of the increasingly higher funding costs. While this compression has abated somewhat during the first half of 2001, average funding costs from the Federal Home Loan Bank were still 22 basis points more in the first half of 2001 than in the first half of 2000, which contributes to the decrease in net interest income between quarters. Interest earned on loans for the first six months of 2001 when compared to the first six months of 2000, increased by $656,000 primarily due to increases in average volumes of $15.2 million but overall by only $163,000 due to declining yields in the loan portfolio which declined approximately 37 basis points between the first half of 2000 and the first half of 2001. Because of declining interest rates in the first six months of 2001 and the repricing attributes of the mix of loans, the overall yield on the loan portfolio at the end of the second quarter 2001 has decreased approximately 31 basis points from the fourth quarter of 2000. Interest income from the securities portfolio was $724,000 less in the first six months of 2001 than the same period in 2000 principally because of a $30.5 million reduction in the overall portfolio between periods. This decrease was caused by maturities, pay downs on mortgage backed securities, and the exercise by issuers of callable features because of the declining interest rate environment. The overall average yield of the portfolio was 6.73% in 2001, a slight increase of 2 basis points over a yield of 6.71% in the first six months of 2000. Interest expense for the six months ended June 30, 2001, increased $259,000 compared to the same period in 2000. Virtually all of this increase was attributed to rate increases, particularly related to certificates of deposit and term borrowings, contracted during the higher interest rate environment in 2000. Average deposit rates in the first six months of 2001 were 3.42% compared to an average rate of 12 3.18% the same period last year. Borrowings from the Federal Home Loan Bank, which in large measure were used to fund the leverage in the securities portfolio, increased 22 basis points to a 6.28% average cost in the first half of 2001 compared to the previous year's period. As these funding sources continue to reprice, primarily through maturities, the Company should realize lower funding costs in the near future. 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 dollar amounts of the change in each. RATE VOLUME ANALYSIS SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000 (dollars in thousands)
INCREASES (DECREASES) DUE TO VOLUME RATE NET Loans $656 ($ 493) $163 Investment securities (741) 17 (724) Federal funds sold and money market funds 214 (1) 213 TOTAL EARNING ASSETS 129 (477) (348) Deposits (26) 331 305 Borrowings (178) 132 (46) TOTAL INTEREST BEARING LIABILITIES (204) 463 259 NET CHANGE IN INTEREST $333 ($940) ($607)
NON-INTEREST INCOME Non-interest income for the six months ended June 30, 2001, totaled $3,540,000 which is $732,000 more than the first six months in 2000. This 26% increase is due principally to fee enhancements implemented by the Bank in late 2000, improved management of customer charges, and a 13% increase in BTI revenues from its three financial services subsidiaries. NON-INTEREST EXPENSE Non-interest expenses for the six months ended June 30, 2001, totaled $8,339,000, an increase of $234,000, or 2.9% from the first six months of 2000. Over the past several months, the Company has 13 made additions to staff in critical customer related and operational areas, has implemented technological improvements throughout the Company, and has expanded the BTI network, particularly in the Bangor market. In the category of salaries and related benefits, in 2000 the Company added a senior credit administrator and a related staff for analysis and collections that has enhanced significantly the credit function of the Bank. Throughout the second quarter of 2000, the banking software conversion to Information Technology, Inc. (ITI) was completed. At that time, the Company began expense recognition of capitalized costs related to this system. This increase in technology expenses is included in the first half of 2001, but had been only partially incurred in the first half of 2000. During the second quarter of 2001, the Company began depreciation of the new BTI headquarters building and the related furniture, fixtures, and equipment. The Company did not incur any additional costs or any losses due to the Year 2000 rollover. All internal and third party provided software has been performing satisfactorily since January 1, 2000. CAPITAL At June 30, 2001, the Company's capital to asset ratio is 11.3%, while the Bank has a leverage ratio of 9.35%, a risk-weighted Tier 1 ratio of 15.1% and a Total Capital ratio of 16.4%, all in the well capitalized categories. These ratios compare to December 31, 2000, when the capital to asset ratio was 10.5% for the Company, and the Bank had a leverage ratio, risk-based Tier 1 ratio, and Total Capital ratio of 9.4%, 15.1%, and 16.4% respectively. Regulatory minimums for these risk based measures are 4% for leverage, 4% for Tier 1, and 8% for Total Capital. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Liquidity is measured by the Bank's ability to meet short-term 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 uses a Basic Surplus/Deficit model to measure its liquidity over a 30-day and 90-day time horizon. The relationship between liquid assets and short-term liabilities that are vulnerable to non-replacement within a 30-day period is examined. The Bank's policy is to maintain its liquidity position at a minimum of 5% of total assets. Liquidity as measured by the Basic Surplus/Deficit model was 9.0% as of June 30, 2001, for the 30-day horizon and 10.4% for the 90-day horizon. The Bank's position with regard to interest rate sensitivity consists of the matching of its assets and liabilities for repricing within a year. The gap analysis in the current interest rate environment shows the Bank with approximately $26 million more liabilities than assets that would be repriced within twelve months, although the mix of these assets and liabilities suggests that the company is structurally asset sensitive. If rates were to rise by 200 basis points, net interest income could increase by $263,000 in the first year, and increase by $689,000 during the second year. If rates were to drop by 200 basis points and utilizing a steepening yield curve shift in rates, simulations based on a static balance sheet indicate that the Bank's net interest income could decrease by approximately $146,000 during the first year of the drop, and decrease its income in the second year by $1.6 million. As interest rates are currently at comparatively low levels, a continued drop of 200 basis points may be unlikely. 14 PART II OTHER INFORMATION Item 1 Legal Proceedings None Item 2 Changes in Securities and Use of Proceeds None Item 3 Defaults Upon Senior Securities None Item 4 Submission of Matters to a Vote of Security Holders None Item 5 Other Information None Item 6 Exhibits and Reports on Form 8-K None 15 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/ Dean S. Read Date: August 10, 2001 Dean S. Read Chief Executive Officer /S/ Gerald Shencavitz Date: August 10, 2001 Gerald Shencavitz Chief Financial Officer 16