10-Q 1 bhb10qsep01.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 September 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 September 30, 2001: Common Stock: 3,270,194 TABLE OF CONTENTS
PART 1 FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Independent Accountants' Report 3 Financial Statements 4-7 Consolidated Balance Sheets at September 30, 2001 and December 31, 2000 4 Consolidated Statements of Income for the Three and Nine Months ended September 30, 2001 and 2000 5 Consolidated Statements of Changes in Shareholders' Equity for the Nine Months ended September 30, 2001 and 2000 6 Consolidated Statements of Cash Flow for the Nine Months ended September 30, 2001 and 2000 7 Notes to Consolidated Financial Statements 8-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10- 15 Item 3. Quantitative and Qualitative Disclosure About Market Risk 15 PART II OTHER INFORMATION Item 1. Legal Proceedings 16 Item 2. Changes in Securities and Use of Proceeds 16 Item 3. Defaults Upon Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5 Other Information 16 Item 6 Exhibits and Reports on Form 8-K 16 Signature Page 17
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 September 30, 2001, and for the three- and nine-month periods ended September 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 November 9, 2001 3 PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS BAR HARBOR BANKSHARES AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2001 AND DECEMBER 31, 2000 (in thousands, except number of shares and per share data)
September 30, 2001 (Unaudited) December 31, 2000 Assets Cash and due from banks $ 16,864 $ 10,580 Securities: Available for sale, at market 127,556 37,844 Held to maturity (market value $1,757 and $116,245 at September 30, 2001 and December 31, 2000, respectively) 1,746 116,306 Other securities 8,168 8,068 Total securities 137,470 162,218 Loans 291,125 271,381 Allowance for possible loan losses (3,987) (4,236) Loans, net of allowance 287,138 267,145 Premises and equipment 13,250 11,996 Other assets 11,544 14,286 TOTAL ASSETS $466,266 $466,225 Liabilities Deposits Demand deposits $ 54,389 $ 42,527 NOW accounts 44,359 41,039 Savings deposits 84,120 73,776 Time deposits 111,625 120,734 Total deposits 294,493 278,076 Securities sold under repurchase agreements 13,032 12,166 Borrowings from Federal Home Loan Bank 99,700 119,152 Other liabilities 5,842 6,324 TOTAL LIABILITIES $413,067 $ 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 43,643 42,854 Accumulated other comprehensive income Unrealized appreciation (depreciation) on securities available for sale, net of taxes of $1,222 and ($39) at September 30, 2001 and December 31, 2000, respectively 2,372 (76) Less: cost of 373,610 shares and 337,500 shares of treasury stock at September 30, 2001, and December 31, 2000, respectively. (4,105) (3,560) TOTAL SHAREHOLDERS' EQUITY 53,199 50,507 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $466,266 $466,225
See independent accountants' 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 NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (in thousands, except number of shares and per share data) (UNAUDITED)
Three Months Ended September 30 Nine Months Ended September 30 2001 2000 2001 2000 Interest and dividend income: Interest and fees on loans $ 6,313 $ 6,086 $18,258 $17,868 Interest and dividends on securities and federal funds 2,182 2,876 7,374 8,579 Total interest and dividend income 8,495 8,962 25,632 26,447 Interest expense 3,715 4,549 12,471 13,046 Net interest income 4,780 4,413 13,161 13,401 Provision for possible loan losses 250 163 1,650 489 Net interest income after provision for possible loan losses 4,530 4,250 11,511 12,912 Noninterest income: Trust and other financial services. 733 765 2,485 2,321 Service charges on deposit accounts 430 312 1,495 955 Credit card service charges and fees 875 784 1,200 898 Other service charges, commissions, and fees 58 33 290 414 Other operating income 29 27 195 141 Total noninterest income 2,125 1,921 5,665 4,729 Noninterest expenses: Salaries and employee benefits 2,268 2,050 6,411 6,232 Occupancy expense 261 239 757 685 Furniture and equipment expense 379 462 1,108 1,202 Credit card expenses 605 569 895 878 Other operating expense 1,300 1,108 3,981 3,536 Total noninterest expenses 4,813 4,428 13,152 12,533 Income before income taxes 1,842 1,743 4,024 5,108 Income taxes 627 598 1,342 1,720 NET INCOME $1,215 $1,145 $ 2,682 $ 3,388 NET INCOME PER SHARE Basic $0.37 $0.34 $0.81 $1.00 Diluted $0.37 $0.34 $0.81 $1.00 Weighted average number of capital stock shares outstanding Basic 3,275,721 3,346,614 3,292,1 81 3,375,2 64 Effect of dilutive employee stock options 7,987 - 7,987 - Diluted 3,288,708 3,346,614 3,300,1 68 3,375,2 64 Dividends per share $0.19 $0.19 $0.57 $0.57
See independent accountants' 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 NINE MONTHS ENDED SEPTEMBER 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 3,388 3,388 Change in unrealized apprecia- tion on securities available for sale, net of tax of $225 436 436 Total comprehensive income 3,388 436 3,824 Cash dividends declared ($0.57 per share) (1,926 ) (1,926) Purchase of treasury stock of 81,900 shares (1,317) (1,317) Balance, September 30, 2000 $7,287 $4,00 2 $42,07 3 ($579) ($3,057 ) $49,726 Balance, December 31, 2000 $7,287 $4,00 2 $42,85 4 ($76) ($3,560 ) $50,507 Net Income 2,682 2,682 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 $1,275 2,476 2,476 Total comprehensive income 2,682 2,448 5,130 Cash dividends declared ($0.57 per share) (1,893 ) (1,893) Purchase of treasury stock of 36,110 shares (545) (545) Balance, September 30, 2001 $7,287 $4,00 2 $43,64 3 $2,372 ($4,105 ) $53,199
See independent accountants' 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 NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000 (Unaudited)
2001 2000 Cash flows from operating activities Net income $ 2,682 $ 3,388 Adjustments to reconcile net income to net cash provided (used) by operating activities Depreciation 1,386 985 Provision for loan losses 1,650 489 Gain on sale of other real estate owned -- (7) Net change in loans held for sale -- 52 Net amortization of bond premium 6 82 Loss on sale of premises and equipment -- 94 Net change in other assets 1,615 (815) Net change in other liabilities (482) 684 Net cash provided (used) by operating activities $ 6,857 $ 4,952 Cash flows from investing activities Purchases of securities held to maturity -- (5,313) Proceeds from maturity and principal paydowns of securities held to maturity 719 15,858 Purchases of securities available for sale (15,012) (8,147) Proceeds from maturity and principal paydowns of securities available for sale 16856 74 Proceeds from call of securities available for sale 25879 1,000 Net (increase) decrease in other securities (100) (1,950) Net loans made to customers (21,668) (16,211) Capital expenditures (2,640) (4,224) Proceeds from sale of other real estate owned -- 39 Proceeds from sale of premises and equipment -- 76 Net cash provided (used) by investing activities 4,034 (18,798) Cash flows from financing activities Net change in deposits 16,417 9,309 Net change in securities sold under repurchase agreements 866 570 Proceeds from Federal Home Loan Bank advances 42,700 115,000 Repayment of advances from Federal Home Loan Bank (78,304) (125,722) Net change in short term other borrowed funds 16,152 16,064 Purchase of treasury stock (545) (1,317) Payment of dividends (1,893) (1,926) Net cash provided (used) by financing activities (4,607) 11,978 Net increase (decrease) in cash and cash equivalents 6,284 (1,868) Cash and cash equivalents, beginning of year 10,580 12,852 Cash and cash equivalents, end of year $ 16,864 $ 10,984 Non-cash transactions Transfer from loans to other real estate owned $ 25 $ 92 Transfer of securities from held to maturity to available for sale $113,864 $ --
See independent accountants' report. The accompanying notes are an integral part of these consolidated financial statements. 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. Certain 2000 balances have been reclassified to conform with the 2001 financial presentation. 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", is 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. See independent accountants' report. The accompanying notes are an integral part of these consolidated financial statements. 8 During 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations," and SFAS 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. The Company is not impacted by this statement at this time. 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. SFAS No. 143, Accounting for Asset Retirement Obligations, and SFAS No. 144, Accounting for the Impairment or Disposal of Long- Lived Assets, provide guidance concerning the recognition and measurement of an impairment loss for certain types of long-lived assets and obligations associated with the retirement of tangible long-lived assets. Management does not expect these statements to affect the Company's consolidated financial condition and results of operations. 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. The Community Banking line of business in the first nine months of 2000 includes the pretax gain in non-interest income of $1,960,000 representing the sale of the Bank's trust operations to BTI. On an after tax basis, this gain is $1,313,000 as reflected in net income for the Bank. The effect of this internal transaction is eliminated in the Consolidated Totals. Other is comprised of inter-company eliminations and parent company only items. Selected segment information is included in the following table. NINE MONTHS ENDED SEPTEMBER 30, (UNAUDITED)
Community Banking Financial Services Other Consolidate d Totals 2001 2000 2001 2000 2001 2000 2001 2000 Net interest income $13,137 $13,38 7 $24 14 $0 $0 $13, 161 $13, 401 Provision for loan losses 1,650 489 0 0 0 0 1,65 0 489 Net interest income after provision for loan losses 11,487 12,898 24 14 0 0 11,5 11 12,9 12 Non-interest income 3,252 4,469 2,485 2,364 (72) (2,10 4) 5,66 5 4,72 9 Non-interest expense 9,944 9,982 3,159 2,793 49 (242) 13,1 52 12,5 33 Income (loss) before income tax 4,795 7,385 (650) (415) (121 ) (1,86 2) 4,02 4 5,10 8 Income tax (benefit) 1,602 2,472 (219) (138) (41) (614) 1,34 2 1,72 0 Net income (loss) $3,193 $4,913 ($431) ($277 ) ($80 ) ($1,2 48) $2,6 82 $3,3 88
See independent accountants' report. The accompanying notes are an integral part of these consolidated financial statements. 9 THREE MONTHS ENDED SEPTEMBER 30 (UNAUDITED)
Community Banking Financial Services Other Consolidate d Totals 2001 2000 2001 2000 2001 2000 2001 2000 Net interest income $4,767 $4,408 $13 $5 $0 $0 $4,7 80 $4,4 13 Provision for loan losses 250 163 0 0 0 0 250 163 Net interest income after provision for loan losses 4,517 4,245 13 5 0 0 4.53 0 4,25 0 Non-interest income 1,477 1,283 728 782 (80) (144) 2,12 5 1,92 1 Non-interest expense 3,805 3,677 1,042 928 (34) (177) 4,81 3 4,42 8 Income (loss) before income tax 2,189 1,851 (301) (141) (46) 33 1,84 2 1,74 3 Income tax (benefit) 734 632 (91) (45) (16) 11 627 598 Net income (loss) $1,455 $1,219 ($210) ($96) ($30 ) $22 $1,2 15 $1,1 45
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain matters discussed in this Report on Form 10-Q contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as Amended and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward looking statements to be covered by the safe harbor provisions for forward looking statements contained in the Private Securities Litigation Reform Act of 1995 and is including this statement for purposes of these safe harbor provisions. The forward looking statements discussed in this Report on Form 10Q 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 nine months ended September 30, 2001. SUMMARY Total assets for the Company of $466.3 million at September 30, 2001, are essentially the same as at December 31, 2000. Earnings were $2,682,000 for the first nine months of 2001, and $706,000 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. Net income of $1,215,000 in the third quarter of 2001 represented an increase of $70,000 over the same period last year. Although total assets are at the same overall level as at December 31, 2000, the mix has changed over the past nine months. Investment securities of $137 million at September 30, 2001, including $15 million of short term money market funds, decreased almost $25 million from December 31, 2000, due to called securities and prepayments of mortgage backed securities that were not replaced. Excluding these money market investments, investment securities decreased almost $40 million since yearend 2000. These reductions occurred in large measure because the lower interest rate environment made early pay-offs 10 and refinancings attractive to borrowers. At September 30, 2001, loans were approximately $20 million more than at December 31, 2000, principally due to seasonal borrowings by the bank's commercial customers and an increase in consumer real estate lending. 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 Financial Accounting Standard (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information." The formation of these three companies is expected to 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 SEPTEMBER 30, 2001 AND DECEMBER 31, 2000 Total assets remained essentially level between December 31, 2000, and September 30, 2001, although the mix of these assets changed. Investment securities decreased a net $24.7 million 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 350 basis points during the first nine months of 2001, have contributed to an acceleration of called securities, refinancings, and payoffs of securitized mortgages. Included in the balance of investment securities is $15 million of money market investments that were purchased principally from funding generated from the investment portfolio. The net incoming cash flow from the investment portfolio has been used to reduce borrowings from the Federal Home Loan Bank, which have decreased $19.5 million since December 31, 2000, and to fund seasonal increases in cash and due from banks which was $6.3 million greater at September 30, 2001 than at yearend 2000. Loans increased $19.7 million during the first nine months of 2001 including a $5.2 million increase in commercial loans and a $14.5 million increase in consumer loans, primarily in real estate mortgages. At the end of the third quarter 2001, consumer loans represented 58% 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. Deposits at September 30, 2001 are $16.4 million greater than December 31, 2000, and include some seasonal increases that accumulate during the more active summer and autumn period in the Bank's market area. The Bank's reserve for possible loan losses as of September 30, 2001, is 1.37% 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 nine months of 2001, net charge offs totaled $2,101,000 compared to $782,000 during the first nine 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 11 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 September 30, 2001, and December 31, 2000.
Category September 30, 2001 December 31, 2000 90-days past due and still accruing $ 504 $ 1,206 Non-accruing 2,706 6,907 $ 3,210 $ 8,113 Gross Loans $291,125 $271,381 Percentage of Gross Loans 1.10% 2.99%
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. Deposits at September 30, 2001 are $16.4 million greater than 2000 year end, principally in demand and money market savings accounts. NET INTEREST INCOME Rates, volumes and the mix of earning assets and interest bearing and non-interest bearing liabilities affect net interest income. Comparing the first nine months of 2001 with the same period for 2000, net interest income decreased a modest $240,000. Because of the dramatic decrease in interest rates in 2001, interest income for the company decreased $815,000 during this nine month period compared to 2000, and interest expense declined by $575,000. Average earning assets of the Bank decreased $9.0 million between the two periods. Furthermore, a rapidly declining interest rate environment, increased competition reflected in loan pricing, reduced opportunity for attractive yields in high quality investments, the retirement of high yielding callable investments and paydowns of mortgage backed securities, and some residual of rapidly rising funding costs in 2000, have narrowed average net interest margins. In some instances, in 1999 and 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 during 2001 because of declining interest rates, average funding costs from the Federal Home Loan Bank were still 5 basis points more in the first nine months of 2001 than in the first nine months of 2000, which contributes to the decrease in net interest income between periods. Interest and fees earned on loans for the first nine months of 2001 when compared to the first nine months of 2000, increased by $757,000 due to increases in average volumes of $11.6 million but overall by only $390,000 due to declining yields in the loan portfolio which decreased 18 basis points between the first nine months of 2000 and the first nine months of 2001. Because of declining interest rates in the first nine months of 2001 and the repricing attributes of the mix of loans, the overall yield on the loan 12 portfolio at the end of the third quarter 2001 has decreased approximately 24 basis points from the fourth quarter of 2000. Interest income from the securities portfolio was $1,507,000 less in the first nine months of 2001 than the same period in 2000 principally because of a $29.1 million reduction in the average portfolio between periods along with an 5 basis point reduction in yield. 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 6.64% in 2001, compared to a yield of 6.69% during the first nine months of 2000. Interest expense for the nine months ended September 30, 2001, decreased $575,000 compared to the same period in 2000. Most of this decrease was attributed to a decrease of $23.6 million in funding liabilities between the two periods offset by a 5 basis point overall increase in cost of these liabilities. Average deposit rates in the first nine months of 2001 were 3.20% compared to an average rate of 3.17% the same period last year. The cost of borrowings from the Federal Home Loan Bank, which in large measure were used to fund the leverage in the securities portfolio, increased 43 basis points to a 6.15% average cost in the first nine months of 2001 compared to the previous year's period. These increases were offset by a 28 basis point decrease in the cost of repurchase agreements. As these funding sources continue to reprice, primarily through maturities, the Company should realize lower funding costs in the near future. At September 30, 2001, outstanding borrowings from the Federal Home Loan Bank had a composite rate of 5.53%. 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 funding liabilities including demand deposits, 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 NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2000 (dollars in thousands)
INCREASES (DECREASES) DUE TO VOLUME RATE NET Loans $757 ($367) $390 Investment securities and money funds (1,444) (63) (1,507) Federal funds sold and money market funds 308 (6) 302 TOTAL EARNING ASSETS (379) (436) (815) Deposits (56) 55 (1) Borrowings (1003) 422 (581) Repurchase Agreements 32 (25) 7 TOTAL INTEREST BEARING LIABILITIES (1027) 452 (575) NET CHANGE IN NET INTEREST INCOME $648 ($888) ($240)
13 NON-INTEREST INCOME Non-interest income for the nine months ended September 30, 2001, totaled $5,665,000, which is $936,000 more than the first nine months in 2000. This 20% increase is due principally to fee enhancements implemented by the Bank in late 2000, improved management of customer charges, and a 7% increase in BTI revenues from its three financial services subsidiaries. NON-INTEREST EXPENSE Non-interest expenses for the nine months ended September 30, 2001, totaled $13,152,000, an increase of $619,000, or 4.9% from the first nine months of 2000. Over the past several months, the Company has made additions to staff in critical customer related and operational areas, has implemented technological improvements throughout the Company, has increased staffing in the credit administration area, and has expanded the BTI network, particularly in the Bangor market. 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 nine months of 2001, but had been only partially incurred in the first nine months 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. CAPITAL At September 30, 2001, the Company's capital to asset ratio is 11.4%, while the Bank has a leverage ratio of 9.44%, a risk- weighted Tier 1 ratio of 14.6% and a Total Capital ratio of 15.9%, 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. The Company is primarily dependent upon the payment of cash dividends from its subsidiary Bank to service its commitments and pay dividends to its shareholders. The Bank's principal regulatory agency, the Federal Deposit Insurance Corporation, limits Bank dividends to current earnings, excluding securities gains, while maintaining a specified Tier 1 leverage capital ratio with which the Bank is in full compliance. 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 14 is to maintain its liquidity position at a minimum of 5% of total assets. Liquidity as measured by the Basic Surplus/Deficit model was 12.0% as of September 30, 2001, for the 30-day horizon and 10.3% 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 $43.4 million more assets than liabilities that would be repriced within twelve months. If rates were to rise by 200 basis points, net interest income could increase by $365,000 in the first year, and increase by $992,000 during the second year. If rates were to drop by 200 basis points and using a parallel yield curve shift in rates, simulations based on a static balance sheet indicate that the Bank's net interest income could decrease by approximately $575,000 during the first year of the drop, and decrease its income in the second year by $2.4 million. Although targeted federal funds rates have decreased 100 basis points since September 30, 2001, a continued drop totalling 200 basis points may be unlikely, thereby moderating any reduction in net interest income from falling rates. 15 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 a) Annual meeting of the Company's shareholders was held on May 1, 2001. b) Proxies for the meeting were solicited pursuant to Section 14(a) of the Securities and Exchange Act of 1934. There were no solicitations in opposition to the nominees for election to the Company's Board of Directors as listed in the proxy statement. The vote for Directors is as follows:
Nominee elected as Director Term Expires For Against Abstain Paul G. Ahern Ruth S. Foster John P. Reeves Bernard K. Cough 2004 2004 2004 2003 2,235,926 2,235,594 2,235,926 2,235,926 -- -- -- -- 42,559 42,790 42,559 42,559
The vote to set the number of Directors for the ensuing year at ten is as follows:
For Against Abstain 2,251,908 14,794 11,768
The vote to ratify the Board of Directors' selection of Berry, Dunn, McNeil & Parker as independent auditors of the Company and its Subsidiaries for the ensuing year is as follows:
For Against Abstain 2,254,725 5,937 15,662
Item 5 Other Information None Item 6 Exhibits and Reports on Form 8-K Form 8-K filed September 5, 2001, reporting Item 5, "Other Events". Company reported on Form 8-K that "the Board of Directors of Bar Harbor Bankshares (the "Corporation") has voted to approve the hiring of a new Chief Executive Officer of the Corporation to replace Dean S. Read. Mr. Read will continue as the President and Chief Executive Officer of Bar Harbor Banking and Trust Company, a wholly-owned subsidiary of the Corporation, and will continue to serve as Chief Executive Officer of the Corporation until such time as his successor has been selected and approved by the Corporation's Board of Directors." 16 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: November 9, 2001 Dean S. Read Chief Executive Officer /S/ Gerald Shencavitz Date: November 9, 2001 Gerald Shencavitz Chief Financial Officer 17 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BAR HARBOR BANKSHARES Date: November 9, 2001 Dean S. Read Chief Executive Officer Date: November 9, 2001 Gerald Shencavitz Chief Financial Officer 17