33 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON DC 20549 FORM 10-K Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (fee required) For the fiscal year ended December 31, 1999. Commission File No. 0-13666 BAR HARBOR BANKSHARES State or other jurisdiction of incorporation or organization: Maine IRS Employer Identification Number: 01-0393663 Address: P O Box 400, 82 Main Street, Bar Harbor, ME Zip Code:04609-0400 Registrant's telephone number, including area code: (207) 288-3314 Securities registered pursuant to Section 12(g) of the Act: Title of Class: Common Stock. Par Value $2.00 per share 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definite proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. Based on the closing price of the common stock of the registrant, the aggregate market value of the voting stock held by non-affiliates of the registrant, as of March 1, 2000 is: Common stock, $2.00 par value $56,067,231 The number of shares outstanding of each of the registrant's classes of common stock, as of March 1, 2000 is: Common stock 3,398,014 Documents incorporated by Reference: (1) Portions of the Annual Report to Stockholders for the year ended December 31, 1999 are incorporated by reference into Part II, Items 6 through 8 and Part IV, Item 14 of the Form 10-K. INDEX <TABLE> <CAPTION> ITEM NUMBER PAGE <S> <C> <C> 1. Business 3-5 2. Properties 5-6 3. Legal Proceedings 6 4. Submission of Matters to a Vote of 6 Security Holders 5. Market for Registrant's Common Equity and Related Stockholder Matters 7 6. Selected Financial Data 7 7. Management's Discussion and Analysis of Financial Condition and Results of 7-19 Operation 7a. Quantitative and Qualitative Disclosures 20 about Market Risk 8. Consolidated Financial Statements and 21 Supplementary Data 9. Changes in and Disagreements with Accountants on Accounting and Financial 21 Disclosure 10. Directors and Executive Officers of the 22- Registrant 24 11. Executive Compensation 25- 27 12. Security Ownership of Certain Beneficial Owners and Management 28 13. Certain Relationships and Related 29 Transactions 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 30- 31 </TABL E> PART I ITEM 1. BUSINESS Bar Harbor Bankshares, ("the Company"), was incorporated January 19, 1984. As of December 31, 1999, the Company's securities consisted of one class of common stock ("the Common Stock"), par value of $2.00 per share, of which there are 3,421,514 shares outstanding held of record by approximately 1,074 stockholders. The Bank conducts operations typical of a full service, independent, community bank. It has ten offices in coastal Maine, including its principal office located at 82 Main Street, Bar Harbor, as well as offices in Hancock County, adjacent Washington County and a trust department office in Penobscot County. The Hancock County offices are located at Main Street, Northeast Harbor; Main Street, Southwest Harbor; Main Street, Blue Hill; route #15, Deer Isle; corner of High and Washington Streets, Ellsworth; and Main Street, Winter Harbor. The Washington County offices are located at the corner of Routes 1 and 1A, Milbridge; Main Street, Machias; and Washington Street, Lubec. The Bank performs its operations, check clearing, technology and mail services in its Operations Center located on Avery Lane in Ellsworth, Maine. In addition, the Bank's Trust Department has an office at One Cumberland Place, Bangor, Maine. The Bank is a retail bank serving primarily individual customers, small retail establishments, seasonal lodging, campgrounds and restaurants. As a coastal bank it serves the lobstering, fishing and aquaculture industries. It also serves Maine's wild blueberry industry through its Washington County offices. The Bank has not made any material changes in its mode of conducting business during the past five years. The Bank operates in a highly competitive market. Competition among banks in Maine has increased in recent years and includes competition from branch offices of statewide and interstate bank holding companies located in the Bank's market area. The Bank continues to be one of the larger independent commercial banks in the State of Maine. In the Bank's immediate service area there are two other independent commercial banks, one savings and loan association, three savings bank branch offices and three commercial bank branch offices owned by holding companies based outside the state. The Bank has a broad deposit base and loss of any one depositor or closely aligned group of depositors would not have a materially adverse effect on its business. Approximately 85% of the Bank's deposits are in interest bearing accounts. The Bank has paid, and anticipates that it will continue to pay, current competitive rates on certificates of deposit, IRAs, NOW and money market accounts and does not anticipate loss of these deposits. The Bank provides the normal banking services offered by a commercial bank including checking accounts, NOW accounts, all forms of savings and time deposit accounts, individual retirement accounts, safe deposit boxes, collections, travelers checks, night depository services, direct deposit payroll services, automated teller services, credit cards, personal money orders, bank-by-mail and club accounts and drive-up facilities at all offices. During 1999, the Bank introduced TeleDirect, an interactive voice response system through which customers can get product information, check balances and activity on their accounts as well as perform transfers between their own accounts. The Bank also has arrangements with other institutions for the provision of certain services, which it does not provide directly, such as computerized payroll services. In addition, the Bank operates a large Trust Department, including an office in Bangor, Maine. Market value for the assets held in the Trust Department as of December 31, 1999 was $379 million compared to $385 million in 1998 and included $17.3 million in new business. The Bank has Automated Teller Machines (ATMs) located in each of its ten branch locations. These ATMs access major networks for use of the Bank's cards throughout the United States including the Plus and NYCE systems as well as the major credit card networks. In addition to the foregoing, the Bank offers lending services including consumer credit in the form of installment loans, overdraft protection (stand-by credit), VISA credit card accounts, student loans, residential mortgage loans and home equity loans. It offers business loans to individuals, partnerships and corporations for capital construction, the purchase of real estate and working capital. Business loans are provided primarily to organizations and individuals in the tourist, health care, blueberry, shipbuilding and fishing and aquaculture industries as well as to the usual small businesses associated with small coastal communities. Certain larger loans which would exceed the Bank's lending limits are written on a participation basis with correspondent banks, with the Bank retaining only such portions of those loans as are within its lending limits. The Bank also provides trust and estate planning services to its customers. The principal market area for all of the Bank's services consists of Hancock and Washington Counties. The Bank's policy for lending limits is up to 20% of its equity to any borrower provided that the loans are secured and approved by the Directors Loan Committee. This committee is chaired by a member of the Bank's Board of Directors, Bernard K. Cough, and includes members of the Bank's management as well as Board of Directors. As a state chartered bank, the Bank is supervised and regulated by the Bureau of Banking of the State of Maine and the Federal Deposit Insurance Corporation. In addition, as a bank holding company, the Company is supervised and regulated by the Federal Reserve Bank. See also Footnote 13 in the notes to the financial statements of the Annual Report to Stockholders. In January of 2000, Bar Harbor Bankshares Chairman, John P. Reeves, announced that Dean S. Read will be joining the Company as Executive Vice President and Chief Operating Officer of Bar Harbor Bankshares and its wholly-owned subsidiary Bar Harbor Banking and Trust Company. Mr. Read will be responsible for management of all internal corporate functions as well as stockholder relations and activities. Mr. Read will succeed Sheldon F. Goldthwait, Jr. as President and Chief Executive Officer upon Mr. Goldthwait's retirement in 2000. Mr. Read brings 30 years of commercial banking experience to the Company. He most recently served as Senior Vice President and Senior Relationship Manager with Key Bank National Association in Augusta, Maine. The Bank is not engaged in any material research activities relating to the development of new services or the improvement of existing services except in the normal course of business activities. In order to better serve its customers, it is the Bank's intent to convert its major banking software systems in the second quarter of 2000. This conversion will include lending, deposit, general ledger, teller and item image applications. As of December 31, 1999, the Bank employed 182 persons in a full or part-time basis. The President, Executive Vice President, Senior Vice President of the Trust Department, Senior Vice President and Treasurer, and Senior Vice President in charge of Human Resources are employed by the Bank as well as serving as officers of the Company. The Company does not compensate them for their services. There are no employees of the Company. On October 4, 1999, the Company formed a wholly owned subsidiary as the first step in a plan to expand and reorganize the provision of financial services. On January 10, 2000, the new subsidiary, BTI Financial Group, acquired Dirigo Investments, Inc., a NASD Registered broker dealer firm in Ellsworth, Maine. Dirigo Investments, Inc. will continue to operate as a full-service discount brokerage firm. In addition, BTI Financial group has formed two other wholly owned operating subsidiaries: Block Capital Management, which it intends to register with the Securities and Exchange Commission as an investment advisor, and Bar Harbor Trust Services, to which the Bank intends to transfer its trust assets after obtaining requisite regulatory and court approvals. The purchase of Dirigo Investments, Inc. will be accounted for under the purchase method of accounting. In addition to facilitating the purchase of Dirigo Investments, Inc., the Bank will contribute capital to Bar Harbor Bankshares, which, in turn, will make a capital contribution to BTI Financial Group to initially capitalize Bar Harbor Trust Services and Block Capital Management. The Bank also will contribute sufficient capital to Bar Harbor Bankshares to provide funds needed to compensate the Bank for the transfer of its Trust Department assets to Bar Harbor Trust Services. Lastly, the Company has purchased real estate in the Ellsworth area, which will house the operations of BTI Financial Group and its subsidiaries. The total transfer of capital for these purposes is expected to be in excess of $7 million. The addition of these three subsidiaries will position BTI Financial Group to more fully participate in a dynamic segment of the financial services industry. Dirigo Investments, Inc., Block Capital Management and Bar Harbor Trust Services will provide a broader range of integrated financial services to Dirigo clients. Dirigo will provide local brokerage services to Block Capital Management and Bar Harbor Trust Services clients. Each of these entities will face significant competition for these services from local banks, which may now or in the future offer a similar range of services, as well as from a number of brokerage firms and investment advisors with offices in the Bank's market area. In addition, most of these services are widely available to the Bank's customers by telephone and over the Internet through firms located outside of the Bank's market area. The foregoing discussion, as well as certain other statements contained in this Form 10-K, or incorporated herein by reference, contain statements which may be considered to be forward-looking within the meaning of the Private Securities Litigation and Reform Act of 1995. Forward looking statements relate to future operations, strategies, financial results or other developments and are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond the Company's control or are subject to change. The expected benefits of the acquisition of Dirigo Investments, Inc. and the operations of Block Capital Management and Bar Harbor Trust Services are subject to a number of future uncertainties including the ability of Bar Harbor Bankshares to successfully integrate the proposed new entities with its existing operations and customer base, future competition from financial institutions and others which may be in the future offer competing services, future changes in state and federal laws and regulations governing financial services and securities, and the ability of existing personnel to successfully manage the proposed financial services group. The Company disclaims any obligation to publicly update or revise any forward-looking statement contained in the foregoing discussion, or elsewhere in this Form 10-K. The Company and its subsidiaries employ a total of 182 employees. On December 8, 1998, the Board of Directors of the Company declared a 100% stock dividend to owners of record as of December 28, 1998, payable on January 25, 1999. All share and per share data information included in the Form 10-K have been restated to reflect the 100% stock dividend. ITEM 2. PROPERTIES The eleven parcels of real estate owned and utilized by the Bank for its operations are described below: 1. The principal office of the Bank is located at 82 Main Street, Bar Harbor, Maine and includes a building housing banking facilities and administrative offices and an adjacent 35 car customer parking lot. The building was renovated in 1998. 2. An office is located at Main Street, Northeast Harbor, Maine. This property consists of a building constructed in 1974 and underwent interior renovations in 1998 to better meet the Bank's needs at that location. 3. An office is located on Main Street, Southwest Harbor, Maine. This property consists of a building constructed in 1975 which was added to and renovated in 1989 to better meet the needs at that location. 4. An office is located at Church Street, Deer Isle, Maine. This property consists of a building constructed in 1974 which was added to and renovated in 1994 to better meet the needs at that location. 5. An office is located on Main Street, Blue Hill, Maine. This property consists of a building constructed in 1960 which was renovated in 1989 to better meet the needs at that location. 6. An office is located at Main Street, Milbridge, Maine. This property consists of a building constructed in 1974 to which a vestibule was added in 1994 to house an ATM which helps to better meet the needs at that location. 7. An office is located at Washington Street, Lubec, Maine. This branch consists of a building constructed in 1990 and is adequate for the Bank's needs at that location. 8. An office is located at High Street, Ellsworth, Maine. This branch consists of a building constructed in 1982 which is adequate for the Bank's current needs at that location. 9. An office is located at Main Street, Winter Harbor. This branch consists of a building constructed in 1995 and is adequate for the Bank's needs at that location. 10. An office is located on Main Street, Machias, Maine. This branch was purchased from Key Bank of Maine in May, 1990, and was renovated in 1995 to better meet the Bank's needs at that location. 11. An Operations Center is located on Avery Lane, Ellsworth, Maine and houses the Bank's operations, check clearing, technology, training and mail departments. The building was constructed in 1996, with occupancy by the Bank taking place in January of 1997. A parcel of land adjacent to the Blue Hill branch was purchased in 1981 but has not been developed. In addition to the above Bank offices, in 2000, the Company acquired land and a building on High Street in Ellsworth, Maine located immediately behind the Bank's Ellsworth branch which will house the operations of BTI Financial Group and its subsidiaries. The Bank has Automated Teller Machines (ATMs) located in each of its ten branch locations. ITEM 3. LEGAL PROCEEDINGS Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS High and low bids for each quarter of 1999 and 1998 are listed below per quotes from The Wall Street Journal. The Company's common stock is traded on the American Stock Exchange (AMEX) under the symbol BHB. Per share data information has been adjusted to reflect the 100% stock dividend described above. </TABLE> <TABLE> 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter High High High High Low Low Low Low <S> <C> <C> <C> <C> 1999 23.50 to 22.25 to 22.00 to 21.375 to 20.125 18.00 18.00 17.625 1998 29.00 to 29.50 to 25.25 to 25.00 to 25.125 24.875 19.25 17.00 </TABLE> ITEM 6. SELECTED FINANCIAL DATA Selected financial information for the past five years is contained on Page 3 of the Company's Annual Report to Shareholders for the year ended December 31, 1999 and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report is incorporated herein by reference. AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST EARNINGS (Amounts in Thousands) 1999 <TABLE> <CAPTION> AVERAGE YIELD/ BALANCE INTERE RATE ST <S> <C> <C> <C> ASSETS Loans $248,708 $21,77 8.76% 7 Taxable Investment 149,698 9,798 6.55% Securities Non-Taxable Investment 5,332 316 5.92% Securities Fed. Funds Sold & Money 1,128 61 5.38% Market Funds Total Interest-Earning $404,866 $31,95 7.89% Assets 2 Non-Interest Earning Assets: Total Cash and Due from 11,450 Banks Allowance for Possible Loan (4,781) Losses Bank Premises and Equipment 7,960 Other Assets 9,060 TOTAL ASSETS $428,555 LIABILITIES AND STOCKHOLDERS' EQUITY Interest Bearing Demand $44,115 $ 480 1.29% Deposits Savings Deposits 77,021 2,338 3.04% Time Deposits 110,854 5,471 4.93% Repurchase Agreements and 74,640 3,930 5.26% Short Term Borrowings Long Term Borrowings 28,662 1,583 5.52% TOTAL INTEREST BEARING $335,292 $13,80 4.12% LIABILITIES 2 Non-Interest Bearing Liabilities: Non-Interest Bearing Demand 43,103 Deposits Other Liabilities 2,029 Stockholders' Equity 48,131 TOTAL LIABILITIES AND STOCKHOLDERS' $428,555 EQUITY NET EARNING ASSETS $69,574 NET INTEREST INCOME/NET $18,15 3.77% INTEREST SPREAD 0 NET INTEREST MARGIN 4.48% NET EARNINGS FOR YEAR END $6,225 DIVIDENDS PAID IN CURRENT $2,476 YEAR RETURN ON EQUITY AND ASSETS RETURN ON AVERAGE ASSETS 1.45% RETURN ON AVERAGE EQUITY 12.93% DIVIDEND PAYOUT RATIO 39.78% EQUITY CAPITAL TO ASSETS 11.23% RATIO </TABLE> AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST EARNINGS (Amounts in Thousands) 1998 <TABLE> <CAPTION> AVERAGE YIELD/ INTERE RATE BALANCE ST ASSETS <S> <C> <C> <C> Loans $224,40 $21,29 9.49% 6 0 Taxable Investment Securities 111,111 7,450 6.71% Non-Taxable Investment 6,650 424 6.37% Securities Fed. Funds Sold & Money 955 47 4.92% Market Funds Total Interest-Earning Assets $343,12 $29,21 8.51% 2 1 Non-Interest Earning Assets: Total Cash and Due from Banks 10,856 Allowance for Possible Loan (4,721) Losses Bank Premises and Equipment 7,823 Other Assets 6,577 TOTAL ASSETS $363,65 7 LIABILITIES AND STOCKHOLDERS' EQUITY Interest Bearing Demand $41,872 $622 1.48% Deposits Savings Deposits 57,791 1,650 2.86% Time Deposits 116,262 6,267 5.39% Repurchase Agreements and 39,644 2,133 5.38% Short Term Borrowings Long Term Borrowings 22,849 1,301 5.69% TOTAL INTEREST BEARING $278,41 $11,97 4.30% LIABILITIES 8 3 Non-Interest Bearing Liabilities: Non-Interest Bearing Demand 38,890 Deposits Other Liabilities 2,177 Stockholders' Equity 44,172 TOTAL LIABILITIES AND STOCKHOLDERS' $363,65 EQUITY 7 NET EARNING ASSETS $64,704 NET INTEREST INCOME/NET $17,23 4.21% INTEREST SPREAD 8 NET INTEREST MARGIN 5.02% NET EARNINGS FOR YEAR END $6,607 DIVIDENDS PAID IN CURRENT $2,307 YEAR RETURN ON EQUITY AND ASSETS RETURN ON AVERAGE ASSETS 1.82% RETURN ON AVERAGE EQUITY 14.96% DIVIDEND PAYOUT RATIO 34.92% EQUITY CAPITAL TO ASSETS 12.14% RATIO </TABLE> AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST EARNINGS (Amounts in Thousands) 1997 <TABLE> <CAPTION> AVERAG YIELD/ E INTERE RATE ST BALANC E ASSETS <S> <C> <C> <C> Loans $217,2 $21,02 9.68% 95 8 Taxable Investment 96,195 6,792 7.06% Securities Non-Taxable Investment 10,653 651 6.11% Securities Fed. Funds Sold & Money 900 47 5.23% Market Funds Total Interest-Earning $325,0 $28,51 8.77% Assets 43 8 Non-Interest Earning Assets: Total Cash and Due from 9,797 Banks Allowance for Possible Loan (4,465 Losses ) Bank Premises and Equipment 7,737 Other Assets 6,442 TOTAL ASSETS $344,5 54 LIABILITIES AND STOCKHOLDERS' EQUITY Interest Bearing Demand $39,53 $668 1.69% Deposits 2 Savings Deposits 52,455 1,334 2.54% Time Deposits 122,49 6,791 5.54% 1 Repurchase Agreements and 40,769 2,238 5.49% Short Term Borrowings Long Term Borrowings 11,486 679 5.91% TOTAL INTEREST BEARING $266,7 $11,71 4.39% LIABILITIES 33 0 Non-Interest Bearing Liabilities: Non-Interest Bearing Demand 36,545 Deposits Other Liabilities 1,804 Stockholders' Equity 39,472 TOTAL LIABILITIES AND STOCKHOLDERS' $344,5 EQUITY 54 NET EARNING ASSETS $58,31 0 NET INTEREST INCOME/NET $16,80 4.38% INTEREST SPREAD 8 NET INTEREST MARGIN 5.17% NET EARNINGS FOR YEAR END $6,422 DIVIDENDS PAID IN CURRENT 2,065 YEAR RETURN ON EQUITY AND ASSETS RETURN ON AVERAGE ASSETS 1.86% RETURN ON AVERAGE EQUITY 16.27% DIVIDEND PAYOUT RATIO 32.15% EQUITY CAPITAL TO ASSETS 11.46% RATIO </TABLE> NOTES TO AVERAGE BALANCE SHEET 1. Tax-exempt income is calculated at coupon rate, not adjusted on a tax equivalent basis. 1. At December 31, 1999, loans on non-accrual status totaled $2,016,000. These loans are included in the loan category on the preceding Average Balance Sheet. If interest had been accrued on such loans, interest income on loans would have been $107,900 higher in 1999. 2. Based on information reported by the Uniform Bank Performance Report, the Bank's net interest margin for 1999 is consistent with the national average for peer banks. In previous years, the net interest margin had remained at higher than the national average levels. The Bank is a community bank which focuses its efforts on customer relationships and good service while remaining competitive in the demand for loans, both in the commercial and consumer sectors. The spread and margin for the Bank have been decreasing over the past three years, as competition for the same customers within the Bank's market area continues to grow. The average yield on the Bank's earning assets dropped to 7.89% from 8.51% as of December 31, 1999. This had an impact on the net interest margin for the Bank, which dropped on average by 62 basis points when comparing 1999 to 1998. In comparison, the average rate on the bank's earning assets dropped 26 basis points in 1998 as compared to 1997, and the margin dropped 15 basis points. The Bank continues to seek quality loans, broadening its customer base as the spread tightens. The effect of rates and volumes is exemplified further in the Rate Volume Analysis as found below 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. YEAR-ENDED DECEMBER 31, 1999 COMPARED TO DECEMBER 31, 1998 INCREASES (DECREASES) DUE TO: <TABLE> <CAPTION> VOLUME RATE NET <S> <C> <C> <C> Loans $2,201 ($1,71 $487 4) Taxable Investment Securities 2,530 (164) 2,366 Non-taxable Investment (80) (28) (108) Securities Federal Funds Sold and Money 11 (15) (4) Market Funds TOTAL EARNING ASSETS $4,662 ($1,92 $2,74 1) 1 Deposits $650 ($900) ($250 ) Repurchase Agreements and 1,845 (48) 1,797 Short Term Borrowings Long Term Borrowings 322 (40) 282 TOTAL INTEREST BEARING $2,817 ($988) $1,82 LIABILITIES 9 NET CHANGE IN INTEREST $1,845 ($933) $912 </TABLE> YEAR-ENDED DECEMBER 31, 1998 COMPARED TO DECEMBER 31, 1997 INCREASES (DECREASES) DUE TO: <TABLE> <CAPTION> VOLUME RATE NET <S> <C> <C> <C> Loans $680 ($418) $262 Taxable Investment Securities 1,005 (357) 648 Non-taxable Investment (254) 27 (227) Securities Federal Funds Sold and Money 4 6 10 Market Funds TOTAL EARNING ASSETS $1,435 ($742) $693 Deposits $131 ($385) ($254 ) Repurchase Agreements and (61) (44) (105) Short Term Borrowings Long Term Borrowings 648 (26) 622 TOTAL INTEREST BEARING $718 ($455) $263 LIABILITIES NET CHANGE IN INTEREST $717 ($287) $430 </TABLE> SUMMARY OF INVESTMENT PORTFOLIO The information presented below is to facilitate the analysis and comparison of sources of income and exposure to risks. <TABLE> <CAPTION> 1999 1998 1997 <S> <C> <C> <C> U. S. Treasury Securities and Obligations of Other U. S. Government $ $5,690 $13,250 Agencies 2,424 Mortgage Backed Securities: 94,592 88,101 57,913 U. S. Government Agencies Other 14,636 6,668 5,082 Obligations of State and Political 4,422 5,634 8,105 Subdivisions Other Bonds 12,757 7,069 1,001 SECURITIES HELD TO $128,83 $113,16 $85,351 MATURITY 1 2 Obligations of Other U. S. Government 28,155 12,332 8,803 Agencies Mortgage Backed Securities: U. S. Government 2,334 4,936 5,233 Agencies Marketable Equity 1,201 576 572 Securities SECURITIES AVAILABLE FOR $ $17,844 $14,608 SALE 31,690 </TABLE> MATURITY SCHEDULE FOR INVESTMENTS HELD TO MATURITY At December, 1999 <TABLE> <CAPTION> Greate Greate r than r than Greate One One Five r than Year or year Years Ten Less to to Ten Years Five Years Years <S> <C> <C> <C> <C> Obligations of Other U. S. Government Agencies $ 0 $2,424 $ 0 $ 0 Average Yield 6.79% Mortgage-backed Securities: U. S. Government Agencies 70 2,343 21,254 70,925 Average Yield 8.69% 6.34% 6.51% 6.82% Mortgage-backed Securities: Other 0 285 3,821 10,530 Average Yield 5.25% 6.69% 6.74% Obligations of State and Political Subdivisions 1,925 1,567 420 510 Average Yield 6.77% 5.67% 6.20% 6.20% Other Bonds $ 0 12,254 503 $ 0 Average Yield 6.41% 8.24% TOTAL $ $ $ $ 1,995 18,873 25,998 81,965 </TABLE> MATURITY SCHEDULE FOR INVESTMENTS AVAILABLE FOR SALE AT DECEMBER 31, 1999 (at fair value) <TABLE> <CAPTION> Greater One One than Greater Year Year to Five than Ten or Five Years Years Less Years to Ten Years <S> <C> <C> <C> <C> Obligations of Other U. S. Government $ $ $ 0 Agencies 5,092 23,063 Average Yield % 6.49% 6.69% Mortgage-Backed Securities: 0 0 0 2,334 U. S. Government Agencies Average Yield 7.81% TOTAL $ $ $ $ 2,334 0 5,092 23,063 </TABLE> Mortgage backed securities are included based upon the final maturity date of the security. The maturity schedule for securities available for sale excludes marketable equity securities totaling $1,200,500 Yields on tax-exempt bonds were not computed on a tax equivalent basis. The Bank does not hold any securities for a single issuer, other than U. S. Government agencies and corporations, where the aggregate book value of the securities exceed 10% of the Bank's stockholders' equity. The maturities for the mortgage-backed securities are shown at the stated maturity. If the Bank presented mortgage-backed securities by average expected life, the breakdown would be: <TABLE> <CAPTION> Greater Greater One than One than Greater Year or Year to Five than Ten Less Five Years Years Years to Ten Years <S> <C> <C> <C> <C> Mortgage-backed Securities Held to 4,092 33,035 43,443 28,658 Maturity Mortgage-backed Securities Available 2,334 0 0 For Sale at Fair Value </TABLE> Changes in the market value of the investment portfolio follow national interest rate fluctuations. As national interest rates rose 75 basis points during 1999, the value of the portfolio decreased with the total unrealized loss (before tax benefit) approximating $(4,951,858) at December 31, 1999 over book value. The Bank does not hold any interest only or principal only bonds, nor does it hold any debt securities whose market value could change to a greater degree than traditional debt. SUMMARY OF LOAN PORTFOLIO <TABLE> <CAPTION> 1999 1998 1997 1996 1995 <S> <C> <C> <C> <C> <C> Real estate loans: Construction & $ $ $ $ $ Development 15,674 11,366 7,925 8,906 8,072 Mortgage 195,64 168,258 158,592 5 146,04 135,06 1 8 Loans to finance agricultural 10,814 10,308 9,993 Production and other 10,092 10,377 loans to farmers Commercial and 22,561 22,778 23,696 industrial loans 29,040 29,807 Loans to individuals for household, Family and other 15,693 16,538 16,668 17,242 17,640 personal expenditures All other loans 282 138 209 319 7 Real Estate Under 520 49 56 320 794 Foreclosure TOTAL LOANS $261,1 $229,43 $217,13 $211,9 $201,7 89 5 9 60 65 Less: Allowance for possible loan 4,293 4,455 4,743 4,293 4,048 Loss NET LOANS $256,8 $224,98 $212,39 $207,6 $197,7 96 0 6 67 17 </TABLE> PAST DUE LOANS The figures below represent loans past due 30 days or more (% is percentage of loans outstanding for a specific category of loans). <TABLE> <CAPTION> 1999 % 1998 % 1997 % 1996 % 1995 % <S> <C> <C <C> <C <C> <C <C> <C <C> <C > > > > > Construction & 373 2. 246 2. 129 1. 247 2. 214 2. Development 4 2 6 8 7 Real Estate 6,75 3. 5,75 3. 3,682 2. 4,10 2. 3,00 2. 7 4 0 4 3 0 8 9 2 Commercial, Industrial and 1,40 4. 1,30 3. 1,041 3. 1,47 3. 517 1. Other 5 2 9 9 1 9 8 3 Loans to 476 3. 567 3. 450 2. 462 2. 434 2. individuals 0 4 7 7 5 Loans past due 90 days or 710 0. 1,71 0. 774 0. 733 0. 849 0. more and 3 0 8 4 4 4 still accruing* Non-Accruing 2,01 0. 1,74 0. 3,236 1. 3,54 1. 3,36 1. Loans 6 8 4 8 5 1 7 0 7 </TABLE> *The percentage for loans past due 90 days or more and still accruing and non-accruing loans relate to total loans outstanding. Each loan in these categories is also included in its past due loan category. Loans that were non-performing as of December 31, 1998 and for which the real estate was acquired by the Bank in 1999 totaled $64,400. MATURITY SCHEDULE - LOAN PORTFOLIO As of December 31, 1999 <TABLE> <CAPTION> After One Year One After or Less Year Five through Years Five Years <S> <C> <C> <C> Commercial, Financial and $ 12,635 $ $ Agricultural 9,065 11,675 Real estate Construction and Land $ 11,243 $ 1,100 $ Development 3,331 </TABLE> The Bank makes construction loans on the basis of: a) permanent financing from another financial institution, or b) approval at the time of origination for permanent financing by the Bank itself. In addition, a number of large commercial real estate loans are written and priced on the basis of fixed rates with a three to five year balloon payment. It is generally the intent of the Bank to re-negotiate the rate and term of the loan at the balloon maturity. Lines of credit are renewed annually. There are consumer construction loans that will either be sold to the secondary market upon completion of construction or rolled into the permanent portfolio of residential mortgage loans. The total amount of commercial, financial and agricultural, construction, and land development loans with adjustable interest rates and maturities of greater than one year is $13.6 million and with fixed interest rates and maturities of greater than one year is $10.6 million. RISK ELEMENTS <TABLE> <CAPTION> 1999 1998 1997 1996 1995 <S> <C> <C> <C> <C> <C> Loans accounted for on a non- $2,0 $1,7 $3,23 $3,54 $3,36 accrual 16 44 6 1 0 basis Accruing loans contractually $ $1,7 $ $ $ past 710 10 774 733 849 Due 90-days or more </TABLE> It is the policy of management to review past due loans on a monthly basis. Those loans 90-days or more past due which are not well secured or in the process of collection are designated as non-accruing. This includes government guaranteed loans unless the guaranteed portion has been sold. If interest had been accruing on such loans, interest income on loans would have been $107,900 higher in 1999. Interest collected on these loans totaled $73,900 in 1999 and was included in net income. Non-accrual loans and those loans 90- days past due and still accruing represent 1.10% of average loans for 1999 and 1.51% for 1998. Management is not aware of any potential problem loans that are not included in the above table. The Bank makes single-family residential loans, commercial real estate loans, commercial loans, and a variety of consumer loans. The Bank's lending activities are conducted in north coastal Maine. Because of the Bank's proximity to Acadia National Park, a large part of the economic activity in the area is generated from the hospitality business associated with tourism. Loans to the hospitality industry (hotels and restaurants) represent the highest loan concentration by industry at 65% of capital, $32.5 million up from $30.5 million in 1998. Other substantial loan concentrations include fishing, which dropped from $8.9 million in 1998 to $6.9 million in 1999, and commercial and real estate development, decreasing slightly from $12.7 million to $11.7 million. As most loans granted by the Bank are collateralized by real estate, the ability of the Bank's borrowers to repay is dependent on the level of economic activity and the level of real estate values in the Bank's market area. Because of the increasing health of the tourist industry and other industries in its market area, the Bank has benefited from the economic well being of its customers. SUMMARY OF LOAN LOSSES The allowance for loan losses is established through a provision for loan losses charged to operations. Loan losses are charged against the allowance when management believes that the collectibility of the loan principal is unlikely. Recoveries on loans previously charged off are credited to the allowance. The allowance is an amount that management believes will be adequate to absorb possible loan losses based on evaluation of their collectibility and prior loss experience. The evaluation takes into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, specific problem loans, and current and anticipated economic conditions that may affect the borrower's ability to pay. While management uses available information to recognize losses on loans, changing economic conditions and the economic prospects of the borrowers may necessitate future additions to the allowance. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Impaired loans, including restructured loans, are measured at the present value of expected future cash flows discounted at the loan's effective interest rate, at the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. Management takes into consideration impaired loans in addition to the above mentioned factors in determining the appropriate level of allowance for loan losses. With the exception of 1995, net loans charged off for the past five years have been below three tenths of one percent. The percentage of net charged off loans to average loans in 1997 represented the lowest percentage (.08%) in the five years presented. In 1997, there was a recovery of a single loan of $300,000 that was charged off in a previous year; but, absent that recovery, net charge offs would have been .22% of total loans. In 1995, the majority of charge offs were commercial loans secured by real estate or real estate mortgages. For the past five years, the majority of loans charged off have been loans to individuals and included many small loans and credit card debt. However, the increase in commercial loan charge offs in 1995 included the charge down of a large commercial loan. Another large commercial loan charge off increased the commercial charge offs for 1999. Approximately 28% of the loans charged off in 1995 represented loans secured by real estate, and 39% represented commercial credits, with recoveries totaling $97,000. In 1996, charged off loans to individuals represented over half of the total charge offs for that year and resulted from losses on installment loans and credit cards. This pattern continued in 1997 and 1998 with installment loans and other consumer loans representing 78% and 57%, respectively, of the total charge offs. In 1999, net losses in the commercial and agricultural portfolios totaled $394,000 or 62% of the net charged off loans. Based on past experience and management's assessment of the present loan portfolio, it is expected that net loan charge offs for 2000 will not exceed $660,000. A breakdown of the allowance for possible loan losses is as follows: <TABLE> <CAPTION> 1999 1998 1997 Percen Perce Percen t of nt of t of Loans Loans Loans in in in Amou each Amou each Amount each nt Catego nt Categ Catego ry to ory ry to Total to Total Loans Total Loans Loans <S> <C> <C> <C> <C> <C> <C> Real Estate $ 81.10% $1,2 78.31 $ 76.71% Mortgages 627 40 % 146 Installments and other 1,10 6.01% 323 7.21% 2,939 7.68% loans to 9 individuals Commercial, financial 1,87 12.78% 1,01 14.42 481 15.51% and 8 0 % Agricultural Other 183 .11% 180 .06% 0 .10% Unallocated 496 .00% 1,70 .00% 1,177 .00% 2 TOTAL $4,2 100.00 4,45 100.0 $4,743 100.00 93 % 5 0% % </TABLE> <TABLE> <CAPTION> 1996 1995 Perce Percen nt of t of Loans Loans in in each each Amou Categ Amou Catego nt ory nt ry to to Total Total Loans Loans <S> <C> <C> <C> <C> Real Estate $1,0 73.26 $ 71.34% Mortgages 54 % 915 Installments and other 1,45 8.13% 1,46 8.74% loans to 7 9 individuals Commercial, financial 629 18.46 278 19.92% and % Agricultural Other 0 .15% 0 0.00% Unallocated 1,15 0.00% 1,38 0.00% 3 6 TOTAL $4,2 100.0 $4,0 100.00 93 0% 48 % </TABLE> SUMMARY OF LOAN LOSS EXPERIENCE <TABLE> <CAPTION> ALLOWANCE FOR LOAN 1999 1998 1997 1996 1995 LOSSES <S> <C> <C> <C> <C> <C> Balance at beginning $ $4,743 $4,293 $4,048 $3,892 of period 4,455 Charge offs: Commercial, Financial, 445 217 102 195 377 Agricultural, Others Real Estate 58 113 27 131 256 Mortgages Installments and other loans 385 458 456 385 268 to Individuals Total Charge Offs 888 788 585 711 901 Recoveries: Commercial, Financial, 51 40 169 73 20 Agricultural, Others Real Estate 60 21 154 94 20 Mortgages Installments and other loans 141 103 92 69 57 to Individuals Total Recoveries 252 164 415 236 97 Net Charge Offs 636 624 170 475 804 Provision Charged to 474 336 620 720 960 Operations Balance at End of $4,29 $4,455 $4,743 $4,293 $4,048 Period 3 Average loans outstanding during $248, $224,4 $217,2 $207,1 $195,1 period 708 06 95 88 79 Net Charge Offs to Average Loans .26 .28 .08 .23 .41 Outstanding during Period </TABLE> SUMMARY OF DEPOSIT PORTFOLIO <TABLE> <CAPTION> 1999 1998 1997 Averag Averag Averag Averag Averag Averag e e Rate e e Rate e e Rate Balanc Balanc Balanc e e e <S> <C> <C> <C> <C> <C> <C> Demand Deposits $43,10 $38,89 $36,54 3 0 5 NOW Accounts 44,115 1.07% 41,872 1.48% 39,532 1.69% Savings Accounts 77,021 3.04% 57,791 2.86% 52,455 2.54% Time Deposits 110,85 4.93% 116,26 5.39% 122,49 5.54% 4 2 1 Total Deposits $275,0 $254,8 $251,0 93 15 23 </TABLE> MATURITY SCHEDULE FOR TIME DEPOSITS $100,000 OR MORE AT DECEMBER 31, 1999 <TABLE> <CAPTION> Over Six Over Three Months Through Three Months Months Through Twelve Months Over Twelve or Less Six Months Months <S> <C> <C> <C> $ 7,558 $ 2,190 $ 6,289 $ 898 </TABLE> RETURN ON EQUITY AND ASSETS <TABLE> <CAPTION> 1999 1998 1997 <S> <C> <C> <C> Return on Average 1.45% 1.82% 1.86% Assets Return on Average 12.93 14.96% 16.27% Equity % Dividend Payout Ratio 39.78 34.92% 32.15% % Average Equity Capital to Average Assets 11.23 12.14% 11.46% Ratio % </TABLE> SHORT TERM BORROWINGS <TABLE> <CAPTION> Maximum Average Weighte Balance Weighte Outstan Amount d at end d ding at Outstan Average of Average Month ding Interes Period Interes End During t Rate t Rate Year During Year <S> <C> <C> <C> <C> <C> 1999 FHLB Advances $74,000 5.76% $74,000 $60,396 5.31% Repurchase $ 8,807 4.50% $11,209 $ 8,264 4.48% Agreements 1998 FHLB Advances $26,000 5.26% $29,000 $22,849 5.69% Repurchase $8,092 4.63% $10,192 $6,686 4.74% Agreements 1997 $24,000 5.69% $45,125 $34,207 5.67% FHLB Advances Repurchase $4,474 5.12% $8,025 $5,244 4.61% Agreements </TABLE> Repurchase agreements generally mature within one to four days from the transaction date. The terms for short-term FHLB advances taken in 1999 ranges from 7 days to 365 days and averaged 84 days. The terms for short-term FHLB advances taken in 1998 ranges from 7 days to 273 days and averaged 80 days. The terms for short-term FHLB advances taken in 1997 range from 7 days to 365 days and averaged 62 days. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates. The Bank's market risk is composed primarily of interest rate risk. The Bank's Asset/Liability Committee (ALCO) is responsible for reviewing the interest rate sensitivity position of the Company and establishing policies to monitor and limit exposure to interest rate risk. All guidelines and policies established by ALCO have been approved by the Board of Directors. Asset/liability management has the role of maintaining a balance between interest-sensitive earning assets and interest-bearing liabilities. Effective management of interest rate risk can protect the Bank against adverse changes in interest rates and can enhance the Bank's interest margins and earnings through periods of changing interest rates. In times of rising interest rates, Bar Harbor Banking and Trust Company will maximize earnings if more loans and/or investments are subject to rate changes than interest bearing liabilities. As interest rates rise, the Bank monitors its rate sensitivity seeking to ensure that both assets and liabilities respond to changes in interest rates to minimize the effect of those changes on net interest income. As of December 31, 1999, Bar Harbor Banking and Trust Company was somewhat liability sensitive with $166 million in assets and $249 million in liabilities that could be repriced within one year. This increases the exposure of interest rate risk to the bank on these funds in a rising rate environment. The repricing structure for 1998 was more evenly matched, with $170 million in assets and $184 million in liabilities that could be repriced within one year. Management continues to watch economic trends with respect to interest rates. The Bank utilizes a simulation model to quantify the estimated exposure to interest rates. The model captures the impact of changing interest rates for the Bank's interest earning assets and interest paying liabilities. The model assumes a static balance sheet and utilizes a non-parallel yield curve shift in rates to recognize the impact of interest rate changes. As mentioned above, the Bank is liability sensitive in the one-year horizon. Based on simulations, if interest rates were to rise by 200 basis points and if the Bank were to maintain the balance sheet as it stands today, the Bank would reduce its net interest income by $620,000 during the next twelve months. If rates were to drop by 200 basis points, the Bank would experience an increase in its net interest income of $867,000 during the next twelve months. The following reflects the Bank's net interest income sensitivity analysis as of December 31, 1999 and 1998. RATE CHANGE - 1999 <TABLE> <CAPTION> -200 basis +200 basis points points <S> <C> <C> Year I Net interest income $ 834 $ (1,022) change ($) Net interest income 4.64% (5.69%) change (%) Year II Net interest income $ 1,307 $ (2,132) change ($) Net interest income 8.18% (10.95%) change (%) </TABLE> RATE CHANGE - 1998 <TABLE> <CAPTION> -200 basis +200 basis points points <S> <C> <C> Year I Net interest income $ 182 $ (161) change ($) Net interest income 1.11% (.98%) change (%) Year II Net interest income $ (181) $ (340) change ($) Net interest income ( 1.14%) (2.14%) change (%) </TABLE> The preceding sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including: the nature and timing of interest rate levels, including yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cashflows, and others. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences might change. Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to: prepayment/refinancing levels likely deviating from those assumed, the varying impact of interest rate change caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, and other internal/external variables. Furthermore, the sensitivity analysis does not reflect actions that ALCO might take in responding to or anticipating changes in interest rates. When appropriate, ALCO may utilize off balance sheet instruments such as interest rate floors, caps and swaps to hedge its interest rate risk position. A Board of Directors approved hedging policy statement governs use of these instruments. As of December 31, 1999 there were no off balance sheet instruments in place. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and Report of Independent Accountant required are contained in the Financial Section on pages 1 through 22 of the Company's Annual Report for the year ended December 31, 1999 and are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following statements pertain to all individuals listed below: 1. There are no arrangements or understandings between any director or officer listed below and any other person pursuant to which such director or officer was selected as an officer or director. 2. There is no family relationship among any of the directors and officers listed below. 3. None of the directors and officers listed below have been involved in any bankruptcy, criminal, or other proceeding set forth or described in sub-section (f) of Item 401 of Regulation S-K as promulgated by the Securities and Exchange Commission. 4. Each of the directors listed below has been elected to a three year term, except where the mandatory retirement age of 75 years necessitated an election of a shorter term, with one third of the Board of Directors, as nearly as may be, standing for election each year. Each director of the Company also serves as a director of the Bank, and references below to the year in which an individual was first elected refer to the year in which s/he was first elected a director of the Bank. All officers of the Company are elected annually. [1] Frederick F. Brown, Director, Age 73. Mr. Brown's principal occupation during the past five years has been as proprietor and owner of F. T. Brown Company, which owns and operates a hardware store in Northeast Harbor and as one-third owner of Island Plumbing & Heating in Northeast Harbor. Mr. Brown first was elected as a director on October 2, 1979. [2] Robert C. Carter, Director, Age 56. Mr. Carter's principal occupation is owner and operator of the Machias Motor Inn and owner and operator of Carter's Gun Shop, both located in Machias, Maine. Mr. Carter was first elected as a director on October 1, 1996. [3] Thomas A. Colwell, Director, Age 55. Mr. Colwell's principal occupation during the past five years has been as owner of Colwell Brothers, Inc, a lobster pound and shipping company. He also serves as a member of the Board of Directors of the Maine Lobster Pound Association and is a director of the Island Medical Center. Mr. Colwell was first elected as a director on October 1, 1991. [4] Bernard K. Cough, Director, Age 72. Mr. Cough's principal occupation during the past five years has been owner/operator of several motels, including the Atlantic Oakes Motel, Atlantic Eyrie Lodge, Inc., Bay View, Inc., and Ocean Gate, Inc. Mr. Cough is also Treasurer of Cough Bros., Inc. Mr. Cough was first elected as a director on October 1, 1985. [5] Peter Dodge, Director, Age 56. Mr. Dodge is President of the Peter Dodge Agency (a Maine corporation) d/b/a the Merle B. Grindle Insurance Agency in Blue Hill, Maine. He is a Trustee of George Stevens Academy, and Director, Bagaduce Music Lending Library. He was first elected as a director on October 6, 1987. [6] Dwight L. Eaton, Executive Officer, Senior Vice President and Trust Officer, Age 64. Mr. Eaton's principal occupation during the past five years has been as Senior Vice President and Trust Officer of the Bank. He serves as Vice President of the Company and was first appointed for that position in 1987. He serves as Chairman and Director of the Acadia Corporation. Mr. Eaton first was elected as a Director on October 4, 1988. [7] Ruth S. Foster, Director, Age 70. Mrs. Foster's principal occupation during the past five years has been as President and principal stockholder of Ruth Foster's, a children's clothing store in Ellsworth, Maine. Mrs. Foster first was elected as a director on October 7, 1986. [8] Cooper F. Friend, Director, Age 46. Mr. Friend's principal occupation during the past five years has been as owner and President of Friend & Friend, Inc., a recreational vehicle dealership; and one-third owner of U-Store It, a storage rental facility, both located in Ellsworth, Maine. He also serves as President of Recreational Motorsports Association of Maine, and is a member of the Board of Directors of the James Russell Wiggins Down East Family YMCA. Mr. Friend first was elected as a director on October 1, 1997. [9] Robert L. Gilfillan, Director, Age 72. Mr. Gilfillan's principal occupation during the past five years has been as the owner and President of the West End Drug Company in Bar Harbor. Mr. Gilfillan first was elected as a director on November 5, 1957. [10] Sheldon F. Goldthwait, Jr., President and Chief Executive Officer, Age 61. Mr. Goldthwait was appointed President and Chief Executive Officer of Bar Harbor Banking and Trust Company January 1, 1995. Prior to that he served as Executive Vice President of Bar Harbor Banking and Trust Company. He serves as Treasurer and Director of the Acadia Corporation. Mr. Goldthwait first was elected as a director on October 4, 1988. [11] Marlene S. Haskell, Executive Officer, Senior Vice President of the Bank, Age 47. Ms Haskell joined the Bank in 1990 as Vice President in charge of Marketing. She was promoted to Senior Vice President in August, 1997. Ms. Haskell's responsibilities include Branch Administration and Marketing. [12] H. Lee Judd, Director, Age 54. Mr. Judd's principal occupation during the past five years has been as President of Hinckley Insurance Group and President of Hinckley Real Estate, located in Southwest Harbor, Maine. He also serves as President of the Causeway Club and Chairman of the Board of Friends of Acadia. Mr. Judd first was elected as a director on October 1, 1997. [13] John P. McCurdy, Director, Age 68. Prior to his retirement in 1991, Mr. McCurdy's principal occupation was as owner and operator of McCurdy Fish Company of Lubec, a processor of smoked herring. Mr. McCurdy first was elected as a director on October 2, 1979. [14] Jarvis W. Newman, Director, Age 64. Mr. Newman is the owner of Newman Marine Brokerage, a boat brokerage in Southwest Harbor and half owner of the Newman and Gray Boatyard. Mr. Newman first was elected as a Director on October 5, 1971. [15] Robert M. Phillips, Director, Age 58. Mr. Phillips is a consultant in the food industry and an officer of International Foods Network, an exporter of a variety of food products, located in Sullivan, Maine. He was first elected as a director on October 5, 1993. [16] John P. Reeves. Chairman of the Board of Directors, Age 65. Mr. Reeves is retired. He was elected as President and Chief Executive Officer of Bar Harbor Banking and Trust Company in 1986 and retired in 1994. He first was elected as a director on October 6, 1970. [17] Marsha C. Sawyer, Executive Officer, Age 47. Mrs. Sawyer is Senior Vice President of the Bank and serves as Clerk of the Company. She first was elected Clerk of the Company in 1986. [18] Gerald Shencavitz, Executive Officer, Senior Vice President of the Bank, Age 47. Mr. Shencavitz joined the Bank in April of 1998 and is responsible for Operations and Information Systems of the Bank. [19] Lynda Z. Tyson, Director, Age 44. Mrs. Tyson works as a marketing and communications consultant and is a freelance writer and editor. Mrs. Tyson was first elected as a director on October 5, 1993. [20] Virginia M. Vendrell, Executive Officer, Age 50. Ms. Vendrell is Senior Vice President, Treasurer, and Chief Financial Officer of the Bank and Treasurer of the Company. She was first elected Treasurer of the Company in 1990. The Company inadvertently failed to file Form 5 for the years ended December 31, 1998 and 1999. Information is being gathered from all directors and senior officers to complete these forms for each covered person, and the Company expects to file all such forms on or before April 30, 2000. No Form 4's were required to be filed during this period. The following is a listing of each reporting person who failed to file a Form 5 for the stated periods and the number of transactions with respect to which no Form 5 was filed: <TABLE> <CAPTION> Name of # of Year Participant Transacti ons <S> <C> <C> Bernard K. Cough 3 1998 Dwight L. Eaton 1 1999 H. Lee Judd 1 1998 Robert M. 1 1998 Phillips </TABLE> In addition, Sheldon F. Goldthwait, Jr., John P. Reeves, Dwight L. Eaton, Virginia M. Vendrell, Marsha C. Sawyer and Marlene S. Haskell maintain Bar Harbor Bankshares stock with the Bank's 401-K plan. Small intermittent purchases and sales were made during 1998 and 1999 at market prices. ITEM 11. EXECUTIVE COMPENSATION Officers of the Company do not, as such, receive compensation, and are compensated as employees of the Bank. The following table sets forth cash compensation received during the Bank's last fiscal year by the executive officers for which such compensation exceeded $100,000. <TABLE> <CAPTION> ANNUAL COMPENSATION Other Annual Year Salary Incenti Compensation ($) ve ($) ($) <S> <C> <C> <C> <C> Sheldon F. Goldthwait, 1997 155,00 19,737 0 Jr. 0 President and 1998 158,00 22,202 0 0 Chief Executive Officer 1999 160,38 6,039 0 0 Dwight L. Eaton 1997 98,000 12,984 0 Senior Vice President and 1998 100,95 14,115 0 0 Trust Officer 1999 102,47 9,546 0 0 Lewis H. Payne 1997 93,500 12,237 0 Executive Vice President 1998 99,300 13,683 0 1999 106,51 3,795 0 2 Virginia M. Vendrell 1997 N/A N/A 0 Senior Vice President and 1998 90,000 12,626 0 Chief Financial Officer 1999 N/A N/A 0 </TABLE> LONG TERM COMPENSATION <TABLE> <CAPTION> AWARDS PAYOUT Restric LTIP ted Optional Payout Year Stock SARs (#) s Awards ($) ($) <S> <C> <C> <C> <C> Sheldon F. Goldthwait, 1997 0 0 0 Jr. 1998 0 0 0 1999 0 0 0 Dwight L. Eaton 1997 0 0 0 1998 0 0 0 1999 0 0 0 Lewis H. Payne 1997 0 0 0 1998 0 0 0 1999 0 0 0 Virginia M. Vendrell 1997 0 0 0 1998 0 0 0 1999 0 0 0 </TABLE> ALL OTHER COMPENSATION ($) <TABLE> <CAPTION> <S> <C> <C> <C> <C> Sheldon F. Goldthwait, 1997 30,027 Jr. 1998 52,906 1999 52,905 Dwight L. Eaton 1997 41,654 1998 48,104 1999 50,857 Lewis H. Payne 1997 1,848 1998 1,561 1999 616 Virginia M. Vendrell 1997 N/A 1998 138 1999 N/A </TABLE> The Bank has an incentive plan in which all employees who were on the payroll as of January 1st of a calendar year and who worked through December 31st are eligible. The Bank utilizes the Performance Compensation Plan for Stakeholders developed by Mike Higgins & Associates, Inc. The plan encompasses the Bank creating incentive models based on multiple goal achievements and weighted to provide reward to share a portion of the improved contribution. The goals must include profit, growth, productivity and quality. COMPENSATION COMMITTEE The Bank Board has appointed a six-member Compensation Committee comprised of Directors Brown, Dodge, Phillips, Reeves, Eaton and Goldthwait. Mr. Eaton and Mr. Goldthwait are Directors and also members of management. The Compensation Committee meets several times each year and makes compensation recommendations for the ensuing year to the Board of Directors. The recommendations of the Committee are then considered and voted upon by the Full Board. During 1999, Mr. Goldthwait and Mr. Eaton were members of the Compensation Committee and also directors. Each abstained from participating in discussion, recommendations, or voting regarding his own compensation. COMPENSATION OF DIRECTORS Each of the directors of the Company is a director of the Bank and as such receives a fee of $250 for each committee meeting attended and a $300.00 fee for attending the monthly Full Board Meeting. The fee paid for the Annual Meeting is $500.00 per member of the Board of Directors. Meetings of the Board of Directors of the Bank are held monthly. No directors' fees are paid to the directors of the Company as such. Those directors of the Bank who are also officers do not receive directors' fees. The Chairman of the Board receives an annual retainer of $3,000 in addition to meeting fees. EMPLOYEE BENEFIT PLANS The Bank has entered into agreements with Messrs. Reeves, Goldthwait, and Eaton whereby those individuals, or their beneficiaries, will receive upon death or retirement, an annual supplemental pension benefit over a period of 10 years in the amount of $15,000 per annum (in the case of Mr. Reeves), and in the amount of $10,000 per annum (in the case of Messrs. Goldthwait and Eaton). This plan is unfunded and benefits will be paid out of Bank earnings. Because Mr. Reeves chose early retirement, he began drawing his annual installment of $5,300 pursuant to this deferred compensation arrangement as of January 1, 1995. Messrs. Goldthwait and Eaton will begin drawing their annual installment during the year 2000. In 1993, the Company established a non-qualified supplemental retirement plan for Messrs. Reeves, Eaton, Goldthwait, and MacDonald. The agreements provide supplemental retirement benefits payable in installments over twenty years upon retirement or death. The Company recognizes the costs associated with the agreements over the service lives of the participating officers. In 1999, the Company modified the plan for Mr. Goldthwait, which resulted in a one- time expense of $639,700. The cost relative to the supplemental plan was $866,200, $138,600, and $127,600 for 1999, 1998 and 1997 respectively. The agreements with Messrs. Reeves, Eaton, Goldthwait, and MacDonald are in the amounts of $49,020, $22,600, $87,176 and $7,700 respectively. Mr. Reeves began drawing his annual installment of $49,020 as of January 1, 1995. Officers of the Bank are entitled to participate in certain group insurance benefits. In accordance with Bank policy, all such benefits are available generally to employees of the Bank. PERFORMANCE GRAPH The following graph illustrates the estimated yearly percentage change in the Company's cumulative total shareholder return on its common stock for each of the last five years. Total shareholder return is computed by taking the difference between the ending price of the common stock at the end of the previous year and the current year, plus any dividends paid divided by the ending price of the common stock at the end of the previous year. For purposes of comparison, the graph also illustrates comparable shareholder return of American Stock Exchange (AMEX) banks as a group as measured by the AMEX Market Index and the peer group index as defined by AMEX. The graph assumes a $100 investment on December 31, 1994 in the common stock of each of the Company, the AMEX peer group banks and the AMEX Market Index as a group and measures the amount by which the market value of each, assuming reinvestment of dividends, has increased as of December 31 of each calendar year since the base measurement point of December 31, 1994. The following graph is based upon a good faith determination of approximate market value for each year indicated based on information obtained from the American Stock Exchange, in the case of its common stock, and from anecdotal information available to the Company as to the value at which its common stock has traded in isolated transactions from time to time. Therefore, although the graph represents a good faith estimate of shareholder return as reflected by market value, the valuations utilized are, of necessity, estimates and may not accurately reflect the actual value at which common stock has traded in particular transactions as of any of the dates indicated. The following information is presented in a line graph in the printed Form 10-K: <TABLE> <CAPTION> 1994 1995 1996 1997 1998 1999 <S> <C> <C> <C> <C> <C> <C> Bar Harbor Banking and Trust 100.0 195. 367. 411. 365.3 284. Company 0 00 18 39 1 10 Peer Group Index 100.0 132. 151. 247. 250.1 214. 0 35 54 13 1 50 AMEX Broad Market 100.0 128. 136. 163. 161.4 201. Index 0 90 01 66 4 27 </TABLE> ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of December 31, 1999, to the knowledge of the Company, Bernard K. Cough was the only beneficial owner of more than five percent of the Company's common stock. Mr. Cough's address is 5 Norman Road, Bar Harbor, Maine. The following table lists, as of December 31, 1999, the number of shares of Common Stock and the percentage of the Common Stock represented thereby, beneficially owned by each director and nominee for director, and by all principal officers and directors of the Company as a group. <TABLE> <CAPTION> Amount of Percent Director, Executive Officer Benefic of Class or Nominee ial Ownersh ip <S> <C> <C> Frederick F. Brown 25,140 * Robert C. Carter 2,100 * Thomas A. Colwell 5,400 * Bernard K. Cough 172,220 5.03% Peter Dodge 4,860 * Dwight L. Eaton 10,762 * Ruth S. Foster 3,350 * Cooper F. Friend 3,400 * Robert L. Gilfillan 79,930 2.34% Sheldon F. Goldthwait, Jr. 30,671 * H. Lee Judd 6,900 * John P. McCurdy 6,600 * Jarvis W. Newman 30,100 * Robert M. Phillips 1,300 * John P. Reeves 25,678 * Lynda Tyson 1,800 * Total ownership of all Directors and Executive 416,544 12.17% Officers of Company as a group (20 persons). * Less than one percent </TABLE> For purposes of this table, beneficial ownership has been determined in accordance with the provisions of Rule 13-d-3 promulgated under the Securities Exchange Act of 1934 as amended. Direct beneficial ownership includes shares held outright or jointly with others. Indirect beneficial ownership includes shares held in the same name of a director's spouse or minor children or in trust for the benefit of a director or member of his or her family. Indirect beneficial ownership does not include, in the case of each director, 97,360 shares (2.85%) of the Common Stock held by two trusts which shares, for purposes of voting, are allocated equally among the directors of the Bank under the terms of the respective trust instruments. No director has any other beneficial interest in such shares. Ownership figures for directors and nominees include directors' qualifying shares owned by each person named. Management is not aware of any arrangement that could, at a subsequent date, result in a change in control of the Company. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Bank retains the firm of Tyson & Partners, Inc. to assist with its marketing program. Lynda Z. Tyson, who was elected to the Board of the Company and the Bank on October 4, 1993, serves as that firm's Chief Operating Officer as well as Director of Marketing. Management believes that the fees charged by Tyson & Partners, Inc. are at least as favorable as any that could have been obtained from persons not affiliated with the Bank. The Bank has had, and expects to have in the future, banking transactions in the ordinary course of its business with directors, officers, principal stockholders and their associates. These transactions are on substantially the same terms, including interest rates and collateral on the loans, as those prevailing at the same time for comparable transactions with others. Such loans have not and will not involve more than normal risk of collectability or present other unfavorable features. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) The following financial statements are incorporated by reference from Item 8 hereof: [Annual Report to Stockholders, Financial Section, included herein as Exhibit 13]. <TABLE> <CAPTION> PAGE <S> <C> Independent Auditor's Report 7 Consolidated Statements of Financial Condition December 31, 1999 and 1998 8 Consolidated Statements of Earnings for the years ended December 31, 1999, 1998, and 1997 9 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1999, 1998, and 1997 10 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998, and 1997 11 Notes to Consolidated Financial Statements 12 - 22 (a) (2) Financial Statement Schedules See Item 14(d) Form 10-K (a) (3) Listing of Exhibits -- see Item 14 (c) (b) Report on Form 8-K not applicable (c) Exhibits -- EXHIBIT INDEX </TABLE> <TABLE> <CAPTION> EXHIBIT NUMBER <S> <C> 2. Plan of Acquisition, reorganization Incorporated by reference agreement, liquidation or succession to Form S-14 dated March 14, 1984 3. Articles of Incorporation and Bylaws Incorporated by reference To Form S-14 dated March 14, 1984 10. Material Contracts Incorporated by reference to Form 10-K dated December 31, 1986 13. Annual report to security holders Enclosed herewith 21. Subsidiaries of the registrant Incorporated by reference to Form 10-K dated December 31, 1987 27. Financial Data Schedule Enclosed herewith </TABLE> SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 (Registrant) /s/ Sheldon F. Goldthwait, Jr. Sheldon F. Goldthwait, Jr. President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Sheldon F. Goldthwait, Jr. /s/ Virginia M. Vendrell Sheldon F. Goldthwait, Jr. Virginia M. Vendrell President and Director Chief Financial Officer Chief Executive Officer Chief Accounting Officer /s/Robert L. Gilfillan /s/ Frederick F. Brown Robert L. Gilfillan, Director Frederick F. Brown, Director /s/ Thomas A. Colwell Thomas A. Colwell, Director /s/ Bernard K. Cough /s/ Peter Dodge Bernard K. Cough, Director Peter Dodge, Director /s/ Dwight L. Eaton /s/ Ruth S. Foster Dwight L. Eaton, Director Ruth S. Foster, Director /s/ Cooper F. Friend /s/ H. Lee Judd Cooper F. Friend, Director H. Lee Judd, Director /s/ Robert M. Phillips /s/ John P. McCurdy James C. MacLeod, Director John P. McCurdy, Director /s/ Lynda Z. Tyson Lynda Z. Tyson