7 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, 1997. 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. The aggregate market value of the voting stock held by non-affiliates of the registrant, as of January 31, 1998 is: Common stock, $2.00 par value $91,255,771 The number of shares outstanding of each of the registrant's classes of common stock, as of January 31, 1998 is: Common stock 1,721,807 Documents incorporated by Reference: (1) portions of the Annual Report to Stockholders for the year ended December 31, 1997 are incorporated by reference into Part II, Items 6 through 8 and Part IV, Item 14 of the Form 10-K. INDEX <TABLE> <S> <C> <C> <CAPTION> ITEM NUMBER PAGE 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 Stockholders Matters 6 6. Selected Financial Data 7 7. Management's Discussion and Analysis of Financial Condition and Results of 7-18 Operation 7a. Quantitative and Qualitative Disclosures about Market Risk 19-20 8. Consolidated Financial Statements and Supplementary Data 21 9. Changes in and Disagreements with Accountants on Accounting and Financial 21 Disclosure 10. Directors and Executive Officers of the 22-23 Registrant 11. Executive Compensation 24-25 12. Security Ownership of Certain Beneficial Owners and Management 26-27 13. Certain Relationships and Related 27 Transactions 14. Exhibits, Financial Statement Schedules 28-29 and Reports on Form 8-K </TABLE> PART I ITEM 1. BUSINESS Bar Harbor Bankshares, ("the Company"), was incorporated January 19, 1984. As of December 31, 1997, 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 1,721,807 shares outstanding held of record by approximately 1,075 stockholders. The accompanying consolidated financial statements include the accounts of the company and its whollyowned subsidiary, Bar Harbor Banking and Trust Company ("the Bank"). All inter-company balances and transactions have been eliminated in the accompanying financial statements. The Bank conducts substantially the same business operations as a typical full service, independent, community bank. It has ten offices in coastal Maine, including its principal office located at 82 Main Street, Bar Harbor, Hancock County, and adjacent Washington County. The Hancock County offices are located at Maine 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. In January of 1997, the Bank moved its operations, check clearing, technology and mail staff to a newly constructed 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 high competitive market. Competition among banks in Maine has increased in recent years as a result of aggressive acquisition programs by statewide holding companies and by completely open interstate banking. The bank continues to be one of the largest 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 banks which are 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, credit cards, personal money orders, bank-by-mail and club accounts and drive-up facilities at all offices. 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. The Trust Department handles book assets for clients totaling $261.7 million and offers professionally managed investment accounts. 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, stand-by credit, VISA credit card accounts and student loans; residential mortgage loans; home equity loans' and 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 areas for all of the Bank's services consists of Hancock and Washington Counties. The Bank's policy for lending limits is up 20% of capital surplus to any borrower provided that the loans are secured and approved by the Executive Loan Committee, which includes members of the Bank's Board of Directors. As a state chartered bank, the Bank has the Bureau of Banking of the State of Maine and the Federal Deposit Insurance Corporation as bank regulatory agencies responsible for its supervision. In addition, as a bank holding company, the Company is supervised by the Federal Reserve Bank. 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. As of December 31, 1997, the Bank employed 171 persons in a full or part-time basis. The President, Executive Vice President, Senior Vice Presidents and Vice President in charge of Human Resources are employed by the Bank as well as serve as officers of the Company. They are not compensated by the Company for their services. There are no employees of the Company. Since the Bank is located in a summer resort area, a portion of the Bank's business is seasonal in nature. In addition, employment in the sardine and blueberry industries of Washington County is seasonal. As a result of these factors, the Bank has had an annual deposit swing which has been declining in the last several years from swings of more than 20% in the late 1980s, to under 10% for both 1996 and 1997. The reduction in outflow may be attributable to increasing interest rates and to safety and soundness issues as customers choose to have their funds insured by maintaining their deposits in the banking system. Deposits generally peak in late September with the low point in late spring. This deposit swing is predictable and does not have a materially adverse effect on the Bank. Should the Bank need additional funds for liquidity, it may utilize short term borrowing lines set up through the Federal Home Loan Bank of Boston, seek repurchase agreements through a primary securities dealer or draw on its seasonal line at the Federal Reserve Bank of Boston. On July 11, 1995, the Board of Directors declared a five-for-one stock split to all shareholders of record as of that date and which took effect on August 7, 1995. All share and per data share included in the Form 10-K have been restated to reflect the stock split. 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 parking lot. The building was renovated and expanded in 1987 and 1988. A portion of the expanded building was completed in 1990 offering space for operational personnel. 2. An office is located at Main Street, Northeast Harbor, Maine. This property consists of a building constructed in 1974 which is adequate for the Bank's current needs at that location and is presently undergoing interior renovations 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 was occupied by the Bank's operations, check clearing, technology, training and mail departments in January of 1997. A parcel of land adjacent to the Blue Hill branch was purchased in 1981. 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 1997 and 1996 are listed below (per quotes from The Bangor Daily News through September 23, 1997), the date of listing on the American Stock Exchange. <TABLE> <S> <C> <C> <C> <C> <C> <C> <C> <C> <capti on> 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter High High High High Low Low Low Low 1997 38.75 to 42.75 to 48.375 to 62.00 to 35.00 36.375 39.75 49.125 1996 37.50 to 44.00 to 42.00 to 39.50 to 26.125 37.00 38.00 36.25 </TABLE> As of January 1, 1998, there were 1,075 registered holders of record of Bar Harbor Bankshares common stock. Dividends paid by the Company in 1997 and 1996: <TABLE> <S> <C> <C> <C> <C> <capti on> 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 1997 $0.28 $0.30 $0.30 $0.32 1996 $0.20 $0.20 $0.25 $0.53 </TABLE> ITEM 6. SELECTED FINANCIAL DATA Selected financial information for the past five years is contained on Pae 3 of the Company's Annual Report to Shareholders for the year ended December 31, 1997 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) 1997 <TABLE> <S> <C> <C> <C> <CAPTION> AVERAGE YIELD/ BALANCE INTEREST RATE ASSETS Loans $217,295 $21,028 9.68% Taxable Investment Securities 96,195 6,792 7.06% Non-Taxable Investment 10,653 651 6.11% Securities Fed. Funds Sold & Money Market 900 47 5.23% Funds Total Interest-Earning Assets $325,043 $28,518 8.77% Non-Interest Earning Assets: Total Cash and Due from 9,797 Less: Allowance for Losses (4,465) Bank Premises and Equipment 7,738 Other Assets 6,442 TOTAL ASSETS $344,555 LIABILITIES AND STOCKHOLDERS' EQUITY Interest Bearing Demand $39,536 $668 1.69% Deposits Savings Deposits 52,455 1,334 2.54% Time Deposits 122,491 6,791 5.54% Repurchase Agreements and Short Term Borrowings 40,769 2,238 5.49% Long Term Borrowings 11,486 679 5.91% TOTAL INTEREST BEARING $266,733 $11,710 4.39% LIABILITIES Non-Interest Bearing Liabilities: Non-Interest Bearing Demand 36,545 Deposits Other Liabilities 1,805 Stockholders' Equity 39,472 TOTAL LIABILITIES AND STOCKHOLDERS' $344,555 EQUITY NET EARNING ASSETS $58,309 NET INTEREST INCOME/NET $16,808 4.38% INTEREST SPREAD NET INTEREST MARGIN 5.17% </TABLE> AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST EARNINGS (Amounts in Thousands) 1996 <TABLE> <S> <C> <C> <C> <CAPTION> AVERAGE YIELD/ BALANCE INTEREST RATE ASSETS Loans $207,188 $20,303 9.80% Taxable Investment Securities 93,607 6,422 6.86% Non-Taxable Investment 12,940 767 5.93% Securities Fed. Funds Sold & Money Market 557 30 5.47% Funds Total Interest-Earning Assets $314,292 $27,522 8.76% Non-Interest Earning Assets: Total Cash and Due from 8,878 Less: Allowance for Losses (4,262) Bank Premises and Equipment 6,880 Other Assets 6,183 TOTAL ASSETS $331,971 LIABILITIES AND STOCKHOLDERS' EQUITY Interest Bearing Demand $ 38,036 $ 618 1.62% Deposits Savings Deposits 54,503 1,371 2.52% Time Deposits 124,427 6,899 5.54% Repurchase Agreements and Short Term Borrowings 37,519 2,030 5.41% Long Term Borrowings 6,768 363 5.37% TOTAL INTEREST BEARING $261,253 $11,281 4.27% LIABILITIES Non-Interest Bearing Liabilities: Non-Interest Bearing Demand 33,408 Deposits Other Liabilities 1,735 Stockholders' Equity 35,575 TOTAL LIABILITIES AND STOCKHOLDERS' $331,971 EQUITY NET EARNING ASSETS $ 53,039 NET INTEREST INCOME/NET $ 16,241 4.44% INTEREST SPREAD NET INTEREST MARGIN 5.17% </TABLE> AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST EARNINGS (Amounts in Thousands) 1995 <TABLE> <S> <C> <C> <C> <CAPTION> AVERAGE YIELD/ BALANCE INTEREST RATE ASSETS Loans $195,179 $19,299 9.89% Taxable Investment Securities 84,364 5,877 6.97% Non-Taxable Investment 14,139 852 6.03% Securities Fed. Funds Sold & Money Market 2,098 124 5.92% Funds Total Interest-Earning Assets $295,780 $26,152 8.84% Non-Interest Earning Assets: Total Cash and Due from 7,728 Less: Allowance for Losses (4,143) Bank Premises and Equipment 5,720 Other Assets 6,027 TOTAL ASSETS $311,112 LIABILITIES AND STOCKHOLDERS' EQUITY Interest Bearing Demand $ 37,110 $ 606 1.63% Deposits Savings Deposits 57,521 1,409 2.45% Time Deposits 115,118 6,413 5.57% Repurchase Agreements and Short Term Borrowings 38,441 2,175 5.66% Long Term Borrowings 580 21 3.56% TOTAL INTEREST BEARING $248,770 $10,624 4.27% LIABILITIES Non-Interest Bearing Liabilities: Non-Interest Bearing Demand 30,083 Deposits Other Liabilities 1,273 Stockholders' Equity 30,986 TOTAL LIABILITIES AND STOCKHOLDERS' $311,112 EQUITY NET EARNING ASSETS $ 47,009 NET INTEREST INCOME/NET $ 15,528 4.57% INTEREST SPREAD NET INTEREST MARGIN 5.25% </TABLE> NOTES TO AVERAGE BALANCE SHEET 1. Tax-exempt income is calculated at coupon rate, not adjusted on a tax equivalent basis. 2. At December 31, 1997, loans on non-accrual status totaled $3,236,000. 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 $362,600 higher in 1997. 3. The Bank's net interest margin remains above the national average, and has remained at higher than average levels for a number of years. 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 gradually over the past three years, as competition for the same customers within the Bank's market area continues to grow. In 1997, the average rate on the bank's earning assets remained flat when compared to 1996 and the cost of interest bearing liabilities increased by 12 basis points. This compares with the average rate on earning assets decreasing by 8 basis points in 1996 when compared to 1995, and the average rate on interest bearing liabilities remaining flat. Although the net interest spread dropped from 1996 to 1997, (6 basis points), the drop was not as significant as the drop between 1995 and 1996, (13 basis points). The average net interest margin has remained at 5.17% for both 1997 and 1996. On average, non-interest bearing liabilities increased in 1997 over 1996 by $3.1 million. 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 found on page 9 of this report. 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-ENDEDECEMBER 31, 1997 COMPARED TO DECEMBER 31, 1996 INCREASES (DECREASES) DUE TO: <TABLE> <S> <C> <C> <C> <CAPTION> VOLUME RATE NET Loans $981 ($256) $725 Taxable Investment Securities 180 183 363 Non-taxable Investment Securities (139) 23 (116) Federal Funds Sold and Money 20 4 24 Market Funds TOTAL EARNING ASSETS $1,042 ($46) $996 Deposits $23 ($118) ($95) Repurchase Agreements and Short Term 110 98 208 Borrowings Long Term Borrowings 276 40 316 TOTAL INTEREST BEARING $409 $ 20 $429 LIABILITIES NET CHANGE IN INTEREST $633 ($ 66) $567 </TABLE> YEAR-ENDED DECEMBER 31 1996 COMPARED TO DECEMBER 31, 1995 INCREASES (DECREASES) DUE TO: <TABLE> <S> <C> <C> <C> <CAPTION> VOLUME RATE NET Loans $1,178 $(174) $1,004 Taxable Investment Securities 654 (110) 544 Non-Taxable Investment Securities (71) (14) (85) Federal Funds Sold and Money (85) (9) (94) Market Funds TOTAL EARNING ASSETS $1,676 $(307) $1,369 Deposits 373 86 459 Repurchase Agreements and Short Term (55) (90) (145) Borrowings Long Term Borrowings 344 (2) 342 TOTAL INTEREST BEARING $ 662 (6) $ 656 LIABILITIES NET CHANGE IN INTEREST $1,014 ($301) $713 </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> <S> <C> <C> <C> <CAPTION> 1997 1996 1995 U. S. Treasury Securities and Obligations of Other U. S. Government $13,250 $11,750 $14,279 Agencies Mortgage Backed Securities: U. S. Government 57,913 49,255 42,764 Agencies Other 5,082 6,812 8,211 Obligations of State and Political 8,105 12,392 13,241 Subdivisions Other Bonds 1,001 2,508 3,714 SECURITIES HELD TO MATURITY $85,351 $82,717 $82,209 Obligations of Other U. S. Government 8,803 13,337 8,145 Agencies Mortgage Backed Securities: U. S. Government 5,233 5,430 5,579 Agencies Other Bonds 0 0 500 Marketable Equity Securities 572 617 0 SECURITIES AVAILABLE FOR SALE $14,608 $19,384 $14,224 </TABLE> MATURITY SCHEDULE FOR INVESTMENTS HELD TO MATURITY At December, 1997 <TABLE> <S> <C> <C> <C> <C> <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 Obligations of Other U. S. Government Agencies $ $ $ $ 2,500 4,500 6,250 0 Average Yield 7.05% 7.05% 6.92% Mortgage-backed Securities: U. S. Government Agencies 0 7,043 7,597 43,273 Average Yield 7.27% 7.07% 7.36% Mortgage-backed Securities: Other 0 0 1,238 3,844 Average Yield 5.27% 7.44% Obligations of State and Political Subdivisions 2,237 4,168 0 1,700 Average Yield 6.50% 6.48% 7.23% Other Bonds 1,001 0 0 0 Average Yield 7.62% TOTAL $ $ $ $ 5,738 15,711 15,085 48,817 </TABLE> MATURITY SCHEDULE FOR INVESTMENTS AVAILABLE FOR SALE AT DECEMBER 31, 1997 (at fair value) <TABLE> <S> <C> <C> <C> <C> <CAPTION> Greater One than One Year to Five Greater Year Five Years than Ten or Years to Ten Years Less Years Obligations of Other U. S. Government $ $ $ $ 1,993 Agencies 999 1,505 4,306 Average Yield 6.9% 6.84% 7.44% 7.18% Mortgage-Backed Securities: 0 0 5,233 U. S. Government Agencies Average Yield 7.49% Other Bonds 0 0 0 Average Yield TOTAL $ $ $ $ 7,226 999 1,505 4,306 </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 $572,000. Yield 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> <S> <C> <C> <C> <C> <CAPTION> Greater Greater One than One than Greater Year or Year to Five than Ten Less Five Years Years Years to Ten Years Mortgage-backed Securities Held to 2,497 36,876 23,622 0 Maturity Mortgage-backed Securities Available 1,235 3,998 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 remained level for 1997, the value of the portfolio also remained level with the total unrealized gain approximately $933,000 at December 31, 1997 over book value. The Bank does not hold any interest only or principal only bonds, nor does it hold any securities whose market value could change to a greater degree than traditional debt. SUMMARY OF LOAN PORTFOLIO <TABLE> <S> <C> <C> <C> <C> <C> <CAPTION> 1997 1996 1995 1994 1993 Real estate loans: Construction & $ $ $ $ $ Development 7,925 8,906 8,072 4,595 4,607 Mortgage 158,59 2 146,041 135,069 124,62 107,94 0 8 Loans to finance agricultural 9,993 9,370 production and other 10,092 10,377 8,217 loans to farmers Commercial and 23,696 31,791 industrial loans 29,040 29,807 27,534 Loans to individuals for household, family and other 16,668 17,242 17,640 15,301 14,621 personal expenditures All other loans 209 319 7 22 269 Real Estate Under 56 320 794 295 329 Foreclosure TOTAL LOANS $217,1 $211,96 $201,76 $185,9 $163,5 39 0 6 94 25 Less: Allowance for possible loan loss 4,743 4,293 4,048 3,892 3,369 NET LOANS $212,3 $207,66 $197,71 $182,1 $160,1 96 7 7 02 56 </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> <S> <C> <c <C> <c <C> <c <C> <c <C> <c <CAPTION> > > > > > 1997 % 1996 % 1995 % 1994 % 1993 % Construction & 129 1. 247 2. 214 2. 77 1. 0 0. Development 6 8 7 7 0 Real Estate 3,68 2. 4,10 2. 3,009 2. 1,71 1. 2,17 2. 2 3 0 8 2 3 4 7 0 Commercial, Industrial and 1,04 3. 1,47 3. 517 1. 559 1. 615 1. Other 1 1 9 8 3 4 7 Loans to 450 2. 462 2. 434 2. 324 2. 238 1. individuals 7 7 5 1 6 Loans past due 90 days or 774 0. 733 0. 849 0. 892 0. 513 0. more and 4 4 4 5 3 still accruing* Non-Accruing 3,23 1. 3,54 1. 3,360 1. 3,13 1. 2,64 1. Loans 6 5 1 7 7 9 7 5 6 </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. There were no loans which were non- performing as of December 31, 1996 and for which the real estate was acquired by the Bank in 1997. MATURITY SCHEDULE - LOAN PORTFOLIO As of December 31, 1997 <TABLE> <S> <C> <C> <C> <CAPTION> After One Year One Year After or Less through Five Five Years Years Commercial, Financial and Agricultural $ 14,214 $ 9,291 $ 10,184 Real estate Construction and Land $ 5,897 $ 2,028 Development </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 our own Bank. 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 permanent portfolio residential mortgage loans on the Bank's books. 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 $12.5 million and with fixed interest rates and maturities of greater than one year is $9 million. RISK ELEMENTS <TABLE> <S> <C> <C> <C> <C> <C> <CAPTION> 1997 1996 1995 1994 1993 Loans accounted for on a non- $3,236 $3,541 $3,360 $3,139 $2,64 accrual basis 5 Accruing loans contractually past due $ $ $ $ $ 90-days or more 774 733 849 892 513 </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 nonaccruing. 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 $362,600 higher in 1997. Interest collected on these loans totaled $146,500 in 1997 and was included in net income. Nonaccrual loans and those loans 90-days past due and still accruing represent 1.85% of average loans for 1997 and 2.06% for 1996. Management is not aware of any potential problem loans which 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 68% of capital, $28.7 million up from $27.8 million in 1996. Of this total indebtedness, 9% were 30-days or more delinquent as of December 31, 1997. Other substantial loan concentrations include fishing, $11.0 million, commercial and real estate development, $13.9 million, and miscellaneous retail, $10.7 million. Credit concentrations over $700,000 decreased substantially from $35 million to $28 million due to payoffs or paydowns by major borrowers. Eighty percent of the credits totaling $700,000 or more are secured by real estate and have loan to value ratios of no more than 70%. 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 Delinquencies are reviewed on a monthly and quarterly basis by senior management as well as the Board of Directors. Information reviewed is used in determining if and when loans represent potential losses to the Bank. A determination of a potential loss could result in a charge to the provision for loan losses, with an increase to the reserve for possible loans so that risks in the portfolio can be identified on a timely basis and an appropriate reserve can be maintained. The Bank utilizes the methodology for the review of the allowance for loan losses to be in accordance with the approach suggested by bank regulators through the Interagency Policy Statement on Allowance for Loan and Lease Losses dated December, 1993. The reserve includes specific reserves based on the review of specific credits, a pool of reserves based on historical charge-offs by loan types and supplementary reserves reflecting concerns and loan concentrations by industry, by customer and by general economic conditions. The allocation has changed based on concentration of loans in the fishing and tourist related industries. Building on the program of measuring adequacy, the Bank has continued to build reserves to ensure that future earnings are not hurt by unforeseen problems in the loan area. Charged off loans have decreased over the past five years, both in dollars (from $1,181,000 in 1993 to $585,000 in 1997) and as a percentage of the average loan portfolio with the exception in 1995. The percentage of net charged off loans to average loans in 1997 represents 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 chargeoffs would have been .22% of total loans. For the years ended 1993 through 1995, the majority of charge offs were commercial loans secured by real estate or real estate mortgages. However, in 1996 and 1997, the majority of charge offs were loans to individuals and included many small loans and credit card debt. The Bank real estate charge offs in 1993 represent charge downs of loan balances on troubled loans based on updated fair value appraisals, or highest third party bids at auction. In 1993, there were two writedowns of REO charged directly to earnings. A property in Northeast Harbor was sold at a loss of $74,000 after paying all expenses, and property on Main Street in Ellsworth was written down by $100,000 to more closely reflect a liquidation. In 1994, the same property in Ellsworth was written down by additional $23,500. This property was sold in 1995 for $120,000. Additionally in 1994, three residential properties owned by the Bank were written down by a total of $58,000 to more closely reflect their market values. Approximately 28% of the chargeoffs in 1995 represented loans secured by real estate, and 39% represented commercial credits. The increase in commercial loan chargeoffs in 1995 included a chargedown of a large commercial loan. Recoveries offset losses totaling $97,000, $141,000, and $264,900 for the years ended 1995, 1994 and 1993, respectively. 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 with installment loans and other consumer loans representing 78% of the total charge offs. Softness in the economy in the early 1990s, reduction of collateral value, and, in some cases, poor management by the owners of the business have caused the major losses in the commercial area in the early 1990s. Based on past experience and management's assessment of the present loan portfolio, it is expected that loan charge offs for 1998 will not exceed $500,000. <TABLE> <S> <C> Commercial $ 67,500 Real Estate mortgages $ 200,000 Installments and other loans to $ 232,500 individuals </TABLE> A breakdown of the allowance for possible loan losses is as follows: <TABLE> <S> <C> <C> <C> <C> <C> <C> <C> <C> <CAPTION> 1997 1996 1995 1994 Percen Perce Perce Perce t of nt of nt of nt of Amou Loans Amou Loans Amou Loans Amoun Loans nt in nt in nt in t in each each each each Catego Categ Categ Categ ry to ory ory ory Total to to to Loans Total Total Total Loans Loans Loans Real Estate $ 76.71 $1,0 73.26 $ 71.34 $ 69.63 Mortgages 146 % 54 % 915 % 1,666 % Installments and other 2,939 7.68% 1,45 8.13% 1,46 8.74% 485 8.23% loans to 7 9 individuals Commercial, financial 481 15.51 629 18.46 278 19.92 1,220 22.13 and % % % % Agricultural Other 0 .10% 0 .15% 0 0.00% 0 .01% Unallocated 1,177 .00% 1,15 0.00% 1,38 0.00% 521 .00% 3 6 TOTAL $4,74 100.0 $4,2 100.0 $4,0 100.0 $ 100.0 3 0% 93 0% 48 0% 3,892 0% </TABLE> SUMMARY OF LOAN LOSS EXPERIENCE <TABLE> <S> <C> <C> <C> <C> <C> <CAPTION> ALLOWANCE FOR LOAN 1997 1996 1995 1994 1993 LOSSES Balance at beginning $4,293 $4,048 $3,892 $3,369 $3,206 of period Charge offs: Commercial, Financial, 102 195 377 122 386 Agricultural, Others Real Estate 27 131 256 267 505 Mortgages Installments and other 456 385 268 189 290 loans to Individuals Total Charge Offs 585 711 901 578 1,181 Recoveries: Commercial, Financial, 169 73 20 47 101 Agricultural, Others Real Estate 154 94 20 54 118 Mortgages Installments and other 92 69 57 40 45 loans to Individuals Total Recoveries 415 236 97 141 264 Net Charge Offs 170 475 804 437 917 Provision Charge to 620 720 960 960 1,080 Operations Balance at End of $4,743 $4,293 $4,048 $3,892 $3,369 Period Average loans outstanding during $217,29 $207,18 $195,17 $174,55 $153,23 period 5 8 9 0 2 Net Charge Offs to Average Loans .08 .23 .41 .25 .60 Outstanding during Period </TABLE> SUMMARY OF DEPOSIT PORTFOLIO <TABLE> <S> <C> <C> <C> <C> <C> <C> <CAPTION> 1997 1996 1995 Averag Averag Averag Averag Averag Averag e e e e Rate e e Rate Balanc Rate Balanc Balanc e e e Demand Deposits $36,54 $ $ 4 33,408 30,084 NOW Accounts 39,532 1.69% 38,036 1.62% 37,110 1.63% Savings Accounts 52,455 2.54% 54,503 2.52% 57,521 2.45% Time Deposits 122,49 5.54% 124,42 5.54% 115,11 5.57% 1 7 8 Total Deposits $251,0 $250,3 $239,8 22 74 33 </TABLE> MATURITY SCHEDULE FOR TIME DEPOSITS AT DECEMBER 31, 1997,$100,000 OR MORE <TABLE> <S> <C> <C> <C> <CAPTION> Over Six Over Three Months Through Three Months Months Through Twelve Months Over Twelve or Less Six Months Months $ 9,173 $ 1,586 $ 2,456 $ 738 </TABLE> RETURN ON EQUITY AND ASSETS <TABLE> <S> <C> <C> <C> <CAPTION> 1997 1996 1995 Return on Average Assets 1.86 2.021.89 Return on Average Equity 16.27 18.86 18.97 Dividend Payout Ratio 32.15 30.22 25.07 Average Equity Capital to Average 11.46 10.729.96 Assets Ratio </TABLE> As of January 1, 1998, there were approximately 1,075 holders of record of Bar Harbor Bankshares common stock. Dividends have been paid by the company during 1997 and 1996, as follows:<TABLE> <S> <C> <C> <C> <C> <CAPTION> March June September December 1997 $0.28 $0.30 $0.30 $0.32 1996 $0.20 $0.20 $0.25 $0.53 </TABLE> SHORT TERM BORROWINGS (In Thousands) <TABLE> <S> <C> <C> <C> <C> <C> <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 1997 FHLB Advances $24,000 5.69% $45,125 $34,207 5.67% 1996 FHLB Advances $43,908 5.62% $41,000 $30,811 5.68& Wholesale Repurchase 0 0.00% $10,000 $ 5.47% Agreements 583 1995 FHLB Advances $26,700 5.85% $29,000 $17,058 5.84% Wholesale Repurchase 0 0.00% $18,250 $ 6.16% Agreements 4,338 </TABLE> The terms for short-term FHLB advances taken in 1997 ranges from 7 days to 365 days and averaged 62 days. The terms for short-term FHLB advances taken in 1996 range from 2 days to 340 days and averaged 49 days. The terms for wholesale repurchase agreements taken in 1996 ranged from 7 days to 14 days and averaged 8 days. The terms for short-term FHLB advances taken in 1995 ranged from 5 days to 200 days and averaged 49 days. The terms for wholesale repurchase agreements taken in 1995 ranged from 4 days to 90 days and averaged 25 days. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates/prices such as interest rates, foreign currency exchange rates, commodity prices, and equity prices. The Company's primary market risk exposure is interest rate risk. The ongoing monitoring and management of this risk is an important component of the Company's asset/liability management process which is governed by policies established by its Board of Directors that are reviewed and approved annually. The Board of Directors delegates responsibility for carrying out the asset/liability management policies to the Asset/Liability Committee (ALCO). In this capacity, ALCO develops guidelines and strategies impacting the Company's asset/liability management related activities based upon estimated market risk sensitivity, policy limits and overall market interest rate levels/trends. Interest Rate Risk Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income and expense streams associated with the Company's financial instruments also change thereby impacting net interest income (NII), the primary component of the Company's earnings. ALCO utilizes the results of a detailed and dynamic simulation model to quantify the estimated exposure of NII to sustained interest rate changes. While ALCO routinely monitors simulated NII sensitivity over a rolling two-year horizon, it also utilizes additional tools to monitor potential longer-term interest rate risk. The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all assets and liabilities reflected on the Company's balance sheet as well as for off balance sheet derivative financial instruments. This sensitivity analysis is compared to ALCO policy limits which specify a maximum tolerance level for NII exposure over a one year horizon, assuming no balance sheet growth, given both a 200 basis point (bp) upward and downward shift in interest rates. A parallel and pro rata shift in rates over a 12 month period is assumed. The following reflects the Company's NII sensitivity analysis as of December 31, 1997. RATE CHANGE <TABLE> <S> <C> <C> <CAPTION> -200 basis +200 basis points points Year I Net interest income change $ 190 $ (34) ($) Net interest income change 1.16% (.21%) (%) Year II Net interest income change $ (84) $ (249) ($) Net interest income change ( .51%) (1.52%) (%) </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, 1997 the following derivative financial instruments were outstanding: <TABLE> <S> <C> <C> <C> <C> <CAPTION> Notional Contract Maturity Fair Principal Date Date Value December 31, 1997 Interest rate $ 5,000 May 4, May 4, ($13) swap 1993 1998 Interest rate $10,000 June 3, June 3, $ 3 floor 1994 1999 </TABLE> The estimated effects of these derivative financial instruments on the Company's earnings are included in the sensitivity analysis presented above. The derivative contracts presented in the above table are designed as hedges in that they are utilized to modify the interest rate characteristics of selected assets and liabilities. The interest rate floor was purchased to hedge the interest income on variable rate loans and securities against the adverse effects of falling interest rates. The interest rate swap, whereby the Company receives a fixed rate and pays a variable rate, is utilized to convert variable rate assets to fixed rate equivalents. ALCO monitors the effectiveness of its derivative hedges relative to its expectation that a high correlation be maintained between the hedging instrument and the related hedged assets/liabilities. All outstanding positions are estimated to remain highly effective. Interest rate floors and swaps are accounted for using the accrual method with an income statement adjustment to interest income or interest expense depending on whether the hedged items re assets or liabilities. The unamortized premiums associated with the floor is presented on the balance sheet along with other prepaid assets. Interest receivable under the floor contract and interest receivable/payable associated with the swap contract are reflected on the balance sheet along with other interest receivable and payable amounts. Unrealized gains or losses associated with these positions are not recognized in the financial statements. While it is not the Company's practice to unwind derivative hedges prior to their maturity, any recognized gains/losses would be deferred on the balance sheet and amoritzed to interest income or expense, as required, over the remaining period of the original hedge. To the extent that a hedge were to be deemed ineffective due to a lack of correlation with the hedged items or if the hedged items were to be settled/terminated prior to maturity of the hedging instrument, then unrecognized gains/losses associated with the hedging instrument would be recognized in the income statement with subsequent accruals and gains/losses also included in the income statement in the period they occur. 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 21 of the Company's Annual Report for the year ended December 31, 1997 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 71. 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. He also serves as President of Northeast Harbor Water Company. Mr. Brown first was elected as a director on October 2, 1979. [2] Robert C. Carter, Director, Age 54. 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 53. Mr. Colwell's principal occupation during the past five years has been as owner of Colwell Brothers, Inc. 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 70. 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., Brookside Motel, Bay View, Inc., and Ocean Gate, Inc. Mr. Cough is also Treasurer of Cough Bros., Inc. and President of Downeast Inns, Inc. Mr. Cough was first elected as a director on October 1, 1985. [5] Peter Dodge, Director, Age 54. 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, Senior Vice President and Trust Officer, Age 62. 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 68. Mrs. Foster's principal occupation is the 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 43. Mr. Friend's principal occupation is owner and President of Friend & Friend, Inc.; and one-third owner of UStore It in Ellsworth, Maine. He also serves as President of Recreational Motorsports Association of Maine, Chairman 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, Chairman of the Board of Directors, Age 70. 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 59. 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] H. Lee Judd, Director, Age 52. 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 Vice President and Treasurer 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. [12] James C. MacLeod, Director, Age 73. Mr. MacLeod is retired. Mr. MacLeod served as Vice President of the Bank until his retirement in December of 1987. He was appointed as a Vice President of the Bank in 1972 and was first elected as a director of the Bank on November 7, 1961. [13] John P. McCurdy, Director, Age 66. Prior to his retirement in 1991, Mr. McCurdy's principal occupation was the 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 62. 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] Lewis H. Payne, Executive Officer, Age 47. Mr. Payne is the Executive Vice President of the Company and of the Bank. He was first elected as Executive Vice President of the Company in 1995. [16] Robert M. Phillips, Director, Age 56. Mr. Phillips is 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. [17] John P. Reeves. Director, Age 63. 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. [18] Abner L. Sargent, Director. Mr. Sargent died on December 10, 1997 at the age of 72. Mr. Sargent was former owner and designated broker of High Street Real Estate and Vice President and Treasurer of Sargent's Mobile Homes, Inc., of Ellsworth. He first was elected as a director on October 6, 1981. [19] Marsha C. Sawyer, Executive Officer, Age 45. Mrs. Sawyer is Vice President of the Bank and serves as Clerk of the Company. She first was elected Clerk of the Company in 1986. [20] Lynda Z. Tyson, Director, Age 42. Mrs. Tyson is Chief Operating Officer and Marketing Director of Tyson & Partners, Inc., a marketing communications consulting firm in Bar Harbor. Mrs. Tyson was first elected as a director on October 5, 1993. [21] Virginia M. Vendrell, Executive Officer, Age 48. 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. ITEM 11. EXECUTIVE COMPENSATION Officers of the Company do not, as such, receive compensation. The following table sets forth cash compensation received during the Bank's last fiscal year by the executive officers for whom such compensation exceeded $100,000. SUMMARY COMPENSATION TABLE <TABLE> <S> <C> <C> <C> <C> <CAPTION> ANNUAL COMPENSATION Other Annual Year Salary Incenti Compensation ($) ve ($) ($) Sheldon F. Goldthwait, 1995 130,00 23,108 0 Jr. 0 President and 1996 135,99 27,428 0 0 Chief Executive Officer 1997 155,00 19,737 0 0 Dwight L. Eaton 1995 17,637 0 94,000 Senior Vice President and 1996 19,460 0 95,992 Trust Officer 1997 12,984 0 98,000 Lewis H. Payne 1995 N/A N/A 0 Executive Vice President 1996 88,594 17,634 0 1997 93,500 12,237 0 </TABLE> <TABLE> <S> <C> <C> <C> <C> <CAPTION> LONG TERM COMPENSATION AWARDS PAYOUT Restric LTIP ted Optional Payout Year Stock SARs (#) s Awards ($) ($) Sheldon F. Goldthwait, 1995 0 0 0 Jr. 1996 0 0 0 1997 0 0 0 Dwight L. Eaton 1995 0 0 0 1996 0 0 0 1997 0 0 0 Lewis H. Payne 1995 0 0 0 1996 0 0 0 1997 0 0 0 ALL OTHER COMPENSATION ($) Sheldon F. Goldthwait, 1995 3,522 Jr. 1996 24,035 1997 30,027 Dwight L. Eaton 1995 3,439 1996 36,175 1997 41,654 Lewis H. Payne 1995 N/A 1996 1,752 1997 1,848 </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 computation is based on earnings per share growing by 10% each year with 1992 being the base year. Once the 10% growth is attained, a pool is created in which all eligible employees receive the same percentage of their salary in the form of an incentive payment. OMPENSATION COMMITTEE The Bank Board has appointed a six- member Compensation Committee comprised of Directors Reeves, Dodge, Gilfillan, McCurdy, and Phillips and Mr. Goldthwait who is a Director and also a member 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 1997, Mr. Goldthwait was a member of the Compensation Committee and also a director. He abstained from participating in discussion, recommendations, or voting regarding his own compensation. Mr. Reeves, who chairs the Compensation Committee, is a former President of the Company and the Bank. 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 Company has two non-qualified supplemental retirement plans for certain officers. The agreements provide supplemental retirement benefits payable in installments over a period of years upon retirement or death. The Company recognizes the cost associated with the agreements over the service lives of the participating officers. For 1997, 1996, and 1995, the expense of these supplemental plans was $127,600, $118,000, and $110,000, respectively. 401(k) Plan The Bank has a contributory 401(k) plan available to full-time employees. Employees may contribute between 1% and 15% of their compensation, to which the Bank will match 25% of the first 6% contributed. For the years ended December 31, 1997, 1996, and 1995, the Bank contributed $49,500, $52,000, and $46,600, respectively. The Bank has a noncontributory plan in lieu of a defined benefit plan. In 1997, 1996 and 1995, the Board of Directors voted to credit each eligible participant's 401(k) account with 3% of salary. The total contributions made for the non- contributory plan was $122,800, $128,000 and $122,500 for the years ended December 31, 1997,1996, and 1995, respectively. Restricted Stock Purchase Plan In 1997, 1996, and 1995, the Bank provided a restricted stock purchase plan through which each employee may purchase up to 100 shares of Bar Harbor Bankshares stock at the current fair market price as of a date determined by the Board of Directors. These shares may be purchased through direct purchase or through the employee's 401(k) accounts. At December 31, 1997, employees exercised their right to purchase 1,224 shares at $60.00 per share, with the actual purchase transpiring in January of 1998. At December 31, 1996, employees exercised their right to purchase 2,346 shares at $38.25 per share, with the actual purchase transpiring in January of 1997. 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. 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. The cost relative to the supplemental plan was $115,700, $106,500, and $98,300 for 1997, 1996, and 1995 respectively. The agreements with Messrs. Reeves, Eaton, Goldthwait, and MacDonald are in the amounts of $49,020,$22,600, $37,400 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. For purposes of comparison, the graph also illustrates comparable shareholder return of NASDAQ banks as a group as measured by the NASDAQ Banks Stock Index and of Union Bankshares, which is, in the opinion of management, the only other bank holding company with respect to which a meaningful comparison of total shareholder return can be made. The graph assumes a $100 investment on December 31, 1991 in the common stock of each of the Company, Union Bankshares and the NASDAQ banks 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, 1991. The following graph is based upon a good faith determination of approximate market value for each year indicated based on information obtained from Union Bankshares, 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 . PERFORMANCE GRAPH The following information is presented in a line graph in the printed proxy: <TABLE> <S> <C> <C> <C> <C> <C> <C> 1991 1992 1993 1994 1995 1996 Bar Harbor Banking and $100. $106. $125.5 $141. $244. $344.8 Trust Company 00 31 1 53 73 8 Union Trust $100. $102. $134.9 $142. $205. $271.2 Company 00 50 5 79 85 4 NASDAQ Banks $100. $145. $165.9 $165. $246. $325.2 00 55 9 38 32 5 </TABLE> ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of December 31, 1997, 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, 1997, 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> <S> <C> <C> <CAPTION> Amount of Percent of Director, Executive Officer or Benefic Class Nominee ial Ownersh ip Frederick F. Brown 12,570 * Robert C. Carter 1,050 * Thomas A. Colwell 2,700 * Bernard K. Cough 86,970 5.05% Peter Dodge 2,430 * Dwight L. Eaton 3,282 * Ruth S. Foster 1,675 * Cooper F. Friend 1,600 * Robert L. Gilfillan 39,965 2.32% Sheldon F. Goldthwait, Jr. 15,176 * H. Lee Judd 3,750 * James C. MacLeod 20,300 1.18% John P. McCurdy 3,300 * Jarvis W. Newman 15,050 * Robert M. Phillips 650 * John P. Reeves 12,662 * Abner L. Sargent 3,500 * Lynda Tyson 700 * Total ownership of all Directors and Executive Officers of Company as a 232,998 13.53% group (21 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, 48,680 shares (2.83%) 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 which 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 which 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 upon 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 included herein as Exhibit 13], Financial Section. PAGE Independent Auditor's Report 6 Consolidated Statements of Financial Condition December 31, 1997 and 1996 7 Consolidated Statements of Earnings for the years ended December 31, 1997, 1996, and 1995 8 Consolidated Statements of changes in the Stockholders' Equity for the years ended December 31, 1997, 1996, and 1995 9 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996, and 1995 10 Notes to Consolidated Financial Statements 11 - 21 (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 EXHIBIT NUMBER 1. Underwriting Agreements Not Applicable 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 4. Instruments defining the rights of Not Applicable security holders 5. Opinion re: legality Not Applicable 6. Opinion re: discount on capital shares Not Applicable 7. Opinion re: liquidation preference Not Applicable 8. Opinion re: tax matters Not Applicable 9. Voting Trust Agreements Not Applicable 10. Material Contracts Incorporated by reference to Form 10-K dated December 31, 1986 11. Statement re: computation of per Not Applicable share earnings 12. Statement of computation of ratios Not Applicable 13. Annual report to security holders Enclosed herewith 14. Material foreign patents Not Applicable 15. Letter re: unaudited interim Not Applicable financial information 16. Letter re: change in certifying Not Applicable accountant 17. Letter re: director resignations Not Applicable 18. Letter re: change in accounting Not Applicable principles 19. Previously unfiled documents Not Applicable 20. Report furnished to security holders Not Applicable 21. Other documents or statements to Not Applicable security holders 22. Subsidiaries of the registrant Incorporated by reference to Form 10-K dated December 31, 1987 23. Published report regarding matters Not Applicable submitted to vote of security holders 24. Consents of experts and counsel Not Applicable 25. Power of Attorney Not Applicable 26. Statement of eligibility of Trustee Not Applicable 27. Invitation for competitive bids Not Applicable 28. Additional Exhibits Not Applicable (d) Financial Statement Schedules Not Applicable 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