Bar Harbor Bankshares
Annual Report 2009

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Plain-text annual report

Balancing Risk & Reward 2009 Summary Annual Report Founded in 1887, Bar Harbor Bank & Trust is a community bank with 12 locations along the coast of Maine, and offers a full range of financial products and services for families, businesses, municipalities and non-profit organizations. Bar Harbor Trust Services, a subsidiary of the Bank, and Bar Harbor Financial Services, a branch of Infinex Investments, Inc., provide retirement planning, investment management, brokerage and insur- ance services to meet the needs of a wide variety of individual, non-profit and municipal clients. Bar Harbor Bankshares (“BHB” or the “Company”) is the parent company of Bar Harbor Bank & Trust (the “Bank”). Year-Over-Year Financial Highlights (dollars in thousands) Net Income Available to Common Shareholders Diluted Earnings Per Share Tax-equivalent Net Interest Income 10000 8000 6000 4000 2000 0 4 3 2 1 0 15 12 9 6 3 0 Non-interest Income Non-interest Expense Total Assets Total Securities Total Loans Total Deposits Total Shareholders’ Equity 10,000 $9,316 8,000 6,000 4,000 2,000 0 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 Net Income Available to Common Shareholders ($ in thousands) 2008 % Change 2009 9,316 3.12 $ 7,731 $ 2.57 34,786 $ 28,090 6,022 $ 6,432 21,754 $ 20,513 $ $ $ $ $ 20.5% 21.4% 23.8% – 6.4% 6.0% 10.3% 19.5% 5.7% 10.9% 73.4% $ 1,072,381 $ 972,288 $ 347,026 $ 290,502 $ 669,492 $ 633,603 $ 641,173 $ 578,193 $ 113,514 $ 65,445 4.00 3.00 2.00 1.00 0 $3.12 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 Diluted Earnings per Share 15 12 9 6 3 0 11.65% 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 Return on Average Equity Dear fellow shareholders: The past year was an extraordinary one for Bar Harbor Bankshares. We confronted a series of unusual and well­publicized events within the national economy and within our industry that challenged but did not change our traditional business values. As bankers, we manage financial risk; this is our fundamental role in our local economy. If we do it well, the Bank and its shareholders are rewarded appropriately. In 2009, we faced the most dramatic arena for balancing million at year end reflecting continued strong growth in risk and reward we have seen in decades. We believe we business lending, thanks to our careful cultivation of this have maintained that balance in the best interest of our important line of business over the past several years. customers, our shareholders, our employees and the Despite the challenges in the broader economy, several communities we are privileged to serve. As you review of our strongest business customers looked to us for our results, we sincerely hope you will agree. financing as they took advantage of business expansion Following record annual earnings in 2008, we are pleased to report another year of record performance in 2009. Despite the continuing national recession and struggles within various components of the Maine economy, our conservative business plan and attention to community banking fundamentals have served us well. Net income available to common shareholders was $9.3 million, up $1.6 million or 20.5% compared with 2008, and earn­ ings per diluted common share were up $0.55 or 21.4%. Reflecting both substantial improvements in top line revenue as well as continuing control over non­interest expenses, our efficiency ratio dropped to 53.2%, which is the Company’s best performance in well over a decade, despite the need to accommodate special deposit insur­ opportunities and we were delighted to accom modate them. Although we often hear the national outcry that “banks are unwilling to lend,” BHB has never faltered in its commitment to support the local economy through sound business, municipal and residential lending. Because our underwriting principles were always conservative, we did not need to make sudden adjustments in our standards when the economy soured. Over the past several years, we have spent a great deal of energy developing a team­based, collaborative credit culture. We believe customers appreciate our responsive style. Our ability to support loan demand during these unset­ tled times has reinforced our reputation among prospec­ tive borrowers as a lender of choice. ance assessments from the FDIC. While the Bank’s residential mortgage loan portfolio During 2009, the Company’s total assets grew 10.3% and ended the year at $1.1 billion. Total loans stood at $669 declined in 2009, demand for residential lending was surprisingly strong, as many households looked to refinance and consolidate debt to take advantage of 2009 Summary Annual Report 01 histor ically low borrowing rates, tax incentive programs During the past two years, bank investors and regulators and more affordable home prices. To reduce interest rate have placed intensified attention on the adequacy of bank risk, $30 million of low­fixed­rate residential mortgages capital. Capital fuels growth, facilitates earnings and pro­ originated in 2009 were sold in the secondary market, vides the financial capacity to absorb potential credit or with customer servicing retained by the Bank, and were investment losses. While official measurements of capital therefore not reflected in outstanding loan balances at adequacy did not change, there were indications in the year end. Along with strong growth in our loan portfolio, we are pleased to report that our asset quality indicators have latter half of 2008 that regulatory practice would increase capital adequacy expectations in response to the failure of major banks and deteriorating economic conditions. remained relatively strong. As of the end of 2009, our In the fall of 2008, under the general umbrella of the non­performing loans remained manageable at 1.37% Emergency Economic Stabilization Act, the United States of total loans. Net charge­offs amounted to a very low Treasury promoted its voluntary Capital Purchase Pro­ 0.13% of total loans, and were actually down from 0.21% gram (CPP) to healthy banks, large and small, in which it of total loans in 2008. Over the past two years, loan fore­ made capital investments in banks through the purchase closures have increased dramatically on the national level. of preferred stock. The purpose of this new capital was While we have also seen an increase in foreclosure activ­ to provide participating banks with the capacity and the ity within our business and residential portfolios here in confidence to increase lending in their local markets and Maine, the absolute number of cases remains quite small to stabilize the economy. Given the extraordinary eco­ and we have worked closely with the affected borrowers nomic uncertainty at that time, BHB determined that the to prevent actual foreclosures whenever possible. most prudent course of action was to participate in the The Bank’s tax­equivalent net interest income increased $6.7 million or 23.8% in 2009 and continued to be the principal source of earnings for the Company. During CPP program. BHB issued $18.75 million of preferred stock and common stock warrants to the United States Treasury in January of 2009. 2009, our net interest margin improved 27 basis points During 2009, BHB used the lending and investment to 3.40% principally as a result of lower borrowing rates capacity afforded by this capital inflow to increase earning and careful attention to deposit and loan pricing. We assets by $100 million, while acquiring valuable capital believe we have benefited from thoughtful positioning of reserve strength should the national recession deepen the balance sheet over the past few years to mitigate and the local economy falter. By the fourth quarter of interest rate risk and insulate the Company’s earnings 2009, the local economy had performed relatively well capacity from unavoidable swings in interest rates. and it appeared the risk of a long and deep economic Our financial services units, Bar Harbor Trust Services and Bar Harbor Financial Services*, continue to build their reputations as innovative and thoughtful financial advisors to a wide variety of individual and institutional clients. The financial markets of the past few years have bred a great deal of uncertainty in the minds of individual investors trough had mitigated. BHB had itself performed well on the strength of robust earning asset growth, an improved net interest margin and a loan portfolio that demonstrated strong asset quality. On the strength of this performance, BHB concluded that the opportunity was right for raising capital in the form of common stock. and volunteer fiduciaries; sound guidance has never In December 2009, the Company completed a public been more valued than now. Despite significant volatility offering of 800,000 shares of its common stock with an in the market value of assets under management during enthusiastic market response from both institutional and the past year, revenues for these two units combined retail investors. The total net proceeds from the offerings, were $2.4 million for 2009, down less than 3% compared including the underwriter’s exercise of its over­allotment with 2008. option in January 2010, amounted to $22.4 million. We *Bar Harbor Financial Services is a branch of Infinex Investments, Inc., an independent registered broker-dealer which is not affiliated with the Company or the Bank. 02 Bar Harbor Bankshares 1200 1000 800 600 400 200 0 400 300 200 100 0 40000 35000 30000 25000 20000 15000 10000 5000 0 800 600 400 200 0 800 600 400 200 0 8000 6000 4000 2000 0 1.5 1.2 0.9 0.6 0.3 0.0 10000 8000 6000 4000 2000 0 25000 20000 15000 10000 5000 0 0.25 0.20 0.15 0.10 0.05 0.00 4 3 2 1 0 80 60 40 20 0 1,200 1,000 800 600 400 200 0 400 300 200 100 0 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 800 600 400 200 0 800 600 400 200 0 $1,072 $669 1.37% 0.13% 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 Assets ($ in millions) Loans ($ in millions) Non-Performing Loans to Total Loans Net Charge-Offs to Average Loans $347 $641 10,000 $9,316 4.00 $3.12 1.5 1.2 0.9 0.6 0.3 0 8,000 6,000 4,000 2,000 0 .25 .20 .15 .10 .05 0 3.00 2.00 1.00 0 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 Securities ($ in millions) Deposits ($ in millions) Net Income Available to Common Shareholders ($ in thousands) Diluted Earnings per Share 8,000 $34,786 25,000 $21,754 $6,022 20,000 6,000 Reflecting both substantial improvements in top line revenue as well as continu- ing control over non-interest expenses, our efficiency ratio dropped to 53.2% in 2009, the Company’s best performance in well over a decade. This year’s 15,000 4,000 10,000 record-low number stacks up against that of top performing banks and creates 2,000 a new benchmark against which to measure success. 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 0 Tax-Equivalent Net Interest Income ($ in thousands) Non-Interest Income ($ in thousands) 5,000 0 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 Non-Interest Expense ($ in thousands) 80 60 40 20 0 53.2% 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 Efficiency Ratio believe the positive demand for our stock demonstrates very hospitable environment for a community bank and not only the strength of BHB’s past performance, but we are fortunate to call it home. also the confidence of investors in our prospects for future growth and success. We are grateful to all our team members for their out­ standing work this year. We especially acknowledge the On February 24, 2010, the Company used a portion of outstanding contributions of Thomas Colwell, who served the proceeds from the stock offering to redeem all 18,751 as Bar Harbor Bankshares Board Chairman from May shares of preferred stock it sold to the United States 2004 until May 2009. During this period, under Tom’s Treasury, thus ending its participation in the CPP. We dedicated leadership, the Company enjoyed splendid believe our participation in the Capital Purchase Program growth and remarkable performance improvements. We enabled the Company to maintain a very strong capital are delighted that Tom is now continuing his exemplary position while supporting our local economy during service as Vice Chairman of the Board. extremely uncertain times. On behalf of the Board of Directors and all Bar Harbor While the Company benefited from the strength of an Bankshares team members, we are thankful for the loyalty additional $24 million in average shareholders’ equity in and support of our shareholders. We are dedicated to 2009, we were able to hold our return on average equity earning your continued confidence in the years ahead. at 11.65% down only 22 basis points from 2008. Sincerely, While we believe the decisions made by the board and management have served the Company well, we also acknowledge that our sustained overall success is due in a major way to the resilience of the Maine coastal economy. In addition to fishing, boat building, biological research and blueberry farming, the Maine coast is driven by tourism, which brings millions of visitors each year to our villages and islands, Acadia National Park, and a rugged coastline of uncommon beauty. Despite spikes in fuel prices and national economic disruptions, the local tourism industry has performed with remarkable stability. Over time, coastal Maine has proven to be a Joseph M. Murphy President and Chief Executive Officer Peter Dodge Chairman 2009 Summary Annual Report 03 Support in a time of need Nautilus Marine Fabrication’s success is built on quality and diversification. Offering custom marine hardware manufacture, abrasive water jet material cutting, boat propeller repair, new propeller sales, and non­toxic hydraulic fluid sales, Nautilus caters to high­end yacht makers, whose pleasure vessels retail for around $500,000, as well as local fishermen who need precision fittings and propeller repairs. Owners Jim Patten and Stephen Brenton, both with nearly 25 years experience, have lived their dream of running a suc­ cessful business since purchasing Nautilus from their former employer in 1998. But Brenton and Patten experienced a nightmare the evening of May 14, 2009 when their facility was destroyed by fire. With the help of friends, neighbors, other local businesses, and their Bank, they were able to keep doing business and quickly rebuild. Vicki Hall, BHBT Vice President of Business Banking, offered some creative financing solutions to help get them back on their feet as quickly as possible. 04 Bar Harbor Bankshares “ Vicki arrived on site the day of the fire, when the fire trucks were still there. The next day, Joe Murphy came by to offer the Bank’s assistance. Our reconstruction took longer than expected but BHBT saw us through with some creative solutions. That’s a really good feeling… knowing your Bank supports you during a tough time. “ Jim Patten Co-owner—Nautilus Marine Meeting the needs and expectations of those we serve every day. How, during such turbulent times for the economy a 2009 independent survey proved this to be true. and the banking industry, were we able to set earn­ Over 95% of customers surveyed are happy with ings records and achieve our best performance year us and are unlikely to switch banks in the next 12 to ever? We’ve concluded that our success is based 18 months. Even more gratifying, that same number on principles and practices we put in place years (95%) would recommend us to friends or family. We ago. While many financial institutions diversified into believe this loyalty is achieved every day, one cus­ risky products and ventures for short­term gain, we tomer at a time, one experience at a time. Every remained committed to our traditional products and interaction counts. conservative credit management practices. Through a consistently disciplined and prudent culture, we have built a wall against adversity while preserving the warm face­to­face experience our coastal Maine customers and communities deserve and expect. Allow us to share some details. Creative Solutions Engaged Employees In 2009, we were also delighted with the results of a separate independent survey of our employees showing 95% of them enjoy the work they do, 94% are proud to tell people they work for Bar Harbor Bank & Trust, and 93% believe the Bank has a strong reputation in the community. Because we Our cost control and credit quality management strive to be the best place to work AND the best practices are vital to our financial success. But place to bank, we are pleased and humbled by our culture is not just about written policies—it is these results. Our customers’ and employees’ loy­ about applying those policies to each customer’s alty, support, and recommendations are indeed unique business and credit needs. The feature what make our ongoing success possible. stories included here demonstrate our willingness and ability to work creatively with customers when conditions warrant. This kind of disciplined flexibility contributes to our best­in­class asset quality numbers, exceptional survey results, and the kind of returns that we are proud to present to you in this report. Loyal Customers Improved Branches The past year has been a busy one for our facilities department. On­time and on­budget renovations to our Blue Hill, Ellsworth, Bar Harbor, and Southwest Harbor offices provide more convenient parking, better drive­through and ATM access, and more attractive, efficient facilities for both customers and Our goal is to deliver exceptional customer care employees. These updates, completed with a focus every day. While we were internally confident that our on cost control and long­term payback, will protect customer service and satisfaction levels were high, our investment in infrastructure for decades to come. 2009 Summary Annual Report 05 Convenient Delivery Channels As technology evolves, so does customer expectation. With that in mind, we’ve added more efficient ways for customers to do business with us. Through Remote Deposit Capture, our business customers can deposit the day’s receipts into a BHBT account without ever leav­ ing the workplace. Customers will soon be able to open deposit accounts online from their home computer. Of course, warm person­to­person interaction will always be available at Bar Harbor Bankshares. Those who prefer vis­ iting a branch to open an account now enjoy a streamlined process thanks to our new deposit automation software. Financial Education Leadership Because recent economic times highlighted the need for better financial education, our marketing focus for 2009 was “information about money.” Media campaigns fea­ tured President Joe Murphy voicing tips about health savings accounts, FDIC insurance, credit reports, and children’s savings habits. Our participation in numerous community education events for both adults and youth broadened the reach. We believe there’s no better mes­ sage during unsettled times. Information is power and with it comes relief. Celebration What exciting times for shareholders, customers, and employees of Bar Harbor Bankshares! By balancing risk and reward…and sticking to the basics of community banking…we are able to celebrate 2009 as our best year ever and have positioned your Company for a bright future. Sarah Robinson, VP­BHTS with Doug Radziewicz The SPCA of Hancock County, a local animal welfare organization and shelter located in Trenton, Maine, recently completed a $2 million capital campaign to expand its facility. 06 Bar Harbor Bankshares Managing and protecting assets Non­profit organizations, vital to Maine’s economy, provide services and jobs that make our communities better places to live and work. Regrettably, many local non­profits, ranging from very small to world renowned, have suffered financial losses during the recent economic downturn. Increasingly the non­profit sector is turning to Bar Harbor Trust Services for the guidance and skill needed to manage and protect their assets. Non­profit boards and managers, as stewards of other people’s money, have a responsibility to manage funds entrusted to them through charitable gifts. We help them make the most of those funds using all the tools in our diverse set of products and services—endowment management, charitable gift annuities, chari­ table remainder trusts, and more. A client of Bar Harbor Trust Services (BHTS) for years, the SPCA of Hancock County had split its endowment management between two institutions. In 2009, after noticing the portfolio managed by Bar Harbor Trust Services had preserved considerably more capital and minimized losses in comparison to their other investment account, the SPCA chose to consolidate all its funds with BHTS. “ As a non-profit organization, the SPCA is sustained by and operates with the trust and support of the public through donations. Bar Harbor Trust Services helped us preserve the funds in our endowment during troubled economic times. We appreciate how they listen to us and manage our money for our particular needs. “ Doug Radziewicz Executive Director—SPCA of Hancock County 2009 Summary Annual Report 07 Flexible credit capabilities for exceptional opportunities Headquartered in eastern Maine, family­owned Lafayette Hotels with 27 properties including 21 in Maine, employs over 1,000 people. Danny and Carla Lafayette chose to partner with Bar Harbor Bank & Trust because, as Danny says, “They have unbelievable knowledge of the state of Maine; they understand tourism and that it’s a driving force in Maine’s economy. They want and appreciate our business and they offer good services and pricing. Best of all, I get a warm, fuzzy feeling when I meet with Greg Dalton. I know he trusts me so I’m confident in moving forward with projects. The Bank has also supported us in our efforts to promote human health in Maine.” Lafayette Hotels, committed to giving back to their com­ munities, recently pledged $2 million to the world­class Lafayette Family Cancer Center in Brewer, Maine. The people at Bar Harbor Bank & Trust understand doing business in Maine; not just coastal markets, but Augusta, Portland, and beyond. And they share our commitment to community. That’s important to us. “ “ Danny Lafayette Owner—Lafayette Hotels Leita Zeugner, Danny & Carla Lafayette, and Greg Dalton at the Holiday Inn by the Bay, Portland. 08 Bar Harbor Bankshares Leveraging loan programs for small business A television special about windjammers ignited a spark for Bob and Dawn Tassi. In 1999, they left their jobs in Nashville and moved to Maine to live a dream as owners of the Schooner Timberwind. Built to carry pilots to and from ships entering or leaving Portland harbor, this historic vessel launched from Union Wharf in Portland in 1931 and has never left Maine waters since. Today, the Timberwind’s multi­day cruises offer guests a safe, relaxing tour of Maine’s coastline. With economic shifts and changes in tourism habits, it hasn’t always been smooth sail­ ing, but the Tassi’s are determined to keep their dream afloat. Last year, BHBT Regional Vice President in Rockland, Todd Starbird, worked with Bob and Dawn to secure a Small Busi­ ness Administration ARC loan. Creativity and determination, in conjunction with a unique government program, helped the Timberwind weather a rough patch. “ Todd has been with us since the beginning, see- ing us through both good and tough times. We feel like he would do absolutely anything to help us. “ Captain Bob and Dawn Tassi The Schooner Timberwind, Rockport, Maine 2009 Summary Annual Report 09 5-Year Selected Financial Data The following table sets forth selected financial data for the last five years. (In thousands, except share data) Balance Sheet Data: Total assets Total securities Total loans Allowance for loan losses Total deposits Total borrowings Total shareholders’ equity Average assets Average shareholders’ equity Results of Operations: Interest and dividend income Interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Non­interest income Non­interest expense Income before income taxes Income taxes Net income 2009 2008 2007 2006 2005 $1,072,381 347,026 669,492 (7,814) 641,173 311,629 113,514 1,052,496 88,846 $ 54,367 21,086 33,281 3,207 30,074 6,022 21,754 14,342 3,992 $ 972,288 290,502 633,603 (5,446) 578,193 323,903 65,445 926,357 65,139 $ 889,472 264,617 579,711 (4,743) 539,116 278,853 65,974 841,206 62,788 $ 824,877 213,252 555,099 (4,525) 496,319 260,712 61,051 788,557 57,579 $ 747,945 183,300 514,866 (4,647) 445,731 239,696 56,104 689,644 56,132 $ 53,594 26,403 27,191 1,995 25,196 $ 51,809 28,906 22,903 456 22,447 $ 46,145 24,449 21,696 131 21,565 $ 37,195 15,336 21,859 — 21,859 6,432 20,513 11,115 3,384 5,929 18,201 10,175 3,020 6,876 18,677 9,764 2,885 6,415 19,268 9,006 2,582 $ 10,350 $ 7,731 $ 7,155 $ 6,879 $ 6,424 Preferred stock dividends and accretion of discount 1,034 — — — — Net income available to common shareholders $ 9,316 $ 7,731 $ 7,155 $ 6,879 $ 6,424 Per Common Share Data: Basic earnings per share Diluted earnings per share Cash dividends per share Dividend payout ratio Selected Financial Ratios: Return on total average assets Return on total average equity Tax­equivalent net interest margin Capital Ratios: Tier 1 leverage capital ratio Tier 1 risk­based capital ratio Total risk­based capital ratio Asset Quality Ratios: Net charge­offs to average loans Allowance for loan losses to total loans Allowance for loan losses to non­performing loans Non­performing loans to total loans $ $ $ 3.19 3.12 1.04 32.56% 0.98% 11.65% 3.40% 10.35% 15.34% 17.14% 0.13% 1.17% 85% 1.37% $ $ $ 2.63 2.57 1.02 38.84% $ $ $ 2.36 2.30 0.96 40.54% $ $ $ 2.26 2.20 0.91 40.12% $ $ $ 2.09 2.03 0.84 40.23% 0.83% 11.87% 3.13% 6.61% 9.95% 11.60% 0.21% 0.86% 124% 0.70% 0.85% 11.40% 2.91% 7.10% 10.76% 11.59% 0.04% 0.82% 230% 0.36% 0.87% 11.95% 2.98% 7.34% 10.82% 11.65% 0.05% 0.82% 721% 0.11% 0.93% 11.44% 3.44 % 7.52% 11.10% 12.05% 0.04% 0.90% 535% 0.17% Refer to the Bar Harbor Bankshares 2009 Annual Report on Form 10-K for a complete set of consolidated audited financial statements. 10 Bar Harbor Bankshares Consolidated Balance Sheets (In thousands, except share data) Assets Cash and due from banks Overnight interest bearing money market funds Cash and cash equivalents Securities available for sale, at fair value Federal Home Loan Bank stock Loans Allowance for loan losses Loans, net of allowance for loan losses Premises and equipment, net Goodwill Bank owned life insurance Other assets TOTAL ASSETS Liabilities Deposits: Demand and other non­interest bearing deposits NOW accounts Savings and money market deposits Time deposits Brokered time deposits Total deposits Short­term borrowings Long­term advances from Federal Home Loan Bank Junior subordinated debentures Other liabilities TOTAL LIABILITIES Shareholders’ equity Capital stock, par value $2.00; authorized 10,000,000 shares; issued 4,443,614 shares at December 31, 2009 and 3,643,614 shares at December 31, 2008 Preferred stock, par value $0; authorized 1,000,000 shares; issued 18,751 shares at December 31, 2009 Surplus Retained earnings Accumulated other comprehensive income (loss): Prior service cost and unamortized net actuarial losses on employee benefit plans, net of tax of ($56) and ($59), at December 31, 2009 and December 31, 2008, respectively Net unrealized appreciation (depreciation) on securities available for sale, net of tax of $1,074 and ($573), at December 31, 2009 and December 31, 2008, respectively Portion of OTTI attributable to non­credit losses, net of tax of $931 and $0, at December 31, 2009 and 2008, respectively Net unrealized appreciation on derivative instruments, net of tax of $209 and $382 at December 31, 2009 and December 31, 2008, respectively Total accumulated other comprehensive income (loss) Less: cost of 752,431 and 796,635 shares of treasury stock at December 31, 2009 and December 31, 2008, respectively TOTAL SHAREHOLDERS’ EQUITY TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY Refer to the Bar Harbor Bankshares 2009 Annual Report on Form 10-K for a complete set of consolidated audited financial statements. As of December 31st 2009 2008 $ 9,831 1 $ 9,041 1 9,832 347,026 16,068 669,492 (7,814) 661,678 11,927 3,158 6,846 15,846 9,042 290,502 14,796 633,603 (5,446) 628,157 10,854 3,158 6,573 9,206 $ 1,072,381 $ 972,288 $ 57,743 74,538 171,791 245,111 91,990 641,173 91,893 214,736 5,000 6,065 958,867 8,887 18,358 24,360 75,001 (109) 2,084 (1,808) 406 573 $ 57,954 67,747 163,780 200,206 88,506 578,193 121,672 197,231 5,000 4,747 906,843 7,287 — 4,903 67,908 (115) (1,149) — 740 (524) (13,665) 113,514 (14,129) 65,445 $ 1,072,381 $ 972,288 2009 Summary Annual Report 11 Consolidated Statements of Income (In thousands, except share data) Interest and dividend income: Interest and fees on loans Interest on securities Dividends on FHLB stock Total interest and dividend income Interest expense: Deposits Short­term borrowings Long­term debt Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Non-interest income: Trust and other financial services Service charges on deposit accounts Mortgage banking activities Credit and debit card service charges and fees Net securities gains (losses) Total other­than­temporary impairment (“OTTI”) losses Non­credit portion of OTTI losses (before taxes) (1) Net OTTI losses recognized in earnings Other operating income Total non­interest income Non-interest expense: Salaries and employee benefits Postretirement plan settlement Occupancy expense Furniture and equipment expense Credit and debit card expenses FDIC insurance assessments Other operating expense Total non­interest expenses Income before income taxes Income taxes Net income Preferred stock dividends and accretion of discount Net income available to common shareholders Computation of Earnings Per Share: Weighted average number of capital stock shares outstanding Basic Effect of dilutive employee stock options Effect of dilutive warrants Diluted Per Common Share Data: Basic Earnings Per Share Diluted Earnings Per Share Dividends per share For the Year Ended December 31st 2009 2008 2007 $ 34,797 19,570 — 54,367 10.724 602 9,760 21,086 33,281 3,207 30,074 2,444 1,412 490 779 1,521 (2,773) 1,319 (1,454) 830 6,022 11,594 — 1,329 1,378 332 1,420 5,701 21,754 14,342 3,992 $ 37,653 15,415 526 53,594 14,976 1,421 10,006 26,403 27,191 1,995 25,196 2,513 1,594 15 2,044 (831) — — — 1,097 6,432 10,827 — 1,387 1,539 1,416 134 5,210 20,513 11,115 3,384 $ 37,923 13,073 813 51,809 16,222 5,967 6,717 28,906 22,903 456 22,447 2,335 1,624 20 2,100 (671) — — — 521 5,929 ­ 9,368 (832) 1,275 1,718 1,469 59 5,144 18,201 10,175 3,020 $ 10,350 $ 7,731 $ 7,155 1,034 9,316 $ — — $ 7,731 $ 7,155 2,916,643 57,182 9,604 2,983,429 2,943,694 63,555 — 3,037,074 75,662 — 3,007,249 3,112,736 $ $ $ 3.19 3.12 1.040 $ $ $ 2.63 2.57 1.020 $ $ $ 2.36 2.30 0.955 (1) Included in other comprehensive income (loss), net of tax Refer to the Bar Harbor Bankshares 2009 Annual Report on Form 10-K for a complete set of consolidated audited financial statements. 12 Bar Harbor Bankshares 2009 Financial Overview BUSINESS STRATEGY As a diversified financial services provider, Bar Harbor Bankshares pursues a strategy of achieving long­term sustainable growth, profitability, and shareholder value, without sacrificing its soundness. The Company works toward achieving this goal by focusing on increasing its loan and deposit market share in the coastal communities of Maine. The Company believes one of its more unique strengths is an understanding of the financial needs of 0.25 coastal communities and the businesses vital to Maine’s coastal economy, namely: tourism, hospitality, retail estab­ 0.20 lishments, restaurants, seasonal lodging and campgrounds, fishing, lobstering, boat building, and marine services. 0.15 The Company’s key strategic focus is vigorous financial stewardship, deploying investor capital safely yet efficiently 0.10 for the best possible returns. The Company strives to pro­ vide unmatched service to its customers, while maintaining 0.05 strong asset quality and a focus toward improving operating efficiencies. In managing its earning asset portfolios, the 0.00 Company seeks to utilize funding and capital resources within well­defined credit, investment, interest­rate and liquidity guidelines. In managing its balance sheet the Company seeks to preserve the sensitivity of net interest income to changes in interest rates, and to enhance profit­ ability through strategies that promise sufficient reward for understood and controlled risk. The Company is deliberate in its efforts to maintain adequate liquidity under prevailing 4 and expected conditions, and strives to maintain a balanced and appropriate mix of loans, securities, core deposits, and 3 borrowed funds. FINANCIAL CONDITION 2 Assets: The Company’s total assets increased $100.1 million or 10.3% during 2009, ending the year at $1.1 billion. This 1 increase of $47.5 million or 14.8%. Tax­exempt loans to municipalities were also up over year­end 2008, posting an increase of $8.8 million, or 163.9%. Consumer loans, which principally consist of residential real estate mortgage loans, declined $20.1 million or 6.6% compared with year­end 2008, largely reflecting principal pay­downs from the Bank’s $225.8 million residential mortgage loan portfolio. 1,200 1,000 800 600 400 200 0 $1,072 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 800 600 400 200 0 $669 1.37% 0.13% 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 Assets ($ in millions) Loans ($ in millions) Non-Performing Loans to Total Loans Net Charge-Offs to Average Loans While the Bank’s residential mortgage loan portfolio declined in 2009, origination activity increased significantly, principally reflecting declines in residential mortgage loan interest rates, borrower refinancing activity, more affordable home prices 400 800 and tax incentive programs. Because of the interest rate risk $347 considerations associated with holding low coupon mortgage 300 600 loans, $29.8 million of low fixed rate residential mortgages $641 originated in 2009 were sold in the secondary market with customer servicing retained by the Bank and as a result were 200 400 not reflected in outstanding loan balances at period end. Consumer loans comprise almost half of the total loan 100 200 increase was principally attributed to the growth of the Bank’s port folio and principally consist of home mortgages, home loan and securities portfolios. 0 Loans: Total loans ended the year at $669.5 million, repre­ senting an increase of $35.9 million, or 5.7%, compared with December 31, 2008. Business loans, which are typically the Bank’s highest yielding assets and most profitable relation­ ships, led the overall growth of the loan portfolio, posting an equity loans and residential construction loans. The Bank 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 0 0 also serves the small business market throughout down east and midcoast Maine. It offers business loans to individuals, partnerships, corporations, and other business entities for Securities ($ in millions) Deposits ($ in millions) capital construction, real estate purchases, working capital, real estate development, and a broad range of other busi­ ness purposes. 80 60 40 20 0 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 $34,786 8,000 6,000 4,000 2,000 0 $6,022 2009 Summary Annual Report 13 $21,754 53.2% 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 Tax-Equivalent Net Interest Income ($ in thousands) Non-Interest Income ($ in thousands) Non-Interest Expense Efficiency Ratio ($ in thousands) 1.5 1.2 0.9 0.6 0.3 0 8,000 6,000 4,000 2,000 0 25,000 20,000 15,000 10,000 5,000 0 .25 .20 .15 .10 .05 0 3.00 2.00 1.00 0 80 60 40 20 0 10,000 $9,316 4.00 $3.12 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 Net Income Available Diluted Earnings to Common Shareholders per Share ($ in thousands) 1200 1000 800 600 400 200 0 400 300 200 100 0 40000 35000 30000 25000 20000 15000 10000 5000 0 800 600 400 200 0 800 600 400 200 0 8000 6000 4000 2000 0 1.5 1.2 0.9 0.6 0.3 0.0 10000 8000 6000 4000 2000 0 25000 20000 15000 10000 5000 0 Credit Quality: At December 31, 2009, the Bank’s total non­ The Bank maintains an allowance for loan losses (the “allow­ performing loans amounted to $9.2 million or 1.37% of total ance”) which is available to absorb probable losses on loans. loans, compared with $4.4 million, or 0.70% at December The allowance is maintained at a level that, in management’s 31, 2008. One agricultural loan accounted for $1.5 million of judgment, is appropriate for the amount of risk inherent in total year­end 2009 non­performing loans and represented the current loan portfolio and adequate to provide for esti­ approximately one­third of the year­over­year increase. Non­ mated probable losses. At December 31, 2009, the allow­ performing commercial real estate mortgages and residential ance stood at $7.8 million, representing an increase of $2.4 real estate mortgages ended the year at $3.1 million and million or 43.5% compared with December 31, 2008. At $2.5 million, respectively, up $1.5 million and $800 thousand December 31, 2009, the allowance expressed as a percent­ compared with December 31, 2008. age of total loans stood at 1.17%, up from 0.86% at During 2009 the Bank enjoyed a low level of loan loss December 31, 2008. experience, which showed improvement compared with Investment Securities: During 2009 the securities portfolio the loan loss experience in 2008. Total net loan charge­offs continued to serve as a key source of earning assets for the amounted to $839 thousand in 2009, or net charge­offs Bank. Total securities ended the year at $347.0 million, rep­ 1200 1000 800 600 400 200 0 400 300 200 100 0 40000 35000 30000 25000 20000 15000 10000 5000 0 800 600 400 200 0 800 600 400 200 0 8000 6000 4000 2000 0 1.5 1.2 0.9 0.6 0.3 0.0 10000 8000 6000 4000 2000 0 25000 20000 15000 10000 5000 0 0.25 0.20 0.15 0.10 0.05 0.00 4 3 2 1 0 80 60 40 20 0 1200 1000 800 600 400 200 0 400 300 200 100 0 40000 35000 30000 25000 20000 15000 10000 5000 0 1,200 1,000 800 600 400 200 0 400 300 200 100 0 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 $1,072 $669 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 Assets ($ in millions) Loans ($ in millions) $347 400 $641 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 Securities ($ in millions) Deposits ($ in millions) 800 600 400 200 0 800 600 200 0 8000 6000 4000 2000 0 800 600 400 200 0 800 600 400 200 0 8,000 6,000 4,000 2,000 0 1.5 1.2 0.9 0.6 0.3 0.0 to average loans outstanding of 0.13%, compared with $1.3 million, or net charge­offs to average loans outstanding of 0.25 0.21% in 2008. 1.37% 0.20 0.15 0.10 0.05 0.00 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 1.5 1.2 0.9 0.6 0.3 0 .25 .20 .15 .10 .05 0 0.13% 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 Non-Performing Loans to Total Loans Net Charge-Offs to Average Loans 10000 4 8000 6000 4000 2000 0 25000 20000 15000 10000 5000 0 For the year ended December 31, 2009, the Bank recorded a provision for loan losses (the “provision”) of $3.2 million, representing an increase of $1.2 million, or 60.8%, com­ 3 10,000 pared with 2008. The increase in the provision was princi­ 4.00 pally attributed to a deterioration in overall credit quality, $9,316 2 8,000 growth in the loan portfolio, and deteriorating economic 3.00 conditions, including elevated unemployment levels and $3.12 depressed real estate values in the markets served by 1 6,000 the Bank. 4,000 2,000 0 0 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 2.00 1.00 0 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 Net Income Available to Common Shareholders ($ in thousands) Diluted Earnings per Share 80 14 Bar Harbor Bankshares 25,000 20,000 15,000 10,000 5,000 0 $21,754 40 60 20 0 80 60 40 20 0 resenting an increase of $56.5 million, or 19.5%, compared 0 0 800 600 200 600 400 200 800 7 0 0 2 8 0 0 2 6 0 0 2 5 0 0 2 8 0 0 2 7 0 0 2 6 0 0 2 5 0 0 2 9 0 0 2 9 0 0 2 1,200 1,000 Loans ($ in millions) Assets ($ in millions) with December 31, 2008. $1,072 securities issued by U.S. government agencies, U.S. obligations, or commercial mortgage­backed securities. The securities portfolio is comprised of mortgage­backed Additionally, the Bank did not own any equity securities or government­sponsored enterprises, and other private label 31, 2009, the securities portfolio did not contain any pools have any corporate debt exposure in its securities portfolio, of sub­prime mortgage­backed securities, collateralized debt issuers. The securities portfolio also includes tax­exempt obli­ nor did it own any perpetual preferred stock in Federal Home $669 1.37% gations of state and political subdivisions, and obligations of other U.S. government­sponsored enterprises. At December 400 0.13% 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 Non-Performing Loans to Total Loans Net Charge-Offs to Average Loans 1.5 1.2 0.9 0.6 0.3 0 8,000 6,000 4,000 2,000 0 25,000 20,000 15,000 10,000 5,000 0 .25 .20 .15 .10 .05 0 3.00 2.00 1.00 0 80 60 40 20 0 Loan Mortgage Corporation (“FHLMC”) or Federal National Mortgage Association (“FNMA”), or any interests in pooled trust preferred securities. 400 300 200 100 0 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 $347 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 800 600 400 200 0 $641 $3.12 10,000 $9,316 4.00 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 Securities ($ in millions) Deposits ($ in millions) Net Income Available Diluted Earnings to Common Shareholders per Share ($ in thousands) $6,022 $21,754 53.2% $34,786 8,000 6,000 4,000 2,000 0 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 Tax-Equivalent Net Interest Income ($ in thousands) Non-Interest Income ($ in thousands) Non-Interest Expense Efficiency Ratio ($ in thousands) $34,786 $6,022 53.2% 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 Tax-Equivalent Net Interest Income ($ in thousands) Non-Interest Income ($ in thousands) Non-Interest Expense Efficiency Ratio ($ in thousands) Deposits: During 2009, the most significant funding source and Total Risk­based capital ratios were 10.35%, 15.34% for the Bank’s earning assets continued to be retail depos­ and 17.14%. its, gathered through its network of twelve banking offices throughout downeast and midcoast Maine. Historically, the banking business in the Bank’s market area has been seasonal, with lower deposits in the winter and spring and higher deposits in summer and autumn. The timing and extent of seasonal swings have varied from year to year, particularly with respect to demand deposits. In January 2009, the Company issued and sold $18.751 million in Fixed Rate Cumulative Perpetual Preferred Stock, Series A, no par value, to the U.S. Treasury in connection with its participation in the U.S. Treasury’s Capital Purchase Program (“CPP”). The CPP is a voluntary program designed by the U.S. Treasury to provide additional capital to healthy, “well­capitalized” banks, to help provide economic stimulus Total deposits ended the year at $641.2 million, represent­ through the creation of additional lending capacity in local ing an increase of $63.0 million, or 10.9%, compared with banking markets. December 31, 2008. Total retail deposits ended the year at $549.2 million, up $59.5 million or 12.1% compared with December 31, 2008. Savings, money market, and NOW account deposits combined were up $14.8 million or 6.4%, while retail time deposits were up $44.9 million or 22.4% compared with December 31, 2008. In December 2009, the Company completed its previously announced offering of 800,000 shares of common stock to the public at $27.50 per share. The net proceeds from this offering, after deducting underwriting discounts and esti­ mated expenses amounted to $20.4 million. As previously reported, in January 2010 the Company completed the Brokered deposits obtained from the national market closing of the underwriter’s exercise of its over­allotment ended the year at $92.0 million, representing an increase of option to purchase an additional 82,021 shares of the $3.5 million, or 3.9%, compared with December 31, 2008. Company’s common stock at a purchase price to the public Brokered deposits are generally utilized to help support the of $27.50 per share. The Company received total net pro­ Bank’s earning asset growth, while maintaining its strong, ceeds from the offering, including the exercise of the over­ on­balance sheet liquidity position via secured borrowing allotment option, after deducting underwriting discounts and lines of credit with the Federal Home Loan Bank and the expenses, amounting to $22.4 million. Federal Reserve Bank. On February 4, 2010, the Company redeemed all 18,751 Borrowings: Borrowed funds principally consist of advances shares of its Fixed Rate Cumulative Perpetual Preferred from the Federal Home Loan Bank of Boston. The Bank uti­ Stock, Series A, it sold to the Treasury as part of the CPP. lizes borrowed funds in leveraging its strong capital position The Company paid $18.774 million to the Treasury to and supporting its earning asset portfolios. redeem the Preferred Stock, consisting of $18.751 million of Total borrowings ended the year at $311.6 million, repre­ senting a decline of $12.3 million, or 3.8%, compared with December 31, 2008. In December 2009 the Company com­ pleted its offering of common stock to the public, the cash proceeds from which were immediately utilized to pay down short­term borrowings. Capital: Consistent with its long­term strategy of operating a sound and profitable organization, the Bank continues to principal and $23 thousand of accrued and unpaid dividends. The Company and the Bank received approvals from their respective regulators to redeem the Preferred Stock. The Company’s redemption of the Preferred Stock is not subject to any additional conditions or stipulations from the Treasury or the Company’s and the Bank’s principal regulators. At December 31, 2009, the Company’s tangible common equity ratio stood at 8.60%, up from 6.42% at December 31, 2008. exceed regulatory requirements for “well­capitalized” institu­ Shareholder Dividends: The Company paid regular cash divi­ tions. Company management considers this to be vital in dends of $1.04 per share of common stock in 2009, com­ promoting depositor and investor confidence and providing pared with $1.02 in 2008, representing an increase of 2.0%. a solid foundation for future growth. Under the capital ade­ quacy guidelines administered by the Bank’s principal regu­ RESULTS OF OPERATIONS lators, “well­capitalized” institutions are those with Tier I Leverage, Tier I Risk­based, and Total Risk­based ratios of at least 5%, 6% and 10%, respectively. At December 31, 2009, the Company’s Tier I Leverage, Tier I Risk­based, Net Income and Earnings Per Share: For the year ended December 31, 2009, the Company reported record net income available to common shareholders and record diluted earnings per share. Net income available to com mon shareholders amounted to $9.3 million, compared with $7.7 2009 Summary Annual Report 15 1.5 1.2 0.9 0.6 0.3 0.0 10000 8000 6000 4000 2000 0 25000 20000 15000 10000 5000 0 800 600 400 200 0 800 600 400 200 8000 6000 4000 2000 1200 1000 800 600 400 200 0 400 300 200 100 40000 35000 30000 25000 20000 15000 10000 1,200 1,000 800 600 400 200 0 400 300 200 100 0 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 800 600 400 200 0 800 600 400 200 0 8,000 6,000 4,000 2,000 0 5 0 0 2 6 0 0 2 0 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 0 7 0 0 2 8 0 0 2 9 0 0 2 Assets ($ in millions) Loans ($ in millions) $347 $641 5 0 0 2 5000 6 0 0 2 0 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 0 8 0 0 2 9 0 0 2 Securities ($ in millions) Deposits ($ in millions) $34,786 $6,022 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 Tax-Equivalent Net Interest Income ($ in thousands) Non-Interest Income ($ in thousands) 1200 1000 800 600 400 200 0 400 300 200 100 0 40000 35000 30000 25000 20000 15000 10000 5000 0 800 600 400 200 0 800 600 400 200 0 8000 6000 4000 2000 0 1.5 1.2 0.9 0.6 0.3 0.0 10000 8000 6000 4000 2000 0 25000 20000 15000 10000 5000 0 0.25 0.20 0.15 0.10 0.05 0.00 4 3 2 1 0 80 60 40 20 0 0.25 0.20 0.15 0.10 0.05 0.00 $1,072 $669 1.37% 0.13% 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 Assets ($ in millions) Loans ($ in millions) Non-Performing Loans to Total Loans Net Charge-Offs to Average Loans $1,072 $669 1.37% $347 $641 10,000 $9,316 4.00 $3.12 1,200 1,000 800 600 400 200 0 400 300 200 100 0 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 800 600 400 200 0 800 600 400 200 0 1.5 1.2 0.9 0.6 0.3 0 4 3 2 1 0 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 .25 .20 .15 .10 .05 0 0.13% 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 1.5 1.2 0.9 0.6 0.3 0 8,000 6,000 4,000 2,000 0 25,000 20,000 15,000 10,000 5,000 0 .25 .20 .15 .10 .05 0 3.00 2.00 1.00 0 80 60 40 20 0 Net Income Available Diluted Earnings to Common Shareholders per Share ($ in thousands) million for the year ended December 31, 2008, representing Net Charge-Offs an increase of $1.6 million, or 20.5%. The Company’s to Average Loans Non-Performing Loans to Total Loans diluted earnings per share, after preferred stock dividends During 2008 the targeted fed funds rate fell from 4.25% to a Securities ($ in millions) range of 0% to 0.25%, where it stayed for all of 2009. The decline in short­term interest rates favorably impacted the Deposits ($ in millions) and accretion of preferred stock discount, amounted to $3.12 Bank’s 2009 net interest margin, as the cost of interest bear­ for 2009 compared with $2.57 in 2008, representing an ing liabilities declined faster and to a greater degree than the increase of $0.55, or 21.4%. decline in earning asset yields. 10,000 80 $9,316 8,000 6,000 4,000 2,000 0 60 40 20 5 0 0 2 6 0 0 2 7 0 0 2 0 8 0 0 2 9 0 0 2 4.00 3.00 2.00 1.00 0 $3.12 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 Net Income Available to Common Shareholders ($ in thousands) Diluted Earnings per Share 8,000 6,000 4,000 2,000 0 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 $34,786 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 Tax-Equivalent Net Interest Income ($ in thousands) $6,022 $21,754 53.2% 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 Non-Interest Income ($ in thousands) 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 Non-Interest Expense Efficiency Ratio ($ in thousands) Return on Average Equity: The Company’s total average Non­interest Income: In addition to net interest income, shareholders’ equity amounted to $88.8 million in 2009, rep­ non­interest income is a significant source of revenue for the resenting an increase of $23.7 million, or 36.4%, compared 25,000 80 with 2008. The Company’s return on average shareholders’ $21,754 equity amounted to 11.65% in 2009, compared with 11.87% 20,000 in 2008. 60 53.2% 15,000 Net Interest Income: Net interest income is the principal component of the Company’s income stream and represents 40 the difference or spread between interest generated from 10,000 Company and an important factor in its results of operations. Non­interest income is principally derived from financial ser­ vices including trust and investment management activities, as well as service charges on deposit accounts, mortgage banking and servicing fees, credit and debit card processing fees, net securities gains, and a variety of other product and service fees. earning assets and the interest expense paid on deposits For the year ended December 31, 2009, total non­interest income amounted to $6.0 million, representing a decline of $410 thousand or 6.4% compared with 2008. The decline in non­interest income was attributed to a variety of factors, including a $1.3 million or 61.9% decline in credit and debit card service charges and fees, reflecting the previously reported sale of the Bank’s merchant processing and Visa credit card portfolios in the fourth quarter of 2008. This decline was offset by a comparable decline in debit and credit card expenses, which are included in non­interest expense in the Company’s consolidated statements of income. The decline in 2009 non­interest income was also attributed to a $313 thousand gain recorded in 2008 repre­ senting the proceeds from shares redeemed in connection and borrowed funds. Fluctuations in market interest rates, 5,000 as well as volume and mix changes in earning assets 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 and interest bearing liabilities, can materially impact net 0 20 0 interest income. Non-Interest Expense ($ in thousands) Efficiency Ratio For the year ended December 31, 2009, net interest income on a tax­equivalent basis amounted to $34.8 million, repre­ senting an increase of $6.7 million, or 23.8%, compared with 2008. This increase was principally attributed to an improved net interest margin, combined with average earning asset growth of 14.0%. The tax­equivalent net interest margin amounted to 3.40% in 2009, representing an improvement of 27 basis points compared with 2008. 16 Bar Harbor Bankshares 1200 1000 800 600 400 200 0 400 300 200 100 0 40000 35000 30000 25000 20000 15000 10000 5000 0 800 600 400 200 0 800 600 400 200 0 8000 6000 4000 2000 0 1.5 1.2 0.9 0.6 0.3 0.0 10000 8000 6000 4000 2000 0 25000 20000 15000 10000 5000 0 0.25 0.20 0.15 0.10 0.05 0.00 4 3 2 1 0 80 60 40 20 0 1,200 1,000 800 600 400 200 0 400 300 200 100 0 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 $1,072 $669 1.37% 800 600 400 200 0 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 Assets ($ in millions) Loans ($ in millions) Non-Performing Loans to Total Loans Net Charge-Offs to Average Loans 1.5 1.2 0.9 0.6 0.3 0 .25 .20 .15 .10 .05 0 0.13% 10,000 8,000 $9,316 4.00 3.00 $3.12 2008. These investment funds, which generally qualify for 6,000 Community Reinvestment Act credit, represent socially 2.00 responsible venture capital investments in small businesses 4,000 throughout Maine and New England. These write­downs principally reflected the impact current economic conditions 1.00 2,000 have had on these funds. Reflecting increased loan collection and foreclosure activity, the Bank’s loan collection expenses 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 0 increased $185 thousand in 2009, or 250.7%, compared 0 with 2008. Net Income Available to Common Shareholders ($ in thousands) Diluted Earnings per Share $347 800 600 $641 with the Visa, Inc. initial public offering. Service charges on deposit accounts declined $182 thousand or 11.4% 400 compared with 2008, principally attributed to declines in deposit account overdraft activity. 200 Trust and financial services fees amounted to $2.4 million 8 0 0 2 9 0 0 2 in 2009, representing a decline of $69 thousand or 2.7%, 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 principally reflecting lower average market values of assets 0 under management during 2009 compared with 2008. Following a recovery in the equity markets, assets under Deposits ($ in millions) 5 0 0 2 6 0 0 2 7 0 0 2 Securities ($ in millions) management at December 31, 2009 rose to $270.1 million, The foregoing increases in 2009 non­interest expense were representing an increase of $39.9 million or 17.3% compared largely offset by a $1.1 million or 76.6% decline in credit and with year­end 2008. debit card expenses and a $161 thousand or 10.5% decline The foregoing declines in non­interest income were offset in in furniture and equipment expenses. part by a $475 thousand increase in income from mortgage 8,000 banking activities, largely reflecting the gains on sales of $34,786 certain residential mortgage loans in the secondary market $6,022 6,000 during 2009. 25,000 20,000 $21,754 Total securities gains, net of other­than­temporary impair­ 15,000 ment losses, amounted to $67 thousand in 2009, compared 4,000 with net securities losses of $831 thousand in 2008. The 10,000 $67 thousand in net securities gains were comprised of real­ ized gains on the sale of securities amounting to $2.5 million, 2,000 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 offset by other­than­temporary impairment losses of $2.4 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 million on certain available­for­sale, 1­4 family, non­agency 0 Tax-Equivalent Net Interest Income ($ in thousands) mortgage backed securities. Non-Interest Income ($ in thousands) Non­interest Expense: For the year ended December 31, 2009, total non­interest expense amounted to $21.8 million, 5,000 0 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 Non-Interest Expense ($ in thousands) 80 60 40 20 0 53.2% 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 Efficiency Ratio representing an increase of $1.2 million, or 6.0%, compared Efficiency Ratio: The Company’s efficiency ratio, or non­ with 2008. The increase in non­interest expense was princi­ interest operating expenses divided by the sum of tax­ pally attributed to a $1.3 million or 959.7% increase in FDIC equivalent net interest income and non­interest income insurance assessments, including an emergency special other than net securities gains and other­than­temporary FDIC assessment amounting to $492 thousand. The special impairments, measures the relationship of operating expenses assessment was levied on all FDIC insured financial institu­ to revenues. Low efficiency ratios are typically a key factor tions. Deposit insurance premiums for all FDIC insured banks for high performing financial institutions. For the year ended have increased as a result of the FDIC’s plan to reestablish December 31, 2009, the Company’s efficiency ratio amounted the Deposit Insurance Fund to levels required by the Federal to 53.2%, which was significantly better than the Company’s Deposit Reform Act of 2005. peer group average. Salaries and employee benefits expense amounted to $11.6 Income Taxes: Total income taxes amounted to $4.0 million in million in 2009, up $767 thousand, or 7.1%, compared with 2009, representing an increase of $608 thousand, or 18.0%, 2008. The increase in salaries and employee benefits was compared with 2008. The Company’s effective tax rate principally attributed to increases in employee health insur­ amounted to 27.8% in 2009, compared with 30.4% in 2008. ance premiums, normal increases in base salaries, and Fluctuations in the Company’s effective tax rate are generally changes in staffing levels and mix. The increase in 2009 non­interest expense was also attributed to $281 thousand in write­downs of certain non­marketable venture capital equity investment considered funds other­ than­temporarily impaired, compared with $68 thousand in attributed to changes in the relationship between non­taxable income and non­deductible expense, and income before income taxes, during any given reporting period. 2009 Summary Annual Report 17 Carol J. Pye Retail & Residential Lending Andrew X. Sankey General Services R. Todd Starbird Regional VP—Business Banking Linda B. Stratton Branch Relationship Manager, Deer Isle Timothy F. Tunney Business Banking Leita K. Zeugner Deposit Services Assistant Vice Presidents Stacie J. Alley Managed Assets Steven W. Blackett Credit Administration Marjorie E. Gray Branch Relationship Manager, Blue Hill Barbara F. Hepburn Human Resources Donna B. Hutton Customer Service Elena M. Martin Electronic Banking Colleen E. Maynard Branch Relationship Manager, Southwest Harbor Elizabeth B. McMillan Human Resources Joseph T. McOscar, Jr. Credit Administration J. Paul Michaud Application Support & Project Management Debra S. Mitchell­Dow Branch Relationship Manager, Bar Harbor Judith L. Newenham Consumer Lending Support Bonnie A. Poland Consumer Lending Support Lester L. Porter Assistant Controller Lisa F. Veazie Customer Service Manager, Deer Isle Audrey H. Eaton Branch Relationship Manager, Ellsworth Ward A. Grant, II Corporate Compliance Officer Joseph E. Hackett Business Banking Vicki L. Hall Business Banking Wilfred R. Hatt Regional VP—Business Banking Derek W. R. Hayes Business Banking Lisa A. Holmes Retail & Residential Lending Robert J. Lavoie Information Systems Maureen T. Lord Regional Branch Relationship Manager, Washington County Carolyn R. Lynch Internal Audit Cheryl L. Mullen Retail Sales and Service & Branch Administration Lisa L. Parsons Regional Branch Relationship Manager, Northeast Harbor & Somesville Russell A. Patton Information Security Management and Staff Bar Harbor Bankshares Management Joseph M. Murphy* President & Chief Executive Officer Gerald Shencavitz* Executive Vice President, Chief Financial Officer & Treasurer President & Chief Executive Officer Bar Harbor Bank & Trust Management  Joseph M. Murphy 4 Gerald Shencavitz Executive Vice President, Chief Financial Officer & Chief Operating Officer Senior Vice Presidents  Michael W. Bonsey*  Cheryl D. Curtis Credit Administration Marketing, Research & Community Relations (cid:31) (cid:29) (cid:28) (cid:27) Business Banking Bar Harbor Trust Services  Gregory W. Dalton*  Daniel A. Hurley, III  Stephen M. Leackfeldt*  Marsha C. Sawyer  David W. Thibault Human Resources Operations & Information Systems Retail Banking & Consumer Lending Vice Presidents Judi L. Anderson Credit Administration Michelle R. Bannister Retail & Residential Lending Marcia T. Bender Branch Operations Penny L. Carter Retail & Residential Lending David S. Cohen Controller & Assistant Treasurer Dawn L. Crabtree Operations (cid:25) (cid:24) (cid:26) (cid:30) (cid:23) *Named executive officers 18 Bar Harbor Bankshares Officers Judith W. Fuller Corporate Secretary Deborah A. Maffucci Accounting & Finance Catherine M. Planchart Community Relations Managers & Assistant Managers Virginia H. Barnes Branch Relationship Manager, Milbridge Laura A. Bridges Quality Assurance Brenda B. Colwell Training Brenda J. Condon Customer Service Manager, Blue Hill Krystal E. Dorr Regional Assistant Manager, Northeast Harbor & Somesville Annette J. Guertin Purchasing Gregory S. Jones Customer Service Manager, Rockland Wendy R. MacLaughlin Human Resources, Operations Jody C. McFadden Branch Relationship Manager, Winter Harbor Dylan A. Mooney Assistant Manager, Accounting & Finance Andrea L. Parker Accounts & Transaction Processing Anne M. Pennell Branch Relationship Manager, Machias Debra R. Sanner Customer Service Manager, Ellsworth Peter M. Swanberg Servicing Terry E. Tracy Branch Administration Ann G. Upham Mortgage Originator Bar Harbor Trust Services Daniel A. Hurley, III President Gerald Shencavitz Chief Financial Officer Joshua A. Radel Chief Investment Officer Joseph M. Pratt Managing Director & Trust Officer Vice Presidents Mischelle E. Adams Trust Officer Melanie J. Bowden Trust Officer Faye A. Geel Trust Officer Lara K. Horner Trust Operations Sarah C. Robinson Trust Officer Scott C. Storgaard Trust Investment Officer Officer Julie B. Zimmerman Trust Officer Supervisor Pamela L. Curativo Trust Operations Bar Harbor Financial Services** Craig D. Worcester Managing Director Ronald L. Hamilton Vice President, Financial Consultant Dennis M. Kinghorn Vice President, Financial Consultant Sonya L. Mitchell Vice President, Financial Consultant Diane M. Rimm Vice President, Operations Employees (As of 01/29/2010) Gwen M. Abbott Jennifer C. Abbott Susan L. Albee Deena M. Allen Faye M. Allen Holly M. Andrews June G. Atherton Vicki J. Austin Kristi L. Bates-Mitchell Charleen L. Beal Karen C. Beal Melynda M. Beal Penny S. Brady Heather L. Brown Katy A. Bryer Hillary A. Carter Crystal N. Case Theresa L. Colson Sarah A. Cormier Kevin J. Crandall Lisa L. Crosby Geneva E. Culshaw Laura H. Danielson Logan-Ashlee Davis Sharon J. Davis Richard E. Dickson Julie M. Eaton Theresa M. Ellis Rebecca H. S. Emerson Pamela J. Farnsworth Ashley G. Foley Amy N. Foskett Ashlee R. Fountaine Candy A. Ginn Dawn F. Gray Shelley E. Gray Susanne M. Griffin Samantha E. Hagerthy Andrew Haley Kelli M. Hall Kirsten M. Hamilton Betsy B. Hanscom Casey E. Hardwick Prescilla J. Harper Nancy B. Hastings Mary D. Hays Ivy M. Heal Holly B. Hersom Cathy A. Higgins Melissa S. Hinckley Nicole S. Hinkel Sharon E. Hobbs Jeanette L. Howie Lynn L. Huffman Margaret Hutchinson Danielle Y. Johnson Holly M. Johnston Maureen E. Kane Rebecca H. Kent Kathryn M. Kief Ebony A. Kramp James W. Lacasse Janice E. Lachance Jane E. Lambert Paula M. Lamoureux Bonnie S. Leblanc Xin Liang Marlene A. Lloyd Jonathan W. Long Virginia L. MacLeod Carol M. Marshall Ashley S. Matthews Bettina F. McGuire Kara M. Miller J. Aaron Mitchell Michele L. Morrison Dawn B. Nason Mary Beth Nichols Jennifer I. Norton Debbie B. Norwood Nichole D. Norwood Alexandra Orcutt Joseph F. Pagan Jane M. Parker Deborah I. Parlee Jon B. Perkins Michelle P. Rafferty Mary C. Ratner Julie A. Redman Judy A. Richards Amanda L. Robbins Jane M. Robinson Rachel A. Russell Alicia M. Santerre Jennifer M. Saunders Frank J. Schaefer Edith E. Schwartz Debra L. Scott-Henderson Stephanie M. Shuster Cindy Smith-Bilbro Andrea L. Snow Rachelle A. Stagg Angela M. Stanley Lottie B. Stevens Teri A. Stover Bristol N. Timmons Brenda D. Tripp Jennifer M. Tucker Jyl E. Tucker Allyson M. Wallace Paula R. Webster Jeanne L. F. Weeks Valissa G. Winters **Bar Harbor Financial Services is a branch of Infinex Investments, Inc., an independent registered broker-dealer which is not affiliated with the Company or the Bank. 2009 Summary Annual Report 19 Board of Directors  Peter Dodge, Blue Hill, ME Chairman of the Board President and Insurance Agent, Peter Dodge Agency d/b/a Merle B. Grindle Agency, John R. Crooker Agency, and The Endicott Agency  Thomas A. Colwell, Deer Isle, ME Vice Chairman of the Board Retired President, Colwell Bros., Inc.  Robert C. Carter, Machias, ME Retired Owner of Machias Motor Inn  Jacquelyn S. Dearborn, Holden, ME Mediator for the Ellsworth and Bangor Court System, Treasurer of Joel A. Dearborn, Esq., PA  Martha T. Dudman, Northeast Harbor, ME President of Dudman Communications Corporation and Author  Lauri E. Fernald, Mt. Desert, ME  Constance C. Shea, Funeral Director and an Owner of Jordan-Fernald Funeral Home  Gregg S. Hannah, Surry, ME Former Treasurer of a marketing consulting firm and past Associate Professor of Business Management at Nichols College  Clyde H. Lewis, Sullivan, ME Vice President and General Manager, Morrison Chevrolet, Inc.  Joseph M. Murphy, Mt. Desert, ME President and Chief Executive Officer of the Company and the Bank  Robert M. Phillips, Sullivan, ME Consultant to the Wild Blueberry Industry Mt. Desert, ME Real Estate Broker and Former Owner of Lynam Real Estate  Kenneth E. Smith, Bar Harbor, ME Owner and Innkeeper of Manor House Inn  Scott G. Toothaker, Ellsworth, ME Principal and Vice President of Melanson Heath & Co.  David B. Woodside, Bar Harbor, ME President and General Manager of Acadia Corporation (cid:31) (cid:29) (cid:27) (cid:20) (cid:21) (cid:23) (cid:18) (cid:30) (cid:28) (cid:26) (cid:25) (cid:24) (cid:22) (cid:19) 20 Bar Harbor Bankshares Corporate Information Annual Meeting Form 10-K Annual Report The Annual Meeting of shareholders of Bar Harbor Bankshares will be held at 11:00 a.m. on Tuesday May 18, 2010 at the Bar Harbor Club located on West Street in Bar Harbor, Maine. Financial Information Shareholders, analysts and other investors seeking financial information about Bar Harbor Bankshares should contact Gerald Shencavitz, Executive Vice President, Chief Financial Officer and Treasurer, at 207-288-3314. Internet Bar Harbor Bank & Trust information, as well as Bar Harbor Bankshares Form 10-K, is available at www.BHBT.com. Shareholder Assistance Questions concerning your shareholder account, including change of address forms, records or information about lost certificates or dividend checks, should be directed to our transfer agent: American Stock Transfer & Trust Company 59 Maiden Lane, Plaza Level New York, NY 10038 800-937-5449 / www.amstock.com Stock Exchange Listing Bar Harbor Bankshares common stock is traded on the NYSE Amex Exchange (www.nyse.com), under the symbol BHB. The Company refers you to its Annual Report on Form 10-K for fiscal year ended December 31, 2009 and appended to this report for detailed financial data, management’s discus- sion and analysis of financial condition and results of oper- ations, disclosures about market risk, market information including stock graphs, descriptions of the business of the Company and its products and services, and a listing of its executive officers. Mailing Address If you need to contact our corporate headquarters office, write: Bar Harbor Bankshares Post Office Box 400 82 Main Street Bar Harbor, Maine 04609-0400 207-288-3314 • 888-853-7100 Printed Financial Information We will provide, without charge, and upon written request, a copy of the Bar Harbor Bankshares Annual Report to the Securities and Exchange Commission on Form 10-K. The Bank will also provide, upon request, Annual Disclosure Statements for Bar Harbor Bank & Trust as of December 31, 2009. Please contact Marsha C. Sawyer, Bar Harbor Bankshares Clerk, at 207-288-3314 or the above address. Annual Report Design by Curran & Connors, Inc. / www.curran-connors.com Photography by Chris Pinchbeck / pinchbeckphoto.com Schooner Timberwind photos courtesy of Bob and Dawn Tassi Smiling dog provided courtesy SPCA of Hancock County FPO PRINTER TO PLACE Bar Harbor 82 Main Street 288-3314 Blue Hill 21 Main Street 374-5600 Deer Isle 25 Church Street 348-2319 Ellsworth 137 High Street 667-7194 Lubec 68 Washington Street 733-4931 Machias 41 Main Street 255-3372 Milbridge 2 Bridge Street 546-7323 Northeast Harbor 111 Main Street 276-3314 Rockland 245 Camden Street 594-9557 Somesville 1055 Main Street 244-4417 Southwest Harbor 314 Main Street 244-3314 Winter Harbor 385 Main Street 963-5800 Business Banking, Trust & Financial Services Offices Bangor One Cumberland Place Suite 100 945-5244 Ellsworth 135 High Street 667-3883

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