UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 204920549
FORM 10-K
Annual Report pursuant to Section 15(d) of the Securities and Exchange Act of 1934
For for the fiscal year ended December 31, 2002.2003. Commission File No. 0-13666
BAR HARBOR BANKSHARES
(Exact name of registrant as specified in its charter)
Maine01-0393663(State or other jurisdiction of (I.R.S. Employerincorporation or organization) Identification No.)
PO Box 40082 Main Street, Bar Harbor, ME04609-0400(Address of principal executive offices) (Zip Code)
Maine | 01-0393663 | |
PO Box 400 | 04609-0400 |
(207) 288-3314
(Registrant’s telephone number, including area code)
Title of Class: Common Stock --- Par Value: $2.00 per share
(Securities registered pursuant to Section 12(g) of the Act)
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: (X) NO: ( )
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. ( )
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act: Yes ( ) No (X)
Based on the closing price of the common stock of the registrant, the aggregate market value of the voting stock held by non-affiliates of the registrant, as of March 25,June 30, 2003 is:was:
Common Stock, $2.00 par value -- $59,734,451$66,662,653
The number of voting shares outstanding of each of the registrant’s classes of common stock, as of March 25, 200319, 2004 is:
Common Stock -- 3,163,901– 3,105,905
Documents incorporated by Reference:
FORWARD LOOKING STATEMENTS
Certain statements contained in this Form 10-K, or incorporated herein by reference, into Part IIIcontain statements which may be considered to be forward-looking within the meaning of the Private Securities Litigation and Reform Act of 1995 (the "PSLRA"). You can identify these forward-looking statements by the use of words like "strategy," "expects," "plans," "believes," "will," "estimates," "intends," "projects," "goals," "targets," and other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts. For these statements, the Company claims the protection of the safe harbor for forward-looking statements provided by the PSLRA.
Investors are cautioned that forward-looking statements are inherently uncertain. Forward-looking statements include, but are not limited to, those made in connection with estimates with respect to the future results of operation, financial condition, and the business of the Company which are subject to change based on the impact of various factors that could cause actual results to differ materially from those projected or suggested due to certain risks and uncertainties. Those factors include but are not limited to:
(i) The Company’s success is dependant to a significant extent upon general economic conditions in Maine, and Maine’s ability to attract new business;
(ii) The Company’s earnings depend to a great extent on the level of net interest income (the difference between interest income earned on loans and investments and the interest expense paid on deposits and borrowings) generated by the Bank and thus the Bank’s results of operations may be adversely affected by increases or decreases in interest rates;
(iii) The banking business is highly competitive and the profitability of the Company depends on the Bank’s ability to attract loans and deposits in Maine, where the Bank competes with a variety of traditional banking and nontraditional institutions such as credit unions and finance companies;
(iv) A significant portion of the Bank’s loan portfolio is comprised of commercial loans and loans secured by real estate, exposing the Company to the risks inherent in financings based upon analysis of credit risk, the value of underlying collateral, and other more intangible factors which are considered in making commercial loans and, accordingly, the Company’s profitability may be negatively impacted by judgment errors in risk analysis, by loan defaults, and the ability of certain borrowers to repay such loans during a downturn in general economic conditions;
(v) A significant delay in or inability to execute strategic initiatives designed to grow revenues and or control expenses;
(vi) The potential need to adapt to industry changes in information technology systems, on which the Company is highly dependent, could present operational issues or require significant capital spending;
(vii) Significant changes in the extensive laws, regulations, and policies governing bank holding companies and their subsidiaries could alter the Company’s business environment or affect its operations; and
(viii) Acts or threats of terrorism and actions taken by the United States or other governments as a result of such acts or threats, including military action, could further adversely affect business and economic conditions in the United States generally and in the Company’s markets, which could have an adverse effect on the Company’s financial performance and that of borrowers and on the financial markets and the price of the Company’s common stock.
The forward looking statements contained herein represent the Company’s judgment as of the date of this report.Form 10-K, and the Company cautions readers not to place undue reliance on such statements. The Company disclaims any obligation to publicly update or revise any forward-looking statement contained in the foregoing discussion, or elsewhere in this Form 10-K, except to the extent required by federal securities laws.
INDEXTABLE OF CONTENTS
1. | Business | 3 - 11 |
2. | Properties | 12 - 13 |
3. | Legal Proceedings | 13 |
4. | Submission of Matters to a Vote of Security Holders | 13 |
5. | Market for Registrant’s Common Equity and Related Shareholder Matters | 14 |
6. | Selected Financial Data | 15 |
7. | Management’s Discussion and Analysis of Financial | 16 - 49 |
8. | Consolidated Financial Statements and Supplementary Data | 50 - 77 |
9. | Changes in and Disagreements with Accountants on | 77 |
10. | Directors and Executive Officers of the Registrants | 77 |
11. | Executive Compensation | 77 |
12. | Security Ownership of Certain Beneficial Owners and Management | 77 |
13. | Certain Relationships and Related Transactions | 78 |
14. | Controls and Procedures | 78 |
15. | Exhibits, Financial Statement Schedules and Reports on Form 8-K | 79 - 96 |
PART I | ||
ITEM 1 | BUSINESS | 6 |
Organization | 6 | |
Bank | 6 | |
BTI | 8 | |
Economy | 9 | |
Competition | 9 | |
Management and Employees | 10 | |
Supervision and Regulation | 11 | |
Financial Information About Industry Segments | 17 | |
Availability of Information – Company Website | 18 | |
ITEM 2 | PROPERTIES | 18 |
ITEM 3 | LEGAL PROCEEDINGS | 19 |
ITEM 4 | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | 19 |
PART II | ||
ITEM 5 | MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS | 20 |
Quarterly Stock Prices | 20 | |
Dividends Paid to Shareholders' | 20 | |
Share Repurchase Program | 21 | |
Incentive Stock Option Plan | 21 | |
ITEM 6 | SELECTED CONSOLIDATED FINANCIAL DATA | 22 |
ITEM 7 | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 23 |
Executive Overview | 23 | |
Critical Accounting Policies | 27 | |
Financial Condition | 28 | |
Results of Operations | 42 | |
Risk Management | 52 | |
ITEM 7A | QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK | 67 |
ITEM 8 | CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | 67 |
ITEM 9 | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES | 97 |
ITEM 9A | CONTROLS AND PROCEDURES | 98 |
PART III | ||
ITEM 10 | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT | 98 |
ITEM 11 | EXECUTIVE COMPENSATION | 99 |
ITEM 12 | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT | 99 |
ITEM 13 | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS | 99 |
ITEM 14 | PRINCIPAL ACCOUNTING FEES AND SERVICES | 99 |
ITEM 15 | EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K | 99 |
SIGNATURES | 102 | |
Ex 2a Plan of Acquisition, Reorganization Agreement, Liquidation, or Succession | ||
Ex 2b BTI Restructuring Plan | ||
Ex 3a Articles of Incorporation | ||
Ex 3b Bylaws | ||
Ex 10 Material Contracts | ||
Ex 10.1a Deferred Compensation Plans | ||
Ex 10.1b Executive Retirement Plans | ||
Ex 10.2 Joseph M. Murphy Employment Contract | ||
Ex 10.3 Incentive Stock Option Plan 2000 | ||
Ex 10.3 Amendment to Employment Agreement, Joseph Murphy | ||
Ex 10.4 Change in Control |
PART I
ITEM 1. BUSINESS
ORGANIZATION
Bar Harbor Bankshares ("the Company"(the "Company") was incorporated January 19, 1984. As of March 25, 2003,19, 2004, the Company’s securities consisted of one class of common stock, ("the Common Stock"), par value of $2.00 per share, of which there were 3,163,901 3,105,905 shares outstanding held of record by approximately 1,0561,057 shareholders. The Company has two, primary, wholly-ownedwholly owned operating subsidiaries: Bar Harbor Banking and Trust Company ("the Bank"(the "Bank"), a community bank which offers a wide range of deposit, loan, and related banking products; and BTI Financial Group ("BTI"), a financial services holding company offering brokerage, trust, private banking, financial planning, brokerage and investment management services to individuals, businesses, not-for-profit organizations and municipalities.
The Company is a bank holding company ("BHC") registered under the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and is subject to supervision, regulation and examination by the Board of Governors of the Federal Reserve System (the "FRB"). The Company is also a Maine Financial Institution Holding Company for the purposes of the laws of the State of Maine, and as such is subject to the jurisdiction of the Superintendent (the "Superintendent") of the Maine Bureau of Financial Institutions ("BFI").
BANK
The Bank, originally founded in 1887 and now a direct, wholly owned subsidiary of the Company, is a Maine financial institution, and its deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC") up to the maximum extent permitted by law. The Bank is subject to the supervision, regulation, and examination of the FDIC and the BFI. It is not a member of the Federal Reserve Bank.
The Bank has teneleven branch offices in coastallocated throughout Down East and Mid Coast Maine, including its principal office located at 82 Main Street, Bar Harbor, as well asHarbor. The Bank’s offices are located in Hancock, CountyWashington, and adjacent Washington County, which representKnox Counties, representing the Bank’s principal market areas. The Hancock County offices, in addition to Bar Harbor, are located in Northeast Harbor, Southwest Harbor, Blue Hill, Deer Isle, Ellsworth, Northeast Harbor, Southwest Harbor, and Winter Harbor. The Washington County offices are located in Milbridge, Machias, and Lubec. The Knox County office, acquired in February 2004, is located in Rockland. The Bank delivers its operations and technology services from its operations center located on Avery Lane in Ellsworth, Maine.
The Bank is a retail bank serving individual and corporatebusiness customers, retail establishments and restaurants, seasonal lodging and campgrounds, and restaurants.a large contingent of retirees. As a coastal bank, it serves the tourism, hospitality, lobstering, fishing, boat building and fishingmarine services industries. It also serves Maine’s wild blueberry industry through its Hancock and Washington County offices. ItThe Bank operates in a competitive market that includes other community banks, savings institutions, and credit unions, and branch offices of statewide and interstate bank holding companies located in the Bank’s market area. The Bank continues to be one of the larger independent commercial banks in the state of Maine.
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. TheHistorically, the banking business in the Bank’s market area historically has been seasonal, with lower deposits in the winter and spring, and higher deposits in the summer and fall. These seasonal swings have been fairly predictable and have not had a materially adverse impact on the Bank. Approximately 86% of the Bank’s deposits are in interest bearing accounts. The Bank has paid, and anticipates that it will continue to pay, competitive interest rates on certificatesall of the deposit Individual Retirement Accounts (IRAS), NOW and money market accountsaccount products it offers and does not anticipate any material loss of these deposits.
The Bank emphasizes personal service to the community, with a concentration on retail banking. Customers are primarily individuals and small businesses for whomto which the Bank offers a wide variety of products and services.
Retail Products and Services: The Bank provides alloffers a variety of consumer financial products and services designed to satisfy the traditional bankingdeposit and loan needs of its retail customers. The Bank’s retail products and services offered by a commercial bank, includinginclude interest bearing checking accounts, NOW accounts, savings accounts, money market accounts, timesavings accounts, club accounts, short-term and long-term certificates of deposit, accounts, individual retirement accounts,and Individual Retirement Accounts. Credit products and services include home mortgages, residential construction loans, home equity loans and lines of credit, student loans, credit cards, installment loans, and overdraft protection. Overdraft protection is offered via a standby credit product. Secured and unsecured installment loans are provided for new or used automobiles, boats, recreational vehicles, mobile homes and other personal needs. The Bank also offers other customary products and services such as safe deposit boxes, bank by mailbox rental, wire transfers, bank-by-mail services, night depositorycheck collection services, foreign currency exchange, money orders, Travelers Checks, and a variety of cash management services.US Savings Bonds. The Bank also staffs a customer service center, providing customers with immediate responses to their questions and needs.
Electronic Banking Services: The Bank continues to offer free, on-line real-time Internet banking services, including free check image and electronic bill payment, through its dedicated website at www.bhbt.com. Additionally, the Bank offers TeleDirect, an interactive voice response system through which customers can get product information, check account balances and activity, on their accounts as well as performinitiate money transfers between their accounts. The Bank continues to offer free, on-line real-time Internet banking services through its dedicated website at www.bhbt.com. Automated Teller Machines (ATMs) are located at each of the teneleven branch locations, in addition to threeas well as two machines in non-Bank locations. These ATMsATM’s access major networks for use of the Bank’s cards throughout the United States, including the Plus, and NYCE, systems as well as theand major credit card networks. Drive-up facilitiescompanies. Additionally, the Bank is a member of Maine Cash Access, providing customers with surcharge-free access to over 150 ATM’s throughout the state of Maine. Visa debit cards are availablealso offered, providing customers with free access to their deposit account balances at all banking offices.point of sale locations throughout most of the world.
Commercial Products and Services: The Bank offers a comprehensive array of lending services, including consumer credit inserves the form of installment loans, overdraft protection (stand-by-credit), VISA credit card accounts, student loans, residential mortgage loans,small business market throughout Down East and home equity loans.Mid Coast Maine. It offers business loans to individuals, partnerships, corporations, and other business entities for capital construction, real estate purchases, working capital, real estate development, and a broad range of other business purposes. Business loans are provided primarily to organizations and individuals in the tourist, hospitality, health care, blueberry, shipbuilding, and fishing industries, as well as to other small and mid-size businesses associated with small coastal communities. Certain larger loans, which exceed the Bank’s lending limits, are written on a participation basis with correspondent banks, whereby the Bank retains only such portions of those loans that are within its lending limits and credit risk tolerances.
The Bank offers a variety of commercial deposit accounts, most notably business checking and tiered money market accounts. These accounts are typically used as operating accounts or short-term savings vehicles. The Bank’s policycash management services provide business customers with short-term investment opportunities through a cash management sweep program, whereby excess operating funds over established thresholds are swept into overnight securities sold under agreements to repurchase. During 2003 the Bank started offering Premier E-corp, an on-line real-time Internet banking service for lending limits is upbusinesses. This service allow business clients to 20% of its equity to any borrower provided that the loans are secured,view their account histories, print statements, view check images, order stop payments, transfer funds between accounts, transmit Automated Clearing House (ACH) files, and approved by the Directors’ Loan Committee. This committee is chaired by a member of the Bank’s Board of Directors,order both domestic and includes non-voting members of the Bank’s managementforeign wire transfers. Other commercial banking services include merchant credit card processing, night depository, and Board of Directors.coin and currency handling.
BTI
BTI Financial Group is a wholly owned subsidiary of the Company. It was incorporated on August 16, 1999, as the holding company for three operating subsidiaries: Bar Harbor Trust Services ("Trust"Trust Services"), a Maine chartered trust company; Block Capital Management ("Block"), an SEC registered investment advisor; and Dirigo Investments, Inc. ("Dirigo"), a National Association of Securities Dealers (NASD) registered broker-dealer. BTI is ableThese companies were organized to provide a comprehensive array of, private banking, financial planning, investment management, and trust services to individuals, businesses, not-for-profit organizations, and municipalities of varying assets size,size.
BTI Restructuring Plan: In the fourth quarter of 2003 the Board of Directors approved a restructuring plan for BTI. Pursuant to this plan, the portfolio management professionals at Block were unified as one team with Trust Services. Block subsequently discontinued operations as an independent subsidiary of BTI. All services provided by Block to clients of Trust Services remained unchanged.
Also pursuant to the restructuring plan, during the first quarter of 2004 Trust Services will become a wholly owned subsidiary of the Bank, and discontinued operations as an independent subsidiary of BTI. All products and services provided by Trust Services will remain unchanged. In addition to provide the highest level of customized personal service. The staff includes credentialed investment management and trust professionals with extensive experience.
financial planning, Trust Services offers revocable, irrevocable, charitable remainder and testamentary trust management, andas well as estate planning and management services such as probate, estate settlement, and tax return preparation. The staff includes credentialed investment and trust professionals with extensive experience. At December 31, 2002, Trust Services had 837737 accounts, with assets totaling $202 million.
Block provides discretionary and non-discretionary investment advisory services for corporate and individual investment portfolios, personal trusts, individual and corporate retirement funds, and endowments for not-for-profit organizations. At December 31, 2002, Block had $181 million in assets under management primarily for clients of Trust.and held in custody amounting to $176 million and $33 million, respectively.
Dirigo principally serves the brokerage needs of individuals, from first-time purchasers, to sophisticated investors. It also offers a line of life insurance, annuity, and retirement products, as well as financial planning services. APursuant to the BTI restructuring plan, Dirigo will discontinue its operations as a stand - -alone broker-dealer subsidiary of BTI. The Bank has retained Infinex Investments, Inc. ("Infinex") as a full service third party processor provides Dirigo’s supportbroker-dealer, which will be conducting business as Bar Harbor Financial Services ("BHFS"), starting in the second quarter of 2004. It is planned that Infinex will assume responsibility for all of the customer accounts of Dirigo. Infinex was formed by a group of member banks, and clearing services.
BTI’s central offices are locatedis currently the largest provider of third party investment and insurance services to banks and their customers in New England. Management believes that through Infinex / BHFS, the Company will be able to take advantage of the expertise, capabilities, and experience of a much larger broker-dealer in a 22,000-square-foot office facility sharedmore cost-effective manner. It is anticipated that this transaction will be completed in the second quarter of 2004.
One of the principal goals underlying the restructuring plan was to simplify and more closely align the Company’s brand names and operating model without diminishing functionality. The Company anticipates the changes will enable it to improve customer service, broaden its product offerings, and achieve increased operating efficiencies. The Company believes that by reducing the number of brand names under which it operates, a clearer message will be presented to its customers and the marketplace.
The Company expects the overall restructuring plan will be completed by the end of the second quarter of 2004. Once the restructuring plan is complete, the BTI corporate entity will be formally retired and dissolved.
ECONOMY
Maine is a state of approximately 1.2 million people inhabiting a space that is roughly the size of the other five New England states combined. Maine’s economy has long been based on the bounty of its natural resources, namely: fishing, farming, forestry, and tourism. The very nature of these industries has meant that a significant portion of Maine’s employment opportunity is seasonal, and overall earnings lag behind national averages. Maine’s population growth can be described in three ways: its population is growing slowly, it’s growing older and it’s growing unevenly. Poverty rates are relatively high at 13.7%, but vary dramatically by region, ranging from 10% in York County to 22% in Washington County. The marketplace served by the Company is driven, in part, by the tourism and hospitality industries, which represent one in ten jobs in the state of Maine.
Despite Maine’s strong natural resource heritage and the independent nature of its people, Maine’s economic vitality has become dependant on regional and national activity. As Maine’s economy has transitioned from an agricultural and industrial foundation towards a service and information-based economy, it has become increasingly dependant on the global market place. As in other states, Maine’s economy is being shaped and propelled by several factors including its population dynamics, the changing composition of the job base, globalization, fiscal devolution, technology, and the increases of women in the workforce.
Housing appreciated in Maine during 2003 as it did elsewhere in New England. House prices increased 7.9% on a year-over-year basis, representing a modest deceleration from the 10.7% rate posted over the two previous full years. Housing construction accelerated more in Maine than in other New England states.
The Northern New England economy continued to improve and strengthen throughout the year. Demand for residential real estate within the region is still strong primarily due to historical lows in long-term interest rates and limited inventory. Retailers in New England reported increases in sales in the fourth quarter compared with prior periods. The lumber and homebuilding sector continue to report strength in residential construction and home improvements. Along with the Bank, located at 135 High Street, Ellsworth, Maine. Dirigo, Trust, and Block maintain their principal offices at the Ellsworth facility and maintain additional offices at One Cumberland Place, Bangor, Maine. BTI also maintains officesincrease in overall economic activity, there were modest improvements in the headquarters buildinglabor markets. These improvements generally took the form of reduced layoffs or modestly increased hiring, although new hiring was still quite minimal.
Changes in the Bankeconomy are difficult to predict, and the foregoing discussion may or may not be indicative of whether the Northern New England economy, including the State of Maine, and particularly Down East and Mid Coast Maine, is improving or will continue to strengthen. A downturn in Bar Harbor, Maine.the local economies that the Company serves, or adverse changes in the real estate markets could negatively impact the Company’s business, financial condition, and results of operations.
COMPETITION
The Company competes principally in Down East coastaland Mid Coast Maine, which can generally be characterized as a rural area.areas. The Company considers its primary market areas to be in Hancock, Knox, and Washington counties, each in the state of Maine. TheAccording to the most recent Census Bureau Report, the population of these three counties is 52,336, 40,147 and 33,573 respectively, representing a combined population of these two counties is approximately 86,000 people, and their135,000. Their economies are based primarily on tourism, health care, fishing, aquaculture, agriculture, and small local businesses, but are also supported by a large contingent of retirees. Major competitors in these market areas include local independent banks, local branches of large regional bank affiliates, thrift institutions, savings and loan institutions, and credit unions. Other competitors in the Company’s primary market area include insurance companies and financing affiliates of consumer durable goods manufacturers.manufacturers, insurance companies, brokerage firms, investment advisors, and other non-bank financial service providers.
As a bank holding company and state-chartered commercial bank, respectively, the Company and the Bank are subject to extensive regulation and supervision, including, in many cases, regulation that limits the type and scope of their activities. The non-bank financial service providers that compete with the Company and the Bank may not be subject to such extensive regulation, supervision, and tax burden. Competition from nationwide banks, as well as local institutions, continues to be aggressive.
The Bank has generally been able to compete effectively with other financial institutions by emphasizing quality customer service, making decisions at the local level, maintaining long-term customer relationships, building customer loyalty, and providing products and services designed to address the specific needs of customers. However,customers; however, no assurance can be given that the Bank will continue to be able to compete effectively with other financial institutions in the future.
The financial services landscape has changed considerably over the past five years in the Company’s primary market area. The subsidiaries of BTI each separately face significant competition for their services from local banks, which now or in the future may offer a similar range of services, as well as from a number of brokerage firms and investment advisors with offices in the Company’s market area. In addition, many of these services are widely available to customers by telephone and over the Internet through firms located outsideNo material part of the Company’s market area.business is dependent upon one, or a few customers, or upon a particular industry segment, the loss of which would have a material adverse impact on the operations of the Company.
MANAGEMENT AND EMPLOYEES
The Company has fourthree principal officers: Joseph M. Murphy, President and Chief Executive Officer; Gerald Shencavitz, Senior Vice President, Chief Financial Officer and Treasurer; Dennis K. Miller, Senior Vice President, Audit and Risk Management; and Judith W. Fuller, Corporate Secretary. Marsha C. Sawyer serves as the Clerk of the Company.
Joseph M. Murphy also serves as President and Chief Executive Officer of BTI.the Bank. Dean S. Read serves as President and Chief Executive Officer of the Bank. Gerald Shencavitz also serves as Chief Financial Officer of each of the Company’s subsidiaries, as well as Chief Operating Officer and Treasurer of the Bank. Other senior operating positions in the Company include Presidentsa President of the BTI, subsidiaries, and Senior Vice Presidents in charge of retail banking, lending, credit administration / risk management, and human resources.
As of December 31, 2002,2003, the Bank employed 152 full time and 26 part time137 full-time equivalent employees, BTI employed 19 full-time equivalent employees, and BTIthe holding company employed 205 full-time and 2 part time employees, representing a full-time equivalent complement of 186161 employees of the Company and its subsidiaries.
The Company maintains comprehensive employee benefit programs, which provide health, dental, long-term and short-term disability, and life insurance. All Company employees are eligible for participation in the Bar Harbor Bankshares 401(k) plan and Profit Sharing Plan. Certain officers and employees of the Company may also participate in the Company’s 2000 stock option planStock Option Plan and/or have Supplemental Executive Retirement Agreements with the Company or the Bank.
The Company’s management believes that employee relations are good, and there are no known disputes between management and employees.
SUPERVISION AND REGULATION
The business in which the Company and its subsidiaries are engaged is subject to extensive supervision, regulation, and examination by various federal and state bank regulatory agencies, including the FRB, the FDIC, and the Superintendent, as well as other governmental agencies in the states in which the Company and its subsidiaries operate. The supervision, regulation, and examination to which the Company and its subsidiaries are subject are intended primarily to protect depositors and other customers, or are aimed at carrying out broad public policy goals, and are not necessarily for the protection of the shareholders.
Some of the more significant statutory and regulatory provisions applicable to banks and BHCs, to which the Company and its subsidiaries are subject, are described more fully below, together with certain statutory and regulatory matters concerning the Company and its subsidiaries. The description of these statutory and regulatory provisions does not purport to be complete and is qualified in its entirety by reference to the particular statutory or regulatory provision. Any change in applicable law or regulation may have a material effect on the Company’s business and operations, as well as those of its subsidiaries. The Company’s shareholders generally are not subject to these statutory and regulatory provisions.
Bank Holding Company Act - As a registered BHC and a Maine financial institution holding company, the Company is subject to regulation under the BHC Act and Maine law and to examination and supervision by the FRB and the Superintendent, and is required to file reports with, and provide additional information requested by, the FRB and the Superintendent. The FRB has the authority to issue orders to BHCs to cease and desist from unsound banking practices and violations of conditions imposed by, or violations of agreements with, the FRB. The FRB is also empowered to assess civil money penalties against companies or individuals that violate the BHC Act or orders or regulations thereunder,there under, to order termination of non-banking activities of non-banking subsidiaries of BHCs, and to order termination of ownership and control of a non-banking subsidiary of a BHC.
The BHC Act prohibits a BHC from acquiring substantially all the assets of a bank or acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank, or increasing such ownership or control of any bank, or merging or consolidating with any BHC without prior FRB approval. Unless a BHC becomes a "financial holding company" (an "FHC") under the Gramm-Leach-Bliley Act ("GLBA"), as discussed below, the BHC Act also prohibits a BHC from acquiring a direct or indirect interest in or control of more than 5% of the voting shares of any company which is not a bank or BHC, and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiary banks, except that it may engage in and may own shares of companies engaged in certain activities the FRB determined to be so closely related to banking or managing and controlling banks as to be a proper incident thereto. In addition, Maine law requires approval by the Superintendent prior to acquisition of more than 5% of the voting shares of a Maine financial institution or any financial institution holding company that controls a Maine financial institution. The Superintendent also must approve acquisition by a Maine financial institution holding company of more than 5% of a financial institution or financial institution holding company domiciled outside of the State of Maine.
Federal Reserve Act - Various other laws and regulations, including Sections 23A and 23B of the Federal Reserve Act, as amended (the "FRA"), generally limit borrowings, extensions of credit, and certain other transactions between the Company and its non-bank subsidiaries and its affiliate insured depository institutions. Section 23A of the FRA also generally requires that an insured depository institution’s loans to non-bank affiliates be secured in appropriate amounts, and Section 23B of the FRA generally requires that transactions between an insured depository institution and its non-bank affiliates be on market terms. These laws and regulations also limit BHCs and their subsidiaries from engaging in certain tying arrangements in connection with any extension of credit, sale or lease of property, or furnishing of services.
Financial Services Modernization - The Gramm-Leach-Bliley Act ("GLBA"), which significantly altered banking laws in the United States, was signed into law in 1999. GLBA enabled combinations among banks, securities firms and insurance companies beginning in 2000. As a result of GLBA, many of the depression-era laws that restricted these affiliations and other activities that may be engaged in by banks and bank holding companies, were repealed. Under GLBA, bank holding companies are permitted to offer their customers virtually any type of service that is financial in nature or incidental thereto, including banking, securities underwriting, insurance (both underwriting and agency), and merchant banking.
The Gramm-Leach-Bliley Act established a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the BHC Act framework to permit BHCs that qualify and elect to be treated as financial holding companies to engage in a range of financial activities broader than would be permissible for traditional BHCs that have not elected to be treated as FHCs, such as the Company. "Financial activities" is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the FRB, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.
In order to elect to become an FHC, a BHC must meet certain tests and file an election form with the FRB. To qualify, all of a BHC’s subsidiary banks must be well-capitalized and well-managed, as measured by regulatory guidelines. In addition, to engage in the new activities, each of the BHC’s banks must have been rated "satisfactory" or better in its most recent federal Community Reinvestment Act evaluation.
A BHC that elects to be treated as an FHC may face significant consequences if its banks fail to maintain the required capital and management ratings, including entering into an agreement with the FRB which imposes limitations on its operations and may even require divestitures. Such possible ramifications may limit the ability of a bank subsidiary to significantly expand or acquire less than well-capitalized and well-managed institutions. The Company has not elected to become an FHC.
Further, the GLBA permits state banks, to the extent permitted under state law, to engage in certain new activities that are permissible for subsidiaries of an FHC. The GLBA expressly preserves the ability of state banks to retain all existing subsidiaries. In order to form a financial subsidiary, a state bank must be well-capitalized,well capitalized, and such banks would be subject to certain capital deduction, risk management, and affiliate transaction rules. Also, the FDIC’s final rules governing the establishment of financial subsidiaries adopt the position that a state nonmember bank may only conduct through a financial subsidiary activities that a national bank could only engage in through a financial subsidiary, such as real estate development or investment, continue to be governed by the FDIC’s standard activities rules. Moreover, to mirror the FRB’s actions with respect to state member banks, the final rules provide that a state bank subsidiary that engages only in activities that the bank could engage in directly (regardless of the nature of the activities) will not be deemed to be a financial subsidiary.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 - - The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 generally authorizes BHCs to acquire banks located in any state, possibly subject to certain state-imposed age and deposit concentration limits, and also generally authorizes interstate mergers, and to a lesser extent, interstate banking.
Declaration of Dividends - According to its Policy Statement on Cash Dividends Not Fully Covered by Earnings (the "FRB Dividend Policy"), the FRB considers adequate capital to be critical to the health of individual banking organizations and to the safety and stability of the banking system. Of course, one of the major components of the capital adequacy of a bank or a BHC is the strength of its earnings and the extent to which its earnings are retained and added to capital, or paid to shareholders in the form of cash dividends. Accordingly, the FRB Dividend Policy suggests that banks and BHCs generally should not maintain their existing rate of cash dividends on common stock, unless the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends, and the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality, and overall financial condition. The FRB Dividend Policy reiterates the FRB’s belief that a BHC should not maintain a level of cash dividends to its shareholders that places undue pressure on the capital of bank subsidiaries, or that can be funded only through additional borrowings or other arrangements that may undermine the BHC’s ability to serve as a source of strength.
Under currentUntil June 30, 2003, Maine corporation law previously provided that a corporation’s board of directors maycould declare, and the corporation may pay, dividends on its outstanding shares in cash or other property, generally out of the corporation’s unreserved and unrestricted earned surplus, or out of the unreserved and unrestricted net earnings of the current fiscal year and the next proceeding fiscal year taken as a single period, except under certain circumstances, including when the corporation is insolvent, or when the payment of the dividend would render the corporation insolvent, or when the declaration would be contrary to the corporation’s charter. These same limitations generally apply to investor-owned, Maine financial institutions. Currentwere repealed effective as of July 1, 2003. Under current Maine corporation law, will be repealed and replaced effective July 1, 2003, with the new Maine Business Corporation Act (the "New Maine Act"). The New Maine Act adopts a simplified test for when the directors of a corporation may make distributions to its shareholders if (subject to restriction by the articles of incorporation), namely, (1) the corporation’s assets must exceed its liabilities (plus any amounts payable to preferred classes of stock), and (2) the corporation must beis able to pay its debts as they become due in the usual course of business (i.e., it must not be insolvent). These new limitations generally apply to investor owned Maine financial institutions and financial institution holding companies.
Federal bank regulatory agencies also have authority to prohibit banking institutions from paying dividends if those agencies determine that, based on the financial condition of the bank, such payment would constitute an unsafe or unsound practice.
Capital Adequacy Guidelines -Guidelines: The FRB has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a BHC and in analyzing applications to it under the BHC Act. The FRB’s capital adequacy guidelines apply on a consolidated basis to BHCs with consolidated assets of $150 million or more; thus, these guidelines apply to the Company.
The FRB’s capital adequacy guidelines generally require BHCs to maintain total capital equal to 8% of total risk-adjusted assets and off-balance sheet items, with at least one-half of that amount consisting of Tier 1 or core capital and the remaining amount consisting of Tier 2 or supplementary capital. Tier 1 capital for BHCs generally consists of the sum of common stockholders’ equity and perpetual preferred stock (subject in the case of the latter to limitations on the kind and amount of such stocks which may be included as Tier 1 capital), less goodwill and other non-qualifying intangible assets. Tier 2 capital generally consists of hybrid capital instruments; perpetual preferred stock, which is not eligible to be included as Tier 1 capital; term subordinated debt and intermediate-term preferred stock; and, subject to limitations, general allowances for loan losses. Assets are adjusted under the risk-based guidelines to take into account different risk characteristics.
In addition to the risk-based capital requirements, the FRB requires BHCs to maintain a minimum leverage capital ratio of Tier 1 capital (defined by reference to the risk-based capital guidelines) to total assets of 3.0%. Total assets for this purpose do not include goodwill and any other intangible assets and investments that the FRB determines should be deducted from Tier 1 capital. The FRB has announced that the 3.0% leverage ratio requirement is the minimum for the strong BHCs without any supervisory, financial or operational weaknesses or deficiencies, or those that are not experiencing or anticipating significant growth. All other BHCs are required to maintain a minimum leverage ratio of at least 4.0%. BHCs with supervisory, financial, operational, or managerial weaknesses, as well as BHCs that are anticipating or experiencing significant growth, are expected to maintain capital ratios well above the minimum levels.
At December 31, 2002,2003, and at the time of this report, the Company’s risk-based capital ratio and leverage ratio were well in excess of regulatory requirements, and its management expects these ratios to remain in excess of regulatory requirements. Separate, but substantially similar, capital requirements under FDIC regulations apply to the Company’s bank subsidiary, and these also exceed regulatory requirements at December 31, 2002.2003.
Failure to meet capital guidelines could subject the Company or the Bank to a variety of FDIC corrective actions, including for example, (i) restricting payment of capital distributions and management fees, (ii) requiring that the appropriate federal banking agency monitor the condition of the institution and its efforts to restore its capital, (iii) requiring submission of a capital restoration plan, (iv) restricting the growth of the institution’s assets, and (v) requiring prior approval of certain expansion proposals.
Information concerning the Company and its subsidiaries with respect to capital requirements is incorporated by reference from Part II, Item 7, section entitled "Capital Resources" and from Part II, Item 8, Notes to Consolidated Financial Statements, Note 13, "Shareholders’ Equity," each in this annual report on Form 10-K for the year ended December 31, 2002.2003.
Activities and Investments of Insured State-Chartered Banks -Banks: FDIC insured, state-chartered banks, such as the Bank, are also subject to similar restrictions on their business and activities. Section 24 of the Federal Deposit Insurance Act ("FDIA"), generally limits the activities as principal and equity investments of FDIC insured, state-chartered banks to those activities that are permissible to national banks. In 1999, the FDIC substantially revised its regulations implementing Section 24 of the FDIA to ease the ability of state-chartered banks to engage in certain activities not permissible for national banks, and to expedite FDIC review of bank applications and notices to engage in such activities.
Safety and Soundness Standards –Standards: The Federal Deposit Insurance Corporation Improvement Act ("FDICIA"), as amended, directs each federal banking agency to prescribe safety and soundness standards for depository institutions relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate risk, asset growth, compensation, asset quality, earnings, and stock valuation. The Community Development and Regulatory Improvement Act of 1994 amended FDICIA by allowing federal banking agencies to publish guidelines rather than regulations covering safety and soundness.
FDICIA also contains a variety of other provisions that may affect the Company’s and the Bank’s operations, including reporting requirements, regulatory guidelines for real estate lending, "truth in savings" provisions, and the requirement that a depository institution give 90 days prior notice to customers and regulatory authorities before closing any branch.
Community Reinvestment –Reinvestment: Pursuant to the Community Reinvestment Act ("CRA") and similar provisions of Maine law, regulatory authorities review the performance of the Company and the Bank in meeting the credit needs of the communities served by the Bank. The applicable regulatory authorities consider compliance with this law in connection with the applications for, among other things, approval for branches, branch relocations, and acquisitions of banks and bank holding companies. The Bank received a "satisfactory" rating at its most recent CRA examination, May 28, 2002.
Customer Information Security -Security: The FDIC and other bank regulatory agencies have published final guidelines establishing standards for safeguarding nonpublic personal information about customers that implement provisions of the GLBA (the "Guidelines"). Among other things, the Guidelines require each financial institution, under the supervision and ongoing oversight of its Board of Directors or an appropriate committee thereof, to develop, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, to protect against any anticipated threats or hazards to the security or integrity of such information, and to protect against unauthorized access to, or use of such information that could result in substantial harm or inconvenience to any customer.
Privacy.Privacy: The FDIC and other regulatory agencies have published final privacy rules pursuant to provisions of the GLBA ("Privacy Rules"). The Privacy Rules, which govern the treatment of nonpublic personal information about consumers by financial institutions, require a financial institution to provide notice to customers (and other consumers in some circumstances) about its privacy policies and practices, describe the conditions under which a financial institution may disclose nonpublic personal information to nonaffiliated third parties, and provide a method for consumers to prevent a financial institution from disclosing that information to most nonaffiliated third parties by "opting-out" of that disclosure, subject to certain exceptions.
USA Patriot Act.Act: The USA Patriot Act of 2001 (the "Patriot Act"), designed to deny terrorists and others the ability to obtain anonymous access to the United StatesU.S. financial system, has significant implications for depository institutions, broker-dealers and other businesses involved in the transfer of money. The Patriot Act, requirestogether with the implementing regulations of various federal regulatory agencies, have caused financial institutions, including the Bank and BTI, to adopt and implement additional or amend existing policies and procedures with respect to, moneyamong other things, anti-money laundering compliance, suspicious activities,activity and currency transaction reporting, customer identity verification and due diligence on customers. Implementationcustomer risk analysis. The statute and its underlying regulations also permit information sharing for counter-terrorist purposes between federal law enforcement agencies and financial institutions, as well as among financial institutions, subject to certain conditions. It also requires the Federal Reserve Board (and other federal banking agencies) to evaluate the effectiveness of an applicant in combating money laundering activities when considering applications filed under Section 3 of the BHC Act, or under the Bank Merger Act. Management believes the Company is in compliance with all of the requirements prescribed by the Patriot Act’s requirements will occur in stages, as rules regarding its provisions are finalized by government agencies.Act and all applicable final implementing regulations.
Deposit Insurance.Insurance - The FDIA does not require the FDIC to charge all banks deposit insurance premiums when the ratio of deposit insurance reserves to insured deposits is maintained above specified levels. However, as a result of general economic conditions and recent bank failures, it is possible that the ratio of deposit insurance reserves to insured deposits could fall below the minimum ratio that FDIA requires, which would result in the FDIC setting deposit insurance assessment rates sufficient to increase deposit insurance reserves to the required ratio. A resumption of assessments of deposit insurance premiums charged to well-capitalized institutions, such as the Company’s subsidiary bank, could have an effect on the Company’s net earnings. The Company cannot predict whether the FDIC will be required to increase deposit insurance assessments above their current levels.
Securities Regulation.Regulation - The common stock of the Company is registered with the U. S. Securities and Exchange Commission ("SEC") under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Act"). Accordingly, the Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the Act.
Sarbanes-Oxley Act of 2002 – On July 30, 2002, President George W. Bush signed into law the Sarbanes-Oxley Actact of 2002 (the "S-O("S-O Act"), which generally establishes a comprehensive framework to modernize and reform the oversight of public company auditing, improve the quality and transparency of financial reporting by those companies, and strengthen the independence of auditors. The following are some, but not all,S-O Act implements a broad range of corporate governance and accounting measures for public companies (including publicly-held bank holding companies such as the Company) designed to promote honesty and transparency in corporate America and better protect investors from the type of corporate wrongdoings that occurred at Enron and WorldCom, among other companies. The S-O Act’s significant reforms:principal provisions, many of which have been interpreted through regulations released in 2003, provide for and include, among other things:
In addition, Dirigo and Block are subject to certain Broker Dealer and Investment Adviser Regulations promulgatedhas been defined by the NASDSEC in accordance with specified requirements. The new legislation also requires the SEC, based on certain enumerated factors, to regularly and SEC.systematically review corporate filings.
The Company has taken steps to comply with and anticipates that it will incur additional expenses in continuing to comply with the provisions of the S-O Act and its underlying regulations. Management believes that such compliance efforts have strengthened the Company’s overall financial reporting and corporate governance structure and does not expect that such compliance has to date, or will in the future have a material impact on the Company’s results of operations or financial condition.
Other Proposals.Proposals - Other legislative and regulatory proposals regarding changes in banking, and the regulation of banks and other financial institutions, are regularly considered by the executive branch of the federal government, Congress and various state governments, including Maine and state and federal regulatory authorities. It cannot be predicted what additional legislative and/or regulatory proposals, if any, will be considered in the future, whether any such proposals will be adopted or, if adopted, how any such proposals would affect the Company or the Bank.
STOCK DIVIDEND
On December 8, 1998, the Board of Directors of the Company declared a 100% stock dividend to owners of record as of December 28, 1998, payable on January 25, 1999. All share and per share data information included in the Form 10-K has been restated to reflect the 100% stock dividend.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The information set forth under this item is incorporated by cross-reference to the Company financial statements set forth below in Part II, Item 8 of this report.report on Form 10-K.
AVAILABILITY OF INFORMATION - COMPANY WEBSITE
The Company maintains a website on the World Wide Web at http://www.bhbt.com. The Company makes available, free of charge, on its web site, which is located at http://www.bhbt.com, ourwebsite its annual report on Form 10-K, quarterly reports on the dateForm 10-Q, current reports on which we electronically file the report withForm 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Commission. InvestorsAct of 1934, as amended, as soon as reasonably practicable after such reports are encouragedelectronically filed with, or furnished to, accessthe SEC. The Company’s reports filed with, or furnished to, the SEC are also available at the SEC’s website at http://www.sec.gov. Information contained on the Company’s website does not constitute a part of this report and other information about our business and operations on our web site.report.
ITEM 2. PROPERTIES
The twelvethirteen parcels of real estate owned and utilized by the Company 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, housingwhich houses its banking facilities and administrative offices, and an adjacent 35-car customer parking lot. The building was renovated in 1998.
2. An office is located onat 111 Main Street, Northeast Harbor, Maine. This property consists of a building constructed in 1974 that underwent interior renovations in 1998 to better meet the Bank’s needs at that location.
3. An office is located onat 314 Main Street, Southwest Harbor, Maine. This property consists of a building constructed in 1975 that was added to, and renovated in 1989, to better meet the needs at that location.
4. An office is located on Church Street, Deer Isle, Maine. This property consists of a building constructed in 1974 that was added to and renovated in 1994 to better meet the needs at that location.
5. An office is located onat 19 Main Street, Blue Hill, Maine. This property consists of a building constructed in 1960 that underwent renovations in 1989 to better meet the needs at that location.
6. An office is located onat the corner of Main Street,and Bridge Streets, Milbridge, Maine. This property consists of a building constructed in 1974, to which a vestibule was added in 1994, to house an ATM that helps to better meet the needs at that location.
7. An office is located onat 68 Washington Street, Lubec, Maine. This property consists of a building constructed in 1990 and is adequate for the Bank’s needs at that location.
8. An office is located on137 High Street, Ellsworth, Maine. This property consists of a building constructed in 1982. The Bank is currently evaluating expansion of the Ellsworth office.
9. An office is located onat 385 Main Street, Winter Harbor, Maine. This property consists of a building constructed in 1995 and is adequate for the Bank’s needs at that location.
10. An office is located onat 20 Main Street, Machias, Maine. This property consists of a building that 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 office is located at 245 Camden St. (Route 1) in Rockland, Maine. The property consists of a building that was purchased from Androscoggin Savings Bank in February 2004. The branch facility was built in 1977 and is adequate for the Bank’s needs at that location.
12. An Operations Center is located on Avery Lane,in Ellsworth, Maine, that houses the Bank’sCompany’s operations departments and data center.centers. The building was constructed in 1996, with occupancy by the Bank taking place in January of 1997. The Operations Center is currently adequate for the Company’s needs.
12. BTI13. The Company owns and occupies a 22,000-square-foot office building at 135 High Street, Ellsworth, Maine. The Bank, Trust Block,Services, and Dirigo, and the Bank occupy portions of this facility. ThisThe facility was renovated in 2001.
A parcel of land adjacent to the Blue Hill branch was purchased in 1981 but has not been developed. The Company also leases office space for Dirigo, Block, and Trust at One Cumberland Place in Bangor, Maine, under terms and conditions considered by management to be favorable to the Company. Other real estates includeestate includes two out parcels one improved,(one improved) contiguous to the BTICompany’s 135 High Street, Ellsworth location.
The Company believes that its offices are sufficient for its present operations. Additional information relating to the Company’s properties is set forthprovided in Item 8, Note 7 of the financial statementsConsolidated Financial Statements contained in this report on Form 10-K and are incorporated herein by reference.
The Bank also has twelve Automated Teller Machines (ATMs) located at ten of its branch offices, plus three off-site ATMs located on Mount Desert Island, the primary market area it serves.
ITEM 3. LEGAL PROCEEDINGS
The Company previously reported that Paul G. Ahern, a former director of the Company and executive officer and employee of BTI, resigned all of his positions in January 2002 and made monetary demands for severance benefits under his employment agreement. The disputes between the Company and Mr. Ahern regarding his demands under his employment agreement were submitted to a binding arbitration proceeding in order to determine the rights of the parties. On November 4, 2002, the Company received a written "Arbitration Award" in which the independent arbitrator in this matter found in favor of the Company and BTI with regard to all of Mr. Ahern’s claims under his employment agreement. This decision of the arbitrator with regard to Mr. Ahern’s employment agreement claims is binding and final.
The Company previously reported that Bonnie R. McFee, a former officer and employee of BTI and its subsidiary Dirigo Investments, resigned all of her positions in January 2002 and made demands for severance benefits under her employment agreement.
The disputes between the Company and Ms. McFee regarding her demands under her employment agreement have been submitted to a binding arbitration proceeding in order to determine the rights of the parties. The arbitration proceeding for Ms. McFee’s claims under her employment agreement was conducted during the week of March 3, 2003. A decision of the arbitrator has not been issued as of the date of this report.
As previously reported, Roselle M. Neely ("Neely") filed a complaint dated May 31, 2002 in the United States District Court for the District of Maine, (the "Neely Complaint") naming the Company, the Bank, Trust Services, certain other subsidiaries, and certain existing or former management personnel as defendants. The complaint relatesrelated to a trust established by Mrs. Neely, (the "Neely Trust"), for which Trust hasServices had acted as trustee since May 2000 and for which the Bank formerly acted as trustee. Mrs. Neely allegesalleged in part that Trust Services improperly disregarded her investment instructions and that Blockthe defendants engaged in excessive trading of securities for the purpose of generating commissions for its affiliated broker-dealer. She seeks an unspecified amount oftrust. The plaintiff sought money damages and punitive damages, plus interest and costs.
The Company has filed an answer denying all allegationsparties settled this matter in December 2003 without any finding or admission of wrongdoing, and is actively defending against these claims.liability. Pursuant to a joint stipulation, the Court dismissed the case on January 15, 2004. The case presently is scheduled for trial in May 2003.
Mrs. Neely had also filed suit againstsettlement, the Bank and Trust in Probate Court in Penobscot County, Maine in January 2002, seeking to appointterms of which are confidential, involved payment of a new corporate trustee for the Neely Trust. In that suit Mrs. Neely alleged that the Bank failed to give her noticestipulated sum on behalf of the appointment of Trust as a successor trustee.defendants. The suit was amended in June 2002 to add allegations similar to those contained in the Neely Complaint. The Bank and Trust denied all allegations of wrongdoing, and filed a counterclaim seeking declaratory judgment from the Probate Court. The suit was resolved with the consent of all parties in January 2003, through court approval of Trust’s resignation as trustee and pending appointment of a successor trustee.
The Company and its subsidiaries are also party to certain other ordinary routine litigation incidental to the normal conduct of their respective businesses, which in the opinion of management will havepayment had no material effect on the Company’s consolidated financial statements.condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company’s security holders in the fourth quarter of 2002.
2003.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
High and low trades for each quarterThe common stock of 2002 and 2001 are listed below per records fromthe Company is traded on the American Stock Exchange where the Company’s common stock is traded("AMEX") under the trading symbol BHB. Quarterly stock prices, and dividends paid during the last two years are summarized below. High and low stock prices are based on quotations provided by the American Stock Exchange. Per share data information has been adjusted to reflect the 100% stock dividend described previously in Part I, Item 1 of this report.
QUARTERLY STOCK PRICES
2002 AND 2003
1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | |||||||||
High | Low | High | Low | High | Low | High | Low | High | Low | High | Low | High | Low | High | Low | |
2003 | $20.50 | $17.50 | $22.55 | $18.65 | $23.61 | $21.00 | $27.00 | $22.70 | ||||||||
2002 | $19.40 | $15.50 | $20.65 | $17.50 | $20.10 | $16.90 | $19.50 | $17.96 | $19.40 | $15.50 | $20.65 | $17.50 | $20.10 | $16.90 | $19.50 | $17.96 |
2001 | $15.50 | $14.00 | $15.88 | $14.15 | $18.15 | $15.51 | $18.90 | $15.45 |
As of March 25,
DIVIDENDS PAID TO SHAREHOLDERS’
2002 AND 2003 there were 1,056 registered holders of record of Bar Harbor Bankshares common stock.
Dividends paid by the Company in 20022003 and 2001:2002:
1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | Total | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | Total | |
2003 | $0.19 | $0.19 | $0.19 | $0.19 | $0.76 | |||||
2002 | $0.19 | $0.19 | $0.19 | $0.19 | $0.76 | $0.19 | $0.19 | $0.19 | $0.19 | $0.76 |
2001 | $0.19 | $0.19 | $0.19 | $0.19 | $0.76 |
As of March 19, 2004, the Company had 1,057 registered shareholders of record. The Company declared and distributed dividends totaling $0.76 per share during 2003, representing an earnings payout ration of 45.8%. In the first quarter of 2004 the Company increased its quarterly dividend by 5.3% to $0.20 per common share. The dividend was paid March 15, 2004 to shareholders of record as of the close of business on February 20, 2004.
The Company has a history of paying quarterly dividends on its common stock. However, the Company’s ability to pay such dividends depends on a number of factors, including its needs for funds and restrictions on the Company’s ability to pay dividends under federal laws and regulations. Therefore, there can be no assurance that dividends on the Company’s common stock will be paid in the future.
As more fully enumerated under Item 7 of this report on Form 10-K, in November 1999 the Company announced a stock repurchase plan, authorizing open market and privately negotiated purchases of up to 10% of the Company’s outstanding shares of common stock, or 344,000 shares. As of the date of termination of this plan on December 31, 2003, the Company had repurchased 339,814 shares of stock under the plan, at a total cost of $6,151 and an average price of $18.10 per share. The Company records repurchased shares as treasury stock.
In March 2004, the Company announced a second stock repurchase plan, authorizing open market and privately negotiated purchases of up to 10% of the Company’s outstanding shares of common stock, or 310,000 shares. Purchases began on March 4, 2004 and will continue through December 31, 2005.
Share Repurchase Program
The following table represents the total shares purchased during 2003 as part of the Share Repurchase plan:
(a) Total Number of Shares (or Units) Purchased | (b) Average Price Paid per Share (or Unit) | ( c ) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | |
January 1, 2003 to January 31, 2003 | 5,375 | $19.77 | 5,375 | 87,071 |
February 1, 2003 to February 28, 2003 | 4,200 | $19.04 | 4,200 | 82,871 |
March 1, 2003 to March 31, 2003 | 7,440 | $18.65 | 7,440 | 75,431 |
April 1, 2003 to April 30, 2003 | 12,250 | $19.15 | 12,250 | 63,181 |
May 1, 2003 to May 31, 2003 | 11,775 | $20.12 | 11,775 | 51,406 |
June 1, 2003 to June 30, 2003 | 7,160 | $21.35 | 7,160 | 44,246 |
July 1, 2003 to July 31, 2003 | 2,550 | $22.04 | 2,550 | 41,696 |
August 1, 2003 to August 31, 2003 | 5,440 | $23.09 | 5,440 | 36,256 |
September 1, 2003 to September 30, 2003 | 4,645 | $22.94 | 4,645 | 31,611 |
October 1, 2003 to October 31, 2003 | 11,800 | $23.47 | 11,800 | 19,811 |
November 1, 2003 to November 30, 2003 | 3,650 | $24.18 | 3,650 | 16,161 |
December 1, 2003 to December 31, 2003 | 11,250 | $25.30 | 11,250 | 4,911 |
Total | 87,535 | $21.56 | 87,535 | 4,911 |
Incentive Stock Option Plan
The following table provides information as of December 31, 2003 with respect to the shares of Common Stock that may be issued under the Company's Incentive Stock Option Plan.
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights, net of forfeits and exercised shares | Weighted Average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation [(excluding securities referenced in column (a)] |
(a) | (b) | (c) | |
Equity compensation plans approved by security holders | 333,636 | $16.90 | 166,364 |
Equity compensation plans not approved by security holders | -- | N/A | -- |
Total | 333,636 | $16.90 | 166,364 |
American Stock Transfer & Trust Company provides transfer agent services for the Company. Inquiries may be directed to: American Stock Transfer & Trust Company, 6201 15th Avenue, 3rd Floor, Brooklyn, NY, 11219, telephone: 1-800-937-5449, Internet address: http://www.amstock.com.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the last five years
(Dollars in thousands, except per share data):
2002 | 2001 | 2000 | 1999 | 1998 | 2003 | 2002 | 2001 | 2000 | 1999 | |
Balance Sheet Data | ||||||||||
Total Assets | $553,818 | $ 487,203 | $ 466,225 | $456,809 | $392,047 | $583,746 | $553,818 | $487,203 | $466,225 | $456,809 |
Total Loans | 351,535 | 297,970 | 271,381 | 261,189 | 229,435 | 383,408 | 351,535 | 297,970 | 271,381 | 261,189 |
Total Investments | 162,300 | 142,073 | 154,464 | 160,785 | 131,285 | 159,297 | 162,300 | 142,073 | 154,464 | 160,785 |
Total Deposits | 322,015 | 291,833 | 278,076 | 281,708 | 266,448 | 339,080 | 322,015 | 291,833 | 278,076 | 281,708 |
Total Borrowings from Federal Home Loan Bank | 170,506 | 156,558 | 120,900 | 119,152 | 113,035 | |||||
Total Shareholders' Equity | 53,836 | 52,538 | 50,507 | 49,145 | 46,861 | 53,115 | 53,836 | 52,538 | 50,507 | 49,145 |
Average Assets | 518,939 | 468,249 | 471,572 | 428,555 | 363,657 | 560,837 | 518,939 | 468,249 | 471,572 | 428,555 |
Average Shareholders' Equity | 52,813 | 52,279 | 49,550 | 48,131 | 44,172 | 53,924 | 52,813 | 52,279 | 49,550 | 48,131 |
Results Of Operations | ||||||||||
Interest and dividend income | $ 32,352 | $ 33,892 | $ 35,333 | $ 31,952 | $ 29,211 | $ 30,579 | $ 32,064 | $ 33,428 | $ 34,790 | $ 31,569 |
Interest expense | 12,775 | 15,751 | 17,616 | 13,802 | 11,973 | 11,075 | 12,775 | 15,751 | 17,616 | 13,802 |
Net interest income | 19,577 | 18,141 | 17,717 | 18,150 | 17,238 | 19,504 | 19,289 | 17,677 | 17,174 | 17,767 |
Provision for loan losses | 1,100 | 2,000 | 952 | 474 | 336 | 540 | 1,100 | 2,000 | 952 | 474 |
Net interest income after | ||||||||||
provision for loan losses | 18,477 | 16,141 | 16,765 | 17,676 | 16,902 | 18,964 | 18,189 | 15,677 | 16,222 | 17,293 |
Noninterest income (including net security gains) | 6,413 | 7,520 | 7,066 | 5,854 | 5,688 | 7,339 | 6,701 | 7,984 | 7,609 | 6,237 |
Noninterest expense | 18,336 | 18,489 | 16,615 | 14,298 | 12,865 | 19,204 | 18,336 | 18,489 | 16,615 | 14,298 |
Pre-Tax Income | 6,554 | 5,172 | 7,216 | 9,232 | 9,725 | 7,099 | 6,554 | 5,172 | 7,216 | 9,232 |
Applicable income taxes | 1,742 | 1,661 | 2,419 | 3,007 | 3,118 | 1,892 | 1,742 | 1,661 | 2,419 | 3,007 |
Net income before accounting change | 4,812 | 3,511 | 4,797 | 6,225 | 6,607 | |||||
Less: Accounting change | 247 | -- | -- | -- | ||||||
Net income before cumulative effect of accounting change | 5,207 | 4,812 | 3,511 | 4,797 | 6,225 | |||||
Less: Cumulative effect of accounting change | -- | 247 | -- | -- | -- | |||||
Net income | $ 4,565 | $ 3,511 | $ 4,797 | $ 6,225 | $ 6,607 | $ 5,207 | $ 4,565 | $ 3,511 | $ 4,797 | $ 6,225 |
Earnings per share: | ||||||||||
Basic before accounting change | $ 1.49 | $ 1.07 | $ 1.43 | $ 1.81 | $ 1.92 | |||||
Accounting change | (0.07) | -- | -- | -- | -- | |||||
Basic after accounting change | $ 1.42 | $ 1.07 | $ 1.43 | $ 1.81 | $ 1.92 | |||||
Basic before cumulative effect of accounting change | $ 1.67 | $ 1.49 | $ 1.07 | $ 1.43 | $ 1.81 | |||||
Cumulative effect of accounting change | -- | (0.07) | -- | -- | -- | |||||
Basic after cumulative effect of accounting change | $ 1.67 | $ 1.42 | $ 1.07 | $ 1.43 | $ 1.81 | |||||
Diluted before accounting change | $ 1.47 | $ 1.06 | $ 1.43 | $ 1.81 | $ 1.92 | |||||
Accounting change | (0.07) | -- | -- | -- | - | |||||
Diluted after accounting change | $ 1.40 | $ 1.06 | $ 1.43 | $ 1.81 | $ 1.92 | |||||
Diluted before cumulative effect of accounting change | $ 1.63 | $ 1.47 | $ 1.06 | $ 1.43 | $ 1.81 | |||||
Cumulative effect of accounting change | -- | (0.07) | -- | -- | -- | |||||
Diluted after cumulative effect of accounting change | $ 1.63 | $ 1.40 | $ 1.06 | $ 1.43 | $ 1.81 | |||||
Return on total average assets | 0.88% | 0.75% | 1.02% | 1.45% | 1.82% | 0.93% | 0.88% | 0.75% | 1.02% | 1.45% |
Return on total average equity | 8.64% | 6.72% | 9.68% | 12.93% | 14.96% | 9.66% | 8.64% | 6.72% | 9.68% | 12.93% |
Average equity/average assets | 10.18% | 11.16% | 10.51% | 11.23% | 12.14% | 9.61% | 10.18% | 11.16% | 10.51% | 11.23% |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of operations of the Company and its subsidiaries for the three-yearsthree years ended December 31, 2002,2003, should be read in conjunction with the consolidated financial statements and notes thereto, and selected financial and statistical information appearing elsewhere in this Form 10-K. The purpose of this discussion is to highlight significant changes in the financial condition and results of operations of the Company and its subsidiaries during the past three years, and provide supplemental information and analysis.
Certain information discussed below is discussedpresented on a fully taxable equivalent basis. Specifically, included in 2003, 2002 2001 and 20002001 net interest income was $1,602, $1,488 $499 and $327$499 of tax-exempt interest income from certain tax-exempt investment securities and loans, which effectively resulted in a reductiontax-equivalent adjustments of the Company’s income tax expense of$684, $613, $193, and $123$193 thousand, respectively. The analysis of net interest income tables included on pages 30-32 ofin this Form 10-K provide a reconciliation of tax-equivalent financial information to the Company’s consolidated financial statements, which have been prepared in accordance with Generally Accepted Accounting Principles. Management believes the disclosure of tax-equivalent net interest income information improves the clarity of financial analysis, and is particularly useful to investors in understanding and evaluating the changes and trends in the Company’s results of operations.
Certain amounts in the 20012002 and prior yearsyears' financial statements have been reclassified to conform with the presentation used in 2002.2003.
Unless otherwise noted, all dollars are expressed in thousands except per share data.
FORWARD LOOKING STATEMENTS DISCLAIMEREXECUTIVE OVERVIEW
General Information
Bar Harbor Bankshares is a Maine corporation and a registered bank holding company under the Bank Holding Company Act of 1956, as amended. At December 31, 2003 the Company had consolidated assets of $584 million and was one of the larger independent community banking institutions in Maine.
The foregoing discussion, as well as certain other statements contained in this Form 10-K, or incorporated herein by reference, contain statements which may be considered to be forward-looking within the meaningCompany’s principal asset is all of the Private Securities Litigation and Reform Actcapital stock of 1995 (the "PSLRA"). You can identify these forward-looking statements by the use of words like "strategy," "expects," "plans," "believes," "will," "estimates," "intends," "projects," "goals," "targets," and other words of similar meaning. You can also identify them byBank, incorporated in the fact that they do not relate strictly to historical or current facts. For these statements,late 19th century. With eleven branch office locations, the Company claims the protectionis a diversified financial services provider, offering a full range of banking services and products to individuals, businesses, governments, and not-for-profit organizations throughout Down East and Mid Coast Maine. These include commercial banking, consumer banking, trust, investment management, and brokerage services.
Major Sources of Revenue
The principal source of the safe harbor for forward-looking statements provided by the PSLRA.
Investors are cautioned that forward-looking statements are inherently uncertain. Forward-looking statements include, but are not limited to, those made in connection with estimates with respect to the future results of operation, financial condition, and the business of the Company which are subject to change based on the impact of various factors that could cause actual results to differ materially from those projected or suggested due to certain risks and uncertainties. Those factors include but are not limited to:
(i) the Company’s successrevenue is dependant to a significant extent upon general economic conditions in Maine and Maine’s ability to attract new business;
(ii) the Company’s earnings depend to a great extent on the level of net interest income (thegenerated by the Bank, representing the difference or spread between interest and loan fee income earned on loans and investmentsfrom its earning assets and the interest expense paid on deposits and borrowings)borrowed funds. The Bank’s earnings are supplemented with investment securities income while its source of funds is supplemented with borrowings from the Federal Home Loan Bank. The Company’s non-interest income is principally derived from service fees on deposit accounts generated by the Bank and thusfees received for trust, investment management and brokerage accounts generated from financial services.
Business Strategy
The Company, as a diversified financial services provider, pursues a strategy of achieving long-term sustainable growth, profitability, and shareholder value, without sacrificing its soundness. The Company works toward achieving this goal by focusing on increasing the Bank’s loan and deposit market share in the coastal communities of Maine, either organically or by way of strategic acquisitions. The Company believes one of its more unique strengths is an understanding of the financial needs of coastal communities and the businesses vital to Maine’s coastal economy, namely: tourism, hospitality, retail establishments and restaurants, seasonal lodging and campgrounds, fishing, lobstering, boat building, and marine services. Consistent with this strategy, in the fourth quarter of 2003 the Company announced the Bank’s expansion into Knox County, Maine, by acquiring an existing branch banking office in the vibrant community of Rockland, with approximately $21 million in deposits and $12 million in loans.
The Company’s key strategic focus is vigorous financial stewardship, deploying investor capital safely yet efficiently for the highest possible returns. The Company strives to provide unmatched service to its customers, while maintaining strong asset quality and a focus towards improving operating efficiencies. In managing its earning asset portfolios, the Company seeks to utilize funding and capital resources within well-defined credit, investment, interest-rate 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 profitability through strategies that promise sufficient reward for understood and controlled risk. The Company is deliberate in its efforts to maintain adequate liquidity, under prevailing and expected conditions, and strives to maintain a balanced and appropriate mix of loans, core deposits, and borrowed funds.
Material Risks and Challenges
In its normal course of its business, the Company faces many risks inherent with providing banking and financial services. Among the more significant risks managed by the Company are losses arising from loans not being repaid, commonly referred to as "credit risk", and losses of income arising from movements in interest rates, commonly referred to as "interest rate and market risk". The Company is also exposed to national and local economic conditions, downturns in the economy, or adverse changes in real estate markets, which could negatively impact its financial condition and results of operations.
Management has numerous policies and control processes in place which provide for the monitoring and mitigation of risks based upon and driven by a variety of assumptions and actions, which if were changed or altered, could impact the Company’s financial condition and results of operations. The foregoing matters are more fully enumerated and discussed throughout this report on Form 10-K.
Summary Financial Condition
Summary Results of Operations
Net income for the year ended December 31, 2003, amounted to $5,207, or $1.63 per fully diluted share of capital stock, compared with $4,565 or $1.40 per fully diluted share in 2002, representing increases of 14.1% and 16.4% respectively.
BTI Restructuring Plan
As more fully enumerated in Part I, Item 1 of this report, in the fourth quarter of 2003 the Company’s Board of Directors approved a re-structuring plan for BTI. While the corporate structure and legal entities will change, all financial services provided will essentially remain the same. As more fully discussed under Item 7, segment reporting, and Item 8, Note 8 of the Consolidated Financial Statements, Line of Business Reporting, the 2003 net loss at BTI amounted to $759 compared with a 2002 net loss of $1,133, representing a reduction in loss of $374, or 33.6%. The Company believes the changes outlined in the BTI re-structuring plan will improve operating efficiencies and future performance.
Other Matters and Events
Outlook
Reflecting trends in the National and Regional economies, the Company’s market area generally witnessed little economic growth during 2003, and interest rate decreases in 2002 and 2003 compressed the Company’s net interest margin. Though these developments have not had a materially adverse affect on the Company to date, the Company continues to monitor them closely as discussed throughout this report. The economies and real estate markets in the Company’s primary market areas will continue to be significant determinants of the quality of the Company’s assets in future periods and, thus, its results of operations, may be adversely affected by increases or decreasesliquidity, and financial condition. The Company believes future economic activity will in interest rates;
(iii) the bankingpart depend on stronger employment, consumer confidence, personal consumption expenditures, and business is highly competitive and the profitability of the Company depends on the Bank’s ability to attract loans and deposits in Maine, where the Bank competes with a variety of traditional banking and nontraditional institutions such as credit unions and finance companies;
(iv) a significant portion of the Bank’s loan portfolio is comprised of commercial loans and loans secured by real estate, exposing the Company to the risks inherent in financings based upon analysis of credit risk, the value of underlying collateral, and other more intangibleexpenditures for new capital equipment. Other factors which are considered in making commercial loans and, accordingly,could effect the Company’s profitability may be negatively impacted by judgment errors in risk analysis, by loan defaults,financial performance and the abilitythat of certain borrowers to repay such loans during a downturn in general economic conditions;
(v) a significant delay in or inability to execute strategic initiatives designed to grow revenues and or control expenses; and
(vi) significant changesits common stock, are more fully enumerated in the extensive laws, regulations, and policies governing bank holding companies and their subsidiaries could alter"Forward-Looking Statements" discussion at the Company’s business environment or affect its operations.
The forward looking statements contained herein represent the Company’s judgment as of the datebeginning of this report on Form 10-K, and the Company cautions readers not to place undue reliance on such statements. The Company disclaims any obligation to publicly update or revise any forward-looking statement contained in the foregoing discussion, or elsewhere in this Form 10-K, except to the extent required by federal securities laws.10-K.
CRITICAL ACCOUNTING POLICIES
Management’s discussion and analysis of the Company’s financial condition are based on the consolidated financial statementsConsolidated Financial Statements, which are prepared in accordance with accounting principles generally accepted in the United States. The preparation of such financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Management evaluates its estimates, including those related to the allowance for loan losses and review of goodwill for impairment, on an ongoing basis. Management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis in making judgments about the carrying values of assets that are not readily apparent from other sources. Actual results could differ from the amount derived from management’s estimates and assumptions under different assumptions or conditions.
The Company’s significant accounting policies are more fully enumerated in Note 1 to the Consolidated Financial Statements included in Item 8 of this Form 10-K. Management believes the following critical accounting policies represent the more significant estimates and assumptions used in the preparation of the consolidated financial statements:
Allowance for Loan Losses - Management believes the allowance for loan losses is a significant accounting estimate used in the preparation of the Company’s consolidated financial statements. The allowance for loan losses, which is established through a charge to the provision for loan losses,loss expense, is based on management’s evaluation of the level of allowance required in relation to the probableestimated loss exposure in the loan portfolio. Management regularly evaluates the allowance for loan losses for adequacy by taking into consideration factors such as previous loss experience, the size and composition of the portfolio, current economic and real estate market conditions and the performance of individual loans in relation to contract terms and estimated fair values of properties to be foreclosed. The use of different estimates or assumptions could produce different provisions for loan losses. Refer to the discussion of Credit Risk in the Risk Management section and Note 1 of the Notes to Consolidated Financial Statements for a detailed description of management’s estimation process and methodology related to the reserve for loan losses.
Income Taxes – The Company estimates its income taxes for each period for which a statement of operations is presented. This involves estimating the Company’s actual current tax liability, as well as assessing temporary timing differences, resulting from differing timing of recognition of expenses, income and tax credits, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the Company’s consolidated balance sheets. The Company must also assess the likelihood that any deferred tax assets will be recovered from future taxable income and to the extent that the recovery is not likely a valuation allowance must be established. Significant management judgment is required in determining income tax expense, and deferred tax assets and liabilities. As of December 31, 2003, there was no valuation allowance for deferred tax assets.
Interest Income Recognition on Loans - Interest income on loans is included in income as earned based upon the unpaid principal balance of the loan. The Company’s policy is to discontinue the accrual of interest, and to reverse and uncollected interest recorded on loans, when scheduled payments become contractually past due in excess of 90 days or, in the judgment of management, the ultimate collectibility of principal or interest becomes doubtful.
Goodwill and Other Intangible Assets - Management utilizes numerous techniques to estimate the value of various intangible assets held by the Company. Management utilized various methods to determine the appropriate carrying value of goodwill as required under Statement of Financial Accounting Standards ("SFAS") No. 142. At decemberDecember 31, 2002,2003, the carrying value of goodwill amounted to $375.$300. Goodwill from a purchase acquisition is subject to ongoing periodic impairment tests. Goodwill is evaluated for impairment using several standard valuation techniques including discounted cash flow analyses, as well as an estimation of the impact of business conditions. Different estimates or assumptions are also utilized to determine the appropriate carrying value of other intangible assets including but not limited to, premises and equipment, mortgage servicing rights, and overall collectibility of loans and receivables.mortgage-servicing rights. The use of different estimates or assumptions could produce different estimates of carrying value.
SUMMARY FINANCIAL OVERVIEWCONDITION
Net income for the year ended December 31, 2002, amounted to $4,565, or $1.40 per fully diluted share of capital stock, compared with $3,511 or $1.06 per fully diluted share in 2001, representing increases of 30% and 32% respectively.
Summary financial highlights for 2002 follow:
ASSET/LIABILITY MANAGEMENTAsset / Liability Management
In managing its asset portfolios, the Bank utilizes funding and capital resources within well-defined credit, investment, interest rate, and liquidity risk guidelines. Loans and investment securities are the Bank’s primary earning assets with additional capacity invested in money market instruments. Average earning assets were 94.0%, 93.0%,92.9% and 93.1%92.5% of total average assets during 2003 and 2002, 2001 and 2000, respectively.
The Company, through its management of liabilities, attempts to provide stable and flexible sources of funding within established liquidity and interest rate risk guidelines. This is accomplished through core deposit products offered within the markets served, as well as through the prudent use of borrowed funds.
The Company’s objectives in managing its balance sheet are to preserve the sensitivity of net interest income to actual or potential changes in interest rates, and to enhance profitability through strategies that promise sufficient reward for understood and controlled risk. The Company is deliberate in its efforts to maintain adequate liquidity, under prevailing and forecasted economic conditions, and to maintain an efficient and appropriate mix of core deposits and borrowed funds.
EARNING ASSETSEarning Assets
For the year ended December 31, 2002,2003, the Company’s total average earning assets amounted to $487,811,$520,741, compared with $435,410 and $438,878$479,999 in 2001 and 2000,2002, representing an increase of 12.0%$40,742, or 8.5%. The increase in earning assets was entirely attributed to growth in the consumer and a decrease of 0.8%, respectively. commercial loan portfolios, as the investment securities portfolio posted year-over-year decline.
The tax-equivalent yield on total average earning assets amounted to 6.76%6.00% in 2002,2003, compared with 7.83% and 8.08%6.81% in 2001 and 2000,the prior year, representing declinesa decline of 107 and 2581 basis points respectively. Total 2002points. Despite the earning asset growth during 2003, total interest on earning assetsearned amounted to $32,965,$31,263, compared with $34,085 and $35,456$32,677 in 2001 and 2000,the prior year, representing declinesa decline of $1,120 and $1,371,$1,414, or 3.3% and 3.9%, respectively.4.3%.
Over the past twothree years there have been twelvethirteen interest rate decreases resulting in a historical 525550 basis point drop in the federal funds targeted rate overduring this period. Further, during 2002 there was ahave been significant parallel shiftshifts in the U.S. Treasury yield curve, withcurve. This trend was most profound during the 2, 5, 10quarter ended June 30, 2003, when the yield on the benchmark 10-year Treasury note dropped to as low as 3.07% and 30-year Treasury Bonds declining 160, 173, 134 and 78 basis points, respectively. Thethe federal funds targeted rate fell to 1.00%, in both cases representing forty-five year lows. This historically low interest rate environment has caused sharp yield declines on the Company’s variable rate earning assets, and prepayment speeds on fixed rate earning assets to increase dramatically. These were the principal factors underlying the 20022003 decline in earning asset yieldsinterest income.
Total Assets
Led by consumer and total interest income oncommercial loan growth, the Company’s total earning assets.assets ended the year at $583,746, representing an increase of $29,928, or 5.4%, compared with December 31, 2003.
Loan Portfolio
The loan portfolio is primarily secured by real estate in the counties of Washington and Hancock, Maine. The following table summarizes the components of the Bank’s loan portfolio as of December 31st over the past five years.
LOANSSUMMARY OF LOAN PORTFOLIO AT DECEMBER 31
2003 | 2002 | 2001 | 2000 | 1999 | |
Real estate loans | |||||
Construction and development | $ 12,639 | $ 16,270 | $ 20,348 | $ 12,297 | $ 15,674 |
Mortgage | 322,579 | 287,990 | 229,634 | 208,815 | 195,645 |
Loans to finance agricultural production and other loans to farmers | 11,719 | 11,053 | 7,149 | 6,674 | 10,814 |
Commercial and industrial loans | 19,167 | 20,010 | 22,158 | 23,729 | 22,561 |
Loans to individuals for household, family and other personal expenditures | 11,775 | 12,818 | 13,918 | 15,841 | 15,693 |
All other loans | 4,554 | 2,684 | 3,699 | 3,978 | 282 |
Real estate under foreclosure | 975 | 710 | 1,064 | 47 | 520 |
TOTAL LOANS | $383,408 | $351,535 | $297,970 | $271,381 | $261,189 |
Less: Allowance for possible loan losses | 5,278 | 4,975 | 4,169 | 4,236 | 4,293 |
NET LOANS | $378,130 | $346,560 | $293,801 | $267,145 | $256,896 |
Total Loans: At December 31, 20022003 total loans amounted to $351,535,$383,408, compared with $297,970 and $271,381$351,535 at December 31, 2001 and 2000,2002, representing increasesan increase of $53,565 and $26,589,$31,873, or 18.0% and 9.8% respectively.9.1%. The 20022003 increase in total loans over 2001 was principally attributed to consumer real estate loans, principally consumer, which grew $35,909$30,958 or 24.0%10.2%, and ended the year at $185,468. Home equity loans were$335,218. Loan growth during 2003 benefited from a favorable market interest rate environment, a stable local economy, and initiatives to expand the second largest contributorBank’s product offerings and attract new customers while continuing to 2002 loan growth, posting an increase of $13,001 or 61.2% over the December 31, 2001 total of $21,238.leverage its existing customer base.
Construction and Development Loans: Total construction and development loans amounted to $12,639 at December 31, 2003 compared with $16,270 at December 31, 2002, compared with $20,348 at December 31, 2001, representing a decrease of $4,078,$3,631, or 20.0%22.3%. Construction and development loans are principally consumer in nature and represent 4.6%3.3% of the loan portfolio at December 31, 2002,2003, compared with 6.8%4.6% at the prior year-end. The decrease in 20022003 construction and development loans was generally attributable to timing, as the balances from the prior year migrated from construction status to completed homes with permanent financing arrangements. The construction loan volume was not replaced.
Mortgage Loans: Mortgage loans, which include consumer real estate, home equity and commercial, accounted for 81.9%84.1% of total loans at year-end, compared with 77.1%81.9% at December 31, 2001.2002. At December 31, 2002,2003, total mortgage loans amounted to $287,990,$322,579, compared with $229,634 and $208,815$287,990 at December 31, 2001 and 2000,2002, representing increasesan increase of $58,356 and $20,819,$34,589, or 25.4% and 10.0% respectively.12.0%. The increase in mortgage loans was principally attributed to strong consumer mortgage loan originations driven by historically low interest rates, accelerated refinancing activity, and a robust demand for real estate in the Company’s primary market area, Hancock County. Commercial mortgage
At December 31, 2003, real estate loans increased $3,926 between periodscomprised 87.4% of the loan portfolio, compared with 86.6% at December 31, 2002. The continued strength in the local real estate markets, both residential and commercial, has led to $71,184,record property values in the Bank’s market area. Recognizing the impact this trend may have on the loan portfolio, the Bank periodically reviews its underwriting standards to ensure that the quality of the loan portfolio is not jeopardized by unrealistic loan to value ratios or 5.8%.debt service levels. To date there has been no significant deterioration in the performance or risk characteristics in the real estate portfolio.
Loans to Finance Agricultural Production and Other Loans to Farmers: Agricultural loans amounted to $11,719 at December 31, 2003 compared with $11,053 at December 31, 2002, compared with $7,149 at December 31, 2001, representing an increase of $3,904$666 or 54.6%6.0%. This category of loans represented 3.1% of the portfolio at December 31, 2002,2003, unchanged compared with 2.4% at the prior year-end. The increasesame date in 2002 balances was principally attributed to an increase in loans related to the blueberry industry in Washington County.2002.
Commercial and Industrial Loans: Commercial and industrial loans represented 5.7%5.0% of the year-end loan portfolio, compared with 7.4% and 8.7%5.7% at December 31, 20012002. Included in this category of loans are certain loans related to the blueberry industry. The Banks market area demographics generally limit the size and 2000 respectively.growth potential in this particular category of loans. At December 31, 20022003 commercial and industrial loans totaled $20,010,$19,167, compared with $22,158$20,010 at the prior year-end,same date in 2002, representing a decrease of $2,148,$843, or 9.7%4.2%. The decrease in commercial and industrial loans was principally attributed to certain loan payoffs that were not replaced with new loan growth. AAdditionally, continued tighteningstrengthening of credit standards generally reducedhas somewhat limited the amount of unsecured or partially secured loansloan growth in this category of the portfolio.
Loans to Individuals for Household, Family and Other Personal Expenditures: Personal consumer loans, including credit card loans and student loans, totaled $11,775 at December 31, 2003 compared with $12,818 at December 31, 2002, compared with $13,918 at December 31, 2001, representing a decrease of $1,100,$1,043, or 7.9%8.1%. This category of loans represented 3.6%3.1% of the portfolio compared with 4.7%3.6% at December 31, 2001.2002. The decline in balances from 20012002 was generally attributed to the application of stricter credit underwriting standards, pay-downs, and customer debt consolidation resulting from a two yearthe continued declining rate environment. AggressiveThe Bank has not campaigned aggressively for these types of loans over the past couple of years, while competition from the financing affiliates of consumer durable goods manufacturers has also tempered the growth in this particular category of loans.been strong.
All Other Loans: All other loans represented 0.8%1.2% of the portfolio at December 31, 20022003 compared with 1.2% at the prior year-end.0.8% in 2002. The balance of all other loans at December 31, 20022003 totaled $2,684$4,554 compared with $3,699$2,684 at December 31, 2001,2002, representing a decreasean increase of $1,015,$1,870, or 27.4%69.7%. This category of loans principally includeincludes loans to government municipalities and notnot-for-profit organizations. The Bank competed aggressively for profit organizations.government municipality loans during 2003, given their typically short maturities and interest rate risk characteristics. Municipality relationships also presented opportunities for providing a variety of other products and services.
Real Estate Loans Under Foreclosure: Real estate loans under foreclosure represented 0.2%0.3% of the December 31, 20022003 loan portfolio compared with 0.4%0.2% at the prior year-end.same date in 2002. At December 31, 2002,2003, real estate loans under foreclosure totaled $710$975 compared with $1,064$710 at December 31, 2001,2002, representing a decreasean increase of $354, or 33.3%.$265. At December 31, 2002,2003, real estate loans under foreclosure were represented by onesix commercial mortgage loans amounting to $5$544 and ten consumer mortgage loans totaling $705.$431. Anticipated losses are provided for in the Company’sBank’s allowance for loan losses.
Loan Concentrations: Loan concentrations continued to reflect the Company’sBank’s business region. At December 31, 2002,2003, approximately 9.9%8.2% or $34,943$31,493 million of the loan portfolio is represented by loans to the hospitality industry compared with 11.6%9.9% or $34,464$34,943 at December 31, 2001.2002. While not necessarily a concentration, at December 31, 2003 loans related to Maine’s wild blueberry industry amounted to approximately $7,116, or 1.86% of total loans.
Loan Interest Income Summary: During 20022003 the total average tax-equivalent yield on loans amounted to 7.30%6.48%, compared with 8.58% and 8.85%7.30% in 2001 and 2000,2002, representing declinesa decline of 128 and 2782 basis points, respectively.points. Over the past twothree years there have been twelvethirteen interest rate decreases in the Federal Funds targeted rate totaling 525550 basis points.points, the last being 25 basis points during the second quarter of 2003. Consequently, the yields on short-term and variable rate loan products have declined precipitously during this period. Furthermore, during 2002 a significant parallel shift in the yield curve occurred with the five, ten and thirty year Treasury Bonds declining to 2.73%, 3.81% and 4.78% at year-end, respectively. The historically low interest rate environment, including a significant downward parallel shift in the U.S. Treasury yield curve during 2003, following a similar shift during 2002, caused a dramatic increase in both consumer and commercial loan refinancing activity. Consequently, a largesizeable portion of the Company’sBank’s higher yielding loans werewas replaced with new loans at prevailing low interest rates.
Total tax-equivalent interest income from loans amounted to $23,813 in 2003, compared with $23,788 in 2002, compared with $24,355 in 2001, representing a decrease of $567,$25, or 2.3%0.1%. The decrease in interest rates contributed $7,334$2,857 to this decline, while the increase in loan volume offset this amount by $6,767.$2,882.
Other Real Estate Owned: At December 31, 20022003 other real estate owned amounted to $80$36 compared with $54 and $108$80 at December 31, 2001 and 2000 respectively. Two2002. One residential properties compriseproperty comprises the December 31, 20022003 balance. When a real estate loan goes to foreclosure and the CompanyBank purchases the property, the propertya transfer is transferredmade from the loan portfolio to the Other Real Estate Owned (OREO) portfolio at its fair value. If the loan balance is higher than the fair value of the property, the difference is charged to the allowance for loan losses prior to the time of the transfer. Other Real Estate Owned is classified on the balance sheet with Other Assets.
Mortgage Loan Servicing: As more fully disclosed in Note 6 to the financial statements, the CompanyBank from time to time will sell mortgage loans to other institutions, and investors. The sale of loans allows the CompanyBank to make more funds available to customers in its servicing area, while the retention of servicing rights provides an additional source of income. At December 31, 2002,2003, the unpaid balance of mortgage loans serviced for others totaled $18,306$12,334 compared with $45,800 and $52,800$28,569 at December 31, 2001 and 2000,2002, representing decreasesa decrease of 60.0% and 13.2%, respectively.56.8%. The decline in 20022003 balances was attributed to accelerated serviced mortgage loan prepayments, resulting from 20022003 loan refinancing activity prompted by historically low interest rates. Pursuant to the Company’sBank’s asset and liability management strategy, and in light of its strong capital position, this run-off was not replaced with additional sold loans. Rather, loans originated during 2003 were held in the Bank’s loan portfolio.
SUMMARY OF LOAN PORTFOLIO AT DECEMBERThe following table shows fixed rate loans and leases reported by remaining maturity, and floating rate loans by next repricing date, for the years ending December 31, 2003, and 2002.
2002 | 2001 | 2000 | 1999 | 1998 | |
Real estate loans | |||||
Construction and development | $ 16,270 | $ 20,348 | $ 12,297 | $ 15,674 | $ 11,366 |
Mortgage | 287,990 | 229,634 | 208,815 | 195,645 | 168,258 |
Loans to finance agricultural production and other loans to farmers | 11,053 | 7,149 | 6,674 | 10,814 | 10,308 |
Commercial and industrial loans | 20,010 | 22,158 | 23,729 | 22,561 | 22,778 |
Loans to individuals for household, family and other personal expenditures | 12,818 | 13,918 | 15,841 | 15,693 | 16,538 |
All other loans | 2,684 | 3,699 | 3,978 | 282 | 138 |
Real estate under foreclosure | 710 | 1,064 | 47 | 520 | 49 |
TOTAL LOANS | $351,535 | $297,970 | $271,381 | $261,189 | $229,435 |
Less: Allowance for possible loan losses | 4,975 | 4,169 | 4,236 | 4,293 | 4,455 |
NET LOANS | $346,560 | $293,801 | $267,145 | $256,896 | $224,980 |
Maturities | 12/031/03 | 12/31/02 | |
Three months or less | $120,309 | $114,613 | |
Over three months through 12 months | 49,020 | 44,196 | |
Over one year through three years | 28,921 | 48,258 | |
Over three years through five years | 28,101 | 14,513 | |
Over five years through 15 years | 97,259 | 67,965 | |
Over 15 years | 59,798 | 61,990 | |
|
| ||
Total | $383,408 | $351,535 |
INVESTMENT SECURITIESInvestment Securities
The investment securities portfolio, including Fed Funds Sold, money market funds and time deposits with other banks, represented 33.2%29.4% of the Company’s average interest earning assets during 20022003 and generated 27.8%23.8% of total interest income.income, compared with 32.1% and 27.2% during 2002, respectively.
The investment securities portfolio primarily consists of mortgaged-backed securities, United States Government agency securities, obligations of state and political subdivisions, and corporate bonds, and mortgage backed securities.bonds. The overall objective of the Company’sBank’s investment strategy for this portfolio is to maintain an appropriate level of liquidity, diversify earning assets, manage interest rate risk, and generate acceptable levels of net interest income. The investment securities portfolio is managed under the policy guidelines established by the Bank’s Board of Directors.
On January 1, 2001, the Company, as allowed under Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," repositioned a significant part of the investment portfolio from held to maturity to available for sale.
Total Investment Securities: At December 31, 20022003 total investment securities amounted to $162,300$159,297 compared with $142,073 and $154,464$162,300 at December 31, 2001 and 2000,2002, representing an increase of $20,227 and a decrease of $12,391,$3,003, or 14.2% and 8.0%, respectively.1.9%. The 20022003 average investment securities balance amounted to $162,099,$153,040, compared with $151,682$154,287 in 2001,2002, representing an increasea decrease of $10,417,$1,247, or 6.9%0.8%. Given the historically low interest rate environment, interest rate risk and strong loan demand, the Bank exercised restraint by not increasing the investment portfolio footings during 2003, despite its strong capital position and appetite for net interest income.
The 2002During 2003 the financial markets experienced significant interest rate volatility with the two, five and ten year U.S. Treasury’s reaching lows of 1.10%, 2.07%, and 3.13%, and highs of 2.12%, 3.63%, and 4.61%, respectively. This interest rate environment prompted accelerated pay-downs on mortgage-backed securities and the exercise of callable features on other securities. These securities the resultingwere replaced pursuant to a strategy that focused on maintaining a portfolio run-off from which was more than replaced. During 2002 the Company principally invested in securities with relatively short duration, and average lives, andthereby reducing exposure to sustained increases in interest rates. This was achieved through investments in securities with variable rate features.predictable cash flows and relatively short average lives; 10-year fully amortizing mortgage-backed securities and high coupon securities, for example. While sacrificing some yield in the near term,near-term, the Company’s objective wasBank’s objectives were to maintain a reasonable level of net interest income, manage longer-term interest rate risk and market risk, and position the portfolio for a rising interest rate environment in the near future.and an improving economy.
Securities Available for Sale: The securities available for sale portfolio is managed on a total return basis with the objective of exceeding the return that would be experienced if investing solely in U.S. Treasury instruments. This category of investments is used for liquidity purposes while simultaneously producing earnings. The designation of "available for sale" is made at the time of purchase, based upon management’s intent to hold the securities for an indefinite time; however, these securities would be available for sale in response to changes in market interest rates, related changes in the securities’ prepayment risk, needs for liquidity, or changes in the availability of and yield on alternative investments.
Investment securities classified as available for sale are reported at their fair value with unrealized gains or losses, net of taxes, excluded from earnings but shown separately as a component of shareholders’ equity. Gains and losses on the sale of securities available for sale are determined using the specific-identification method and are shown separately in the statement of income. Premiums and discounts are recognized in interest income using the interest method over the estimated life of the security. Premiums paid on mortgaged backed securities are amortized proportionate to the three month trailing average Constant Payment Rate (CPR) of each securitized pool of mortgages.
Securities available for sale totaled $124,422 at December 31, 2003, compared with $128,826 at December 31, 2002, compared with $106,743 at December 31, 2001, representing an increasea decrease of $22,083,$4,404, or 20.7%3.4%. Securities available for sale represented 79.4%78.1% of total investment securities at December 31, 2002,2003, compared with 75.1%79.4% at December 31, 2001. 2002.
The December 31, 2002 and 2001 balances of securities held for sale are stated net of fair value adjustments reflecting net unrealized gains of $692, and $3,284 at December 31, 2003 and $2,587,2002, respectively. The 2003 decline in unrealized gains was primarily due to higher interest rates at December 31, 2003 compared with the same date last year, sales of securities during 2003, and accelerated pay-downs of high yielding securities during 2003.
The following table summarizes the available for sale portfolio over the past three years:
INVESTMENTS AVAILABLE FOR SALE AT DECEMBER 31
(at fair value)
2003 | 2002 | 2001 | |
Obligations of U.S. Government Agencies | $ 5,528 | $ 13,668 | $ 9,660 |
Mortgage Backed Securities | |||
U. S. Government Agencies | 87,270 | 77,305 | 67,400 |
Other – MBS | 21,709 | 17,597 | 12,521 |
Other | 9,915 | 20,256 | 17,162 |
Total | $124,422 | $128,826 | $106,743 |
Net Securities Gains: For the year ended December 31, 2002,2003, net gains on the sale of securities amounted to $450$1,257 compared with none$450 in 2001 and 2000. The majority2002. As more fully discussed under the Results of 2002 sales were corporate securities amounting to $12,024. ChangesOperations section of this report, changes in market interest rates during 2003 and 2002 presented attractive opportunities for repositioning a relatively small portion of the investment securities portfolio, while maintaining an informed and reasonable level of balance sheet interest rate risk.
Securities Held to Maturity: The securities held to maturity portfolio is managed for yield and earnings generation, liquidity through cash flow, and interest rate risk characteristics within the framework of the entire balance sheet.
Investment securities held to maturity are those where the CompanyBank has the positive intent and ability to hold until maturity. Held to maturity investments are reported at their aggregate cost, adjusted for amortization of premiums and accretion of discounts that are recognized in interest income using the interest method. Premiums are amortized to the earliest call date, while discounts are accreted to maturity.
Securities held to maturity totaled $33,965 at December 31, 2003, compared with $31,545 at December 31, 2002, compared with $26,866 at December 31, 2001 and $116,306 at December 31, 2000, representing an increase of $4,679,$2,420, or 17.4% and $89,440, or 76.9%7.7%. Securities held to maturity represented 19.4%21.3% of total investment securities as of December 31, 2002,2003, compared with 18.9% and 75.2%19.4% at December 31, 2001 and 2000, respectively.
The decreasethe same date in securities2002. Securities held to maturity in 2001 compared with 2000 was attributed to a transfer of securities totaling $113,856 from held to maturity to available for sale in January 2001, offset by the addition of $25,109 ofpredominately represent tax-exempt, bank qualified, municipal bond purchasesbonds, the majority of which were purchased in the fourth quarter of 2001 that were classified as held to maturity.2001.
At December 31, 2002,2003, investments held to maturity had net unrealized gains of $532,$1,128, compared with unrealized losses of $1,923 and $61$532 at December 31, 2001 and 2000, respectively.
2002.
At December 31, 2002,2003, investments held to maturity portfolio had a weighted average expected life of 9.7 years, a modified duration of 8.611.1 years, and was yieldinggenerating a tax-equivalent yield of 7.10%.
The following table summarizes the held to maturity portfolio over the past three years:
INVESTMENTS HELD TO MATURITY AT DECEMBER 31
(at book value)
2003 | 2002 | 2001 | |
Obligations of State and Political Subdivisions | $ 33,374 | $30,182 | $26,866 |
Mortgage Backed Securities | |||
U. S. Government Agencies | 591 | 1,363 | -- |
Total | $33,965 | $31,545 | $26,866 |
Other Securities: Other securities consist of money market funds, overnight Federal fundsFunds sold, and time deposits with other banks and other non-marketable securities. The 2002 average balance ofbanks. At December 31, 2003, other securities amounted to $6,461,totaled $910 compared with $11,530$1,929 at the same date in 2001,2002, representing a decrease of $5,069,$1,019, or 44.0%52.8%.
Credit Risk: The 2002 decrease was principally attributed toBank evaluates and monitors the temporary investmentcredit risk of excess liquidity in 2001 resulting from seasonal deposit flows and acceleratedits investments utilizing a variety of resources including external credit rating agencies. At December 31, 2003, 94.3% of the investment portfolio run-off.was rated "AAA", principally consisting of mortgage-backed securities. The Bank held no investment securities below a credit rating of "A" at that date.
Investment Securities Interest Income: During 20022003 the total aggregate tax-equivalent yield on the investment securities portfolio amounted to 5.66%4.93%, compared with 6.41% and 6.83%5.91% at the same date in 2001 and 2000, representing declines of 75 and 42 basis points, respectively.2002. The declining interest rate environment over the past two years has resulted in a significant increase in prepayment speeds on high coupon mortgage backed securities, an acceleration of premium amortization, and the exercise of call features on certain securities. Securities replaced or added to the investment securities portfolio in 2002 were primarily variable rate orduring 2003 had relatively short average lives or were variable rate and consequently, lower yields.yielding.
Total tax-equivalent interest income from investment securities amounted to $9,177$7,450 in 2003, compared with $8,889 in 2002, compared with $9,730 in 2001, and $11,464 in 2000, representing decreasesa decrease of $553,$1,439, or 5.7%, and $1,734, or 15.1%, respectively.16.2%. The decrease in interest rates contributed $1,462yields accounted for the decline, as year-over-year volume essentially remained the same.
Investment Securities Maturity Distribution: The following tables summarize the maturity distribution of the held to maturity and available for sale portfolios at December 31, 2003, based upon the 2002 decline, whilefinal maturity date of the increase in volume offset this amount by $909.security. Expected maturities may differ from contractual maturities because issuers may have the right to call or pre-pay certain securities. In the case of mortgage-backed securities, actual maturities may also differ from expected maturities due to the amortizing nature of the underlying mortgage collateral, and the fact that borrowers may have the right to prepay.
INVESTMENTS HELD TO MATURITY AT DECEMBER 31(at book value)
2002 | 2001 | 2000 | |
Obligations of U.S. Government Agencies | $ -- | $ -- | $ 2,407 |
Obligations of State and Political Subdivisions | 30,182 | 26,866 | 2,442 |
Mortgage Backed Securities | |||
U. S. Government Agencies | 1,363 | -- | 81,990 |
Other – MBS | -- | -- | 13,968 |
Other | -- | -- | 15,499 |
Total | $31,545 | $26,866 | $116,306 |
INVESTMENTS AVAILABLE FOR SALE AT DECEMBER 31(at fair value)
2002 | 2001 | 2000 | |
Obligations of U.S. Government Agencies | $ 13,668 | $ 9,660 | $ 34,379 |
Mortgage Backed Securities | |||
U. S. Government Agencies | 77,305 | 67,400 | 2,243 |
Other – MBS | 17,597 | 12,521 | -- |
Other | 20,256 | 17,162 | 1,222 |
Total | $128,826 | $106,743 | $37,844 |
MATURITY SCHEDULE FOR INVESTMENTS
HELD TO MATURITY AT DECEMBER 31,20022003
(at book value)
One Year Or Less | Greater Than One Year to Five Years | Greater Than Five Years to Ten Years | Greater Than Ten Years | One Year Or Less | Greater Than One Year to Five Years | Greater Than Five Years to Ten Years | Greater Than Ten Years | |
Mortgage Backed Securities: | ||||||||
U. S. Government Agencies | $ -- | $ -- | $ -- | $ 1,363 | $ -- | $ -- | $ -- | $ 591 |
Average Yield | 0% | 0% | 0% | 6.37% | 0% | 0% | 0% | 6.50% |
|
|
| ||||||
Obligations of State and Political Subdivisions | -- | 943 | 655 | 28,574 | 975 | 180 | 390 | 31,829 |
Average Yield | 0% | 3.70% | 3.80% | 5.20% | 3.70% | 3.20% | 3.20% | 4.89% |
|
|
| ||||||
Total | $ -- | $ 943 | $ 665 | $29,937 | $975 | $180 | $390 | $32,420 |
MATURITY SCHEDULE FOR INVESTMENTS
AVAILABLE FOR SALE AT DECEMBER 31, 20022003
(at fair value)
One Year or Less | Greater Than One Year to Five Years | Greater Than Five Years to Ten Years | Greater Than Ten Years | One Year or Less | Greater than One Year to Five Years | Greater than Five Years to Ten Years | Greater than Ten Years | |
Obligations to U. S. Government Agencies | $1,762 | $ 5,538 | $ 3,366 | $ 3,002 | $ -- | $1,515 | $ 3,485 | $ 528 |
Average Yield | 7.46% | 4.40% | 5.16% | 5.17% | 0.00% | 3.33% | 3.61% | 6.45% |
Mortgage Backed Securities: | ||||||||
U. S. Government Agencies | 106 | 3,135 | 11,561 | 62,503 | ||||
Mortgage backed Securities: | ||||||||
U. S. Government agencies | -- | 1,880 | 32,476 | 52,914 | ||||
Average Yield | 6.00% | 6.60% | 6.14% | 6.20% | 0.00% | 5.26% | 4.93% | 5.58% |
Mortgage Backed Securities: | ||||||||
Mortgage backed Securities: | ||||||||
Other | -- | -- | 1,733 | 15,864 | -- | -- | 56 | 21,653 |
Average Yield | 0% | 0% | 6.91% | 6.66% | 0.00% | 0.00% | 8.00% | 5.38% |
Other Bonds | 104 | 5,632 | -- | 14,520 | -- | -- | -- | 9,915 |
Average Yield | 5.75% | 6.79% | 0% | 3.97% | 0.00% | 0.00% | 0.00% | 3.87% |
Total | $1,972 | $14,305 | $16,660 | $95,889 | $ -- | $3,395 | $36,017 | $85,010 |
Available for sale securities are included based upon the final maturity date of the security.
Investment Securities Concentrations: The CompanyBank does not hold any securities for a single issuer, other than U. S. Government agencies, where the aggregate book value of the securities exceed 10% of the Bank’sCompany’s shareholders’ equity.
Impaired Investments: The investment securities portfolio contains certain investments where amortized cost exceeds fair market value, which at December 31, 2003 amounted to $648. Unrealized losses that are considered other-than-temporary are recorded as an impairment expense on the Company’s Income Statement. In evaluating whether impairments are other-than-temporary, management considers a variety of factors including the nature of the investment(s), the cause of the impairment(s), the number of investment positions that are in an unrealized loss position, and the severity and duration of the impairment(s). Other data considered by management includes, for example, industry analyst reports, sector credit ratings, volatility of the security’s market price, and or any other information considered relevant.
At December 31, 2003, management determined there were no unrealized losses in the investment securities portfolio that were other-than-temporary.
The following table summarizes temporarily impaired investment securities and their approximate fair values at December 31, 2003. All securities referenced are debt securities. At December 31, 2003 the Bank did not hold any common stock or equity securities in its investment securities portfolio.
FUNDING SOURCESTEMPORARILY IMPAIRED INVESTMENT SECURITIES
DECEMBER 31, 2003
Less Than 12 Months | 12 Months or Longer | Total | ||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |
Description of Securities: | Value | Losses | Value | Losses | Value | Losses |
Obligations to U.S. Government Agencies | $ 2,483 | $ 50 | $ - - | $ - - | $ 2,483 | $ 50 |
Mortgage-backed securities: |
| |||||
U.S. Government agencies | 25,128 | 184 | 4,090 | 30 | 29,218 | 214 |
Other | 459 | 1 | 8,301 | 122 | 8,760 | 123 |
Obligations of states of the U.S. and political |
| |||||
Sub-divisions thereof | 202 | 29 | 1,006 | 125 | 1,208 | 154 |
Corporate bonds | 4,910 | 107 | - - | - - | 4,910 | 107 |
Total temporarily impaired securities | $33,182 | $371 | $13,397 | $277 | $46,579 | $648 |
At December 31, 2003 the total unrealized losses on temporarily impaired investments amounted to $648, representing, 1.4% of their carrying value. Unrealized losses on investment securities that have been in an unrealized loss position for more than twelve months amounted to $277 thousand, or 2.0% of their carrying value.
At December 31, 2003 the total number of investment positions in an unrealized loss position amounted to 72, represented by 57 mortgage backed-securities, 6 municipal bonds, 5 government agency bonds and 4 corporate bonds. At that same date there were no individual investment positions where the unrealized loss exceeded 3.6% of its carrying value.
Management believes the unrealized losses in the investment portfolio at December 31, 2003 were attributed to interest rates, and particularly resulted from the volatile movements in the U.S. Treasury curve over the past two years. Specifically, certain debt securities were purchased in an interest rate environment lower than where the U.S. Treasury yield curve stood on December 31, 2003. Subsequent to December 31, 2003 the yield curve posted a sharp decline, with the 10-year U.S. Treasury, for example, closing as low as 3.68%, or 57 basis points lower than where it stood at year-end.
Funding Sources
The Bank utilizes various traditional sources of funding to support its earning asset portfolios.portfolios, principally customer deposits and borrowings from the Federal Home Loan Bank of Boston ("FHLB") of which it is a member. Average total funding in 20022003 amounted to $460,625,$499,224, compared with $409,959$460,625 in 2001,2002, representing an increase of $50,666,$38,599, or 12.4%8.4%.
Deposits:Deposits
The most significant source of funding for earning assets continued to be customer deposits, gathered throughout the Bank’s branch office network. During 2002,2003, total average deposits accounted for 65.9%61.9% of the funding required to support the Company’s earning asset portfolios.portfolios, compared with 63.2% during 2002.
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 the summer and fall. These seasonal swings have been fairly predictable and have not had a materially adverse impact on the Bank. Seasonal swings in deposits have been typically absorbed by the Bank’s strong liquidity position, including borrowing lines from the FHLB and cash flows from the investment securities portfolio.
Total Deposits: At December 31, 20022003 total deposits amounted to $322,015,$339,080, compared with $291,833 and $278,076$322,015 at December 31, 2001 and 2000, representing increases of $30,182 and $13,757, or 10.3% and 4.9%, respectively. Average 2002, deposit balances amounted to $303,475, compared with $279,923 in 2001, representing an increase of $23,552,$17,065, or 8.4%5.3%.
The Total average deposits amounted to $322,414 during 2003, compared with $303,475 during 2002, representing an increase of $18,939 or 6.2%. While all categories of deposits posted year-over-year increases, the growth in 2002 deposits2003 was led by non-maturity transaction accounts; namely: demand deposit, money market and savings accounts, posting a year-over-year increase of $17,842 or 19.6%, and ending the year at $108,982.NOW accounts. Depositor preference during 20022003 appeared to be that of greater liquidity, given general economic and market conditions. NOW accounts also showed solid growth
The following table summarizes the components of the Bank’s total average deposit portfolio:
SUMMARY OF DEPOSIT PORTFOLIO
2003 | 2002 | 2001 | ||||
Average Balance | Average Rate | Average Balance | Average Rate | Average Balance | Average Rate | |
Demand deposits | $ 45,607 | -- | $ 43,673 | -- | $ 42,661 | -- |
NOW accounts | 54,221 | 0.34% | 48,739 | 0.60% | 43,758 | 0.82% |
Savings accounts | 104,275 | 0.88% | 95,514 | 1.71% | 77,002 | 2.73% |
Time deposits | 118,311 | 2.74% | 115,549 | 3.42% | 116,502 | 5.01% |
Total deposits | $322,414 | $303,475 | $279,923 |
Demand Deposits: Non-interest bearing demand deposits, which are principally commercial in 2002, ending the yearnature, ended 2003 at $50,172, or 9.8% higher than December 31, 2001.
Time deposits, excluding brokered funds, ended the year at $110,872$49,880 compared with $108,896$46,001 at December 31, 2001,2002, representing an increase of $1,976$3,879, or 1.8%8.4%, compared with December 31, 2002. Total average demand deposits amounted to $45,607 during 2003, representing an increase of $1,934, or 4.4%. Demand deposits represented 14.1% of total average deposits during 2003, compared with 14.4% in the prior year. The Bank offers its business customers with a variety of cash management products including a Cash Management Sweep Account. Customers are able to automatically transfer their excess demand deposit balances, over certain thresholds established with an earnings credit rate, to interest bearing, overnight securities repurchase agreements. Demand deposits also include balances generated by way of the Bank’s Merchant Credit Card Processing Program.
NOW Accounts: The Bank offersNOW accounts to individuals and not-for-profit organizations. During 2003 the Bank’s most successful NOW account product continued to be Gold Wave Checking, a relationship product designed for its elderly and retired customers. At December 31, 2003, total NOW accounts stood at $60,287, representing an increase of $10,115 or 20.2% compared with the same date in 2002. During 2003 total average NOW accounts amounted to $54,221, compared with $48,739 during 2002, representing an increase of $5,482, or 11.2%.
Savings Accounts: Savings accounts, which also include money market accounts, represented 32.2% of total deposits at December 31, 2003, compared with 33.8% at the same date in 2002. The Bank offers statement savings accounts, and as a community oriented financial institution continues to offer the more traditional passbook savings accounts.
The Bank also offers a tiered-rate, competitively priced money market account, Investors Choice, providing businesses and individuals with short-term investment alternatives. During 2003, a period of historically low interest rates, customers appeared to demonstrate a thirst for the higher liquidity offered through the Investors Choice money market account, versus more traditional longer-term certificates of deposit.
At December 31, 2003, total savings accounts amounted to $109,309, compared with $108,982 at the same date in 2002, representing an increase of $327, or 0.3%. Total average savings accounts amounted to $104,275 during 2003, representing an increase of $8,761, or 9.2%, compared with 2002.
Time Deposits: Total time deposits ended 2003 at $119,604 compared with $116,860 at December 31, 2002, representing an increase of $2,744 or 2.4%. Total average time deposits amounted to $118,311 during 2003, representing an increase of $2,762, or 2.4%, compared with 2002. The relatively sluggish growth in this category of deposits was presumablyin part due to depositors’ unwillingnessapparent hesitation to commit toinvest in longer term fixed rate investmentscertificates at historically low rates.
Non-interest bearing demandyields. Additionally, in light of the extended low rate environment and its resulting pressure on the Bank’s net-interest margin, during 2003 the Bank did not compete for time deposits endedas aggressively as it has in the yearpast, with respect to pricing.In pricing non-customer relationship time deposits, the Bank will consider other available sources of funding which may be offered at $46,001, representing a decline of $111, or 0.2%, compared with December 31, 2001. Demand deposits represented 14.2% of total deposits at December 31, 2002, compared with 15.8% at the prior year-end.more attractive terms and prices, including borrowed and brokered funds.
Time deposits in denominations of $100 or greater totaled $18,784 at December 31, 2003 compared with $15,185 at December 31, 2002, representing an increase of $3,599, or 23.7%. Time deposits in denominations over $100 amounted to 5.5% of total deposits at December 31, 2003, compared with $13,9054.7% at the same date last year, representing an increasein 2002. Included in time deposits of $1,280$100 or 9.2%. The 2002 increase was attributed to the purchase of $5,988 in long-termgreater were brokered deposits at rates considered favorable to the Company.deposits. Total brokered deposits at December 31, 20022003 amounted to $5,988, or 1.9%1.8% of total deposits, compared with none in$5,988 and 1.9% at December 31, 2002.
The following schedule summarizes the prior year.maturity distribution of time deposits of $100 or more:
MATURITY SCHEDULE FOR TIME DEPOSITS $100 THOUSAND OR MORE
DECEMBER 31, 2003
Three Months | Over Three Months | Over Six Months Through | Over Twelve Months |
$4,359 | $3,472 | $4,625 | $6,328 |
Borrowed Funds:
Borrowed funds consist of securities sold under agreement to repurchase and borrowings from the Federal Home Loan Bank (FHLB).FHLB. Advances from the FHLB are secured by stock in the FHLB, U.S. Treasury and Government Agency notes, mortgage-backed securities, and qualifying first mortgage loans.
The Bank utilizes borrowed funds in leveraging its strong capital position and supporting its earning asset portfolios. Borrowed funds are principally utilized to support the Bank’s investment securities portfolio and, to a lesser extent, fund loan growth. Borrowed funds also provide a means to help manage balance sheet interest rate risk, given the Company’sBank’s ability to select desired amounts, terms and maturities.maturities on a daily basis.
Total Borrowed Funds: At December 31, 2002,2003, total borrowed funds amounted to $170,501,$186,431, compared with $136,059 and $131,318$170,501 at December 31, 2001 and 2000,2002, representing increasesan increase of $34,442 and $4,741,$15,930, or 25.3% and 3.6%, respectively.9.3%. Average 20022003 borrowed funds balances amounted to $157,150,$176,810, compared with $130,036 in 2001,$157,150 during 2002, representing an increase of $27,114,$19,660, or 20.8%12.5%.
The increase in borrowed funds during 20022003 was principally utilized to fund loan growth, and to a lesser extent growth inas the Company’sBank’s investment securities portfolio.portfolio declined on a year-over-year basis.
As of December 31, 2002,2003, total short-term borrowings, including repurchase agreements, amounted to $47,943,$58,525, compared with $46,159 and $86,318$47,943 at December 31, 20012002, or 31.4% and 200028.1% of total borrowings, respectively. Conversely, long-term borrowings at December 31, 20022003 totaled $122,558,$127,906, compared with $89,900 and $45,000$122,558 at December 31, 20012002, or 68.6% and 2000, representing increases71.9% of 36.3% and 99.8%,total borrowings, respectively.
Borrowing maturities are managed in concert with the Bank’s asset and liability management strategy, and are closely aligned with the ongoing management of balance sheet interest rate risk. Over the past twofew years, newthe Bank has added longer term borrowings andto the replacementbalance sheet in order to hedge the interest rate risk associated with the growth in longer-term, fixed rate, earning assets generated during periods of scheduled maturities were predominately redirected to longer- term advances from the FHLB. This strategy was in response to opportunities presented by historically low interest rates. While this strategy has pressured net interest income in the short-term, management believes it positions the Company well for rising interest rates and more importantly, the addition and/or replacement of long-term, fixed rate assets on the balance sheet.an improving economy.
Interest Expense Summary: For the year ended December 31, 2002,2003, total interest expense amounted to $12,775,$11,075, compared with $15,751$12,775 in 2001, and $17,616 in 2000,2002, representing decreasesa decrease of $2,976,$1,700, or 18.9%, and $1,865, or 10.5%, respectively.13.3%. The total cost of the Company’sBank’s interest bearing liabilities amounted to 2.44% in 2003, compared with 3.06% in 2002, compared with 4.29%representing a decline of 62 basis points.
As more fully enumerated under the Results of Operations section of Managements Discussion and 4.70% during 2001 and 2000, representing declines of 123 and 41 basis points, respectively.
DecliningAnalysis, declining interest rates over the past two years was the principal factor underlying the decreases in the Company’sBank’s cost of interest bearing funds and total interest expense. The decline in interest rates contributed $7,091$2,907 to the 20022003 decrease in interest expense, while increased levels of interest-bearing liabilities offset this amount by $4,115.$1,207.
SUMMARY OF DEPOSIT PORTFOLIO
2002 | 2001 | 2000 | ||||
Average | Average | Average | Average | Average | Average | |
Demand deposits | $ 43,673 | -- | $ 42,661 | -- | $ 44,180 | -- |
NOW accounts | 48,739 | 0.60% | 43,758 | 0.82% | 44,260 | 0.99% |
Savings accounts | 95,514 | 1.71% | 77,002 | 2.73% | 76,189 | 3.06% |
Time deposits | 115,549 | 3.42% | 116,502 | 5.01% | 115,984 | 5.38% |
Total deposits | $303,475 | $279,923 | $280,613 |
MATURITY SCHEDULE FOR TIME DEPOSITS $100 THOUSAND OR MOREDECEMBER 31, 2002
Three Months | Over Three Months | Over Six Months Through | Over Twelve Months |
$1,739 | $2,298 | $4,754 | $6,394 |
CAPITAL RESOURCESCapital Resources
Consistent with its long-term goal of operating a sound and profitable organization, Bar Harbor Banksharesthe Company continues to be a "well capitalized" bank holding company according to regulatory standards. In 2002,2003, the Company continued to maintain a strong capital position, which is vital in promoting depositor and investor confidence and providing a solid foundation for future growth. Historically, most of the Company’s capital requirements have been provided through retained earnings and this continues to be the case.
On December 8, 1998, the board of directors of the Company declared a 100% stock dividend to owners of record as of December 28, 1998, payable on January 25, 1999. All share and per share data included in the Form 10-K have been restated to reflect the 100% stock dividend.
Stock Repurchase Plans: In November 1999, Bar Harbor Banksharesthe Company announced a stock buybackrepurchase plan. The Board of Directors of the Company hasat that time authorized open market and privately negotiated purchases of up to 10% of the Company’s outstanding shares of common stock, or 344,000 shares. The Board of Directors hassubsequently authorized the continuance of thisthat program through December 31, 2003. As of December 31, 2002,2003, the Company had repurchased 269,154339,814 shares of stock under thisthe plan, at a total cost of $4,561$6,151 and an average price of $16.94.$18.10 per share. The share repurchase program terminated on December 31, 2003. The Company holdsrecords the repurchased shares as treasury stock.
In March 2004, the Company announced a second stock repurchase plan. The Board of Directors of the Company authorized open market and privately negotiated purchases of up to 10% of the Company’s outstanding shares of common stock, or 310,000 shares. Purchases began on March 4, 2004 and will continue through December 31, 2005. Depending on market conditions and other factors, these purchases may be commenced or suspended at any time, or from time-to-time, without prior notice. The Company’s believes that a stock repurchase plan is a prudent use of capital at this time. The Company anticipates that the stock repurchase plan will be immediately accretive to the return on average equity and earnings per share.
Cash Dividends: The Company has historically paid regular quarterly cash dividends on its common stock. In the third quarter of 1999, the Company increased its quarterly dividend from $0.17 per share to $0.19 per share. Quarterly dividends have continued at this rate through 2002.2003. Each quarter the boardBoard of directorsDirectors declares the payment of regular quarterly cash dividends, subject to adjustment from time to time, based on the Company’s earnings outlook and other relevant factors. In the first quarter of 2004 the Company increased its quarterly dividend by 5.3% to $0.20 per common share. The dividend was paid March 15, 2004 to shareholders of record as of the close of business on February 20, 2004.
The Company’s principal source of funds2003 dividend payout ratio amounted to pay cash dividends and support its commitments is from its banking subsidiary, Bar Harbor Banking and Trust Company. As discussed herein, under "Regulatory Matters" the Bank’s principal regulatory agency, the FDIC, currently limits Bank dividends to current earnings excluding securities gains while maintaining a Tier 1 leverage capital ratio of 8.0%45.8%, without prior approval. The Bank iscompared with 53.6% in full compliance with these requirements and does not anticipate any impact on its ability to pay future dividends at historical levels.2002.
During 2002, the Company’s shareholders’ equity grew $1,298, or 2.5%, after the payment of $2,445 in shareholder dividends, stock repurchases of $1,563, and an increase of $640, net of tax, in value through market appreciation of securities available for sale and derivative instruments.
Capital Ratios: At December 31, 2002,2003, the Company’s total risk based capital was $53,434$56,403 or 14.5%14.7% of risk-weighted assets, compared with $52,950 and 16.8%$53,434, or 14.5% of total risk-weighted assets at December 31, 2001, and $53,235 and 18.0%2002. Tier I capital totaled $51,601 or 13.4% of risk-weighted assets, compared with 48,819, or 13.2% of total risk weighted assets at December 31, 2000. Tier I capital to risk-weighted assets was $48,819 or 13.2% at December 31, 2002, compared with $49,017, or 15.6% at December 31, 2001, and $49,538, or 16.8% at December 31, 2000.2002. The ratio of Tier I capital to average weighted assets, or leverage ratio, at December 31, 20022003 was 8.9%, compared with 10.3%unchanged from the same date in 2001 and 10.6% in 2000.2002.
As more fully depicted in Note No. 13 to the financial statements,Consolidated Financial Statements, during 2003 the Bank maintained its standing as a "well capitalized" institution as defined by regulatory standards. At December 31, 2003, the Bank’s Tier I Leverage, Tier I Risk Based and Total Risk Based capital ratios exceed allexceeded the regulatory requirements for a "well"well capitalized" bank.
Overinstitutions by 3.3%, 6.0% and 2.9%, respectively. At December 31, 2003 the past two years the Company’sCompany’ s capital ratios have shown a moderate decline. The purchase of $2,340 of stock pursuant to the Company’s stock buyback plan, the funding of operating losses at BTI,exceeded regulatory capital adequacy standards by 6.7%, 9.4% and dividend payout ratios of 53.6% and 70.9% in 2002 and 2001 respectively, all contributed to the decline.4.9%, respectively.
Except as may be noted in "Supervision and Regulation" herein above, or "Regulatory Matters" herein below, thereThere are no known trends, events or uncertainties, nor any recommendations by any regulatory authority, that are reasonably likely to have a material effect on the Company’s liquidity, capital resources, or operating results.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is the principal component of the Company’s income stream and represents the difference or spread between interest and loan fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Net interest income is entirely generated by the Bank. Fluctuations in interest rates as well as volume and mix changes in earning assets and interest bearing liabilities can materially impact net interest income.
Total Net interest income is entirely generated by the Bank. Net interest income, after the provision for possible loan losses, represented 74.9% of total 2002 revenue, compared with 68.5% and 70.5% in 2001 and 2000, respectively.
Interest Income: For the year ended December 31, 2002,2003, net interest income on a fully tax- equivalent basis amounted to $20,190$20,188 compared with $18,334$19,902 and $17,840$17,870 in 20012002 and 2000,2001, representing increases of $1,856$286 and $494,$2,032, or 10.1%1.4% and 2.8%11.4%, respectively.
The increase in 20022003 net interest income was entirely attributed to a $52,401$40,742 increase in average earning assets between periods,during the year, as the 20022003 net interest margin declined seven27 basis points to 4.14%3.88%, compared with 2001.2002. The net interest margin in 20002001 amounted to 4.06%4.18%.
Of the $1,856 increase in 2002 net interest income, $3,561 was attributed to increased volume, offset by $1,705 due to changes in interest rates.
As more fully enumerated under the "earning assets" discussion in this report, the declining interest rate environment over the past two years has had a relatively significant impact on the Company’sBank’s earning asset yields and the cost of its interest bearing funds. During 2002,2003, the yield on average earning assets amounted to 6.76%6.00%, compared with 7.83%6.81% and 8.08%7.86% in 20012002 and 2000,2001, representing declines of 10781 and 25105 basis points, respectively. Likewise,Similarly, the cost of interest bearing liabilities amounted to 2.44% in 2003, compared with 3.06% and 4.29% in 2002 compared with 4.29% and 4.70% in 2001, and 2000, representing declines of 12362 and 41123 basis points, respectively.
Over Driven by record loan refinancing activity and accelerated cash flows from the past two yearsinvestment portfolio during 2003, the decline in yields on earning assets outpaced the decline in the cost of interest bearing liabilities has declined atby 19 basis points.
During 2003 the Bank pursued a faster rate than the yields on interest earning assets, 16 basis points faster in 2002 and 16 basis points faster in 2001. These differentials helped support the relative stabilitynumber of the Company’sstrategies to achieve a reasonably stable net interest margin during this period, without increasing itsin an extended low interest rate environment, while it continued to manage exposure to rising rates over the longer term. The Company attributes this success to timelylonger-term horizon. These strategies included a repositioning of a portion of the investment securities portfolio, utilization of interest rate swap agreements, and effective loan and deposit pricing strategies, orchestrated within well-established asset/liability management policies and the overall management of balance sheet interest rate risk.
During 2003 the Bank successfully marketed 10-year, fully amortizing 10-year mortgage products, including a bi-weekly payment 10-year mortgage product. While 10-year fully amortizing products generate lower yields than longer-term products, their cash flow characteristics diminished the degree of long-term interest rate risk, and better-positioned the Bank for rising interest rates in the future.
The Bank continued to utilize longer-term borrowings to fund a portion of earning asset growth during 2003 as it had during 2002. While the use of longer-term borrowing maturities naturally resulted in less net interest income, they more closely matched the maturities of fixed rate earning assets that were added to the Bank’s balance sheet, thereby preserving the sensitivity of net interest income in a rising rate environment.
The Bank has been deliberate in its efforts to hedge the interest rate risk associated with the addition of fixed rate earning assets to the balance sheet during a period of historically low interest rates. As more fully enumerated under the Market Risk section of this report, the Bank maintained its asset sensitive balance sheet during 2003, and believes it is positioned to benefit from rising rates and an improving economy.
The following tables summarize the Company’s average balance sheets and the components of net interest income, including a reconciliation of tax equivalent adjustments, for the years ended December 31, 2003, 2002 and 2001:
AVERAGE BALANCE SHEET AND
ANALYSIS OF NET INTEREST INCOME
For the year ended December 31, 20022003
Average | Interest | Average | ||||
Average | Interest | Average | ||||
Interest Earning Assets: | ||||||
Loans (1,3) | $325,712 | $23,788 | 7.30% | $367,701 | $23,813 | 6.48% |
Investment securities(3) | 155,638 | 9,023 | 5.80% | 150,138 | 7,406 | 4.93% |
Federal Funds sold, money market funds, and time | ||||||
deposits with other banks | 6,461 | 154 | 2.38% | 2,902 | 44 | 1.52% |
Total Investments | 162,099 | 9,177 | 5.66% | 153,040 | 7,450 | 4.87% |
Total Earning Assets | 487,811 | 32,965 | 6.76% | 520,741 | 31,263 | 6.00% |
Non Interest Earning Assets: | ||||||
Cash and due from banks | 10,913 | 8,227 | ||||
Other assets (2) | 20,215 | 31,869 | ||||
Total Assets | $518,939 | $560,837 | ||||
Interest Bearing Liabilities: | ||||||
Deposits | $259,802 | $ 5,880 | 2.26% | $276,807 | $ 4,336 | 1.57% |
Securities sold under repurchase agreements | 13,124 | 288 | 2.19% | 13,086 | 173 | 1.32% |
Other borrowings | 144,026 | 6,607 | 4.59% | 163,724 | 6,566 | 4.01% |
Total borrowings | 157,150 | 6,895 | 4.39% | |||
Total Borrowings | 176,810 | 6,739 | 3.81% | |||
Total Interest Bearing Liabilities | 416,952 | 12,775 | 3.06% | 453,617 | 11,075 | 2.44% |
Non Interest Bearing Liabilities: | ||||||
Demand deposits | 43,673 | 45,607 | ||||
Other liabilities | 5,501 | 7,689 | ||||
Total Liabilities | 466,126 | 506,913 | ||||
Shareholders' equity | 52,813 | 53,924 | ||||
Total Liabilities and Shareholders' Equity | $518,939 | $560,837 | ||||
Net Interest Income and Net Interest Margin (3) | 20,190 | 4.14% | 20,188 | 3.88% | ||
Less: Tax Equivalent Adjustment | (613) | (684) | ||||
Net Interest Income | $19,577 | 4.01% | $19,504 | 3.75% |
(1) For purposes of these computations, non-accrual loans are included in average loans.
(2) For purposes of these computations, unrealized gains (losses) on available-for-sale securities and allowance for loan losses are recorded in other assets.
(3) For purposes of these computations, reported on a tax equivalent basis.
AVERAGE BALANCE SHEETS AND
ANALYSIS OF NET INTEREST INCOME
For the year ended December 31, 20012002
Average | Interest | Average | Average | Interest | Average | |
Interest Earning Assets: | ||||||
Loans (1,3) | $283,728 | $24,355 | 8.58% | $325,712 | $23,788 | 7.30% |
Investment securities(3) | 140,152 | 9,258 | 6.61% | 147,826 | 8,735 | 5.91% |
Federal Funds sold, money market funds, and time | ||||||
deposits with other banks | 11,530 | 472 | 4.09% | 6,461 | 154 | 2.38% |
Total Investments | 151,682 | 9,730 | 6.41% | 154,287 | 8,889 | 5.76% |
Total Earning Assets | 435,410 | 34,085 | 7.83% | 479,999 | 32,677 | 6.81% |
Non Interest Earning Assets: | ||||||
Cash and due from banks | 11,767 | 10,913 | ||||
Other assets (2) | 21,072 | 28,027 | ||||
Total Assets | $468,249 | $518,939 | ||||
Interest Bearing Liabilities: | ||||||
Deposits | $237,262 | $ 8,298 | 3.50% | $259,802 | $ 5,880 | 2.26% |
Securities sold under repurchase agreements | 13,348 | 519 | 3.89% | 13,124 | 288 | 2.19% |
Other borrowings | 116,688 | 6,934 | 5.94% | 144,026 | 6,607 | 4.59% |
Total Borrowings | 130,036 | 7,453 | 5.73% | 157,150 | 6,895 | 4.39% |
Total Interest Bearing Liabilities | 367,298 | 15,751 | 4.29% | 416,952 | 12,775 | 3.06% |
Non Interest Bearing Liabilities: | ||||||
Demand deposits | 42,661 | 43,673 | ||||
Other liabilities | 6,011 | 5,501 | ||||
Total Liabilities | 415,970 | 466,126 | ||||
Shareholders' equity | 52,279 | 52,813 | ||||
Total Liabilities and Shareholders' Equity | $468,249 | $518,939 | ||||
Net Interest Income and Net Interest Margin (3) | 18,334 | 4.21% | 19,902 | 4.15% | ||
Less: Tax Equivalent Adjustment | (193) | (613) | ||||
Net Interest Income | $18,141 | 4.17% | $19,289 | 4.02% |
(1) For purposes of these computations, non-accrual loans are included in average loans.
(2) For purposes of these computations, unrealized gains (losses) on available-for-sale securities and allowance for loan losses are recorded in other assets.
(3) For purposes of these computations, reported on a tax equivalent basis.
AVERAGE BALANCE SHEET AND
ANALYSIS OF NET INTEREST INCOME
For the year ended December 31, 20002001
Average | Interest | Average | Average | Interest | Average | |
Interest Earning Assets: | ||||||
Loans (1,3) | $271,000 | $23,992 | 8.85% | $283,728 | $24,355 | 8.58% |
Investment securities(3) | 167,184 | 11,424 | 6.83% | 132,398 | 8,794 | 6.64% |
Federal Funds sold, money market funds, and time | ||||||
deposits with other banks | 694 | 40 | 5.76% | 11,530 | 472 | 4.09% |
Total Investments | 167,878 | 11,464 | 6.83% | 143,928 | 9,266 | 6.44% |
Total Earning Assets | 438,878 | 35,456 | 8.08% | $427,656 | $33,621 | 7.86% |
Non Interest Earning Assets: | ||||||
Cash and due from banks | 13,598 | 11,767 | ||||
Other assets (2) | 19,096 | 28,826 | ||||
Total Assets | $471,572 | $468,249 | ||||
Interest Bearing Liabilities: | ||||||
Deposits | $236,433 | $ 9,008 | 3.81% | $237,262 | $ 8,298 | 3.50% |
Securities sold under repurchase agreements | 11,479 | 544 | 4.74% | 13,348 | 519 | 3.89% |
Other borrowings | 127,224 | 8,064 | 6.34% | 116,688 | 6,934 | 5.94% |
Total Borrowings | 138,703 | 8,608 | 6.21% | 130,036 | 7,453 | 5.73% |
Total Interest Bearing Liabilities | 375,136 | 17,616 | 4.70% | 367,298 | 15,751 | 4.29% |
Non Interest Bearing Liabilities: | ||||||
Demand deposits | 44,180 | 42,661 | ||||
Other liabilities | 2,706 | 6,011 | ||||
Total Liabilities | 422,022 | 415,970 | ||||
Shareholders' equity | 49,550 | 52,279 | ||||
Total Liabilities and Shareholders' Equity | $471,572 | $468,249 | ||||
Net Interest Income and Net Interest Margin (3) | 17,840 | 4.06% | 17,870 | 4.18% | ||
Less: Tax Equivalent Adjustment | (123) | (193) | ||||
Net Interest Income | $17,717 | 4.04% | $17,677 | 4.13% |
(1) For purposes of these computations, non-accrual loans are included in average loans.
(2) For purposes of these computations, unrealized gains (losses) on available-for-sale securities and allowance for loan losses are recorded in other assets.
(3) For purposes of these computations, reported on a tax equivalent basis.
RATE/VOLUMEInterest Margin: The net interest margin, expressed on a tax-equivalent basis, is determined by dividing tax-equivalent net interest income by average interest-earning assets. The interest rate spread represents the difference between the average tax-equivalent yield earned on interest earning-assets and the average rate paid on interest bearing liabilities. The net interest margin is generally higher than the interest rate spread due to the additional income earned on those assets funded by non-interest bearing liabilities, primarily demand deposits and shareholders’ equity.
As previously discussed, the tax-equivalent net interest margin amounted to 3.88% in 2003, compared with 4.15% and 4.18% during 2002 and 2001, respectively.
The following table summarizes the net interest margin components, on a quarterly basis, over the past two years. Factors contributing to the changes in net interest income and the net interest margin are outlined in the succeeding discussion and analysis.
NET INTEREST MARGIN ANALYSIS
FOR QUARTER ENDED
2003 | 2002 | |||||||
4th Qtr | 3rd Qtr | 2nd Qtr | 1st Qtr | 4th Qtr | 3rd Qtr | 2nd Qtr | 1st Qtr | |
|
|
|
| |||||
Average | Average | Average | Average | Average | Average | Average | Average | |
Interest Earning Assets: |
|
|
|
| ||||
Loans (1,2) | 6.22% | 6.27% | 6.67% | 6.79% | 6.97% | 7.28% | 7.46% | 7.57% |
Investment securities (2) | 4.60% | 4.60% | 5.08% | 5.29% | 5.13% | 5.73% | 5.75% | 6.13% |
Fed Funds sold, money market funds, and | 1.37% | 2.14% | 2.15% | 2.32% | 1.54% | 2.80% | 1.85% | 1.98% |
Total Investments | 4.53% | 4.55% | 5.03% | 5.23% | 5.03% | 5.55% | 5.66% | 5.90% |
Total Earning Assets | 5.73% | 5.78% | 6.19% | 6.30% | 6.32% | 6.72% | 6.88% | 6.99% |
|
|
|
| |||||
Interest Bearing Liabilities: |
|
|
|
| ||||
Deposits | 1.37% | 1.49% | 1.67% | 1.79% | 1.97% | 2.25% | 2.42% | 2.46% |
Securities sold under repurchase agreements | 1.10% | 1.21% | 1.45% | 1.58% | 2.05% | 2.14% | 2.27% | 2.32% |
Other borrowings | 3.95% | 3.93% | 3.99% | 4.19% | 4.52% | 4.68% | 4.47% | 4.69% |
Total Borrowings | 3.70% | 3.74% | 3.83% | 3.99% | 4.30% | 4.48% | 4.31% | 4.46% |
Total Interest Bearing Liabilities | 2.27% | 2.37% | 2.53% | 2.64% | 2.83% | 3.08% | 3.16% | 3.22% |
|
|
|
| |||||
Rate Spread | 3.45% | 3.40% | 3.66% | 3.66% | 3.49% | 3.64% | 3.73% | 3.77% |
|
|
|
| |||||
Net Interest Margin (2) | 3.76% | 3.73% | 3.97% | 4.03% | 3.92% | 4.08% | 4.14% | 4.25% |
|
|
|
| |||||
Net Interest Margin w/o Tax | 3.64% | 3.59% | 3.83% | 3.90% | 3.79% | 3.94% | 4.03% | 4.12% |
As depicted on the foregoing table, the net interest margin peaked at 4.25% during the first quarter of 2002, and reached a two year low of 3.73% during the third quarter of 2003, representing a decline of 52 basis points. The margin decline in the third quarter of 2003 immediately followed the peak of loan re-financing activity, in part triggered by the sharp second quarter drop in the U.S. Treasury yield curve, at which time longer-term interest rates dipped to historical lows. Accelerated prepayments on fixed rate loans and investment securities, combined with accelerated amortization of premiums in the investment portfolio, drove this decline. During the fourth quarter of 2003, the net interest margin began to strengthen, and loan prepayments and investment securities cash flow began to slow. In line with the current interest rate environment, management anticipates the net interest margin will continue to stabilize into the first quarter of 2004.
Rate / Volume Analysis: As previously discussed, the Bank’s tax-equivalent net interest income increased $286 during 2003 compared with 2002. The volume of interest earning assets added to the balance sheet during 2003 contributed $1,764 to this increase, but was offset by $1,478 due to the impact of lower yields and interest rates.
The following tables set forth a summary analysis of the relative impact on net interest income of changes in the average volume of interest earning assets and interest bearing liabilities, and changes in average rates on such assets and liabilities. The income from tax-exempt assets has been adjusted to a fully tax equivalent basis, thereby allowing a uniform comparisons to be made. Because of the numerous simultaneous volume and rate changes during the periods analyzed, it is not possible to precisely allocate changes to volume or rate. For presentation purposes, changes which are not solely due to volume changes or rate changes have been allocated to these categories in proportion to the relationships of the absolute dollar amounts of the change in each.
ANALYSIS OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME
TWELVE MONTHS ENDED DECEMBER 31, 2003 VERSUS DECEMBER 31, 2002
INCREASES (DECREASES) DUE TO:
Average | Average | Interest | |
Loans (1,2) | $2,882 | $(2,857) | $ 25 |
Taxable investment securities | 10 | (1,488) | (1,478) |
Non-taxable investment securities (2) | 145 | 4 | 149 |
Fed funds sold, money market funds, and time | (66) | (44) | (110) |
TOTAL EARNING ASSETS | 2,971 | (4,385) | (1,414) |
Deposits | 364 | (1,908) | (1,544) |
Securities sold under repurchase agreements | (1) | (114) | (115) |
Other borrowings | 844 | (885) | (41) |
TOTAL INTEREST BEARING LIABILITIES | 1,207 | (2,907) | (1,700) |
NET CHANGE IN NET INTEREST INCOME (2) | $1,764 | $(1,478) | $ 286 |
(1) For purposes of these computations, non-accrual loans are included in average loans.
(2) For purposes of these computations, reported on a tax-equivalent basis.
ANALYSIS OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME
TWELVE MONTHS ENDED DECEMBER 31, 2002 VERSUS DECEMBER 31, 2001
INCREASES (DECREASES) DUE TO:
Average Volume | Average Rate | Net Interest Income | Average | Average | Interest | |
Loans (1, 2) | $6,767 | $(7,334) | $ (567) | |||
Loans (1,2) | $3,336 | $(3,903) | $ (567) | |||
Taxable investment securities | (458) | (1,390) | (1,848) | (434) | (1,238) | (1,672) |
Non-taxable investment securities (2) | 1,530 | 83 | 1,613 | 1,530 | 83 | 1,613 |
Federal funds sold, money market funds, and time deposits with other banks | (163) | (155) | (319) | |||
Fed funds sold, money market funds, and time | (163) | (155) | (318) | |||
TOTAL EARNING ASSETS | 7,676 | (8,796) | (1,120) | 4,269 | (5,213) | (944) |
Deposits | 872 | (3,290) | (2,418) | 729 | (3,147) | (2,418) |
Securities sold under repurchase agreements | (9) | (222) | (231) | (9) | (222) | (231) |
Other borrowings | 3,252 | (3,579) | (327) | 1,437 | (1,764) | (327) |
TOTAL INTEREST BEARING LIABILITIES | 4,115 | (7,091) | (2,976) | 2,157 | (5,133) | (2,976) |
NET CHANGE IN INTEREST INCOME (2) | $3,561 | $(1,705) | $1,856 | |||
NET CHANGE IN NET INTEREST INCOME (2) | $2,112 | $ (80) | $ 2,032 |
(1) For purposes of these computations, non-accrual loans are included in average loans.
(2) For purposes of these computations, reported on a tax-equivalent basis.
ANALYSIS OF VOLUME AND RATE CHANGES ON NET INTEREST INCOMETWELVE MONTHS ENDED DECEMBER 31, 2001 VERSUS DECEMBER 31, 2000INCREASES (DECREASES) DUE TO:
Average | Average | Net | |
Loans (1,2) | $ 1,023 | $ (660) | $ 363 |
Taxable investment securities | (2,029) | (266) | (2,295) |
Non-taxable investment securities (2) | 171 | (42) | 129 |
Federal funds sold, money market funds, and Time deposits with other banks | 440 | (8) | 432 |
TOTAL EARNING ASSETS | (395) | (976) | (1,371) |
Deposits | 32 | (742) | (710) |
Securities sold under repurchase agreements | (243) | (268) | (25) |
Other borrowings | (649) | (481) | (1,130) |
TOTAL INTEREST BEARING LIABILITIES | (374) | (1,491) | (1,865) |
NET CHANGE IN INTEREST INCOME (2) | $ (21) | $ 515 | $ 494 |
(1) For purposes of these computations, non-accrual loans are included in average loans.(2) For purposes of these computations, reported on a tax-equivalent basis.
Other Operating Income and Expenses
In addition to net interest income, non-interest income is a significant source of revenue for the Company and an important factor in its results of operations. Likewise, non-interest expense represents a significant category of expense for the Company, second only to interest expense.
For the year ended December 31, 2002,2003, total non-interest income amounted to $6,413,$7,339, compared with $7,520$6,701 and $7,066$7,984 in 2002 and 2001, representing an increase of $638, or 9.5%, and 2000, representing a decrease of $1,107,$1,283, or 14.7%, and an increase of $454, or 6.4%16.1%, respectively.
For the year ended December 31, 2002,2003, total non-interest expense amounted to $18,336,$19,204, compared with $18,336 and $18,489 in 2002 and $16,615 in 2001, representing an increase of $868, or 4.7%, and 2000, representing a decrease of $153, and an increase of $1,874, or 0.8% and 11.3%, respectively.
Segment Reporting: As more fully disclosed in Note 8 to the consolidated financial statements,Consolidated Financial Statements, the Company manages and operates two major lines of business: Community Banking and Financial Services. Community Banking includes lending and deposit gathering activities and related services to businesses and consumers. Financial Services, consists of trust services, investment portfolio management, and broker-dealer operations. The business lines are identified by the entities through which the products or services are delivered. The following discussion and analysis of other operating income and expenses focuses on each business segment separately:
Community Banking
Years Ended December 31, 2003, 2002, 2001, and 20002001
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |
Non-interest income | $ 4,298 | $ 4,214 | $ 5,768 | $ 5,301 | $ 4,586 | $ 4,678 |
Non-interest expense | $14,221 | $13,344 | $12,652 | $15,115 | $14,221 | $13,344 |
Non-interest Income: Non-interest income from Community Banking represented 67.0%72.2% of the Company’s total 20022003 non-interest income, compared with 56.0%68.4% and 81.6%58.6% in 20012002 and 2000,2001, respectively.
For the year ended December 31, 2002,2003, the Bank’s total non-interest income amounted to $4,298,$5,301, compared with $4,214$4,586 and $5,768$4,678 in 20012002 and 2000,2001, representing an increase of $84$715 or 15.6%, and a decrease of $1,554,$92 or 2.0% and 26.9%, respectively.
The increase in 20022003 non-interest income was principally attributed to $450$1,257 in net gains on the sale of investment securities, compared with none$450 during 2001.2002, representing an increase of $807, or 179.3%. Changes in market interest rates during 20022003 presented attractive opportunities to reposition a relatively small portion of the Bank’s investment securities portfolio.portfolio, while maintaining a reasonable and informed level of interest rate risk. There is no assurance that the recording of securities gains will continue in future reporting periods at 20022003 levels. It is important to note, however, that the available for sale investment securities portfolio is managed on a total return basis, in concert with well-structured asset/liability management policies. The Bank will continue to respond to changes in market interest rates, changes in securities pre-payment or extension risk, changes in the availability of and yields on alternative investments, and its needs for adequate liquidity.
Service charges on deposit accounts amounted to $1,509 during 2003 compared with $1,483 in 2003, representing a modest increase of $26, or 1.8%. The growth in service charge income continued to be pressured during 2003, given aggressive competitive pricing in the Bank’s market place and a continued consolidation of customer deposit relationships.
Fees from credit card processing activities amounted to $1,614 during 2003, representing a decline of $40 or 2.4% compared with 2002, reflecting lower overall transaction volumes than experienced in the prior year. Income from mortgage loan servicing declined $58 during 2003 or 48.6%, as the Bank held originated mortgage loans while the pre-payment speeds on its serviced portfolio increased dramatically in reaction to historically low interest rates.
Increases in 2002 non-interest income were attributed to $450 in net gains on the sale of investment securities, compared with none during 2001. Offsetting the increase in 2002 income from securities gains was a $381, or 20.4%, decline in service charges on deposit accounts compared with 2001. In December of 2000 the Bank implemented various product and service fee enhancements and improved its management over fee waivers. These actions substantially improved non-interest income during the first half of 2001. However, as was generally anticipated, the initial impact on fee income was not fully sustained in the months following implementation, as many low balance accounts were either consolidated or closed, and certain customer habits, including overdraft activity, showed substantial change. Led by a decline in mortgage loan servicing fees, other fee income also declined in 2002, decreasing $213 from 2001 levels.
Included in the Bank’s 2000 non-interest income is $1,960, representing the gain on the sale of the Bank’s trust business to its affiliate, BTI Financial Group. As depicted in Note 8 to the financial statements, this non-interest income is eliminated in the consolidation of the Company’s financial statements. Excluding this one-time event from the 2000 results, the Bank’s 2001 non-interest income increased $406, or 10.7%. The improvement in the Bank’s 2001 non-interest income was principally attributed to product and service fee enhancements implemented in late 2000, and improved management of customer service charges.
Non-interest Expense: Non-interest expense from Community Banking represented 77.6%78.7% of the Company’s total 20022003 non-interest expense, compared with 77.6% and 72.2% in 2002 and 76.1% in 2001, and 2000, respectively.
For the year ended December 31, 2002,2003, the Bank’s total non-interest expense amounted to $14,221,$15,115 compared with $13,344$14,221 and $12,65213,344, in 20012002 and 2000,2001, representing increases of $894 and $877, or 6.3% and $692, or 6.6% and 5.5%, respectively.
The increase in 2002 non interest2003 non-interest expense was principally attributed higher salaries and employee benefit expenses, and corporate management fees. Corporate management fees were paid to the BHB holding company and were principally used for salaries and benefits expense. The salaries and employee benefit expense increases in 2003 were principally the result of strategic adjustments to the workforce, some one-time severance payments, employee compensation increases, increases inand higher subsidized employee health insurance deferred executive compensation, and certain additions to the Bank’s workforce. The year-over-year increase in salaries and employee benefits amounted to $818, or 12.6%. Charitable contributions during 2002 were also higher than 2001 levels, increasing $76 to a total of $183, or 2.15% of the Bank’ total pre-tax income.supplemental retirement benefits.
Salaries and employee benefit expenses also accounted for a substantial portion of the 20012002 increase in non-interest expenses compared with 2000, and were principally attributed to staff additions in customer service, credit administration, and operational areas of the Bank. Also contributing to the 2001 increase in non-interest expense was the software depreciation resulting from the conversion of all core applications to a new and improved integrated platform during 2000 and the implementation of on-line, real-time internet banking applications in early 2001.
Financial Services
Years Ended December 31, 2003, 2002, 2001, and 20002001
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |
Non-interest income | $2,352 | $3,407 | $3,243 | $2,332 | $2,352 | $3,407 |
Non-interest expense | $3,720 | $4,979 | $3,857 | $3,502 | $3,720 | $4,979 |
Non-interest Income: Non-interest income from Financial Services (BTI Financial Group)(BTI) represented 36.7%31.8% of the Company’s total 20022003 non-interest income, compared with 45.3%35.1% and 45.9%42.7% in 20012002 and 2000,2001, respectively.
For the year ended December 31, 2002,2003, total non-interest income at BTI amounted to $2,352,$2,332, compared with $2,352 and $3,407 in 2002 and $3,2432001, representing decreases of $20 and $1,055, or 0.9% and 31.0%, respectively.
Fees charged to clients of Trust Services are principally derived from the market values of assets managed and held in 2001 and 2000,custody. For the year ended December 31, 2003 total non-interest income at Trust Services amounted to $1,721 compared with $1,822 in 2002, representing a decreasedecline of $1,055$101, or 5.5%.
During 2003, fee income at Trust Services was impacted by a year-over-year decline in assets under management and an increase of $164, or 31.0% and 5.1%, respectively. Includedheld in 2001 non-interest income is an adjustment of $322 representing a full accrual of fee income. Excluding this adjustment, total 2001 non-interest income decreased $158 or 4.9%custody, which at December 31, 2003 stood at $208,925 compared with 2000.$201,708 at the same date in 2002. While equity markets and managed asset portfolio performance showed strength during 2003, these gains were essentially offset by closed accounts, in particular, two large relationships amounting to approximately $14,000. During 2003, Trust Services continued to migrate certain smaller account relationships to Dirigo, providing clients with more economical solutions while improving overall operating efficiencies.
The decline in 2002 non-interest income at Trust Services was principallyalso attributed to a significant declinedeclines in the market value of assets under management at Block Capital Management (Block) and Bar Harbor Trust Services (Trust). Fees charged to clients are derived principally fromheld in custody. However, the market values of assets managed. At December 31, 2002, assets under management totaled $180,774, compared with $238,679 and $305,474 at December 31, 2001 and 2000, representing declines of $57,905 and $66,795, or 24.3% and 21.9%, respectively. The two-year decline in managed assets2002 was principally attributed tomore the significant declines in the stock market over this same period. The decline in managed assets was also attributed to lost business, as investor confidence has been seriously eroded byresult of depressed securities markets, investor confidence, corporate scandals, troubled world economies, both here and abroad, and overall geo-political tensions and uncertainties.
For the year ended December 31, 2002,2003, total revenue at Block and Trust amounted to $1,822, compared with $2,673 in 2001, and $2,611 in 2000, representing a decrease of $851, or 31.8%, and an increase of $62 or 2.4%, respectively.
Restrained investor confidence, particularly in the retail brokerage sector, also impacted 2002 performancenon-interest income at Dirigo, BTI’s full service brokerage subsidiary. After posting a 2001 revenuesubsidiary, amounted to $492 compared with $464 during 2002, representing an increase of $157,$28, or 26.0%, 2002 revenue at Dirigo investments declined. 6.0%.
For the year ended December 31, 2002, total revenue at Dirigo amounted to $464, compared with $760 in 2001, representing a decrease of $296, or 38.9%. It is anticipated that compared with 2001. Restrained investor confidence, particularly in the 2001 expansionretail brokerage sector, combined with a number of staffing changes and reductions, impacted Dirigo’s market area via the opening of an office in Bangor, Maine, the strengthening of professional brokerage staffrevenue stream during 2002, and the ongoing expansion of its product offerings, will have a stabilizing impact on Dirigo’s future revenue.2002.
Non-interest Expense: Non-interest expense from Financial Services represented 20.3%18.2% of the Company’s total 20022003 non-interest expense, compared with 20.3% and 26.9% in 2002 and 23.2% in 2001, and 2000, respectively.
For the year ended December 31, 2002,2003, total non-interest expense at BTI amounted to $3,720,$3,502, compared with $3,720 and $4,979 in 2002 and $3,857 in 2001, representing decreases of $218 and 2000, representing a decrease of $1,259, or 5.9% and an increase of $1,122, or 25.3% and 29.1%, respectively.
IncludedThe reduction in 2001 non-interest expense is a one time restructuring charge of $618 recorded in the fourth quarter, primarily as a result of management changes within BTI. Excluding the restructuring charge, 2001 non-interest expense amounted to $4,361, representing an increase of $504 compared with 2000, or 13.1%. Likewise, without considering the 2001 restructuring charge, BTI’s total 2002 non-interest expense declined $641, or 14.7%.
The decline in 2002 non-interest expenseduring 2003 was attributed to a numbercombination of factors. Salaries and employee benefit expenses declined $343,$227, or 16.9%13.4%, and were principally the result of management and staffing changes. MarketingOccupancy expense declined $270during 2003, resulting from 2001 levels,a downsizing of the Bangor office in late 2002 and was principally attributed to large scale marketing campaigns conductedthe occupation of additional office space in early 2001, shortly following the formationBTI headquarters complex by affiliates of BTI, namely the Bank and to a lesser extent, more effective utilization of marketing dollars during 2002. Expensethe Company. Led by declines in professional services, 2003 expense reductions were also achieved in a variety of other operating areas, as BTI pursuedcontinued pursing austerity initiatives to more closely match expenses with revenues.improve overall operating efficiency. Offsetting a portion of the 2002foregoing 2003 expense reductions waswere certain non-recurring charges associated with organizational restructuring activities and, to a $210 increaselesser extent, expenses incurred in occupancy costsconnection with certain legal settlements. Non -interest expense in 2003 also included a $75 write down of goodwill associated with the purchase and renovationacquisition of a new BTI headquarters complex and occupied in MayDirigo.
During 2002 BTI’s non-interest expense declined $1,259, or 25.3% from 2001 and the expansion of office facilities in Bangor, Maine.
The increaselevels. Included in 2001 non-interest expense over 2000 was principally attributed to salaries and employee benefits expenses, start up marketing and legal expenses, and occupancy costs associated with the expansiona restructuring charge of BTI.
In response to declining revenues and eroding profitability, BTI implemented a variety of expense reduction measures$618 recorded in the fourth quarter as a result of 2002. It is anticipated these measures will further reduce BTI’s current year operatingsignificant management changes within BTI. The decline in 2002 non-interest expense was also attributed a reduction of $343 in salaries and employee benefit expenses resulting from management and favorably impact its future profitability.staffing changes. Marketing expenses declined $270 from 2001 levels following large-scale campaigns supporting the formation of BTI.
Accounting Change: During the first half of 2002 the Company completed its implementation of SFAS No. 142, "Goodwill and Other Intangible Assets," which requires goodwill to be tested for impairment rather than amortized over a period of time. The Company estimated the value of goodwill utilizing several standard valuation techniques, including discounted cash flows, as well as an estimation of the impact of current business conditions on the long-term value of the goodwill carried on the balance sheet. Management and the Board of Directors determined the impact of the overall deterioration of the stock and bond markets on investor activities within its target market area had negatively impacted the value of the Company’s goodwill balance related the acquisition of Dirigo. This resulted in an estimation of impairment of $247, net of tax. As depicted in Note 21 of the Company’s financial statements,Accordingly, the Company recorded an after tax charge of $247 in the first quarter of 2002.
Included in BTI’s 2001 non-interest expense is $73, representing the amortization of Dirigo goodwill. Pursuant to SFAS No. 142, no goodwill amortization expense was recorded in 2002.
Income Taxes
The Company’s effective income tax rate in 20022003 amounted to 26.6%26.7%, compared with 26.6% and 32.1% in 2002 and 33.5% in 2001, respectively. The income tax provisions for these periods was less than the expense that would result from applying the federal statutory rate of 34% to income before income taxes principally because of tax-exempt interest income on certain investment securities, loans and 2000, respectively.bank owned life insurance. The decline in the effective income tax rate during 2002 was principally attributed to increases in the Company’s tax-exempt interest income, primarily resulting from the addition of tax-exempt securities to the Company’sBank’s investment securities portfolio.portfolio in late 2001.
RISK MANAGEMENT
Among the most significant financial risks managed by the Company are credit risk, market risk, liquidity risk and off balance sheet risk. Management’s discussion and analysis of these risks follows.
Credit Risk
Credit risk is managed through loan officer authorities, loan policies, the Bank’s Senior Loan Committee, oversight from the Bank’s Senior Credit Officer, the Directors Loan Committee, and the Bank’s Board of Directors. Management follows a policy of continually identifying, analyzing and grading credit risk inherent in the loan portfolio. An ongoing independent review, subsequent to management’s review, of individual credits is performed by an independent loan review function that reports to the Audit Committee of the Board of Directors.
As a result of management’s ongoing review of the loan portfolio, loans are placed on non-accrual status, either due to the delinquent status of principal and/or interest, or a judgment by management that, although payments of principal and/or interest are current, such action is prudent because collection isin full of all outstanding principal and interest are in doubt. Loans are generally placed on non-accrual status when principal and/or interest is 90 days overdue. Consumer loans are generally charged off when principal and/or interest payments are 120 days overdue.
Non-performing Loans: Non-performing loans (NPLs): Non-performing loans include loans on non-accrual status, loans whichthat have been treated as troubled debt restructurings, and loans past due 90 days or more and still accruing interest. As of December 31, 2003, there were no troubled debt restructurings in the loan portfolio.
The following table sets forth the details of non-performing loans over the last five years.
NON-ACCRUAL LOANS
AND ACCRUING PAST DUE 90 DAYS OR MORE
AT DECEMBER 31
2002 | 2001 | 2000 | 1999 | 1998 | 2003 | 2002 | 2001 | 2000 | 1999 | |
Loans accounted for on a | ||||||||||
non-accrual basis | $ 986 | $2,191 | $6,907 | $2,016 | $1,744 | $1,295 | $ 986 | $2,191 | $6,907 | $2,016 |
Accruing loans contractually | ||||||||||
past due 90 days or more | 188 | 151 | 1,206 | 706 | 1,710 | 199 | 188 | 151 | 1,206 | 706 |
Total Non-Performing Loans | $1,174 | $2,342 | $8,113 | $2,722 | $3,454 | $1,494 | $1,174 | $2,342 | $8,113 | $2,722 |
Ratios: | ||||||||||
Allowance for loan losses to total loans | 1.42% | 1.40% | 1.56% | 1.64% | 1.94% | |||||
Non-performing to total loans | 0.33% | 0.79% | 2.99% | 1.04% | 1.51% | |||||
Allowance for loan losses to non-performing loans | 424% | 178% | 52% | 158% | 129% | |||||
Allowance for Loan Losses to Total Loans | 1.38% | 1.42% | 1.40% | 1.56% | 1.64% | |||||
Non-Performing to Total Loans | 0.39% | 0.33% | 0.79% | 2.99% | 1.04% | |||||
Allowance for Loan Losses to Non-Performing Loans | 353% | 424% | 178% | 52% | 158% |
The Company continuedAt December 31, 2003, total non-performing loans stood at $1,494, or 0.39% of total loans, compared with $1,174 or 0.33% at the same date in 2002. While non-performing loans have increased, they remain at relatively low levels and are not considered to maintainbe a reflection of an overall deterioration in credit quality of the portfolio.
During 2003 and 2002 the Bank maintained its non-performing loans at significantly lower levels than incompared with 2001 and prior years andyears. The Bank attributes this improvementsuccess to a strengthening of its credit administration processes and underwriting standards, aided by a healthystable local economy. During 2000, the Company establishedThe Bank continues to maintain a centralized loan collection and managed asset department, providing timely and enhancedeffective collection efforts for problem loans.
Over the past two years, the ratio of non-performing loans to total loans declined 266 basis points and, as of December 31, 2002, stood at their lowest level in six years. Non-performing loans declined $1,168 or 49.9% in 2002, following a decline of $5,771 or 71.1% in 2001. At December 31, 2002, total non-performing loans amounted to $1,174, or 0.33% of total loans, compared with $2,342 or 0.79% at the prior year-end, and $8,113 or 2.99% at December 31, 2000.
The 2001 reduction in non-performing loans was principally attributed to one relationship with non-accruing aggregate outstanding loans at December 31, 2000, of $3,100, of which $1,000 was charged off and the balance repaid upon asset liquidation, a $700 repayment by oneliquidation.
While the 2003 non-performing loan ratios continued to reflect favorably on the quality of the loan portfolio, the Bank is cognizant of soft economic conditions overall and weaknesses in certain industry segments in particular, customer, and other loans brought current.
At December 31, 2002, the Company’s allowance for loan losses expressed as a percentis managing credit risk accordingly. Future levels of non-performing loans was 424%, compared with 178%may be influenced by economic conditions, including the impact of those conditions on the Bank’s customers, interest rates, and 52%other factors existing at December 31, 2001 and 2000, respectively.the time.
Allowance for Loan Losses and Provision: The allowance for loan losses ("allowance") is available to absorb losses on loans. The determination of the adequacy of the allowance and provisioning for estimated losses is evaluated quarterly based on review of loans, with particular emphasis on non-performing and other loans that management believes warrant special consideration. The Bank’s Board of Directors reviews the evaluation of the allowance to ensure its adequacy.
The allowance is maintained at a level that, in management’s judgment, is appropriate for the amount of risk inherent in the loan portfolio, given past, present and expected conditions, and adequate to provide for probableestimated losses that have already occurred. Reserves are established for specific loans including impaired loans, a pool of reserves based on historical charge-offs by loan types, and supplemental reserves that adjust historical loss experience to reflect current economic conditions, industry specific risks, and other observable data. Loan loss provisions are recorded, and the allowance is increased, when loss is identified and deemed likely.
Specific reserves for impaired loans are determined in accordance with SFAS No. 114, "Accounting by Creditors For Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors For Impairment of a Loan-Income Recognition and Disclosures." The amount of loans considered to be impaired totaled $1,295 as of December 31, 2003, compared with $986 and $2,191 as of December 31, 2002 compared with $2,191 and $6,907 as of December 31, 2001, and 2000, respectively. The related allowances for loan losses on these impaired loans was $394, $120 $517 and $2,200$517 as of December 31, 2003, 2002 2001 and 2000,2001, respectively. The amount of interest income not recorded on impaired loans was $80, $183 $182 and $220$182 as of December 31, 2003, 2002 2001 and 2000,2001, respectively.
No portion of the allowance is restricted to any loan or group of loans, and the entire allowance is available to absorb realized losses. The amount and timing of realized losses and future allowance allocations may vary from current estimates.
Management recognizes that early and accurate recognition of risk is the best means to reduce credit losses and maximize earnings. The CompanyBank employs a comprehensive risk management structure to identify and manage the risk of loss. For consumer loans, the CompanyBank identifies loan delinquency beginning at 21-day delinquency and provides appropriate follow-up by written correspondence or personal contact. Non-residential mortgage consumer losses are recognized no later than the point at which a loan is 120 days past due. Residential mortgage losses are recognized during the foreclosure process when that loss is quantifiable and reasonably assured. For commercial loans the CompanyBank applies a risk grading system. This system stratifies the portfolio and allows management to focus appropriate efforts on the highest risk components of the portfolio. The risk grades include ratings that correlate with regulatory definitions of Pass, Other Assets Especially Mentioned, Substandard, Doubtful, and Loss.
Loan loss provisions are recorded based upon overall aggregate data, and the allowance is increased when, loss ison an aggregate basis, additional estimated losses are identified and deemed likely.
While management uses available information to recognize losses on loans, changing economic conditions and the economic prospects of the borrowers may necessitate future additions or reductions to the allowance. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’sBank’s allowance, which also may necessitate future additions or reductions to the allowance, based on information available to them at the time of their examination.
The following table Summary of Loan Loss Experience, includes an analysis of thedetails changes toin the allowance for loan losses and summarizes loan loss forexperience by loan type over the past five years.
ALLOWANCE FOR LOAN LOSSES
SUMMARY OF LOAN LOSS EXPERIENCE
2002 | 2001 | 2000 | 1999 | 1998 | 2003 | 2002 | 2001 | 2000 | 1999 | |
Balance at beginning of period | $ 4,169 | $ 4,236 | $ 4,293 | $ 4,455 | $ 4,743 | $ 4,975 | $ 4,169 | $ 4,236 | $ 4,293 | $ 4,455 |
Charge offs: | ||||||||||
Commercial,financial | ||||||||||
Commercial, financial | ||||||||||
agricultural, others | 111 | 1,416 | 253 | 445 | 217 | 75 | 111 | 1,416 | 253 | 445 |
Real estate: | ||||||||||
Construction and development | -- | -- | 4 | -- | -- | -- | -- | |||
Mortgage | 176 | 434 | 170 | 58 | 113 | 207 | 176 | 434 | 170 | 58 |
Installments and other loans | ||||||||||
to individuals | 195 | 454 | 800 | 385 | 458 | 141 | 195 | 454 | 800 | 385 |
Total charge offs | 482 | 2,304 | 1,223 | 888 | 788 | 427 | 482 | 2,304 | 1,223 | 888 |
Recoveries: | ||||||||||
Commercial,financial | -- | -- | ||||||||
Commercial, financial | ||||||||||
agricultural, others | 121 | 96 | 136 | 51 | 40 | 24 | 121 | 96 | 136 | 51 |
Real estate: | ||||||||||
Construction and development | -- | -- | -- | -- | -- | -- | -- | |||
Mortgage | 4 | 74 | 7 | 60 | 21 | 106 | 4 | 7 | 7 | 60 |
Installments and other loans | ||||||||||
to individuals | 63 | 67 | 71 | 141 | 103 | 60 | 63 | 67 | 71 | 141 |
Total recoveries | 188 | 237 | 214 | 252 | 164 | 190 | 188 | 237 | 214 | 252 |
Net charge offs | 294 | 2,067 | 1,009 | 636 | 624 | 237 | 294 | 2,067 | 1,009 | 636 |
Provision charged to operations | 1,100 | 2,000 | 952 | 474 | 336 | 540 | 1,100 | 2,000 | 952 | 474 |
Balance at end of period | $ 4,975 | $ 4,169 | $ 4,236 | $ 4,293 | $ 4,455 | $ 5,278 | $ 4,975 | $ 4,169 | $ 4,236 | $ 4,293 |
Average loans outstanding during period | $325,712 | $283,728 | $271,000 | $248,708 | $224,406 | |||||
Average loans outstanding during Period | $367,701 | $325,712 | $283,728 | $271,000 | $248,708 | |||||
Net charge offs to average loans | ||||||||||
outstanding during period | 0.09% | 0.73% | 0.37% | 0.26% | 0.28% | |||||
Net charge offs to average loans outstanding during period | 0.06% | 0.09% | 0.73% | 0.37% | 0.26% |
The Company’sBank’s loan charge off experience improved significantlyremained nominal during 2003. Total net charge offs during the year amounted to $237 or 0.06% of average loans outstanding, following $294 or 0.09% during 2002. For the year ended December 31, 2002 net loans charged off amounted to $294, compared with $2,067 in 2001 and $1,009 in 2000, representing a decrease of $1,773 and an increase of $1,058, or 85.8% and 104.9%, respectively. The 2001 increase in loan charge-offs included one large credit exceeding $1,000.
For the year ended December 31, 2002,2003, the CompanyBank provided $1,100$540 to theits allowance for loan losses, compared with $2,000$1,100 in 2001,2002, representing a decrease of $900,$560, or 45%50.9%. The provision for loan losses ("provision") in 2002 was 0.34%2003 amounted to 0.15% of average loans, compared with 0.34% and 0.70% in 2002 and 2001, was 0.70%,respectively.
The decrease in the 2003 provision principally resulted from a continued strengthening of credit quality, including a variety of credit quality indicators, aided by a continuation of low net charge off experience. Portfolio characteristics and in 2000 was $952, or 0.35% of average loans. relatively stable economic conditions also contributed to the lower provision.
The 2002 decrease in the provision for loan losses was attributed, in part, to one large credit exceeding $1,000 that was charged off in 2001, the repayment of certain previously classified loans, and an overall strengthening of credit quality in the loan portfolio. Portfolio characteristics and relatively stable economic conditions also contributed to the lower provision in 2002.
The following table presents the five-year breakdown of the allowance for loan losses by loan type at each respective year-end.
ALLOCATION OF ALLOWANCE FOR POSSIBLE LOAN LOSSES
(at December 31)
2002 | 2001 | 2000 | 1999 | 1998 | ||||||
Amount | Percent of Loans in Each Category to Total loans | Amount | Percent of Loans in Each Category to Total loans | Amount | Percent of Loans in Each Category to Total loans | Amount | Percent of Loans in Each Category to Total loans | Amount | Percent of Loans in Each Category to Total loans | |
Commercial, financial, and agricultural | $1,737 | 8.84% | $1,387 | 9.84% | $1,563 | 11.20% | $ 578 | 12.78% | $1,010 | 14.42% |
Real estate mortgages: | ||||||||||
Real estate-construction | 266 | 4.63% | 135 | 6.83% | 115 | 4.53% | 143 | 6.00% | 78 | 4.95% |
Real estate-mortgage | 1,992 | 82.12% | 1,525 | 77.42% | 1,945 | 76.96% | 1,784 | 75.10% | 1,162 | 73.36% |
Installments and other loans | ||||||||||
to individuals | 531 | 3.65% | 855 | 4.67% | 560 | 5.91% | 1,109 | 6.01% | 323 | 7.21% |
Other | -- | 0.76% | -- | 1.24% | -- | 1.48% | 183 | 0.11% | 180 | 0.06% |
Unallocated | 449 | 0.00% | 267 | 0.00% | 53 | 0.00% | 496 | 0.00% | 1,702 | 0.00% |
TOTAL | $4,975 | 100.00% | $4,169 | 100.00% | $4,236 | 100.00% | $4,293 | 100.00% | $4,455 | 100.00% |
2003 | 2002 | 2001 | 2000 | 1999 | ||||||
Amount | Percent of | Amount | Percent of Loans in Each Category to Total loans | Amount | Percent of Loans in Each Category to Total loans | Amount | Percent of Loans in Each Category toTotal loans | Amount | Percent of Loans in Each Category to Total loans | |
Commercial, financial, | $2,281 | 8.05% | $1,737 | 8.84% | $1,387 | 9.84% | $1,563 | 11.20% | $ 578 | 12.78% |
Real estate mortgages: |
| |||||||||
Real estate- | 67 | 3.30% | 266 | 4.63% | 135 | 6.83% | 115 | 4.53% | 143 | 6.00% |
Real estate-mortgage | 1,708 | 84.39% | 1,992 | 82.12% | 1,525 | 77.42% | 1,945 | 76.96% | 1,784 | 75.10% |
Installments and other | 342 | 3.07% | 531 | 3.65% | 855 | 4.67% | 560 | 5.84% | 1,109 | 6.01% |
Other | -- | 1.19% | -- | 0.76% | -- | 1.24% | -- | 1.47% | 183 | 0.11% |
Unallocated | 880 | 0.00% | 449 | 0.00% | 267 | 0.00% | 53 | 0.00% | 496 | 0.00% |
TOTAL | $5,278 | 100.00% | $4,975 | 100.00% | $ 4,169 | 100.00% | $4,236 | 100.00% | $4,293 | 100.00% |
At December 31, 2002,2003, the loan loss adequacy analysis resulted in a need for specific reserves of $3,555,$3,415, general reserves of $850,$590, impaired reserves of $120,$394, and other reserves of $450.$879. Specific reserves are determined by way of individual review of commercial loan relationships in excess of $250, combined with reserves calculated against total outstandings by category using the Company’sBank’s historical loss experience and other observable data.
General reserves account for the risk and probable loss inherent in certain pools of industry and geographic concentration within the loan portfolio. Loan concentrations continue to reflect the Company’sBank’s business region. TheAt December 31, 2003, the loan portfolio includes $34,943included $31,492 of loans to the hospitality industry, or 9.9%8.2% of total loans, compared with $34,464,$34,943, or 11.6%9.9%, at December 31, 2001. 2002. While not necessarily considered a loan concentration, at December 31, 2003 loans related to Maine’s wild blueberry industry amounted to approximately $7,116, or 1.86% of total loans.
There were no major changes in loan concentrations during 2002.2003. However, changes were made to the allowance calculation to incorporate loss estimates relating to emerging issues in the Maine wild blueberry industry, to which the CompanyBank has extended credit, and is principally centered in Washington County, Maine. OverDuring 2003 the past two to three years, blueberry inventories have grown as increased supplies have exceeded demand both hereindustry was favorably impacted by price recovery and abroad and prices have softened. Asinventory stabilization, thus diminishing previously recognized credit risk. However, during the fourth quarter of 2003 certain legal matters developed regarding the blueberry industry, the uncertainties of which warranted continued recognition of credit risk. While more recent developments appear favorable, at December 31, 2002, approximately $300 has been included in2003 the allowance representingadequacy analysis of the Allowance incorporates management’s estimate of inherent losses associated with respect to this industry segment.
Management reviews impaired loans to insure such loans are transferred to non-accrual and written down when necessary. The review includes specific analysis of commercial relationships over $250.$250 and residential foreclosure accounts. Smaller homogeneous loans are not individually reviewed, but are reserved collectively. Impaired reserves consider all consumer loans that are over 90 days past due and impaired commercial loans which are fully reserved within the specific reserves via individual review and specific allocation of potential loss for loans relationships over $250, and pool reserves for smaller impaired loans. The Bank had no troubled debt restructurings at December 31, 2002,2003, and all of its impaired loans were considered collateral dependent and were adequately reserved. Total reserves against impaired loans were $120$394 at December 31, 2002.
Loan delinquency levels have remained at low levels during 2002. However, existing loan documentation and/or structural weaknesses for certain loans written in prior years continue to impede collection efforts in certain cases and have impacted probable losses. These weaknesses are historical in nature and do not necessarily reflect current loan underwriting and documentation standards. The extent of these problems in the entire loan portfolio is not entirely known; however, it is known that such problems exist and, accordingly, the allowance for loan losses incorporates this knowledge.2003.
Based upon the process employed and giving recognition to all attendant factors associated with the loan portfolio, the Company considers the allowance for loan losses at December 31, 20022003 to be appropriate for the risks inherent in the loan portfolio, and resident in the local and national economy as of that date.
Market Risk – Quantitative and Qualitative Disclosures
Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign exchange rate risk and commodity price risk, do not arise in the normal course of the Company’s business activities.
The responsibility for balance sheet risk management oversight is the function of the Bank’s Asset/Liability Committee ("ALCO"), chaired by the Chief Financial Officer and composed of various members of corporate senior management. ALCO meets regularly to review balance sheet structure, formulate strategy in light of current and expected economic conditions, adjust product prices as necessary, implement policy, monitor liquidity, and review performance against guidelines established to control exposure to the various types of inherent risk.
Interest Rate Risk: Interest rate risk can be defined as an exposure to movement in interest rates that could have an adverse impact on the Bank’s net interest income. Interest rate risk arises naturally from the imbalance in the re-pricing, maturity and/or cash flow characteristics of assets and liabilities. Management’s objectives are to measure, monitor and develop strategies in response to the interest rate risk profile inherent in the Bank’s balance sheet.
The Bank’s interest rate risk measurement and management techniques incorporate the re-pricing and cash flow attributes of balance sheet and off balance sheet instruments as they relate to current and potential changes in interest rates. The level of interest rate risk, measured in terms of the potential future effect on net interest income, is determined through the use of modeling and other techniques under multiple interest rate scenarios. Interest rate risk is evaluated in depth on a quarterly basis and reviewed by ALCO and the Board of Directors.
The Bank’s Asset Liability Management Policy, approved annually by the Board of Directors, establishes interest rate risk limits in terms of variability of net interest income under rising, flat and decreasing rate scenarios. It is the role of ALCO to evaluate the overall risk profile and to determine actions to maintain and achieve a posture consistent with policy guidelines.
Interest rate risk is monitored through the use of two complementary measures: static gap analysis ("gap") and earnings simulation modeling. While each measurement may have its limitations, taken together they form a reasonably comprehensive view of the magnitude of the Bank’s interest rate risk, the level of risk over time, and the quantification of exposure to changes in certain interest rate relationships.
The Bank utilizes an interest rate risk model widely recognized in the financial industry to monitor and measure interest rate risk. The Bank also utilizes an outside consultant to perform rate shocks of its balance sheet, and to perform a variety of other analysis for the ALCO. The model simulates the behavior of interest income and expense of all on and off-balance sheet instruments under different interest rate scenarios together with a dynamic future balance sheet. Interest rate risk is measured in terms of potential changes in net interest income based upon shifts in the U.S. Treasury yield curve.
Static Gap Analysis: Interest rate gap analysis provides a static view of the maturity and re-pricing characteristics of the Bank’s on and off-balance sheet positions. Gap is defined as the difference between assets and liabilities re-pricing or maturing within specified periods. An asset-sensitive position, or "positive gap",gap," indicates that there are more rate sensitive assets than rate-sensitive liabilities re-pricing or maturing within a specified time period, which would imply a favorable impact on net interest income during periods of rising interest rates. Conversely, a liability-sensitive position, or "negative gap",gap," generally implies a favorable impact on net interest income during periods of falling interest rates. There are certain limitations inherent in static gap analysis. These limitations include the fact that it is a static measurement and it does not reflect the degrees to which interest earning assets and interest bearing liabilities may respond non-proportionally to changes in market interest rates. Although the ALCO reviews all assumptions used in the model in detail, assets and liabilities do not always have clear re-pricing dates, and re-pricing may occur earlier or later than assumed in the model.
The Bank’s static interest rate sensitivity gap is pictured below:
INTEREST RATE RISK
CUMULATIVE STATIC GAP POSITION
December 31, 20022003 and 20012002
One Day | Over Six Months To One Year | One Year | Over Five Years | One Day | Over Six Months To One Year | One Year | Over Five Years | |
December 31, 2003 | $ (3,532) | $30,921 | $ 75,221 | $ (3) | ||||
December 31, 2002 | $61,072 | $94,368 | $146,814 | $ 3 | $ 61,072 | $94,368 | $146,814 | $ 3 |
December 31, 2001 | $ (7,081) | $10,131 | $100,118 | $ (1) | ||||
$ Change | $68,153 | $84,237 | $ 46,696 | $ 4 | $(64,604) | $(63,447) | $(71,593) | $ (6) |
The Bank’s December 31, 2003 cumulative interest rate risk sensitivity static gap position indicates the Bank’s balance sheet, over a six month horizon, was about evenly matched, compared with an asset sensitive position for this same horizon at December 31, 2002. The December 31, 2003 gap also indicates the Bank’s balance sheet maintained its asset sensitivity position in the over-six-months and one-year-to-five-year horizons, but not to the same degree as was the case at December 31, 2002. Changes in the Bank’s cumulative static gap position reflect strategic adjustments to the balance sheet, accommodating the continued low interest rate environment and reducing interest rate exposure in an extended flat or downward interest rate environment. The year-over-year changes also reflect the impact of 2003 loan refinancing activity, the $20,000 in interest rate swap agreements added during 2003, a shortening of funding maturities on deposit products and other sources of funds, and the fact that many of the Bank’s funding costs reached, or were near their assumed floors.
Based in part upon the cumulative static gap position, management believes that the Bank decreased its risk to flat or declining rates during 2003, while maintaining a reasonable degree of longer-term of asset sensitivity, thereby positioning the balance sheet favorably for rising rates and an improving economy. In addition, the change in the gap position during 2003 contributed favorably to net interest income and earnings.
Interest Rate Sensitivity Modeling: The interest rate risk sensitivity model requires that assets and liabilities be broken down into components as to fixed, variable, and adjustable interest rates, as well as other homogeneous groupings, which are segregated as to maturity and type of instrument. The model includes assumptions about how the balance sheet is likely to evolve through time and in different interest rate environments. The model uses contractual re-pricing dates for variable products, contractual maturities for fixed rate products, and product specific assumptions for deposits accounts, such as money market accounts, that are subject to re-pricing based on current market conditions. Re-pricing margins are also determined for adjustable rate assets and incorporated in the model. Investment securities and borrowings with call provisions, are examined on an individual basis in each rate environment to estimate the likelihood of a call. Prepayment assumptions for mortgage loans and mortgage backed securities are developed from industry median estimates of prepayment speeds, based upon similar coupon ranges and seasoning. Cash flows and maturities are then determined, and for certain assets, prepayment assumptions are estimated under different rate scenarios. Interest income and interest expense are then simulated under several rate conditions including:
Changes in net interest income based upon the foregoing simulations are measured against the flat interest rate scenario and actions are taken in order to maintain the balance sheet interest rate risk within established policy guidelines.
The following table summarizes the Bank’s net interest income sensitivity analysis as of December 31, 2002,2003, over one and two year horizons. In light of the Federal Funds Raterate of 1.25%1.00% on the date presented, the analysis incorporates a declining interest rate scenario of 100 basis points, compared withrather than 200 basis points, as shown at December 31, 2001.would normally be the case. The table also summarizes net interest income sensitivity under a non-parallel shift in the yield curve, whereby short term interest rates rise 200 and 400 basis points, a scenario which management believes ismay be more likely, given the current shape of the yield curve.
INTEREST RATE RISK
CHANGE IN NET INTEREST INCOME FROM THE FLAT RATE SCENERIO
DECEMBER 31, 20022003
-100 Basis Points | +200 Basis Points | +200 Basis Points | +400 Basis Points | -100 Basis Points | +200 Basis Points | +200 Basis Points Short Term Rates | +400 Basis Points Short Term Rates | |
Year 1 | ||||||||
Net interest income change ($) | ($386) | $546 | $291 | $818 | ($121) | $ 171 | ($83) | $ 122 |
Net interest income change (%) | (1.97%) | 2.78% | 1.48% | 4.17% | (0.59%) | 0.83% | (0.40%) | 0.60% |
|
|
|
| |||||
Year 2 |
|
|
|
| ||||
Net interest income change vs. year 1 base ($) | ($2,429) | $877 | $123 | $1,758 | ||||
Net interest income change vs. year one base ($) | ($1,309) | $ 500 | ($117) | $ 341 | ||||
Net interest income change vs. year 1 base (%) | (12.37%) | 4.47% | 0.63% | 8.96% | (6.38%) | 2.44% | (0.57%) | 1.66% |
The following table summarizesforegoing interest rate sensitivity modeling results indicate that the BanksBank’s balance sheet is about evenly matched in a variety of interest rate scenarios. Accordingly, management believes interest rate risk will not have a material adverse impact on future net interest income.
Assuming interest rates remain at or near their current levels and the Bank maintains a static balance sheet, management believes the net interest margin will remain under pressure, as the Bank’s asset base continues to cycle into the current rate environment while most of the funding base has already reset to current interest rate levels. Management believes continued balance sheet growth will be needed to increase the Bank’s net interest income, sensitivity analysis as of December 31, 2001, utilizing a 200 basis point decline inshould rates remain at current levels.
Assuming interest rates and a 200 and 300 point increase in interest rates. This simulation assumed a parallel shift in the yield curve.
INTEREST RATE RISKCHANGE IN NET INTEREST INCOME FROM THE FLAT RATE SCENERIODECEMBER 31, 2001
-200 Basis Points | +200 Basis Points | +300 Basis Points | |
Year 1 | |||
Net interest income change ($) | ($894) | $487 | $692 |
Net interest income change (%) | (4.89%) | 2.66% | 3.78% |
Year 2 | |||
Net interest income change vs. year one base ($) | ($3,529) | $1,159 | $1,386 |
Net interest income change vs. year 1 base (%) | (19.29%) | 6.34% | 3.78% |
Based on the information and assumptions in effect at December 31, 2002, management believes that a 200 basis point increase in interest rates over the next 12 months would increase net interest income $546, or 2.78% in 2003, and $877, or 4.47% in 2004. Should short-term interest rates risecontinue to decline further and the yield curve flatten, management believes thatBank maintains a 200 basis point increase over the next 12 months would increase net interest income by $291, or 1.48%, and that a 400 basis point increase during this same period would increase net interest income by $818, or 4.17%. Extending this scenario to a twenty-four month horizon, and assuming no additional movement in rates in 2004,static balance sheet, management believes net interest income would increase $123 and $1,758 in 2003 and 2004, or 0.63% and 8.96%, respectively.
Based on the information and assumptions in effect at December 31, 2002, management believeswill remain relatively stable over a one-year horizon then begin to decline. The interest rate sensitivity simulation model suggests that, a 100 basis point decrease in interest rates over the next two years would decreaseinitially, funding cost reductions will be able to offset declining asset yields keeping net interest income $386, or 1.97% in 2003, and $2,429, or 12.37%a narrow range. However, beyond one year, as funding costs reach their assumed floors, asset yields will continue to decline, resulting in 2004. lower levels of net interest income. Management believes continued balance sheet growth will be needed to maintain the Bank’s current level of net interest income, should rates continue to fall.
While the simulated interest rate decline over a two-year horizon would reduce net interest income by 6.38% in year two falls outside of the Bank’s policy target of 10.0%,second year, management believes that a 100 basis point decline in interest rates, or a Federal Funds Targeted rate of 0.25%0.00%, represents a scenario that is not likely to occur. Further, a repositioning of the balance sheet to hedge such a decline, would adversely impact net interest income in a rising rate environment, a scenario management believes is more likely to occur over the longer term.
In a rising rate environment with the Bank maintaining a static balance sheet, management believes net interest income will begin increasing over the one-year horizon and continue to increase in year two and beyond. The interest rate sensitivity simulation model suggests that as rates rise asset extensions resulting from reduced bond calls and prepayments, combined with a high concentration of short term funding, will delay an expected benefit over the one-year horizon. However, over the two-year horizon assets yields will continue to reset at higher levels and margins will widen as funding costs begin to stabilize more quickly. Management believes rising interest rates will increase net interest income without continued balance sheet growth. Management also believes it is well positioned for rising rates beyond the two-year horizon.
Managing the Bank’s interest rate risk sensitivity has been challenging during this period of historically low interest rates. During 2002,2003, the yield curve showed a relatively sharp, downward, parallel shift. As was anticipated by management through use of the interest rate sensitivity model, the Bank’s 2002 net interest income was moderately impacted and, wereimpacted. Were it not for the 2003 growth in earning assets combined with strategies designed to adjust the posture of the balance sheet, 2003 net interest income would have resulted inposted a year-over-year decline.
AtThe following table summarized the Banks net interest income sensitivity analysis as of December 31, 2002, the Bank continued to maintain a moderately asset sensitive balance sheet, positioning itself for an eventual rise in interest rates. Should interest rates remain flat for an extended period of time,over one and two-year horizons, and assuming no earning asset growth and a static balance sheet, management believes thatparallel shift in the yield curve. The table also summarized net interest income will continue showing slight to moderate declines. Management expects short- term interest rates may be susceptible to further declines during 2003, with the balance ofsensitivity under a non-parallel shift in the yield curve, holding relatively constant. Management believes that the current level of interest rate risk is acceptable.whereby short-term rates rise by 200 and 400 basis points.
INTEREST RATE RISK
CHANGE IN NET INTEREST INCOME FROM THE FLAT RATE SCENERIO
DECEMBER 31, 2002
-100 Basis Points | +200 Basis Points | +200 Basis Points | +400 Basis Points | |
Year 1 | ||||
Net interest income change ($) | ($386) | $546 | $291 | $818 |
Net interest income change (%) | (1.97%) | 2.78% | 1.48% | 4.17% |
|
|
| ||
Year 2 | ||||
Net interest income change vs. year 1 base ($) | ($2,429) | $877 | $123 | $1,758 |
Net interest income change vs. year 1 base (%) | (12.37%) | 4.47% | 0.63% | 8.96% |
The Bank engages an independent consultant to periodically review its interest rate risk position and the reasonableness of assumptions used, with periodic reports provided to the Bank’s Board of Directors. At December 31, 2002,2003, there were no significant differences between the views of the independent consultant and Management regarding the Bank’s interest rate risk exposure.
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 and yield curve shape, prepayments on loans and securities, deposit rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, 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.
As market conditions vary from those assumed in the sensitivity analysis, actual results may also differ due to: prepayment/refinancing levels deviating from those assumed, the 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, product preference changes, and other such variables. The sensitivity analysis also does not reflect actions that ALCOthe Bank’s asset and liability management committee might take in responding to or anticipating changes in interest rates.
Derivative instruments and hedging activities: As part of the Bank’s overall interest rate risk management strategy, management periodically uses derivative instruments to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The Bank’s interest rate risk management strategy involves modifying the re-pricing characteristics of certain assets and liabilities so that changes in interest rates do not have a significant adverse effect on net interest income, the net interest margin and cash flows. Derivative instruments that management periodically uses as part of its interest rate risk management strategy include interest rate swaps, caps and floors. A policy statement, approved by the Board of Directors of the Bank, governs use of these instruments.
At December 31, 2002, the Bank had one derivative instrument outstanding, an interest rate swap, compared with none at the prior year-end. The details are summarized as follows:
Description | Maturity | Notional Amount | Fixed Interest Rate | Variable Interest Rate | Hedge Pool |
Receive fixed rate, pay variable rate. | 4/26/04 | $10,000 | 6.425% | Prime | Home Equity Loans |
The $10 million interest rate swap hedges a defined pool of the Bank’s home equity loans yielding an interest rate of prime, which at December 31, 2002 was 4.25%. The bank is required to pay a counter- party monthly variable rate payments indexed to prime, while receiving monthly fixed rate payments based upon an interest rate of 6.425% over the term of the agreement.
The credit risk associated with the interest rate swap agreement is the risk of non-performance by the counter-party to the agreement. However, management does not anticipate non-performance by the counter-party, and monitors risk through its asset/liability management policies and procedures.
The interest rate swap agreement, which qualifies as a cash flow hedge, has an original maturity of two years and as of December 31, 2002 had an unrealized gain of $272 thousand. In accordance with the Statement of Financial Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 137, and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", the unrealized gain is recorded in the statement of condition with the offset recorded in the statement of other comprehensive income. The use of the interest rate swap agreement increased interest income by $119 during 2002.
Liquidity Risk
Liquidity is measured by the Company’s ability to meet short-term cash needs at a reasonable cost or minimal loss. The Company seeks to obtain favorable sources of liabilities and to maintain prudent levels of liquid assets in order to satisfy varied liquidity demands. Besides serving as a funding source for maturing obligations, liquidity provides flexibility in responding to customer initiated needs. Many factors affect the Company’s ability to meet liquidity needs, including variations in the markets served by its network of offices, its mix of assets and liabilities, reputation and credit standing in the marketplace, and general economic conditions.
The CompanyBank actively manages its liquidity position through target ratios established under its asset/liability management policy. Continual monitoring of these ratios, both historical and through forecasts under multiple rate scenarios, allows the CompanyBank to employ strategies necessary to maintain adequate liquidity.
The CompanyBank uses a basic surplus/deficit model to measure its liquidity over 30- and 90-day time horizons. The relationship between liquid assets and short-term liabilities that are vulnerable to non-replacement are routinely monitored. The Company’sBank’s policy is to maintain its liquidity position at a minimum of 5% of total assets. At December 31, 2002,2003, liquidity, as measured by the basic surplus/deficit model, was 9.0% for7.5% over the 30-day horizon and 6.1% for9.6% over the 90-day horizon. Including its available lines from the Federal Home Loan Bank (FHLB), at December 31, 3003 the Bank’s basic surplus amounted to 8.3% over the 30-day horizon and 10.4% over the 90-day horizon. A portion of the Company’sBanks deposit bases is seasonal in nature, with balances typically declining in the Winter months through late Spring, during which period the Company’sBank’s liquidity position tightens.
At December 31, 2002,2003, the CompanyBank had $15,414$9,386 in unused lines of credit, and net unencumbered qualifying collateral availability to support a $28,000an increase of approximately $59,000 in its line of credit with the Federal Home Loan Bank. The CompanyBank also had capacity to borrow funds on a serviced basis utilizing certain un-pledged securities.securities in its investment securities portfolio. The Bank’s loan portfolio and investment portfolio provide a source of contingent liquidity that could be accessed in a reasonable time period through sales. The Bank also has access to the national brokered deposit market.
The Company maintains a liquidity contingency plan approved by the Bank’s Board of Directors. This plan addresses the steps that would be taken in the event of a liquidity crisis, and identifies other sources of liquidity available to the Company.
Changes in economic conditions, including consumer savings habits and availability or access to the brokered deposit market could potentially have a significant impact on the Company’s liquidity position.
Off -Balance Sheet Commitments
Off-Balance Sheet Risks
CommitmentsThe bank is party to extend credit:The Company makes contractualfinancial instruments with off-balance sheet risk in the normal course of business to meet the needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and extends linescertain derivative instruments, namely, interest rate swap agreements.
Commitments to Extend Credit: Commitments to extend credit represent agreements by the Bank to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis using the same credit which are subject topolicies as it does for its balance sheet instruments. The amount of collateral obtained, if deemednecessary by the Company’sBank upon the issuance of a commitment, is based on management’s credit approval and monitoring procedures. As more fully described in Note 17 toevaluation of the financial statements, at December 31, 2002 and 2001,borrower.
The following table summarizes the Bank’s commitments to extend credit in the formas of loans, including unused lines of credit and commitments to originate loans, amounted to $71,142 and $67,595 respectively. Increases in the unused lines of credit on home equity loans, combined with commercial lines of credit at year-end, are responsible for the $3,547December 31:
2003 | 2002 | 2001 | |
Commitments to originate loans | $26,993 | $19,981 | $16,563 |
Unused lines of credit | $68,018 | $49,107 | $45,453 |
Unadvanced portions of construction loans | $ 3,863 | $ 2,054 | $ 5,579 |
Total | $98,874 | $71,142 | $ 67,595 |
The increase in unused lines and commitments compared with 2001. In the opinion of management, there are no material2003 commitments to extend credit that represent unusual risks.was led by consumer real estate home equity lines and, to a lesser extent, business lines of credit.
LettersDerivative Instruments / Counter-party Risk: As part of creditits overall asset and stand-by lettersliability management strategy, the Bank periodically uses derivative instruments to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The Bank’s interest rate risk management strategy involves modifying the re-pricing characteristics of credit: The Company guaranteescertain assets and liabilities so that changes in interest rates do not have a significant adverse effect on net interest income, the obligations or performancenet interest margin and cash flows. Derivative instruments that management periodically uses as part of customersits interest rate risk management strategy include interest rate swaps, caps and floors. These instruments are factored into the Bank’s overall interest rate risk position. A policy statement, approved by issuing lettersthe Board of credit and standby lettersDirectors of credit to third parties. These lettersthe Bank, governs use of credit are sometimes issued in support of third party debt. The risk involved in issuing letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers, and they are subject to the same origination, portfolio maintenance and management procedures in effect to monitor other credit and off-balance sheet products. these instruments.
At December 31, 2002 and 2001, outstanding letters of credit and standby letters of credit totaled $2,800 and $5,059 respectively.
Counter-party risk: Pursuant to its asset/liability management policy,2003 the Bank may enter intohad three outstanding derivative instruments, all interest rate swap agreements. The details are summarized as follows:
Description | Maturity | Notional Amount | Fixed Interest Rate | Variable Interest Rate | Hedge Pool |
Receive fixed rate, pay variable rate | 04/25/04 | $10,000 | 6.43% | Prime | Home Equity Loans |
Receive fixed rate, pay variable rate | 09/01/07 | $10,000 | 6.04% | Prime | Home Equity Loans |
Receive fixed rate, pay variable rate | 01/24/09 | $10,000 | 6.25% | Prime | Home Equity Loans |
The interest rate swap agreements hedge a defined pool of the Bank's home equity loans yielding an interest rate of prime, which at December 31, 2003 was 4.00%. The Bank is required to pay a counter party monthly variable rate payments indexed to prime, while receiving monthly fixed rate payments based upon interest rates of 6.425%, 6.040%, and floor6.250%, respectively over the term of each respective agreement.
The following table summarizes the contractual cash flows of the interest rate swap agreements underoutstanding at December 31, 2003, based upon the then current Prime interest rate of 4.00%.
Payments Due by Period | |||||
Total | Less Than | 1-3 Years | 3-5 Years | Greater Than | |
Fixed payments due from counter-party | $5,590 | $1,437 | $2,458 | $1,656 | $ 39 |
Variable payments due to counter-party | 3,926 | 1,030 | 1,602 | 1,168 | 126 |
Net cash flow | $1,664 | $ 407 | $ 856 | $ 488 | $(87) |
The credit risk associated with the interest rate swap agreements is the risk of non-performance by the counter-party to the agreement. However, management does not anticipate non-performance by the counter-party, and regularly reviews the credit quality of the counter-party from which the Bank and the swap or floor counter-party would be obligated to exchange interest payments on notional principal amounts.instruments have been purchased. For swap and floor transactions the contract or notional amount does not represent exposure to credit loss. The Bank would be exposed to risk should the counter-party default in its responsibility to pay interest under the terms of the swap or floor agreement.
The interest rate swap agreements, which management believes qualify as a cash flow hedges, had total unrealized gains of $86 at December 31, 2003. In accordance with the Statement of Financial Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 137, and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", the unrealized gain is recorded in the statement of condition with the offset recorded in the statement of Other Comprehensive Income. The use of the interest rate swap agreement increased interest income by $498 during 2003 compared with $117 in 2002.
The Financial Accounting Standards Board (FASB) is currently developing SFAS No. 133 implementation guidance covering cash flow hedges; specifically, hedging the variable interest payments on a group of Prime-Rate-Based Interest-Bearing Loans. At issue is whether the prime interest rate may be designated as the benchmark rate in a hedge of interest rate risk, as opposed to either the U.S. Treasury rate or the LIBOR swap rate. Should the FASB rule that the prime interest rate may not be used as a benchmark rate, the Company will modify its accounting treatment covering interest rate swap agreements. The Company does not believe this guidance will have a materially adverse impact on its financial condition or results of operations.
Off-Balance Sheet Arrangements
The Company is, from time to time, a party to certain off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, that may be material to investors. "Off-balance sheet arrangement" includes any transaction, agreement, or other contractual arrangement to which an unconsolidated entity is a party, under which the Company has:
At December 31, 2003 the Company had the following Off-balance Sheet Arrangements:
Stand-by Letters of Credit: The Bank controls counter-partyguarantees the obligations or performance of certain customers by issuing standby letters of credit to third parties. These letters of credit are sometimes issued in support of third party debt. The risk throughinvolved in issuing standby letters of credit approvals, limits,is essentially the same as the credit risk involved in extending loan facilities to customers, and monitoring procedures. As more fully described herein under market risk,they are subject to the same origination, portfolio maintenance and management procedures in effect to monitor other credit products. The amount of collateral obtained, if deemed necessary by the Bank upon issuance of a standby letter of credit, is based upon managements credit evaluation of the customer. At December 31, 2003, outstanding standby letters of credit totaled $3,650, compared with $3,669 at December 31, 2002, the Company had one derivative instrument outstanding, an interest rate swap withrepresenting a notional amountdecrease of $10 million, compared with none during 2001 and 2000.$19, or 0.03%.
Other Off Balance Sheet Arrangements: At December 31, 20022003, the Company did not have any other "off-balance sheet arrangements" that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.
Off-balance Sheet Contractual Obligations
The Company is a party to several off-balance contractual obligations under which it is obligated to make future payments. These principally include borrowings from the FHLB, consisting of short and 2001, there were no interestlong-term fixed rate caps or floor agreements in place.
REGULATORY MATTERS
As previously reported, the Bankborrowings, and collateralized by all stock in the third quarterFHLB, a blanket lien on qualified collateral consisting primarily of 2001,loans with first mortgages secured by one-to-four family properties, and certain pledged investment securities. The Company has an obligation and commitment to repay all borrowings from the FHLB.
The Company is also obligated to make payments on an operating lease for its office at one Cumberland Place in Bangor, ME.
The following table summarizes the Company’s contractual obligations at December 31, 2003. Borrowings are stated at their contractual maturity due dates and do not reflect callable features, or amortizing principal features on certain borrowings.
CONTRACTUAL OBLIGATIONS
(Dollars in thousands)
Description | Total Amount of Obligations | Payments Due Per Period | |||
<1 year | 1-3 years | 4-5 years | >5 years | ||
Operating Leases | $ 24 | $ 24 | $ -- | $ -- | $ -- |
Capital Leases | -- | -- | -- | -- | -- |
Long-Term Debt | 170,506 | 42,600 | 19,517 | 22,273 | 86,116 |
Purchase Obligations | |||||
Other Long-term Obligations | -- | -- | -- | -- | -- |
Total | $341,036 | $42,624 | $19,517 | $22,273 | $86,116 |
In the normal course of its banking and financial services business, and in connection with providing products and services to its customers, the Company has entered into an agreement ("Agreement") with its principal regulators, the FDICa variety of traditional third party contracts for support services. Examples of such contractual agreements would include services providing ATM and Visa Debit and Credit Card processing, trust services accounting support, check printing, and the BFI.leasing of T-1 telecommunication lines supporting the Company’s wide area technology network. The majority of the Company’s core operating systems and software applications are maintained "in-house" with traditional third party maintenance agreements of one year or less.
Impact of Inflation and Changing Prices
PursuantThe Consolidated Financial Statements and the accompanying Notes to that Agreement, the Bank has increased its allowance for loan losses, developed a classified asset reduction plan for certain commercial relationships, revised its credit administration plan, implemented certain revisionsConsolidated Financial Statements presented elsewhere in its asset appraisal procedures, established a minimum capital thresholdthis report have been prepared in accordance with accounting principles generally accepted in the United States, which require the measurement of 8% or 3% abovefinancial position and operating results in terms of historical dollars without considering changes in the regulatory minimumrelative purchasing power of 5% for "well capitalized" banks, improved certain account reconciliation procedures, addressed certain weaknesses in its information systems, improved its proceduresmoney over time due to ensure its compliance withinflation.
Unlike many industrial companies, substantially all of the "Bank Secrecy Act,"assets and initiated a long-term strategic planning process which has recently been completed and will be refreshed at least annually. The Bank has also implemented a policyvirtually all of paying dividends to its parent,the liabilities of the Company only from current earnings, exclusive of gainsare monetary in nature. As a result, interest rates have a more significant impact on the saleCompany’s performance than the general level of securities, without prior approvalinflation. Over short periods of its principal regulators.time, interest rates and the U.S. Treasury yield curve may not necessarily move in the same direction or in the same magnitude as inflation.
The Bank is providing updates coveringWhile the statusfinancial nature of the foregoing itemsCompany’s consolidated balance sheets and statements of income is more clearly affected by changes in interest rates than by inflation, inflation does affect the Company because as prices increase the money supply tends to its principal regulatorsincrease, the size of loans requested tends to increase, total Company assets increase, and interest rates are affected by inflationary expectations. In addition, operating expenses tend to increase without a corresponding increase in productivity. There is no precise method, however, to measure the effects of inflation on a quarterly basis. In management’s judgment, the Bank is adequately addressingCompany’s financial statements. Accordingly, any examination or analysis of the matters set forth infinancial statements should take into consideration the Agreement.possible effects of inflation.
Recently Issued Accounting Standards
In April 2003, FASB issued Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill149, "Amendment of Statement 133 on Derivative Instruments and Other Intangible Assets,Hedging Activities." requires that goodwill reflected on the Company’s balance sheet be no longer amortized to earnings, but instead be reviewedThe Statement amends and clarifies accounting for impairment. The amortization of goodwill ceases upon adoption of the statement. The Company adoptedderivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 142 effective January 1, 2002. The Company determined that goodwill was impaired as of January 1, 2002, the date of adoption, and the impairment loss, net of taxes, was recognized as a cumulative effect of a change in accounting principle in the Company’s Consolidated Statement of Income.133.
SFAS No. 146, "Accounting149 is effective for Costs Associated with Exitcontracts entered into or Disposal Activities" addresses financial accountingmodified after June 30, 2003, except as stated below and reporting for costs associated with exit or disposal activities.hedging relationships designated after June 30, 2003. The guidance should be applied prospectively. The provisions of this Statement that relate to SFAS No. 146 requires the recognition of certain costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment133 Implementation Issues that have been effective for fiscal quarters that began prior to an exit or disposal plan.
SFAS No. 147, "Acquisitions of Certain Financial Institutions" amends SFAS 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions"June 15, 2003, should continue to exclude from its scope most acquisitions of financial institutions. Such transactions should be accounted forapplied in accordance with their respective effective dates. In addition, certain provisions relating to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to existing contracts as well as new contracts entered into after June 30, 2003. SFAS No. 141, "Business Combinations". SFAS No 147 is effective on October 1, 2002.
SFAS No. 148 contains enhanced disclosure requirements for stock-based compensation. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. Adoption of the Statement in 2002 had no149 does not have a material impact on the Company’s consolidated financial conditionstatements.
In May 2003, FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and resultsEquity." This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of operations.both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances).
Statement of Position (SOP) 01-6, "Accounting by Certain Entities (Including Entities with Trade Receivables) That Lend to or Finance the Activities of Others," was issued in December 2001. The SOPSFAS No. 150 is effective for financial statementsinstruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. This Statement does not impact the Company's Consolidated Financial Statements, as the Company does not have any financial instruments with characteristics of both liabilities and equity.
FASB’s Emerging Issues Task Force, in its Issue No. 03-1, has issued new disclosure requirements with respect to investment securities with unrealized losses that have not been classified as other-than-temporary. Companies are required to disclose separately investments that have had continual unrealized losses for fiscaltwelve months or more, and those that have had continual unrealized losses for less than twelve months. For investments in the former category, a narrative disclosure is required that would allow financial statement users to understand the positive and negative information management considered in reaching the conclusion that the impairments are not other-than-temporary. The new disclosure requirements, which are effective for years beginningending after December 15, 2001. The SOP reconciles and conforms the accounting and financial reporting provisions established by various Audit and Accounting Industry Guides. Adoption of this Statement had no2003, did not have a material impact on the Company’s consolidated financial conditionstatements.
In December 2003, the President signed the Medicare Prescription Drug, Improvement and resultsModernization Act of operations.2003 (the Act) into law. The Act includes the following two new features to Medicare (Medicare Part D) that could affect the measurement of the accumulated postretirement benefit obligation (APBO) and net periodic postretirement benefit cost for the Plan:
The effects of the Act on the APBO or net periodic postretirement benefit cost are not reflected in the financial statements or accompanying notes. Pending specific authoritative guidance on the accounting for the federal subsidy could require the Company to change previously reported information when the guidance is issued.
In December 2003, FASB issued a revised version of SFAS 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." The Statement retains all of the previous requirements and introduces additional disclosure requirements and interim reporting requirements. SFAS 132 (revised 2003) is effective for years ending after December 15, 2003.
ITEM 7A. Qualitative and Quantitative Disclosures about Market Risk
The Company does not expectinformation contained in the adoptionsection captioned Management’s Discussion and Analysis of these standards to have a material affect on the financial conditionFinancial Condition and resultsResults of operations of the Company.Operation "Market Risk" in Item 7 is incorporated herein by reference.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Bar Harbor Bankshares
We have audited the accompanying consolidated balance sheets of Bar Harbor Bankshares and Subsidiaries as of December 31, 20022003 and 2001,2002, and the related consolidated statements of income, changes in shareholders'shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2002.2003. These financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with U. S. generally accepted auditing standards.the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bar Harbor Bankshares and Subsidiaries as of December 31, 20022003 and 2001,2002, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2002,2003, in conformity with U.S.accounting principles generally accepted accounting principles.
As discussed in Notes 1 and 21 to the consolidated financial statements, the Company changed its methodUnited States of accounting for goodwill in 2002 in accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets".
America.
/s/ BERRY, DUNN, McNEILBerry, Dunn, McNeil & PARKERParker
Portland, Maine
February 14, 200319, 2004
CONSOLIDATED BALANCE SHEETS
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002,2003, AND 20012002
(Dollars in thousands)
2002 | 2001 | 2003 | 2002 | ||
Assets | |||||
Cash and due from banks | $ 11,529 | $ 17,355 | $ 14,199 | $ 11,529 | |
Securities: | |||||
Available for sale, at market | 128,826 | 106,743 | 124,422 | 128,826 | |
Held to maturity (market value $32,077 and $24,943 at | |||||
December 31, 2002 and 2001, respectively) | 31,545 | 26,866 | |||
Held to maturity (market value $35,093 and $32,077 at | |||||
December 31, 2003 and 2002, respectively) | 33,965 | 31,545 | |||
Other securities | 1,929 | 8,464 | 910 | 1,929 | |
Total securities | 162,300 | 142,073 | 159,297 | 162,300 | |
Loans | 351,535 | 297,970 | 383,408 | 351,535 | |
Allowance for loan losses | (4,975) | (4,169) | (5,278) | (4,975) | |
Loans, net of allowance | 346,560 | 293,801 | 378,130 | 346,560 | |
Premises and equipment, net | 11,313 | 12,118 | 11,410 | 11,313 | |
Goodwill | 375 | 750 | 300 | 375 | |
Other assets | 21,741 | 21,106 | 20,410 | 21,741 | |
TOTAL ASSETS | $553,818 | $487,203 | $583,746 | $553,818 | |
Liabilities | |||||
Deposits | |||||
Demand deposits | $ 46,001 | $ 46,112 | $ 49,880 | $ 46,001 | |
NOW accounts | 50,172 | 45,685 | 60,287 | 50,172 | |
Savings deposits | 108,982 | 91,140 | 109,309 | 108,982 | |
Time deposits | 116,860 | 108,896 | 119,604 | 116,860 | |
Total deposits | 322,015 | 291,833 | 339,080 | 322,015 | |
Securities sold under repurchase agreements | 13,943 | 15,159 | 15,925 | 13,943 | |
Borrowings from Federal Home Loan Bank | 156,558 | 120,900 | 170,506 | 156,558 | |
Other liabilities | 7,466 | 6,773 | 5,120 | 7,466 | |
TOTAL LIABILITIES | 499,982 | 434,665 | 530,63 | 499,982 | |
Commitments and contingent liabilities (Notes 13, 14, 16, 17, 18) | |||||
Commitments and contingent liabilities (Notes 13, 14, 16, 17, |
| ||||
Shareholders' equity | |||||
Capital stock, par value $2.00; authorized 10,000,000 shares; | |||||
issued 3,643,614 shares in 2002 and 2001. | 7,287 | ||||
issued 3,643,614 shares | 7,287 | 7,287 | |||
Surplus | 4,002 | 4,002 | 4,002 | ||
Retained earnings | 45,994 | 43,875 | 48,746 | 45,994 | |
Accumulated other comprehensive income: | |||||
Unrealized appreciation on securities available for sale, | |||||
net of taxes of $1,117 and $880 at December 31, 2002 | |||||
and 2001, respectively | 2,167 | 1,707 | |||
Unrealized appreciation on derivative instruments, net of taxes | 180 | -- | |||
Less: cost of 463,913 shares and 386,314 shares | |||||
of treasury stock at December 31, 2002 and 2001, | |||||
net of taxes of $235 and $1,117 at December 31, 2003 and | |||||
2002, respectively | 457 | 2,167 | |||
Unrealized appreciation on derivative instruments, net of taxes | |||||
of $29 and $93 at December 31, 2003 and 2002, | |||||
respectively | 57 | 180 | |||
Less: cost of 540,193 shares and 463,913 shares | |||||
of treasury stock at December 31, 2003 and 2002, | |||||
respectively | (5,794) | (4,333) | (7,434) | (5,794) | |
TOTAL SHAREHOLDERS' EQUITY | 53,836 | 52,538 | 53,115 | 53,836 | |
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ 553,818 | $487,203 | $583,746 | $553,818 |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2003, 2002 2001 AND 20002001
(Dollars in thousands, except per share data)
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |
Interest and dividend income: | ||||||
Interest and fees on loans | $23,754 | $ 24,308 | $ 23,939 | $ 23,772 | $ 23,754 | $ 24,308 |
Interest and dividends on securities and federal funds | 8,598 | 9,584 | 11,394 | 6,807 | 8,310 | 9,120 |
Total interest and dividend income | 32,352 | 33,892 | 35,333 | 30,579 | 32,064 | 33,428 |
| ||||||
Interest expense: |
| |||||
Deposits | 5,880 | 8,298 | 9,008 | 4,336 | 5,880 | 8,298 |
Short-term borrowings | 770 | 2,722 | 550 | 549 | 770 | 2,722 |
Long-term borrowings | 6,125 | 4,731 | 8,058 | 6,190 | 6,125 | 4,731 |
Total interest expense | 12,775 | 15,751 | 17,616 | 11,075 | 12,775 | 15,751 |
Net interest income | 19,577 | 18,141 | 17,717 | 19,504 | 19,289 | 17,677 |
Provision for loan losses | 1,100 | 2,000 | 952 | 540 | 1,100 | 2,000 |
Net interest income after provision for loan losses | 18,477 | 16,141 | 16,765 | 18,964 | 18,189 | 15,677 |
Noninterest income: | ||||||
Trust and other financial services | 2,261 | 3,407 | 3,200 | 2,192 | 2,261 | 3,407 |
Service charges on deposit accounts | 1,483 | 1,864 | 1,364 | 1,509 | 1,483 | 1,864 |
Other service charges, commissions and fees | 225 | 438 | 1,035 | 200 | 225 | 438 |
Credit card service charges and fees | 1,654 | 1,528 | 1,426 | 1,614 | 1,654 | 1,528 |
Other operating income | 340 | 283 | 41 | 567 | 628 | 747 |
Net securities gains | 450 | -- | 1,257 | 450 | -- | |
Total noninterest income | 6,413 | 7,520 | 7,066 | 7,339 | 6,701 | 7,984 |
Noninterest expenses: | ||||||
Salaries and employee benefits | 9,235 | 8,534 | 7,937 | 9,834 | 9,235 | 8,534 |
Occupancy expense | 1,111 | 1,100 | 865 | 1,058 | 1,111 | 1,100 |
Furniture and equipment expense | 1,535 | 1,510 | 1,680 | 1,540 | 1,535 | 1,510 |
Credit card expenses | 1,224 | 1,209 | 1,162 | 1,187 | 1,224 | 1,209 |
Other operating expense | 5,231 | 6,136 | 4,971 | 5,585 | 5,231 | 6,136 |
Total noninterest expenses | 18,336 | 18,489 | 16,615 | 19,204 | 18,336 | 18,489 |
|
| |||||
Income before income taxes and cumulative effect of accounting change | 6,554 | 5,172 | 7,216 | 7,099 | 6,554 | 5,172 |
Income taxes | 1,742 | 1,661 | 2,419 | 1,892 | 1,742 | 1,661 |
Net income before cumulative effect of accounting change | 4,812 | 3,511 | 4,797 | 5,207 | 4,812 | 3,511 |
Cumulative effect of change in accounting for goodwill, net of tax of $128 | (247) | -- | ||||
Less: cumulative effect of change in accounting for goodwill, net of tax of $128 | -- | 247 | -- | |||
Net Income | $ 4,565 | $ 3,511 | $ 4,797 | $ 5,207 | $ 4,565 | $ 3,511 |
Computation of Net Income Per Share: | ||||||
Weighted average number of capital stock shares outstanding | ||||||
Basic | 3,219,377 | 3,279,043 | 3,360,770 | 3,124,230 | 3,219,377 | 3,279,043 |
Effect of dilutive employee stock options | 50,743 | 32,118 | -- | 78,974 | 50,743 | 32,118 |
Diluted | 3,270,120 | 3,311,161 | 3,360,770 | 3,203,204 | 3,270,120 | 3,311,161 |
|
|
| ||||
NET INCOME PER SHARE: |
|
| ||||
Basic before cumulative effect of accounting change | $ 1.49 | $ 1.07 | $ 1.43 | 1.67 | 1.49 | 1.07 |
Cumulative effect of change in accounting for goodwill, net of income tax benefit | (0.07) | -- | -- | -- | (0.07) | -- |
Basic | $ 1.42 | $ 1.07 | $ 1.43 | $ 1.67 | $ 1.42 | $ 1.07 |
|
|
| ||||
Diluted before cumulative effect of accounting change | $ 1.47 | $ 1.06 | $ 1.43 | 1.63 | 1.47 | 1.06 |
Cumulative effect of change in accounting for goodwill, net of income tax benefit | (0.07) | -- | -- | (0.07) | -- | |
Diluted | $ 1.40 | $ 1.06 | $ 1.43 | $ 1.63 | $ 1.40 | $ 1.06 |
|
| |||||
Dividends per share | $ 0.76 | $ 0.76 | $ 0.76 | $ 0.76 | $ 0.76 | $ 0.76 |
The accompanying notes are an integral part of these consolidated financial statements.
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002 2001 AND 20002001
(Dollars in thousands, except per share data)
Accumulated | ||||||||||||
Other | Total | |||||||||||
Capital | Retained | Comprehensive | Treasury | Shareholders' | ||||||||
Stock | Surplus | Earnings | Income | Stock | Equity | |||||||
Balance December 31, 1999 | $ 7,287 | $ 4,002 | $ 40,611 | $ (1,015) | $ (1,740) | $ 49,145 | ||||||
Net income 2000 | - | - | 4,797 | - | - | 4,797 | ||||||
Net unrealized appreciation on securities | ||||||||||||
available for sale, net of tax of $484 | - | - | - | 939 | - | 939 | ||||||
Total comprehensive income | - | - | 4,797 | 939 | - | 5,736 | ||||||
Cash dividends declared ($0.76 per share) | (2,554) | (2,554) | ||||||||||
Purchase of treasury stock (115,400 shares) | - | - | - | - | (1,820) | (1,820) | ||||||
Balance December 31, 2000 | $ 7,287 | $ 4,002 | $ 42,854 | $ (76) | $ (3,560) | $ 50,507 | ||||||
Capital | Surplus | Retained | Accumulated Other | Treasury | Total | |||||||
Balance December 31, 2000 | $ 7,287 | $ 4,002 | $ 42,854 | $ (76) | $ (3,560) | $ 50,507 | $7,287 | $4,002 | $42,854 | $ (76) | $(3,560) | $50,507 |
Net income 2001 | - | - | 3,511 | - | - | 3,511 | -- | -- | 3,511 | -- | -- | 3,511 |
Cumulative effect to record unrealized depreciation on | ||||||||||||
securities held to maturity transferred to securities | ||||||||||||
available for sale | - | - | - | (28) | - | (28) | ||||||
Net unrealized appreciation on securities | ||||||||||||
available for sale, net of tax of $ 933 | - | - | - | 1,811 | - | 1,811 | ||||||
Cumulative effect to record unrealized | -- | -- | -- | (28) | -- | (28) | ||||||
Net unrealized appreciation on securities | -- | -- | -- | 1,811 | -- | 1,811 | ||||||
Total comprehensive income | - | - | 3,511 | 1,783 | - | 5,294 | -- | -- | 3,511 | 1,783 | -- | 5,294 |
Cash dividends declared ($0.76 per share) | (2,490) | (2,490) | (2,490) | (2,490) | ||||||||
Purchase of treasury stock (48,814 shares) | - | - | - | - | (773) | (773) | -- | -- | -- | -- | (773) | (773) |
Balance December 31, 2001 | $ 7,287 | $ 4,002 | $ 43,875 | $ 1,707 | $ (4,333) | $ 52,538 | $7,287 | $4,002 | $43,875 | $1,707 | $(4,333) | $52,538 |
Balance December 31, 2001 | $ 7,287 | $ 4,002 | $ 43,875 | $ 1,707 | $ (4,333) | $ 52,538 | $7,287 | $4,002 | $43,875 | $1,707 | $(4,333) | $52,538 |
Net income 2002 | - | - | 4,565 | - | - | 4,565 | -- | -- | 4,565 | -- | -- | 4,565 |
Net unrealized appreciation on securities | - | |||||||||||
available for sale, net of tax of $ 237 | - | - | - | 460 | - | 460 | ||||||
Net unrealized appreciation on derivative instruments | ||||||||||||
marked to market, net of tax of $ 93 | - | - | - | 180 | - | 180 | ||||||
Net unrealized appreciation on securities | -- | -- | -- | 757 | -- | 757 | ||||||
Reclassification adjustment of securities gains | -- | -- | -- | (297) | -- | (297) | ||||||
Net unrealized appreciation on derivative | -- | -- | -- | 180 | -- | 180 | ||||||
Total comprehensive income | - | - | 4,565 | 640 | - | 5,205 | -- | -- | 4,565 | 640 | -- | 5,205 |
Cash dividends declared ($0.76 per share) | - | - | (2,445) | - | - | (2,445) | -- | -- | (2,445) | -- | -- | (2,445) |
Purchase of treasury stock (82,840 shares) | - | - | - | - | (1,563) | (1,563) | -- | -- | -- | -- | (1,563) | (1,563) |
Stock options exercised (5,241 shares) | - | - | (1) | - | 102 | 101 | -- | -- | (1) | -- | 102 | 101 |
Balance December 31, 2002 | $ 7,287 | $ 4,002 | $ 45,994 | $ 2,347 | $ (5,794) | $ 53,836 | $7,287 | $4,002 | $45,994 | $2,347 | $(5,794) | $53,836 |
Balance December 31, 2002 | $7,287 | $4,002 | $45,994 | $ 2,347 | $(5,794) | $53,836 | ||||||
Net income 2003 | -- | -- | 5,207 | -- | -- | 5,207 | ||||||
Net unrealized depreciation on securities | -- | -- | -- | (880) | -- | (880) | ||||||
Reclassification adjustment of securities gains | -- | -- | -- | (830) | -- | (830) | ||||||
Net unrealized depreciation on derivative | -- | -- | -- | (123) | -- | (123) | ||||||
Total comprehensive income | -- | -- | 5,207 | (1,833) | -- | 3,374 | ||||||
Cash dividends declared ($0.76 per share) | -- | -- | (2,386) | -- | -- | (2,386) | ||||||
Purchase of treasury stock (87,535 shares) | -- | -- | -- | -- | (1,888) | (1,888) | ||||||
Stock options exercised (11,255 shares) | -- | -- | (69) | -- | 248 | 179 | ||||||
Balance December 31, 2003 | $7,287 | $4,002 | $48,746 | $ 514 | $(7,434) | $53,115 |
The accompanying notes are an integral part of these consolidated financial statements.
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 2001 AND 20002001
(Dollars in thousands)
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |
Cash flows from operating activities: | ||||||
Net income | $ 4,565 | $ 3,511 | $ 4,797 | $ 5,207 | $ 4,565 | $ 3,511 |
Adjustments to reconcile net income to net cash | ||||||
provided by operating activities: | ||||||
Depreciation | 1,117 | 1,482 | 1,202 | 1,107 | 1,117 | 1,482 |
Deferred income taxes | (129) | 111 | 26 | 124 | (129) | 111 |
Provision for loan losses | 1,100 | 2,000 | 952 | 540 | 1,100 | 2,000 |
Gain on sale of other real estate owned | (4) | (25) | (12) | (1) | (4) | (25) |
Realized gain on sale of securities available for sale | (450) | -- | -- | |||
Realized gains on sale of securities available for sale | (1,257) | (450) | -- | |||
Net amortization (accretion) of bond premiums (discounts) | 16 | (97) | 89 | 296 | 16 | (97) |
Loss on sale of premises and equipment | -- | -- | 95 | |||
Goodwill impairment loss | 375 | -- | -- | 75 | 375 | |
Net change in other assets | (563) | 39 | (2,757) | 1,966 | (563) | 39 |
Net change in other liabilities | 693 | 449 | 2,210 | (2,346) | 693 | 449 |
Net cash provided by operating activities | 6,720 | 7,470 | 6,602 | 5,711 | 6,720 | 7,470 |
Cash flows from investing activities: | ||||||
Purchases of securities held to maturity | (4,527) | (25,109) | (5,213) | (2,857) | (4,527) | (25,109) |
Proceeds from maturity and principal pay downs of | ||||||
Proceeds from maturity and principal paydowns of | ||||||
securities held to maturity | 237 | 810 | 17,626 | 851 | 237 | 810 |
Purchases of securities available for sale | (92,391) | (5,000) | (6,808) | (118,883) | (92,391) | (5,000) |
Proceeds from maturities, calls, and principal pay downs of | ||||||
Proceeds from maturity and principal paydowns of | ||||||
securities available for sale | 45,025 | 52,639 | 2,099 | 74,905 | 45,025 | 25,280 |
Proceeds from sale of securities available for sale | 26,025 | -- | -- | 46,337 | 26,025 | 27,359 |
Net decrease (increase) in other securities | 6,535 | (8,150) | (1,949) | 1,019 | 6,535 | (8,150) |
Net loans made to customers | (53,859) | (28,756) | (11,290) | (32,110) | (53,859) | (28,756) |
Capital expenditures | (312) | (2,440) | (4,953) | (1,204) | (312) | (2,440) |
Proceeds from sale of other real estate owned | 4 | 76 | 44 | 1 | 4 | 76 |
Proceeds from sale of fixed assets | -- | -- | 100 | |||
Net cash used in investing activities | (73,263) | (15,930) | (10,344) | (31,941) | (73,263) | (15,930) |
Cash flows from financing activities: | ||||||
Net increase (decrease) in deposits | 30,182 | 13,757 | (3,632) | |||
Net increase in deposits | 17,065 | 30,182 | 13,757 | |||
Net change in securities sold under repurchase agreements | (1,216) | 2,993 | 3,359 | 1,982 | (1,216) | 2,993 |
Proceeds from Federal Home Loan Bank advances | 258,125 | 69,900 | 104,500 | 817,263 | 258,125 | 69,900 |
Repayment of Federal Home Loan Bank advances | (222,467) | (63,632) | (62,383) | (803,315) | (222,467) | (63,632) |
Net change in short-term borrowed funds | -- | (4,520) | (36,000) | |||
Net change in short term borrowed funds | -- | -- | (4,520) | |||
Purchase of treasury stock | (1,563) | (773) | (1,820) | (1,888) | (1,563) | (773) |
Proceeds from stock issuance | 101 | -- | -- | |||
Proceeds from sale of capital stock | 179 | 101 | -- | |||
Payments of dividends | (2,445) | (2,490) | (2,554) | (2,386) | (2,445) | (2,490) |
Net cash provided by financing activities | 60,717 | 15,235 | 1,470 | 28,900 | 60,717 | 15,235 |
Net increase (decrease) in cash and cash equivalents | (5,826) | 6,775 | (2,272) | 2,670 | (5,826) | 6,775 |
Cash and cash equivalents at beginning of year | 17,355 | 10,580 | 12,852 | 11,529 | 17,355 | 10,580 |
Cash and cash equivalents at end of year | $ 11,529 | $ 17,355 | $10,580 | $ 14,199 | $ 11,529 | $ 17,355 |
Supplemental disclosures of cash flow information | ||||||
Cash paid during the year for: | ||||||
Supplemental disclosures of cash flow information | ||||||
Interest | $ 12,754 | $ 15,978 | $17,606 | $ 11,075 | $ 12,754 | $ 15,978 |
Income taxes, net of refunds | $ 1,382 | $ 2,080 | $ 2,200 | $ 2,067 | $ 1,382 | $ 2,080 |
Non-cash transactions | ||||||
Non-cash transactions: | ||||||
Transfer from loans to other real estate owned | $ 100 | $ 100 | $ 89 | $ -- | $ 100 | $ 100 |
Transfer of securities from held to maturity to available for sale | -- | $113,856 | -- | $ -- | $ -- | $113,656 |
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED STATEMENTS
BAR HARBOR BANKSHARES AND SUBSIDIARIES
December 31, 2003, 2002, 2001, and 20002001
(amounts in tables are in thousands)
thousands, except number of shares and per share amounts)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Bar Harbor Bankshares, ("the Company"), through its wholly-ownedwholly owned subsidiaries, Bar Harbor Banking and Trust Company ("the Bank"), and BTI Financial Group ("BTI"), provides a full range of banking, trust, financial management, and investment management services to individual, corporate, government and corporate customersnot-for-profit organizations throughout easternDown East and Mid Coast Maine. These banking services are available in each of its ten branch locations while BTI subsidiaries are in three locations. The Bank and BTI are subject to the regulations of certain federal and state agencies and undergo periodic examinations by those regulatory authorities.
Basis of Financial Statement Presentation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for financial institutions and with the instructions to Form 10-K of the Securities Exchange Act of 1934. Certain amounts in the 20012002 and prior years’ financial statements have been reclassified to conform with the presentation used in 2002.2003.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and the carrying value of real estate owned, management obtains independent appraisals for significant properties.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Bar Harbor Bankshares and its wholly-ownedwholly owned subsidiaries, Bar Harbor Banking and Trust Company and BTI Financial Group. All significant intercompanyinter-company balances and transactions have been eliminated in the accompanying consolidated financial statements.
Comprehensive Income
Comprehensive income includes both net income and other comprehensive income. Other comprehensive income includes the changes in unrealized gains and losses on securities available for sale and derivative instruments, and is disclosed net of related income taxes in the consolidated statements of changes in shareholders’ equity.
Cash and Due from Banks
The Bank is required to comply with various laws and regulations of the Federal Reserve Bank, which require that the Bank maintain certain amounts of cash on deposit, and is restricted from investing those amounts. At December 31, 2002,2003, the reserve requirement was $150.$19. In the normal course of business, the Bank has funds on deposit at other financial institutions in amounts in excess of the $100 that is insured by the Federal Deposit Insurance Corporation.
Securities Available for Sale
Securities available for sale consist of certain securities to be held for indefinite periods of time, which are reported at fair value with unrealized gains and losses reported as a separate component of shareholders' equity, net of the related tax effect. Gains and losses on the sale of securities available for sale are determined using the specific-identification method and are shown separately in the statement of income. Premiums and discounts are recognized in interest income using the interest method over the estimated life of the security.
Securities Held to Maturity
Debt securities that the Bank has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts that are recognized in interest income using the interest method over the period to maturity or earliest call date.
Other Securities
Other securities include non-marketable securities carried at cost, and money market funds reported at fair value.
Loans
Loans
Loan origination are carried at the principal amounts outstanding net of the allowance for loan losses, charge-offs, and net of deferred loan costs and fees. Deferred loan costs and fees and certain direct loan origination costs are deferred and recognized in interest income as an adjustment to the loan yieldamortized over the lifeestimated lives of the related loans.loans using the interest method.
Interest on loans is accrued and credited to income based on the principal amount of loans outstanding. The accrual of interest income is discontinued when, in the opinion of management, full collection of principal, interest, and fees is in question. If, in the opinion of management, a loan on non-accrual is determined to be creditworthy, it may be placed back on accrual status. Interest income on impaired loans is reported on a cash basis when received. Loans 30 days or more past due are considered delinquent.
A loan is considered impaired when it is probable that the Bank will not collect all amounts due according to the contractual terms of the loan agreement. The carrying values of impaired loans, primarily those on a non-accruing status, are periodically adjusted to reflect cash payments, revised estimates of future cash flows, and increases in the present value of expected cash flows due to the passage of time. Cash payments representing interest income are reported as such. Other cash payments are reported as reductions in carrying value, while increases or decreases due to changes in estimates of future payments and due to the passage of time are reported as provision for loan losses.
The allowance for possible loan losses is maintained at a level adequate to absorb probable losses. Management determines the adequacy of the allowance based upon reviews of individual credits, recent loss experience, current economic conditions, the risk characteristics of the various categories of loans and other pertinent factors. Credits deemed uncollectible are charged to the allowance. Provisions for loan losses and recoveries on loans previously charged off are added to the allowance.
Mortgage Servicing Rights
Mortgage servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to unamortized cost. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance to the extent that fair value is less than the capitalized value of the rights.
Premises and Equipment
Premises and equipment and related improvements are stated at cost less accumulated depreciation. Depreciation is computed by the straight-line and accelerated methods over the estimated useful lives of the related assets.
Other Real Estate Owned (OREO)
Real estate acquired in satisfaction of a loan is reported in other assets. Properties acquired by foreclosure or deed in lieu of foreclosure are transferred to OREO and recorded at the lower of cost or fair market value less estimated costs to sell based on appraised value at the date actually or constructively received. Loan losses arising from the acquisition of such property are charged against the allowance for loan losses. Subsequent reductions in market value below the carrying costs are charged to other operating expenses.
Goodwill
Effective January 1,During the first half of 2002, the Company discontinued amortizationcompleted implementation of SFAS No. 142, "Goodwill and Other Intangible Assets," which requires most goodwill to be tested for impairment at least annually, rather than amortized over a period of time. The Company estimated the value of goodwill utilizing several standard valuation techniques, including discounted cash flow analysis, as well as an estimation of the impact of current business conditions on the long-term value of the goodwill carried on the balance sheet. Management and the Board of Directors determined the impact of the overall deterioration of the stock and bond markets on investor activities within its target market area had negatively impacted the value of the Company's goodwill balance related to the acquisition of Dirigo Investments, Inc., its broker-dealer subsidiary of BTI. This resulted in accordance with SFAS Nos. 142an estimation of impairment of $247 thousand, net of tax, recorded during the quarter ended March 31, 2002. As of June 30, 2003 and 147. Prior to 2002, goodwill was being amortized using the straightline method over ten and fifteen years. Inin accordance with SFAS No. 142, the Company completed its annual review of the goodwill will be reviewed for impairment on an annual basis and if certain conditions occur.
determined there has been no additional impairment.
Income Taxes
Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Principal temporary differences occur with respect to pension and other postretirement benefits, depreciation, unrealized gains and losses on securities, and the provision for loan losses.
Derivative Financial Instruments Designated as Hedges
The Bank recognizes derivatives in the consolidated balance sheet at fair value. At December 31, 2003 The Bank has anhad three interest rate agreementswap agreements which qualifiesqualify as a cash flow hedge pursuant to SFAS No. 133. The Bank formally documents relationships between hedging instruments and hedging items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Bank also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows or fair values of hedged items. Changes in fair value of a derivative that is highly effective and that qualifies as a cash flow hedge are recorded in other comprehensive income and are reclassified into earnings when the forecasted transaction or related cash flows affect earnings. The Bank discontinues hedge accounting when it determines that the derivative is no longer highly effective in offsetting changes in cash flows of the hedged item, that is unlikely that the forecasted transaction will occur, or that the designation of the derivative as a hedging instrument is no longer appropriate.
Financial Instruments with Off-balance Sheet Risk
In the ordinary course of business the Bank has entered into off-balance sheet financial instruments consisting of commitments to extend credit, commitments under credit-card arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.
Statements of Cash Flows
For purposes of the statements of cash flows, the BankCompany considers cash on hand and amounts due from banks as cash and cash equivalents.
Earnings Per Share
Basic earnings per share is calculated by dividing net earnings by the number of weighted average shares outstanding for the year. Diluted earnings per share reflects the effect of stock options outstanding at the end of the period.
year.
Stock Options
The Bar Harbor Bankshares and its Subsidiaries Incentive Stock Option Plan (ISO) for officers and employees was established October 3, 2000, providing for the issuance of up to 450 thousand shares of common stock. The purchase price of the stock covered by each option shall be its fair market value, which must be equal to at least 100% of the fair market value on the date such option is granted. Initial grants were made in 2001 totaling 225 thousand.228 thousand shares. During 2002 and 2003 there were 162163 and 44 thousand additional grants issued,shares granted, respectively, bringing the total to 387435 thousand options granted, all having a 5-7 year vesting schedule. No option shall be granted after October 3, 2010, ten years after the effective date of the ISO.
The Company accounts for these options in accordance with the Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." As the exercise price of each option equals the market price of the Company’s stock on the date of grant, no compensation cost has been recognized for the plan. Had compensation costs for the plan been determined based on the fair value of the options at the grant dates consistent with the method described in SFAS No. 123, "Accounting for Stock-Based Compensation," the Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands except for per-share data):
2002 | Earnings Per Share | |||||
Earnings Per Share | ||||||
2003 | Net Income | Basic | Diluted | |||
As reported | $5,207 | $1.67 | $1.63 | |||
Deduct: Total stock-based employee compensation | 97 | 0.03 | 0.03 | |||
Pro forma | $5,110 | $1.64 | $1.60 | |||
Net Income | Basic | Diluted | ||||
Earnings Per Share | ||||||
2002 | Net Income | Basic | Diluted | |||
As reported | $4,565 | $1.42 | $1.40 | $4,565 | $1.42 | $1.40 |
Deduct: Total stock-based employee compensation |
95 |
0.03 |
0.03 | |||
Deduct: Total stock-based employee compensation expense | 95 | 0.03 | 0.03 | |||
Pro forma | $4,470 | $1.39 | $1.37 | $4,470 | $1.39 | $1.37 |
Weighted-average fair value of options granted during the year | $1.71 |
Earnings Per Share | ||||||
2001 | Earnings Per Share | Net Income | Basic | Diluted | ||
Net Income | Basic | Diluted | ||||
As reported | $3,511 | $1.07 | $1.06 | $3,511 | $1.07 | $1.06 |
Deduct: Total stock-based employee compensation |
55 |
0.02 |
0.02 | |||
Deduct: Total stock-based employee compensation expense | 55 | 0.02 | 0.02 | |||
Pro forma | $3,456 | $1.05 | $1.04 | $3,456 | $1.05 | $1.04 |
Weighted-average fair value of options granted during the year | $2.98 |
The fair value of each option is estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted-average assumptions used for all grants; dividend yield of 2.81% in 2003, 3.93% in 2002, and 4.22% in 2001, risk-free interest rate of 2.63% in 2003, 2.23% in 2002, and 3.62% in 2001, expected life of 3.5 years, and expected volatility of 27% in 2003, 11% in 2002, and 27% in 2001.
All grants are for a term of 10 years.
Fair Value Disclosures
The Company in estimating its fair market value disclosures for financial instruments used the following methods and assumptions:
Cash, cash equivalents, and cash surrender value of life insurance: The carrying amounts reported in the balance sheets approximate their fair values.
Securities available for sale, securities held to maturity and other securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The carrying value of other securities approximates fair value.
Loans receivable: For variable rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. The fair value of other loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
Deposits: The fair value of demand deposits, NOW accounts and savings accounts is the amount payable on demand. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered in the Bank's market for deposits of similar remaining maturities.
Borrowings: The carrying amounts of federal fundsFederal Funds purchased, securities sold under repurchase agreements, and other short-term borrowings maturing within 90 days, approximate their fair values.
The fair values of the Bank's long-term borrowings (other than deposits) are estimated using discounted cash flow analyses, based on quoted market rates.
Accrued interest: The carrying amounts of accrued interest approximate their fair values.
Interest Rate Swap:Swaps: The fair value for the interest rate swap isswaps are based on quoted market prices.
Off-balance sheet instruments: The Bank's off-balance sheet instruments consist of loan commitments. Fair values for loan commitments have not been presented, as the value is not material to the Company’s financial statements due to the short-term nature of the underlying commitments.
Impact of Recently Issued Accounting Standards
EffectiveIn April 2003, Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards (SFAS) No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." The Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in 2002, the FASB issued the following:other contracts, and for hedging activities under SFAS No. 133.
SFAS No. 142, "Goodwill149 is effective for contracts entered into or modified after June 30, 2003, except as stated below and Other Intangible Assets," requiresfor hedging relationships designated after June 30, 2003. The guidance should be applied prospectively. The provisions of this Statement that goodwill no longer be amortizedrelate to earnings, but instead be reviewed for impairment. The amortization of goodwill ceased upon adoption of the Statement, which was adopted by the Company as of January 1, 2002.
SFAS No. 146, "Accounting133 Implementation Issues that have been effective for Costs Associatedfiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with Exittheir respective effective dates. In addition, certain provisions relating to forward purchases or Disposal Activities," addresses financial accounting and reporting for costs associated with exitsales of when-issued securities or disposal activities.other securities that do not yet exist, should be applied to existing contracts as well as new contracts entered into after June 30, 2003. SFAS 146 requires the recognition of costs associated with exit or disposal activities when they are incurred rather than at the date ofNo.149 does not have a commitment to an exit or disposal plan. This Statement had nomaterial impact on the Company’s consolidated financial conditionstatements.
In May 2003, FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and resultsEquity." This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of operations.both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances).
SFAS No. 147, "Acquisitions150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of Certain Financial Institutions," amends SFAS No. 72, "Accountingthe first interim period beginning after June 15, 2003, except for Certain Acquisitionsmandatorily redeemable financial instruments of Banking or Thrift Institutions," to exclude from its scope most acquisitions of financial institutions. Such transactions should be accounted for in accordance with SFAS No. 141, "Business Combinations."nonpublic entities. This Statement does not impact the Company's consolidated financial statements, as the Company does not have any financial instruments with characteristics of both liabilities and equity.
FASB’s Emerging Issues Task Force, in its Issue No. 03-1, has issued new disclosure requirements with respect to investment securities with unrealized losses that have not been classified as other-than-temporary. Companies are required to disclose separately investments that have had nocontinual unrealized losses for twelve months or more, and those that have had continual unrealized losses for less than twelve months. For investments in the former category, a narrative disclosure is required that would allow financial statement users to understand the positive and negative information management considered in reaching the conclusion that the impairments are not other-than-temporary. The new disclosure requirements, which are effective for years ending after December 15, 2003, did not have a material impact on the Company’s consolidated financial conditionstatements.
In December 2003, the President signed the Medicare Prescription Drug, Improvement and resultsModernization Act of operations.2003 (the Act) into law. The Act includes the following two new features to Medicare (Medicare Part D) that could affect the measurement of the accumulated postretirement benefit obligation (APBO) and net periodic postretirement benefit cost for the Plan:
The effects of the Act on the APBO or net periodic postretirement benefit cost are not reflected in the financial statements or accompanying notes. Pending specific authoritative guidance on the accounting for the federal subsidy could require the Company to change previously reported information when the guidance is issued.
In December 2003, FASB issued a revised version of SFAS No. 148, "Accounting for Stock-Based Compensation-Transition132, "Employers' Disclosures about Pensions and Disclosure,Other Postretirement Benefits." contains enhancedThe Statement retains all of the previous requirements and introduces additional disclosure requirements for stock-based compensation. Adoption of the Statement in 2002 had no impact on the Company’s consolidated financial condition and results of operations.
Statement of Position (SOP) 01-6, "Accounting by Certain Entities (Including Entities with Trade Receivables) That Lend to or Finance the Activities of Others," was issued in December 2001. The SOPinterim reporting requirements. SFAS No. 132 (revised 2003) is effective for financial statements issued for fiscal years beginningending after December 15, 2001. The SOP reconciles2003, and conforms the accounting andits disclosure requirements have been reflected in these financial reporting provisions established by various Audit and Accounting Industry Guides. Adoption of this Statement had no impact on the Company’s consolidated financial condition and results of operations.statements.
2. INVESTMENT SECURITIES
The investment securities portfolio contains certain investments where amortized cost exceeds fair market value, which at December 31, 2003, amounted to $648. Unrealized losses that are considered other-than-temporary are recorded as an impairment expense on the Company’s Income Statement. In evaluating whether impairments are other-than-temporary, management considers a variety of factors including the nature of the investment(s), the cause of the impairment(s), the number of investment positions that are in an unrealized loss position, and the severity and duration of the impairment(s). Other data considered by management includes, for example, industry analyst reports, sector credit ratings, volatility of the security’s market price, and/or any other information considered relevant.
At December 31, 2003, management determined there were no unrealized losses in the investment securities portfolio that were other-than-temporary.
The amortized cost of investment securities and their approximate fair values at December 31, 2003 and 2002 and 2001 follows:
2002 | ||||||||
Gross | Estimated | |||||||
Amortized | Unrealized | Fair | ||||||
2003 | 2003 | |||||||
Available for Sale: | Cost | Gains | Losses | Value | Amortized | Gross | Gross | Estimated |
Obligations to U.S. Government Agencies | $13,624 | $ 44 | $ - | $ 13,668 | ||||
Obligations of U.S. Government Agencies | $ 5,557 | $ 21 | $ 50 | $ 5,528 | ||||
Mortgage-backed securities: | ||||||||
U.S. Government agencies | 74,597 | 2,787 | 79 | 77,305 | 86,498 | 986 | 214 | 87,270 |
Other | 17,339 | 261 | 3 | 17,597 | 21,658 | 174 | 123 | 21,709 |
Other bonds | 19,982 | 294 | 20 | 20,256 | 10,017 | 5 | 107 | 9,915 |
Total securities available for sale | $125,542 | $ 3,386 | $ 102 | $ 128,826 | $123,730 | $1,186 | $494 | $124,422 |
Held to Maturity: | ||||||||
Obligations of states of the U.S. and political | ||||||||
subdivisions thereof | $ 30,182 | $ 627 | $ 124 | $ 30,685 | ||||
Obligations of states of the U.S. and political | $ 33,374 | $1,265 | $154 | $ 34,485 | ||||
Mortgage-backed securities: | ||||||||
U.S. Government agencies | 1,363 | 29 | - | 1,392 | 591 | 17 | -- | 608 |
Total securities held to maturity | $ 31,545 | $ 656 | $ 124 | $ 32,077 | $ 33,965 | $1,282 | $154 | $ 35,093 |
2001 | ||||||||
Gross | Estimated | |||||||
Amortized | Unrealized | Fair | ||||||
Available for Sale: | Cost | Gains | Losses | Value | ||||
Obligations to U.S. Government Agencies | $ 9,477 | $ 183 | $ - | $ 9,660 | ||||
Mortgage-backed securities | ||||||||
U.S. Government agencies | 65,831 | 1,596 | 27 | 67,400 | ||||
Other | 12,244 | 291 | 14 | 12,521 | ||||
Other bonds | 16,604 | 558 | - | 17,162 | ||||
Total securities available for sale | $104,156 | $ 2,628 | $ 41 | $ 106,743 | ||||
Held to Maturity: | ||||||||
Obligations of states of the U.S. and political | ||||||||
subdivisions thereof | $ 26,866 | $ - | $ 1,923 | $ 24,943 | ||||
Total securities held to maturity | $ 26,866 | $ - | $ 1,923 | $ 24,943 |
2002 | ||||
Available for Sale: | Amortized | Gross | Gross | Estimated |
Obligations of U.S. Government Agencies | $ 13,624 | $ 44 | $ -- | $ 13,668 |
Mortgage-backed securities: | ||||
U.S. Government agencies | 74,597 | 2,787 | 79 | 77,305 |
Other | 17,339 | 261 | 3 | 17,597 |
Other bonds | 19,982 | 294 | 20 | 20,256 |
Total securities available for sale | $125,542 | $3,386 | $102 | $128,826 |
Held to Maturity: | ||||
Obligations of states of the U.S. and political | $ 30,182 | $ 627 | $124 | $ 30,685 |
Mortgage-backed securities: | ||||
U.S. Government agencies | 1,363 | 29 | -- | 1,392 |
Total securities held to maturity | $ 31,545 | $ 656 | $124 | $ 32,077 |
The investment securities portfolio contains certain investments where amortized cost exceeds fair market value, which at December 31, 2003 amounted to $648. Unrealized losses that are considered other-than-temporary are recorded as an impairment expense on the Company’s Income Statement. In evaluating whether impairments are other-than-temporary, management considers a variety of factors including the nature of the investment(s), the cause of the impairment(s), the number of investment positions that are in an unrealized loss position, and the severity and duration of the impairment(s). Other data considered by management includes, for example, industry analyst reports, sector credit ratings, volatility of the security’s market price, and or any other information considered relevant.
At December 31, 2003, management determined there were no unrealized losses in the investment securities portfolio that were other-than-temporary.
The following table summarizes temporarily impaired investment securities and their approximate fair values at December 31, 2003. All securities referenced are debt securities.
Less Than 12 Months | 12 Months or Longer | Total | ||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |
Description of Securities: | Value | Losses | Value | Losses | Value | Losses |
Obligations of U.S. Government Agencies | $ 2,483 | $ 50 | $ - - | $ - - | $ 2,483 | $ 50 |
Mortgage-backed securities: |
| |||||
U.S. Government agencies | 25,128 | 184 | 4,090 | 30 | 29,218 | 214 |
Other | 459 | 1 | 8,301 | 122 | 8,760 | 123 |
Obligations of states of the U.S. and political |
| |||||
Sub-divisions thereof | 202 | 29 | 1,006 | 125 | 1,208 | 154 |
Corporate bonds | 4,910 | 107 | - - | - - | 4,910 | 107 |
Total temporarily impaired securities | $33,182 | $371 | $13,397 | $277 | $46,579 | $648 |
At December 31, 2002,2003, the amortized cost and estimated fair value of securities held to maturity and securities available for sale are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Securities Available for Sale
December 31, 2002 | December 31, 2003 | |||
Amortized | Estimated | |||
Securities Available for Sale | ||||
Amortized | Estimated | |||
Due in one year or less | $ 1,850 | $ 1,866 | $ -- | $ -- |
Due after one year through five years | 10,900 | 11,170 | 3,345 | 3,395 |
Due after five years through ten years | 3,345 | 3,366 | 36,043 | 36,017 |
Due after ten years | 17,511 | 17,522 | 84,342 | 85,010 |
Mortgage-backed securities | 91,936 | 94,902 | ||
$125,542 | $128,826 | $123,730 | $124,422 |
Securities Held to Maturity
Securities Held to Maturity | ||||
December 31, 2002 | ||||
Amortized | Estimated | |||
Due in one year or less | $ 975 | $ 990 | ||
Due after one year through five years | $ 943 | $ 971 | 180 | |
Due after five years through ten years | 665 | 390 | ||
Due after ten years | 28,574 | 29,049 | 32,420 | 33,533 |
Mortgage-backed securities | 1,363 | 1,392 | ||
$31,545 | $32,077 | $33,965 | $35,093 |
For the years ended December 31, 2002, 2001 and 2000, proceeds from sales of securities available for sale were $26 million, $0, and $0, respectively. Gross realized gains amounted to $456 thousand and gross realized losses amounted to $6 thousand in 2002. There were no sales of securities held to maturity in 2002, 2001, and 2000. U.S. Government securities having a carrying value of approximately $21.1 million at December 31, 2002, and $20.5 million at December 31, 2001 are pledged to secure certain deposits and for other purposes as required by law. Market values for these securities at December 31, 2002 and 2001 were $22.2 million and $21.0 million, respectively.
3. LOANS
The following table shows the composition of the Bank’s loan portfolio as of December 31, 20022003 and 2001:2002:
2002 | 2001 | 2003 | 2002 | |
Commercial loans: | ||||
Real Estate- variable rate | $ 67,071 | $ 62,204 | $ 72,923 | $ 67,071 |
Real Estate- fixed rate | 4,113 | 5,054 | 4,595 | 4,113 |
Other - variable rate | 30,667 | 29,403 | 31,393 | 30,667 |
Other | 14,470 | 14,404 | ||
Other – fixed rate | 18,990 | 14,470 | ||
116,321 | 111,065 | 127,901 | 116,321 | |
| ||||
Tax Exempt: | ||||
Variable rate | - | 95 | ||
Fixed rate | 2,286 | 1,548 | 3,652 | 2,286 |
2,286 | 1,643 | |||
Consumer: |
| |||
Real Estate- variable rate | 55,977 | 58,437 | 51,529 | 55,977 |
Real Estate- fixed rate | 129,491 | 91,122 | 150,573 | 129,491 |
Home equity | 34,239 | 21,238 | 35,941 | 34,239 |
Installment | 5,019 | 6,250 | 4,250 | 5,019 |
Other | 7,832 | 7,818 | 8,876 | 7,832 |
232,558 | 184,865 | 251,169 | 232,558 | |
| ||||
Real estate under foreclosure | 710 | 1,064 | 975 | 710 |
Deferred origination fees, net | (340) | (667) | (289) | (340) |
Allowance for loan losses | (4,975) | (4,169) | (5,278) | (4,975) |
$ 346,560 | $ 293,801 | $378,130 | $346,560 |
At December 31, 2002,2003, and 2001,2002, loans on non-accrual status totaled $986$1,295 and $2,191,$986, respectively. In addition to loans on non-accrual status at December 31, 20022003 and 2001,2002, the Bank had loans past due greater than 90 days, and still accruing interest, totaling $188$199 and $151,$188, respectively. The Bank continues to accrue interest on these loans because it believes collection of the interest due is reasonably assured.
The Bank makes single family and multi-family residential loans, commercial real estate loans, commercial loans, and a variety of consumer loans. The Bank’s lending activities are conducted in eastern 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. At December 31, 2002, approximately $34,943 of2003, loans were made to companies in the hospitality industry. Loans for commercial and real estate development totaled $7,256 at December 31, 2002.industry amounted to approximately $31,493. The loan portfolio at December 31, 20022003 and 20012002 consisted of 54%50.7% and 58%54.2% variable rate loans, respectively.
4. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for each of the three years ended December 31 were as follows:
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |
Balance, beginning of year | $4,169 | $4,236 | $4,293 | $4,975 | $4,169 | $4,236 |
Provision for loan losses | 1,100 | 2,000 | 952 | 540 | 1,100 | 2,000 |
Loans charged off | 482 | 2,304 | 1,223 | 427 | 482 | 2,304 |
Less: recoveries on loans previously charged off | 188 | 237 | 214 | 190 | 188 | 237 |
Net loans charged off | 294 | 2,067 | 1,009 | 237 | 294 | 2,067 |
Balance, end of year | $4,975 | $4,169 | $4,236 | $5,278 | $4,975 | $4,169 |
Information pertaining to impaired loans at December 31 and for the years then ended is as follows:
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |
Investment in impaired loans | $ 986 | $2,191 | $6,907 | $1,295 | $ 986 | $2,191 |
Portion of impaired loan balance for which | $ 986 | $2,191 | $6,907 | |||
Portion of impaired loan balance for which | $1,295 | $ 986 | $2,191 | |||
Portion of allowance for loan losses allocated | $ 120 | $ 517 | $2,200 | $ 394 | $ 120 | $ 517 |
Interest not recorded on impaired loans at year end | $ 183 | $ 182 | $ 220 | $ 80 | $ 183 | $ 182 |
Average balance of impaired loans | $1,379 | $4,287 | $3,885 | $1,429 | $1,379 | $4,287 |
5. LOANS TO RELATED PARTIES
In the ordinary course of business, the Bank has granted loans to certain officers and directors and the companies with which they are associated. All such loans and commitments to lend were made under terms that are consistent with the Bank’s normal lending policies.
Loans to related parties at December 31, which in aggregate exceed $60,000, were as follows:
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |
Beginning balance | $8,806 | $7,663 | $6,212 | $4,361 | $8,806 | $7,663 |
New loans | 5,260 | 3,071 | 1,541 | 2,477 | 5,260 | 3,071 |
Less: repayments | 4,676 | 1,545 | 4,388 | 1,161 | 4,676 | 1,545 |
Ending balance | $9,390 | $9,189 | $3,365 | $5,677 | $9,390 | $9,189 |
Balances have been adjusted to reflect changes in status of directors and officers for each year presented.
6. MORTGAGE SERVICING
The Bank originates residential real estate mortgages both for portfolio and for sale into the secondary market. Certain loans are sold to institutional investors such as the Federal Home Loan Mortgage Corporation (Freddie Mac). Under loan sale and servicing agreements with the investor, the Bank generally continues to service the residential real estate mortgages. The Bank pays the investor an agreed-upon rate on the loan which, including a guarantee fee paid to Freddie Mac, is less than the interest rate the Bank receives from the borrower. The Bank, as a fee for servicing the residential real estate mortgages, retains the difference. As required by SFAS No. 140, the Bank capitalizes mortgagemortgage- servicing rights at their fair value upon sale of the related loans. Capitalized servicing rights at December 31, 2003 and 2002 were $0 and 2001 were $61,835 and $170,028,$62, respectively. Amortization expense totaled $110,511, $115,900,$75, $111, and $90,600 for$116, in 2003, 2002 and 2001, and 2000, respectively.
Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balance of mortgage loans serviced for others was $18.3 million$12,334 and $45.8 million$28,569 at December 31, 20022003 and 2001,2002, respectively.
7. PREMISES AND EQUIPMENT
The detail of premises and equipment is as follows:
2002 | 2001 | 2003 | 2002 | |
Land | $ 1,296 | $ 1,296 | $ 1,321 | $ 1,296 |
Buildings and improvements | 11,834 | 11,755 | 12,453 | 11,834 |
Furniture and equipment | 7,005 | 6,773 | 7,522 | 7,005 |
20,135 | 19,824 | |||
Less: accumulated depreciation | (8,822) | (7,706) | (9,886) | ( 8,822) |
$11,313 | $12,118 | |||
Total | $11,410 | $11,313 |
8. LINE OF BUSINESS REPORTING
The Company manages and operates two major lines of business: Community Banking and Financial Services. Community Banking includes lending and deposit-gathering activities and related services to businesses and consumers. Financial Services, which was formed in January 2000, consists of broker-dealer operations, trust services, and investment portfolio management. The business lines are identified by the entities through which the product or service is delivered.
The reported lines of business results reflect the underlying core operating performance within the business units. Other is comprised of intercompany eliminations. Substantially all of the Company’s assets are part of the Community Banking line of business. Selected segment information is included in the following table.tables.
The following tables represent the business lines through which the products or services were delivered for the years ended December 31, 2003, 2002, 2001, and 2000.
2001.
Year Ended December 31, 2002 | Community | Financial | Other | Consolidated |
Net interest income | $19,551 | $ 26 | $ - | $ 19,577 |
Provision for loan losses | 1,100 | - | - | 1,100 |
Net interest income after provision | 18,451 | 26 | - | 18,477 |
Noninterest income | 4,298 | 2,352 | (237) | 6,413 |
Noninterest expense | 14,221 | 3,720 | 395 | 18,336 |
Income(loss) before income taxes | 8,528 | (1,342) | (632) | 6,554 |
Income taxes (benefit) | 2,413 | (456) | (215) | 1,742 |
Net income(loss) before cumulative effect of accounting | 6,115 | (886) | (417) | 4,812 |
Cumulative effect of change in accounting for goodwill, | - | ( 247) | - | (247) |
Net income(loss) | $ 6,115 | $ (1,133) | $ (417) | $ 4,565 |
Year Ended December 31, 2001 | Community | Financial | Other | Consolidated |
Net interest income | $18,105 | $ 36 | $ - | $ 18,141 |
Provision for loan losses | 2,000 | - | - | 2,000 |
Net interest income after provision | 16,105 | 36 | - | 16,141 |
Noninterest income | 4,214 | 3,407 | (101) | 7,520 |
Noninterest expense | 13,344 | 4,979 | 166 | 18,489 |
Income(loss) before income taxes | 6,975 | (1,536) | (267) | 5,172 |
Income taxes (benefit) | 2,273 | (521) | (91) | 1,661 |
Net income(loss) | $ 4,702 | $ (1,015) | $ (176) | $ 3,511 |
Year Ended December 31, 2000 | Community | Financial | Other | Consolidated | ||||
Year Ended December 31, 2003 | Community | Financial | Other | Consolidated | ||||
Net interest income | $17,688 | $ 26 | $ 3 | $17,717 | $19,484 | $ 20 | $ -- | $19,504 |
Provision for loan losses | 952 | -- | 952 | 540 | -- | -- | 540 | |
Net interest income after provision | 16,736 | 26 | 3 | 16,765 | 18,944 | 20 | -- | 18,964 |
Noninterest income | 5,768 | 3,243 | (1,945) | 7,066 | 5,301 | 2,332 | (294) | 7,339 |
Noninterest expense | 12,652 | 3,857 | 106 | 16,615 | 15,115 | 3,502 | 587 | 19,204 |
Income(loss) before income taxes | 9,852 | (588) | (2,048) | 7,216 | ||||
Income/(loss) before income taxes | 9,130 | (1,150) | (881) | 7,099 | ||||
Income taxes (benefit) | 3,294 | (199) | (676) | 2,419 | 2,582 | (391) | (299) | 1,892 |
Net income(loss) | $ 6,558 | $ (389) | $(1,372) | $ 4,797 | ||||
Net income/(loss) | $ 6,548 | $ (759) | $(582) | $ 5,207 | ||||
Year Ended December 31, 2002 | Community Banking | Financial Services | Other | Consolidated Totals | ||||
Net interest income | $19,263 | $ 26 | $ -- | $19,289 | ||||
Provision for loan losses | 1,100 | -- | -- | 1,100 | ||||
Net interest income after provision | 18,163 | 26 | -- | 18,189 | ||||
Noninterest income | 4,586 | 2,352 | (237) | 6,701 | ||||
Noninterest expense | 14,221 | 3,720 | 395 | 18,336 | ||||
Income/(loss) before income taxes | 8,528 | (1,342) | (632) | 6,554 | ||||
Income taxes (benefit) | 2,413 | (456) | (215) | 1,742 | ||||
Net income/(loss) before cumulative effect of accounting change | 6,115 | (886) | (417) | 4,812 | ||||
Less: cumulative effect of change in accounting for | -- | 247 | -- | 247 | ||||
Net income/(loss) | $ 6,115 | $(1,133) | $ (417) | $ 4,565 | ||||
Year Ended December 31, 2001 | Community Banking | Financial Services | Other | Consolidated Totals | ||||
Net interest income | $17,641 | $ 36 | $ -- | $17,677 | ||||
Provision for loan losses | 2,000 | -- | -- | 2,000 | ||||
Net interest income after provision | 15,641 | 36 | -- | 15,677 | ||||
Noninterest income | 4,678 | 3,407 | (101) | 7,984 | ||||
Noninterest expense | 13,344 | 4,979 | 166 | 18,489 | ||||
Income/(loss) before income taxes | 6,975 | (1,536) | (267) | 5,172 | ||||
Income taxes (benefit) | 2,273 | (521) | (91) | 1,661 | ||||
Net income/(loss) | $ 4,702 | $(1,015) | $ (176) | $ 3,511 |
9. DEPOSITS
The aggregate amount of short-term jumbo certificates of deposit, each with a minimum denomination of $100,000, was $15.1$18.8 million and $13.9$15.2 million in 20022003 and 2001,2002, respectively.
At December 31, 2002,2003, the scheduled maturities of time deposits arewere as follows:
2003 | $ 64,268 | |
2004 | 13,913 | $ 65,325 |
2005 | 10,477 | 16,736 |
2006 | 4,530 | 6,702 |
2007 and thereafter | 9,283 | |
2007 | 6,978 | |
2008 and thereafter | 8,792 | |
Individual Retirement Accounts (IRAs) | 14,389 | 15,071 |
$116,860 | $119,604 |
10. REPURCHASE AGREEMENTS
Securities sold under agreements to repurchase generally mature within one to four days from the transaction date.
Information concerning securities sold under agreements to repurchase for 2003, 2002, 2001, and 20002001 is summarized as follows:
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |
| ||||||
Average daily balance during the year | $13,124 | $13,342 | $11,479 | $13,086 | $13,124 | $13,342 |
Average interest rate during the year | 2.20% | 3.89% | 4.74% | 1.32% | 2.20% | 3.89% |
Maximum month-end balance during the year | $15,717 | $16,203 | $16,788 | $17,083 | $15,717 | $16,203 |
Amount outstanding at end of year | $13,943 | $15,159 | $12,166 | $15,925 | $13,943 | $15,159 |
Securities underlying the agreements at year end were under the Bank’s control and were as follows:
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |
Carrying value | $13,834 | $18,772 | $28,970 | $20,069 | $13,834 | $18,772 |
Estimated fair value | $14,624 | $19,250 | $28,828 | $20,256 | $14,624 | $19,250 |
11. ADVANCES FROM THE FEDERAL HOME LOAN BANK (FHLB)
A summary of advances from the FHLB is as follows:
Total | Range of | Maturity |
$ 34,000 | 1.35% to 5.84% | 2003 |
7,000 | 1.21% to 5.09% | 2004 |
11,643 | 3.14% to 5.99% | 2005 |
6,400 | 3.57% to 5.66% | 2006 |
97,515 | 1.29% to 5.95% | 2007-2012 |
$ 156,558 | ||
Total | Range of | Maturity |
�� $ 31,000 | 1.79% to 6.76% | 2002 |
5,000 | 4.62% to 5.84% | 2003 |
4,700 | 3.27% to 5.09% | 2004 |
10,000 | 5.99% | 2005 |
70,200 | 4.04% to 5.95% | 2006-2011 |
$120,900 |
Total | Range of | Maturity |
$ 42,600 | 1.11% to 5.09% | 2004 |
11,117 | 3.14% to 5.99% | 2005 |
8,400 | 1.14% to 5.66% | 2006 |
22,273 | 1.35% to 5.01% | 2007 |
28,400 | 2.78% to 5.68% | 2008 |
57,716 | 3.86% to 5.95% | 2009-2012 |
$170,506 | ||
Total | Range of | Maturity |
$ 34,000 | 1.35% to 5.84% | 2003 |
7,000 | 1.21% to 5.09% | 2004 |
11,643 | 3.14% to 5.99% | 2005 |
6,400 | 3.57% to 5.66% | 2006 |
24,527 | 1.29% to 5.09% | 2007 |
72,988 | 3.86% to 5.95% | 2008-2012 |
$156,558 |
All FHLB advances are fixed-rate instruments. Advances are payable at their call dates or final maturity. Advances are stated at their contractual maturity dates and do not reflect callable features or amortizing principal features.
At December 31, 2002,2003, the Bank has $57 millionhad $63,500 in callable advances with maturity dates ranging from 20052004 to 2011.
In addition to the above outstanding advances, other FHLB funds available to the Bank at December 31, 2002, totaled approximately $10.4 million. Pursuant to a collateralan agreement with the FHLB, advances are collateralized by all stock in the FHLB. QualifyingFHLB, a blanket lien on qualifying first mortgage loans, loans guaranteed by the U. S. Government, certain multi-family loans, U.S. Government Agency debentures, U.S. Government mortgage-backed securities, and other non-Government mortgage-backed securities collateralized by 1-4 family loans totaling $150.5 million are available as collateral for FHLB advances.mortgage backed securities.
12. INCOME TAXES
The current and deferred components of income tax expense are as follows:
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |
| ||||||
Current |
| |||||
Federal | $1,781 | $1,476 | $2,307 | $1,669 | $1,781 | $1,476 |
State | 90 | 74 | 86 | 99 | 90 | 74 |
1,871 | 1,550 | 2,393 | 1,768 | 1,871 | 1,550 | |
Deferred | (129) | 111 | 26 | 124 | (129) | 111 |
$1,742 | $1,661 | $2,419 | $1,892 | $1,742 | $1,661 |
The actual tax expense differs from the expected tax expense computed by applying the applicable U. S. Federal corporate income tax rate to income before income taxes and cumulative effect of accounting change as follows:
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |
Computed tax expense | $2,229 | $1,758 | $2,453 | $2,414 | $2,229 | $1,758 |
Increase (reduction) in income taxes resulting from: |
| |||||
Officers’ life insurance | (74) | (80) | (69) | (70) | (74) | (80) |
Tax exempt interest | (455) | (168) | (95) | (500) | (455) | (168) |
State taxes, net of federal benefit | 70 | 57 | 56 | 91 | 70 | 57 |
Other | (28) | 94 | 74 | (43) | (28) | 94 |
$1,742 | $1,661 | $2,419 | $1,892 | $1,742 | $1,661 |
The tax effects of temporary differences that give rise to deferred income tax assets and liabilities are as follows:
2002 | 2001 | 2003 | 2002 | |||||
Asset | Liability | Asset | Liability | Asset | Liability | Asset | Liability | |
Allowance for loan losses | $1,390 | $1,100 | $1,572 | $1,390 | ||||
Deferred compensation | 733 | 676 | 745 | 733 | ||||
Postretirement benefit obligation | 546 | 549 | 529 | 546 | ||||
Unrealized appreciation on securities | 1,117 | 880 | $ 235 | $1,117 | ||||
Unrealized appreciation on derivative instruments | 93 | 29 | 93 | |||||
Depreciation | 320 | 267 | 453 | 320 | ||||
Other | 379 | 275 | 385 | 226 | 256 | 330 | 379 | 275 |
$3,048 | $1,805 | $2,710 | $1,373 | $3,102 | $1,047 | $3,048 | $1,805 |
As of December 31, 20022003 and 2001,2002, the net deferred income tax asset amounted to $1.3 million$2,055 and $2.3 million,$1,234, respectively, and is included in other assets in the balance sheet. No valuation allowance for deferred taxes was required at December 31, 20022003 or 2001.2002.
13. SHAREHOLDERS’ EQUITY
Bar Harbor Bankshares’The Company’s subsidiary, Bar Harbor Banking and Trust Company,the Bank, has the ability to pay dividends to the parent subject to the minimum regulatory capital requirements. At December 31, 2002 the amount available for dividends, while maintaining the regulatory minimum, was approximately $23.9 million. The Bank’s principal regulatory agency, the Federal Deposit Insurance Corporation, currently limits Bank dividends to current earnings excluding securities gains while maintaining a Tier I leverage capital ratio of 8%, without prior FDIC approval.
The Company and Bank isare subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s financial statements. Under capital adequacy guidelines and the regulatory frameworks for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and Bank’s capital amounts and classification are also subject to qualitative judgment by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital to risk-weighted assets and average assets. Management believes, as of December 31, 2002,2003, that the Company and Bank exceedsexceed all capital adequacy requirements to which it isthey are subject. As of December 31, 2002,2003, the most recent notification from the federal regulators categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company and Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Bank’s category.
The Company’s and Bank’s actual capital amounts and ratios are also presented in the following table:
Actual | Minimum | Minimum | ||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |
As of December 31, 2003 | ||||||
Total Capital | ||||||
(To Risk-Weighted Assets) | ||||||
Consolidated | $56,403 | 14.7% | $30,694 | 8.0% | N/A | |
Bank | $50,139 | 13.3% | $30,208 | 8.0% | $37,761 | 10.0% |
Tier 1 Capital |
|
|
| |||
(To Risk-Weighted Assets) |
| |||||
Consolidated | $51,601 | 13.4% | $15,347 | 4.0% | N/A | |
Bank | $45,412 | 12.0% | $15,104 | 4.0% | $22,656 | 6.0% |
Tier 1Capital |
| |||||
(To Average Assets) |
| |||||
Consolidated | $51,601 | 8.9% | $23,111 | 4.0% | N/A | |
Bank | $45,412 | 7.9% | $22,904 | 4.0% | $28,630 | 5.0% |
Actual | Minimum | Minimum | ||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |
As of December 31, 2002 | ||||||
Total Capital (to risk-weighted assets) | ||||||
Consolidated | $53,434 | 14.5% | $29,510 | 8.0% | N/A | |
Bank | $48,636 | 13.3% | $29,214 | 8.0% | $36,518 | 10.0% |
Tier 1 Capital (to risk-weighted assets) | ||||||
Consolidated | $48,819 | 13.2% | $14,755 | 4.0% | N/A | |
Bank | $44,066 | 12.1% | $14,607 | 4.0% | $21,911 | 6.0% |
Tier 1 Capital (to average assets) | ||||||
Consolidated | $48,819 | 8.9% | $21,894 | 4.0% | N/A | |
Bank | $44,066 | 8.1% | $21,738 | 4.0% | $27,172 | 5.0% |
Actual | Minimum | Minimum | Actual | Minimum | Minimum | |||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | |
As of December 31, 2001 | ||||||||||||
Total Capital (to risk-weighted assets) | ||||||||||||
As of December 31, 2002 | ||||||||||||
Total Capital | ||||||||||||
(To Risk-Weighted Assets) | ||||||||||||
Consolidated | $52,950 | 16.8% | $25,154 | 8.0% | N/A | $53,434 | 14.5% | $29,510 | 8.0% | N/A | ||
Bank | $47,053 | 15.1% | $24,860 | 8.0% | $31,075 | 10.0% | $48,636 | 13.3% | $29,214 | 8.0% | $36,518 | 10.0% |
Tier 1 Capital (to risk-weighted assets) | ||||||||||||
Tier 1 Capital | ||||||||||||
(To Risk-Weighted Assets) | ||||||||||||
Consolidated | $49,017 | 15.6% | $12,577 | 4.0% | N/A | $48,819 | 13.2% | $14,755 | 4.0% | N/A |
| |
Bank | $43,166 | 13.9% | $12,430 | 4.0% | $18,645 | 6.0% | $44,066 | 12.1% | $14,607 | 4.0% | $21,911 | 6.0% |
Tier 1 Capital (to average assets) | ||||||||||||
Tier 1Capital |
| |||||||||||
(To Average Assets) | ||||||||||||
Consolidated | $49,017 | 10.3% | $18,997 | 4.0% | N/A | $48,819 | 8.9% | $21,894 | 4.0% | N/A | ||
Bank | $43,166 | 9.2% | $18,733 | 4.0% | $23,416 | 5.0% | $44,066 | 8.1% | $21,738 | 4.0% | $27,172 | 5.0% |
At December 31, 20022003 and 2001,2002, the Company and its banking subsidiary, Bar Harbor Banking and Trust Company, were in compliance with all applicable regulatory requirements and had capital ratios in excess of federal regulatory risk-based and leverage requirements.
In November of 1999, the Board of DirectorsCompany announced a stock repurchase plan which was subsequently continued through December 31, 2003, at which time it terminated. Under that plan the Company was authorized the repurchaseto make open market and privately negotiated purchases of up to 10% of the Company’sits outstanding shares of common stock, or approximately 344,000 shares, and has authorized the continuance of this program through December 31, 2003. The purchase can take place either through the open market or in privately negotiated transactions and at market prices.shares. As of December 31, 2002,2003, the Company had repurchased 339,814 shares of stock under the plan, at a total cost of 269,154 shares were purchased for$6,151 and an average per share price of $16.94.$18.10 per share. The Company records the repurchased shares as treasury stock.
In March 2004, the Company announced a second stock repurchase plan which allows the Company to make open market and privately negotiated purchases of up to 10% of its outstanding shares of common stock, or 310,000 shares. Purchases began on March 4, 2004 and will continue through December 31, 2005. Depending on market conditions and other factors, these purchases may be commenced or suspended at any time, or from time-to-time, without prior notice.
14. EMPLOYEE BENEFIT PLANS
The Company has non-qualified supplemental retirement agreements for certain retired officers. The agreements provide supplemental retirement benefits payable in installments over a period of years upon retirement or death. The Company recognized the ntenet present value of payments associated with the agreements over the service periods of the participating officers. For 2003, 2002, and 2001, and 2000, the interest expense of these supplemental retirement agreements was $142, $142,$ 136, $126, and $104,$126, respectively.
The Company Board of Directors has authorized the Company, subject to any applicable regulatory requirements, to enter intomaintains supplemental executive retirement plansplan agreements with Joseph M. Murphy, President and CEO of the Company, and BTI, GerryGerald Shencavitz, Chief Financial Officer of the Company and Dean S. Read, President and CEO of the Bank. The terms of those supplemental retirementThese plans have not been finalized as of the date of this report, but are expected to provide for a stream of future payments in accordance with aindividually defined vesting scheduleschedules upon retirement, of the named executives,termination, or in the event that the executive leaves the Company following a change of control event. As of December 31, 2003, the Company had accrued a total of $581 in control. The Company has accrued amounts in accordanceconnection with generally accepted accounting principles to provide for estimatedthese future payment obligations under the supplemental retirement plans once finalized and effective. As of December 31, 2002, the Company had accrued $328 for this purpose. Implementation of these supplemental executive retirement plans is subject to compliance with any applicable regulatory requirements review and final approval by the Company’s Board of Directors, and execution and delivery by the Company and the named executive officers, of formal agreements. obligations.
401(k) PLAN
The Company has a 401(k) plan available to full-time employees. For the years ended December 31, 2003, 2002, 2001, and 2000,2001, the Company contributed $393, $321, $244, and $241,$244, respectively.
15. POSTRETIREMENT BENEFITS
The Company sponsors a postretirement benefit plan, which provides medical and life insurance coverage to all eligible employees. The cost of providing these benefits is accrued during the active service period of the employee. Net periodic postretirement benefit cost includes the following components:
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |
Interest cost on accumulated postretirement benefit obligation | $ 84 | $ 84 | $ 77 | $ 80 | $ 84 | $ 84 |
Amortization | (23) | (27) | (41) | |||
Amortization of actuarial (gain) or loss | (23) | (23) | (27) | |||
Net periodic postretirement benefit cost | $ 61 | $ 57 | $ 36 | $ 57 | $ 61 | $ 57 |
It is the Company's policy to fund the cost of postretirement health care and life insurance plans as claims and premiums are paid.
Change in benefit obligations: | 2002 | 2001 | 2000 | 2003 | 2002 | 2001 |
Benefit obligation at beginning of year | $1,247 | $1,234 | $1,127 | $1,235 | $1,247 | $1,234 |
Interest cost on accumulated postretirement benefit obligation | 84 | 84 | 77 | 80 | 84 | 84 |
Amortization | (17) | (3) | 94 | |||
Actuarial (gain) or loss | 17 | (17) | (3) | |||
Benefits paid | (79) | (68) | (64) | (70) | (79) | (68) |
Benefit obligation at end of year | $1,235 | $1,247 | $1,234 | $1,262 | $1,235 | $1,247 |
Unrecognized gain at end of year | $ 346 | $ 367 | $ 376 | $ 305 | $ 346 | $ 367 |
Accrued benefit cost included in other liabilities | $1,581 | $1,614 | $1,610 | $1,567 | $1,581 | $1,614 |
The accumulated postretirement benefit obligation (APBO) in 2003 and 2002 was determined using a 7%6% and 6.75% respectively, weighted average discount rate. The net periodic benefit cost in 2003, 2002, and 2001 was determined using a 6.75%, 7%, and 7% respectively, weighted average discount rate.
The health care cost trend rates wererate assumption was 12% in 2002,2004, gradually declining to 6% after 12 years and remaining at that level thereafter. An increase in the health care trend of 1% would increase the APBO by approximately $89$92 and the net periodperiodic cost by $6. A decrease in the health care trend of 1% would decrease the APBO by approximately $78$81 and the net periodic cost by $6.$5.
The Company expects to contribute $77 to the postretirement benefit plan in 2004.
16. STOCK OPTIONS
A summary of the status of the plan as of December 31, 2002,2003, and 2001,2002, and changes during the year then ended is presented below.
2002 | 2001 | 2003 | 2002 | 2001 | ||||||
Number of | Weighted Average | Number of | Weighted Average | Number Of Shares | Weighted Average Exercise Price | Number Of Shares | Weighted Average Exercise Price | Number of Shares | Weighted Average Exercise Price | |
Outstanding at the beginning of the year | 224,808 | $15.43 | -- | $ -- | 328,457 | $16.30 | 228,160 | $15.43 | -- | $ -- |
Granted during the year | 161,602 | 17.17 | 224,808 | 15.43 | 44,500 | 21.43 | 162,602 | 17.18 | 228,160 | 15.43 |
Exercised during the year | (5,241) | 15.41 | -- | -- | (11,255) | 15.91 | (5,241) | 15.41 | -- | -- |
Forfeited during the year | (55,064) | 15.41 | -- | -- | (28,066) | 17.51 | (57,064) | 15.41 | -- | -- |
|
| |||||||||
Outstanding at end of year | 326,105 | $16.30 | 224,808 | $15.43 | 333,636 | $16.90 | 328,457 | $16.30 | 228,160 | $15.43 |
| ||||||||||
Exercisable at year end | 29,598 | 10,830 | 66,235 | 29,672 | 10,830 |
| ||||
Weighted-average fair value of options | $ 1.80 | $ 1.71 | $ 2.98 |
The following information applies to options outstanding at December 31, 2003:
Options Outstanding | Options Exercisable | ||||
Range of | Number of | Weighted Average | Weighted Average | Number | Weighted Average |
$15.40 to $15.40 | 136,933 | 7.47 | $15.40 | 39,818 | $15.40 |
$15.80 to $15.80 | 5,000 | 7.82 | $15.80 | 1,445 | $15.80 |
$16.05 to $16.05 | 90,000 | 8.15 | $16.05 | 15,000 | $16.05 |
$17.75 to $26.20 | 101,703 | 8.93 | $19.71 | 9,972 | $18.55 |
$15.40 to $26.20 | 333,636 | 8.10 | $16.90 | 66,235 | $16.03 |
The following information applies to options outstanding at December 31, 2002:
Options Outstanding | Options Exercisable | ||||
Range of |
Number of | Weighted Average |
Weighted Average |
Number | Weighted Average |
$15.40 - $19.20 | 326,105 | 8.70 years | $16.30 | 29,598 | $15.43 |
The following information applies to options outstanding at December 31, 2001:
Options Outstanding | Options Exercisable | Options Outstanding | Options Exercisable | |||||||
Range of |
Number of | Weighted Average |
Weighted Average |
Number | Weighted Average |
Number of | Weighted Average |
Weighted Average |
Number | Weighted Average |
$15.40 - $17.75 | 224,808 | 8.75 years | $15.43 | 10,830 | $15.40 | |||||
$15.40 - $19.20 | 328,457 | 8.91 years | $16.30 | 29,672 | $15.43 |
17. FINANCIAL INSTRUMENTS
The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to originate loans, and standby letters of credit.credit and interest rate swaps.
Commitments to originate loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case by casecase-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the borrower.
The Bank’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for its balance sheet instruments.
The notional, or contract amount for financial instruments with off-balance sheet risk are:were:
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |
Commitments to originate loans | $19,981 | $16,563 | $ 4,500 | $26,993 | $19,981 | $16,563 |
Unused lines of credit | $49,107 | $45,453 | $25,126 | $68,018 | $49,107 | $45,453 |
Standby letters of credit | $ 2,800 | $ 5,059 | $ 3,626 | |||
Unadvanced portions of construction loans | $ 2,054 | $ 5,579 | $ 6,485 | $ 3,863 | $ 2,054 | $ 5,579 |
Standby Letters of Credit | $ 3,650 | $ 2,800 | $ 5,059 |
The Bank uses derivative instruments as partial hedges against large fluctuations in interest rates. The Bank uses interest rate swap instruments to hedge against potentially lower yields on the variable prime rate loan categoryloans in a declining rate environment. If rates were to decline, resulting in reduced income on the adjustable rate loans, there would be an increased income flow from the interest rate swap instrument.
Financial instruments are reviewed as part of the asset/liability management process. The financial instruments are factored into the Bank’s overall interest rate risk position. The Bank regularly reviews the credit quality of the counterparty from which the instruments have been purchased.
As ofAt December 31, 2002,2003 the Bank had a $10 millionthree outstanding derivative instruments totaling $30,000 (notional principal amount), all of which were interest rate swap contract in whichagreements. The details are summarized as follows:
Description | Maturity | Notional Amount | Fixed Interest Rate | Variable Interest Rate | Hedge Pool |
Receive fixed rate, pay variable rate | 04/25/04 | $10,000 | 6.425% | Prime | Home Equity Loans |
Receive fixed rate, pay variable rate | 09/01/07 | $10,000 | 6.040% | Prime | Home Equity Loans |
Receive fixed rate, pay variable rate | 01/24/09 | $10,000 | 6.250% | Prime | Home Equity Loans |
The interest rate-swap agreements hedge a defined pool of the Bank is hedging prime-basedBank's home equity loans yielding an interest rate of prime, which at December 31, 2003 was 4.00%. The Bank is required to pay a counter party monthly variable rate payments indexed to prime, while receiving monthly fixed rate payments based upon interest rates of 6.425%. , 6.040%, and 6.250%, respectively over the term of each respective agreement.
The interest rate swap maturesagreements, which qualify as a cash flow hedges, had total unrealized gains of $86 at December 31, 2003. In accordance with Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 137, and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", the unrealized gain is recorded in April 2004.the balance sheet with the offset recorded in the statement of Changes in Shareholders’ Equity, Other Comprehensive Income. The use of the interest rate swap is recordedagreement increased interest income by $498 during 2003 compared with $117 in other assets at its fair value of $272, with the change in fair value recorded in other comprehensive income, net of tax. At December 31, 2001, the Company held no derivative instruments.2002.
The estimated fair values of the Bank’sCompany’s financial instruments were as follows:
December 31, 2002 | December 31, 2001 | December 31, 2003 | December 31, 2002 | |||||
Carrying | Fair | Carrying | Fair | Carrying Value | Fair | Carrying | Fair | |
Financial Assets: | ||||||||
Cash and cash equivalents | $ 11,529 | $ 11,529 | $ 17,355 | $ 17,355 | $ 14,199 | $ 14,199 | $ 11,529 | $ 11,529 |
Securities available for sale | 128,826 | 128,826 | 106,743 | 106,743 | 124,422 | 124,422 | 128,826 | 128,826 |
Securities held to maturity | 31,545 | 32,077 | 26,866 | 24,943 | 33,965 | 35,093 | 31,545 | 32,077 |
Other securities | 1,929 | 1,929 | 8,464 | 8,464 | 910 | 910 | 1,929 | 1,929 |
Cash surrender value of life insurance | 5,278 | 5,278 | 5,057 | 5,057 | 5,488 | 5,488 | 5,278 | 5,278 |
Loans receivable | 346,560 | 355,812 | 293,801 | 294,778 | 378,130 | 385,543 | 346,560 | 355,812 |
Interest receivable | 2,796 | 2,796 | 2,797 | 2,797 | 2,536 | 2,536 | 2,796 | 2,796 |
Derivative instrument (swap) | 272 | 272 | -- | -- | 86 | 86 | 273 | 273 |
| ||||||||
Financial liabilities: |
| |||||||
Deposits | 322,015 | 324,028 | 291,833 | 291,220 | 339,080 | 340,521 | 322,015 | 324,028 |
Securities sold under repurchase agreements | 13,943 | 13,943 | 15,159 | 15,159 | 15,925 | 15,925 | 13,943 | 13,943 |
Borrowings | 156,558 | 161,311 | 120,900 | 118,657 | 170,506 | 176,534 | 156,558 | 161,311 |
Interest payable | 763 | 763 | 727 | 727 | 758 | 758 | 763 | 763 |
18. LEGAL CONTINGENCIES
Various legal claims arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Company’s consolidated financial statements.
19. QUARTERLY SUMMARIZED FINANCIAL DATA (UNAUDITED)
Year 2003 | 1 | 2 | 3 | 4 | Year | |||||
Interest and dividend income | $7,721 | $7,734 | $7,513 | $7,611 | $30,579 | |||||
Interest expense | 2,841 | 2,837 | 2,728 | 2,669 | 11,075 | |||||
Net interest income | 4,880 | 4,897 | 4,785 | 4,942 | 19,504 | |||||
Provision for loan losses | 150 | 150 | 120 | 120 | 540 | |||||
Noninterest income | 1,804 | 1,776 | 1,953 | 1,806 | 7,339 | |||||
Noninterest expense | 4,735 | 4,559 | 4,978 | 4,932 | 19,204 | |||||
Income before income taxes | 1,799 | 1,964 | 1,640 | 1,696 | 7,099 | |||||
Income taxes | 495 | 552 | 411 | 434 | 1,892 | |||||
Net income | $1,304 | $1,412 | $1,229 | $1,262 | $ 5,207 | |||||
| ||||||||||
Earnings per share: | ||||||||||
Basic | $ 0.42 | $ 0.45 | $ 0.39 | $ 0.41 | $ 1.67 | |||||
Diluted | $ 0.41 | $ 0.44 | $ 0.38 | $ 0.40 | $ 1.63 | |||||
| ||||||||||
Year 2002 | 1 | 2 | 3 | 4 | Year | 1 | 2 | 3 | 4 | Year |
Interest and dividend income | $7,964 | $7,992 | $8,207 | $8,189 | $32,352 | $7,886 | $7,924 | $8,149 | $8,105 | $32,064 |
Interest expense | 3,148 | 3,208 | 3,267 | 3,152 | 12,775 | 3,148 | 3,208 | 3,267 | 3,152 | 12,775 |
Net interest income | 4,816 | 4,784 | 4,940 | 5,037 | 19,577 | 4,738 | 4,716 | 4,882 | 4,953 | 19,289 |
Provision for loan losses | 300 | 300 | 275 | 225 | 1,100 | 300 | 300 | 275 | 225 | 1,100 |
Noninterest income | 1,340 | 1,494 | 2,116 | 1,463 | 6,413 | 1,418 | 1,562 | 2,174 | 1,547 | 6,701 |
Noninterest expense | 4,197 | 4,491 | 5,120 | 4,528 | 18,336 | 4,197 | 4,491 | 5,120 | 4,528 | 18,336 |
Income before income taxes | 1,659 | 1,487 | 1,661 | 1,747 | 6,554 | 1,659 | 1,487 | 1,661 | 1,747 | 6,554 |
Income taxes | 449 | 360 | 514 | 419 | 1,742 | 449 | 360 | 514 | 419 | 1,742 |
Net income before accounting change | 1,210 | 1,127 | 1,147 | 1,328 | 4,812 | 1,210 | 1,127 | 1,147 | 1,328 | 4,812 |
Cumulative effect of accounting change, net of tax | (247) | -- | -- | -- | (247) | |||||
Less: Accounting change net of tax | 247 | -- | -- | -- | 247 | |||||
Net income | $ 963 | $1,127 | $1,147 | $1,328 | $4,565 | $ 963 | $1,127 | $1,147 | $1,328 | $ 4,565 |
Earnings per share: | ||||||||||
Basic before cumulative effect of accounting change | $ 0.37 | $ 0.35 | $ 0.35 | $ 0.42 | $ 1.49 | $ 0.37 | $ 0.35 | $ 0.35 | $ 0.42 | $ 1.49 |
Cumulative effect of accounting change, net of tax | $(0.07) | $ -- | $ -- | $ -- | $ (0.07) | |||||
Cumulative effect of accounting change | $ (0.07) | $ -- | $ -- | $ -- | $ (0.07) | |||||
Basic | $ 0.30 | $ 0.35 | $ 0.35 | $ 0.42 | $ 1.42 | $ 0.30 | $ 0.35 | $ 0.35 | $ 0.42 | $ 1.42 |
| ||||||||||
Diluted before cumulative effect of accounting change | $ 0.37 | $ 0.34 | $ 0.35 | $ 0.41 | $ 1.47 | $ 0.37 | $ 0.34 | $ 0.35 | $ 0.41 | $ 1.47 |
Cumulative effect of accounting change, net of tax | $(0.07) | $ -- | $ -- | $ -- | $ (0.07) | |||||
Cumulative effect of accounting change | $ (0.07) | $ -- | $ -- | $ -- | $ (0.07) | |||||
Diluted | $ 0.30 | $ 0.34 | $ 0.35 | $ 0.41 | $ 1.40 | $ 0.30 | $ 0.34 | $ 0.35 | $ 0.41 | $ 1.40 |
Year 2001 | 1 | 2 | 3 | 4 | Year |
Interest and dividend income | $8,672 | $8,465 | $8,495 | $8,260 | $33,892 |
Interest expense | 4,477 | 4,279 | 3,715 | 3,280 | 15,751 |
Net interest income | 4,195 | 4,186 | 4,780 | 4,980 | 18,141 |
Provision for loan losses | 200 | 1,200 | 250 | 350 | 2,000 |
Noninterest income | 1,848 | 1,692 | 2,125 | 1,855 | 7,520 |
Noninterest expense | 4,195 | 4,144 | 4,813 | 5,337 | 18,489 |
Income before income taxes | 1,648 | 534 | 1,842 | 1,148 | 5,172 |
Income taxes | 558 | 157 | 627 | 319 | 1,661 |
Net income | $1,090 | $ 377 | $1,215 | $ 829 | $ 3,511 |
Earnings per share: | |||||
Basic | $ 0.33 | $ 0.12 | $ 0.37 | $ 0.25 | $ 1.07 |
Diluted | $ 0.33 | $ 0.11 | $ 0.37 | $ 0.25 | $ 1.06 |
20. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
The condensed financial statements of Bar Harbor Bankshares as of December 31, 20022003 and 2001,2002, and for each of the three years in the period ended December 31, 2002,2003, are presented below:
BALANCE SHEETS
December 31
2002 | 2001 | 2003 | 2002 | |
Cash | $ 334 | $ 219 | $ 376 | $ 334 |
Investment in subsidiaries | 52,620 | 51,711 | 51,850 | 52,620 |
Premises | 746 | 747 | 745 | 746 |
Other assets | 160 | 2 | 459 | 160 |
Total assets | $ 53,860 | $ 52,679 | ||
Total Assets | $53,430 | $53,860 | ||
|
| |||
Liabilities & Shareholders' Equity | $ 53,860 | $ 52,679 | ||
Liabilities & Shareholders’ Equity | $53,430 | $53,860 |
STATEMENTS OF INCOME
Years Ended December 31
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |
Dividend income from subsidiaries | $ 5,369 | $ 5,296 | $11,055 | $5,075 | $5,369 | $ 5,296 |
Equity in undistributed earnings of subsidiaries (1) | (387) | (1,609) | (6,108) | 714 | (387) | (1,609) |
Bankshares expenses, net of tax benefit | (417) | (176) | (150) | (582) | (417) | (176) |
Net income | $ 4,565 | $ 3,511 | $ 4,797 | $5,207 | $4,565 | $ 3,511 |
(1) Amount in parentheses represents the excess of dividends over net income of subsidiaries.
STATEMENTS OF CASH FLOWS
Years Ended December 31
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |
Cash flow from operating activities: | ||||||
Net income | $ 4,565 | $ 3,511 | $ 4,797 | $ 5,207 | $4,565 | $3,511 |
Adjustments to reconcile net income to cash | ||||||
provided by operating activities: | ||||||
Adjustments to reconcile net income to cash | ||||||
Depreciation | 7 | 11 | -- | 8 | 7 | 11 |
(Increase)decrease in other assets | (77) | 74 | (76) | |||
Increase/(decrease) in other assets | (6) | (77) | 74 | |||
Equity in undistributed earnings of subsidiaries | 387 | 1,609 | 6,108 | (714) | 387 | 1,609 |
Net cash provided by operating activities | 4,882 | 5,205 | 10,829 | 4,495 | 4,882 | 5,205 |
Cash flows from investing activities: | ||||||
Additional investments in subsidiaries | (854) | (2,370) | (6,835) | (350) | (854) | (2,370) |
Capital expenditures | (6) | -- | (758) | (8) | (6) | -- |
Net cash used in investing activities | (860) | (2,370) | (7,593) | (358) | (860) | (2,370) |
Cash flows from financing activities: | ||||||
Purchase of treasury stock | (1,563) | (773) | (1,820) | (1,888) | (1,563) | (773) |
Proceeds from stock issuance | 101 | -- | 179 | 101 | -- | |
Dividend paid | (2,445) | (2,490) | (2,554) | |||
Dividends paid | (2,386) | (2,445) | (2,490) | |||
Net cash used in financing activities | (3,907) | (3,263) | (4,374) | (4,095) | (3,907) | (3,263) |
Net increase (decrease) in cash | 115 | (428) | (1,138) | |||
Net increase (decrease) in cash and cash equivalents | 42 | 115 | (428) | |||
Cash and cash equivalents, beginning of year | 219 | 647 | 1,785 | 334 | 219 | 647 |
Cash and cash equivalents, end of year | $334 | $219 | $ 647 | $ 376 | $ 334 | $ 219 |
21. GOODWILL
The following is the effect on net income and earnings per share if amortization of goodwill had not been recorded in each period presented.
2002 | 2001 | 2000 | 2003 | 2002 | 2001 | |
Reported net income | $4,565 | $3,511 | $4,797 | $5,207 | $4,565 | $3,511 |
Add: Goodwill amortization (net of tax) | -- | 48 | 47 | -- | -- | 48 |
Adjusted net income | $4,565 | $3,559 | $4,844 | $5,207 | $4,565 | $ 3,559 |
Basic earnings per share: | ||||||
Reported | $ 1.42 | $1.07 | $1.43 | $ 1.67 | $ 1.42 | $ 1.07 |
Add: Goodwill amortization (net of tax) | -- | 0.01 | 0.01 | -- | -- | 0.01 |
Adjusted basic earnings per share | $ 1.42 | $1.08 | $1.44 | $ 1.67 | $ 1.42 | $ 1.08 |
Diluted earnings per share: | ||||||
Reported net income | $ 1.40 | $1.06 | $1.43 | $ 1.63 | $ 1.40 | $ 1.06 |
Add: Goodwill amortization (net of tax) | -- | 0.01 | 0.01 | -- | -- | 0.01 |
Adjusted diluted earnings per share | $ 1.40 | $1.07 | $1.44 | $ 1.63 | $ 1.40 | $ 1.07 |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.On March 26, 2004, the Audit Committee of the Board of Directors of Bar Harbor Bankshares (the "Company") dismissed Berry, Dunn, McNeil & Parker ("BDMP") as its independent accountants, and approved the appointment of KPMG LLP as its independent public accountants for the Company’s fiscal year ending December 31, 2004, subject to KPMG LLP completing normal client acceptance processes and procedures. The Company intends to file a Form 8-K upon completion of the acceptance process and procedures.
The reports of BDMP on the Company’s consolidated financial statements for the years ending December 31, 2003 and 2002 did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles.
During the Company’s fiscal years 2003 and 2002, and the interim period preceding the dismissal of BDMP on March 26, 2004, there have been no disagreements between the Company and BDMP on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreement(s), if not resolved to the satisfaction of BDMP, would have caused it to make reference to the subject matter of the disagreement(s) in connection with its prior reports.
PART IIIDuring the two-year period ending December 31, 2003, and the interim period preceding the dismissal of BDMP, no reportable events occurred in connection with the relationship between BDMP and the Company.
ITEM 9A. CONTROLS AND PROCEDURES
As required by Commission Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company’s management conducted an evaluation with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of the Company’s disclosure controls and procedures, as of the end of the last fiscal year. In designing and evaluating the Company’s disclosure controls and procedures, the Company and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only a reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that they believe the Company’s disclosure controls and procedures are reasonably effective to ensure that information required to be disclosed by the Company in the reports it files or submits with the Commission under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. We intend to continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and we may from time to time make changes to the disclosure controls and procedures to enhance their effectiveness and to ensure that our systems evolve with our business.
There was no change in our internal control over financial reporting that occurred during the period covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers: Information required by this item is incorporated by reference from the sections entitled "Management of the Company", and "Executive Officers", and Section 16(a) "Beneficial Ownership Reporting Compliance" in the 2002Company’s definitive Proxy Statement for the 2004 Annual Meeting of Shareholders, which is filed with the Commission.
Compliance with Section 16(a) of the Securities Exchange Act of 1934: The information required under this item is incorporated herein by reference from the section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company’s definitive Proxy Statement for the 2004 Annual Meeting of Shareholders, which is filed with the Commission.
Audit Committee Financial Expert: The Company’s Board of Directors has determined that Mr. Scott Toothaker, a director and Exchange Commission.member of the Company’s Audit Committee, qualifies as an "audit committee financial expert" as defined in rules of the Commission and that Mr. Toothaker is an "independent director" as that term is defined in applicable AMEX listing standards.
Code of Ethics: The Company’s Board of Directors has adopted a Code of Ethics that applies to its principal executive officer and principal financial officers. A copy of the Code of Ethics is available on the Company’s website at http://www.bhbt.com. Copies of the Code of Ethics will be provided, without charge, to any person upon request. Requests for copies should be directed by mail to the Company’s Secretary, Judith W. Fuller, at 82 Main Street, Bar Harbor, Maine, 04609, or by telephone at (207) 288-3314.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference from the section entitled "Compensation of Directors and Executive Officers" in the 2002definitive Proxy Statement for the 2004 Annual Meeting of Shareholders, which is filed with the Securities and Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference from the sectionsections entitled "Voting Securities and Principal Holders thereof" and "Equity Compensation Plan Information" in the 2002definitive Proxy Statement for the 2004 Annual Meeting of Shareholders, which is filed with the Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference from the section entitled "Transactions with Directors, Officers, and Principal Shareholders" in the 2002definitive Proxy Statement for the 2004 Annual Meeting of Shareholders, which is filed with the Securities and Exchange Commission.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by this item is incorporated by reference to the section entitled "Selection of Auditors" in the Company’s definitive Proxy Statement for the 2004 Annual Meeting of Shareholders, which is filed with the Commission.
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of Company management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.
Disclosure controls and procedures means controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. While the Company believes that its disclosure controls and procedures are effective, it intends to continue to examine, refine and formalize its disclosure controls and procedures and to monitor ongoing developments in this area.
There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these internal controls subsequent to the date the Company carried out this evaluation.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements Filed herewith at Item 8.8
2. Financial Statement Schedules Filed herewith at Item 8
3. Exhibits:
EXHIBIT NUMBER | ||
2 | (a) Plan of Acquisition, Reorganization (b) BTI Restructuring Plan | (a) Incorporated by reference to Form S-14 filed with the Commission March 26, 1984 (Commission Number 2-90171). (b) Filed herewith |
3 | (a) Articles of Incorporation.
(b) Bylaws | (a) Articles as amended July 11, 1995, are incorporated by reference to Form S-14 filed with the Commission March 26, 1984 (Commission Number 2-90171). Bylaws as amended to date are filed herewith. (b) Bylaws as amended to date are incorporated by reference to Form 10-K, Item 14(a)(3) filed with the Commission March 28, 2002. (Commission Number 001-13349) |
10 | Material Contracts | |
10.1 | (a) Deferred Compensation Plans
| (a)
|
10.2 |
Employment Contract |
|
10.3 | Incentive Stock Option Plan | Incorporated by reference to Form 10-K, Item 14(a)(3) filled with the Commission March 28, |
10.3 | Amendment to Employment Agreement, Change in Control, Confidentiality and Noncompetition Agreement between the Company and Joseph M. Murphy. | Incorporated by reference to Form 10-Q, Part II, Item 6, filed with the Commission November 13, 2003 (Commission File Number 001-13349). |
10.4 | Change in Control, Confidentiality, and Noncompetition Agreement between the Company and Gerald Shencavitz. | Incorporated by reference to Form 10-Q, Part II, Item 6, filed with the Commission November 13, 2003 (Commission File Number 001-13349). |
10.5 | Change in Control, Confidentiality, and Noncompetition Agreement between the Company and Dean Read. | Incorporated by reference to Form 10-Q, Part II, Item 6, filed with the Commission November 13, 2003 (Commission File Number 001-13349). |
10.5 | Purchase and Assumption Agreement between Bar Harbor Banking and Trust Company and Androscoggin Savings Bank, dated October 24, 2003. | Incorporated by reference to Form 10-Q, Part II, Item 6 filled with the Commission November 13, 2003 (Commission File Number 001-13349). |
13 | Annual Report to Shareholders | Filed herewith |
14 | Code of Ethics | Filed herewith |
16.1 | Letter Regarding Change in Certifying Accountant | Filed herewith |
21 | Subsidiaries of the Registrant | Incorporated by reference to Form 10-K, Item 14(a)(21) filed with the Commission March 28, 2002. Commission Number 001-13349. |
| (a) Certification of Chief Executive Officer under Rule 13a-14/15d-14(a) (b) Certification of Chief Financial Officer under Rule 13a-14/15d-14(a) | (a) Filed herewith. (b) Filed herewith. |
32 | (a) Certification of Chief Executive Officer under 18 U.S.C. Sec. 1350. (b) Certification of Chief Financial Officer under 18 U.S.C. Sec. 1350. | (a) Filed herewith.
(b) Filed herewith. |
99 | Company’s definitive Proxy Statement for 2004 Annual Meeting of Stockholders | Filed separately |
(b) Reports on Form 8-K
8-K. Current reports on Form 8-K have been filed during the last quarter as follows:
Date Filed | Item Number | Description |
| 5 |
|
| 12 | Results of operations for the period ended September 30, 2003 |
1/20/04 | 5 |
|
2/2.04 | 12 | Results of operations for the |
2/13/04 | 5 | Consummation of the |
| 5 | Announcement regarding BTI Restructuring Plan |
3/1/04 | 5 | Announcement regarding implementation of |
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.
March 27, 200329, 2004 BAR HARBOR BANKSHARES
(Registrant)
/s//s/ Joseph M. Murphy
Joseph M. Murphy
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/ Thomas A. Colwell /s/ Robert C. Carter /s/ Peter Dodge /s/Martha Tod Dudman /s/ Dwight L. Eaton /s/Ruth S. Foster /s/Cooper F. Friend /s/John P. McCurdy | /s/ Joseph M. Murphy |
|
|
|
|
| |
| |
/s/ | |
| |
| /s/ John P. Reeves |
| |
| |
|
|
| |
| |
| |
| |
|
|
| |
| |
/s/Gerald Shencavitz | |
| |
|
|
|
|
|
|
/s/ | /s/Scott G. Toothaker |
|
|
|
|
CERTIFICATION
I, Joseph M. Murphy, certify that:
Date: March 27, 2003 /s/ Joseph M. Murphy Joseph M. Murphy President and Chief Executive Officer
CERTIFICATION
I, Gerald Shencavitz, certify that:
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrant’s board of directors or persons performing the equivalent function:
6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with respect to significant deficiencies and material weaknesses.
Date: March 27, 2003 /s/Gerald Shencavitz
Gerald Shencavitz Chief Financial Officer
EXHIBIT 10.2FORM OF EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made and entered into this 3rdday of January, 2003, by and between BAR HARBOR BANKSHARES, a Maine corporation with its headquarters located in Bar Harbor, Maine (hereinafter "the Company"), and JOSEPHM. MURPHY, a resident of Mount Desert, Maine (hereinafter "the President").
In consideration of the mutual promises, covenants, and agreements made herein, receipt and sufficiency of which are hereby acknowledged, the parties, intending to be legally bound hereby, agree as follows:
1. EMPLOYMENT. The Company hereby employs the President, and the President hereby accepts employment by the Company as the President and Chief Executive Officer of Bar Harbor Bankshares, on the terms and conditions specified herein.
2. TERM. The President’s employment shall be for a term of two (2) years commencing on the date of this agreement and ending January 3, 2005, unless sooner terminated. The Company agrees to notify the President not less than one hundred and eighty days (180) prior to January 3, 2005, if it does not intend to extend the President’s employment.
In the absence of notice of intent not to extend this Agreement by the Company, the Agreement shall be deemed automatically extended in additional one-year terms. After the initial extension, the Company agrees to a like notice period and subsequent extensions of this Agreement until and unless the Company and the President shall mutually agree to modify the terms of this Agreement. During any extension of this Agreement, as provided herein, all other provisions of this Agreement shall remain in effect.
Upon expiration of this Agreement, pursuant to a notice of intention not to extend, the President’s employment by the Company shall cease and no severance payments such as those set forth in Section 6 shall be due provided, however, that the obligations set forth in Sections 7, 8, and 9 shall survive termination of this Agreement and shall remain fully enforceable.
Either the Board or the President may terminate the President’s employment at any time for any reason, subject to the provisions of Section 6 of this Agreement.
3. RESPONSIBILITIES and OTHER ACTIVITIES. The President shall be employed as President and Chief Executive Officer of Bar Harbor Bankshares, and shall undertake the overall management, responsibilities, and duties related to this position as defined by the Board of Directors of the Company and summarized in the job description attached as Exhibit A. The President shall faithfully perform the duties of his position as described herein, devote substantially all of his business time and energies to the business and affairs of the Company and shall use his best efforts, skills and abilities to promote the Company’s interests. The President may not engage in any business activities or render any services of a business, commercial, or professional nature (whether or not for compensation) that would affect adversely the President’s performance of his responsibilities and duties hereunder or conflict with the business of the Company for the benefit of any person or entity, unless the President receives the prior written consent of the Company.
4. COMPENSATION. The Company shall pay the President a base salary of not less than Eighteen Thousand three hundred thirty three Dollars and thirty-three cents ($18,333.33) per month (an annualized rate of not less than Two Hundred Twenty Thousand Dollars ($220,000.00) per annum) payable in accordance with the Company’s standard payroll practices. This base salary shall be reviewed annually beginning as of the first week of January, 2004 and thereafter annually by the Compensation Committee of the Company’s Board of Directors and adjusted at the Company’s sole discretion. The President shall also participate in a performance compensation plan, to be developed during 2003 by mutual agreement between the President and the Company, which shall be effective in calendar year 2003. Other such plans may be agreed upon by the parties in subsequent calendar years in concert with the Company’s evolving goals and objectives.
5. BENEFITS.
(a) The President shall be eligible to participate in such medical, dental, disability, retirement, life insurance and other employee benefits on the same basis as may be provided to other similarly situated employees of the Company. The President shall be entitled to participate in a Supplemental Executive Retirement Plan (SERP), the terms of which shall be negotiated and finalized by March 31, 2003. This benefit shall be the subject of a separate contract that shall be incorporated by reference into this Agreement and shall not be changed, altered or terminated except by mutual agreement of the contracting parties. As to all other benefits to which the President may be entitled in parity with all other employees,such benefits may be created, changed, or terminated from time to time in the Company’s sole discretion. In addition, the President shall be entitled to reasonable paid vacations consistent with the Company’s vacation policy.
(b) The Company shall reimburse the President for all reasonable, ordinary, and necessary expenses incurred by the President in the performance of his duties hereunder in accordance with the Company’s policies.
6. TERMINATION.
(a) Termination by the Company. The Company may elect to terminate this Agreement and the President from his employment at any time for any reason by giving the President thirty (30) days’ prior written notice of termination, subject to payment by the Company of the base salary described below.
In the event of termination pursuant to this Section 6(a) the President shall be entitled to receive any earned but unpaid base salary through the notice period plus severance pay equal to two year’s base compensation, (which the parties agree shall be deemed to include any unused vacation time) payable either in monthly installments or a lump sum at the discretion of the Company.
The rights and benefits the President may have under employee benefit plans and programs of the Company in existence as of the effective date of such termination, if any, shall be determined in accordance with the terms of such plans and programs. Except as provided in this Section 6 and in Sections 7, 8, and 9, all obligations of the parties hereunder shall cease upon termination.
(b) Resignation. The President may voluntarily resign his employment at any time for any reason by giving the Company not less thanthirty (30) days’ prior written notice of termination. In such event, the President shall be entitled only to his earned but unpaid base salary accrued up to his last day of work together with any unused but accrued vacation time subject to Company policy limitations. The rights and benefits the President may have under employee benefit plans and programs of the Company in existence as of the effective date of such termination, if any, shall be determined in accordance with the terms of such plans and programs. The Company may then establish at its discretion a last day of work but the President shall still be entitled to full pay and benefits through the 30 day notice period notwithstanding that he may actually work less than 30 days at the election of the Company. Except in this Section 6 and in Sections 7, 8 and 9, all obligations of the parties under this Agreement shall cease immediately upon the President’s last day of work.
(c) Good Reason. In the case of "Good Reason" as defined herein, the President may consider that his employment has been constructively terminated by the Company. For purposes of this Agreement, "Good Reason" shall mean:
(i) The assignment to the President of duties inconsistent with the President’s position (including status, offices, titles, and reporting requirements) authority, duties, or responsibilities as described in Section 3 of this Agreement, or any other action by the Company which results in a substantial and material diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice there of given by the President.
(ii) Any failure by the Company to comply with any of the provisions of Section 4 of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the President.
(iii) Any purported termination by the Company of the President’s employment otherwise than as expressly permitted by the Agreement; or
(iv) Any failure by the Company (or successor Company) to comply with the Change of Control provisions of Section 10 of this Agreement.
(d) Termination Due to Death. In the event of the death of the President during this Agreement, the estate or other legal representatives of the President shall be entitled to any amount of earned but unpaid base salary accrued through the pay period in which death occurs plus any accrued but untaken vacation benefits, such payment to be paid promptly following death. The estate or other legal representatives of the President also shall be entitled to receive incentive compensation payments, if any, that the President would have earned if his employment had continued through the then current fiscal year of the Company, which amount shall be reduced to account for the percentage of the fiscal year not worked by the President because of such death. Rights and benefits that the President, or the President’s estate or other legal representatives, may have under employee benefit plans and programs of the Company upon the President’s death, if any, shall be determined in accordance with the terms and provisions of such plans and programs.
(e) Termination Due to Disability.
(i) The President’s employment hereunder may be terminated by the Company in the event the President is totally or partially disabled as determined by a Board Certified Medical Doctor for a cumulative period of ninety (90) days during any twelve (12) month period. During such ninety-day period, the President shall be paid his compensation in accordance with the terms of the short-term sick leave program then provided by the Company and/or through the standard group Long-Term Disability program offered to officers and employees of the Company and its subsidiaries. For purposes of this Agreement, "disability" shall be defined and benefits shall be paid in accordance with the terms of the long-term disability policy then available to all employees and executives of the Company.
(ii) Upon termination of the President’s employment due to disability pursuant to Section 6(e)(i) hereof, the President shall be entitled to continued benefits in accordance with the normal policies and practices, if any, in effect as of the date of such termination for officers and employees of the Company; provided further, that the President shall be entitled to receive incentive payments, if any, the President would have earned if his employment had continued through the then current fiscal year of the Company, which amount shall be reduced to account for the percentage of the fiscal year not worked by the President because of such disability. Any continued rights and benefits the President, or the President’s legal representatives, may have under employee benefit plans and programs of the Company upon the President’s termination due to disability, if any, shall be determined in accordance with the terms and provisions of such plans and programs. Except as provided in Section 6 and in Sections 7, 8, and 9, all obligations of the parties under this Agreement shall cease immediately upon termination.
a.Cause
The Company may terminate the employment of the President and immediately remove the President from his employment for "cause". For purposes of this Section, "cause" shall include, but not be limited to, the following:
(i) Any admission of, or a plea of guilty or no contest to, any charge of embezzlement, theft or fraudulent act or any crime which by three quarters vote of the Board of Directors would reasonably be expected to be materially detrimental to the business, operations, reputation or financial condition of the Company;
(ii) Willful misconduct of President in connection with the performance of any of his duties, including, without limitation, misappropriation of funds or property of the Company or any of its subsidiaries and/or affiliates or securing or attempting to secure personally any profit in connection with any transaction entered into on behalf of the Company or any of its subsidiaries and/or affiliates as determined by a three quarters vote of the Board of Directors;
(iii) Conduct by the President that would result in material injury to the reputation of the Company or its affiliates if the President were retained in his position with the Company such as, but not limited to substance abuse, sexual harassment behaviors or violent or abusive behaviors exhibited in the workplace, as determined by a three quarters vote of the Board of Directors;
(iv) The entry of any legal or regulatory order, which has the effect of precluding the President from performing his duties hereunder for more than 30 consecutive days;
(v) Active disloyalty, such as aiding a competitor as determined by a three quarters vote of the Board of Directors;
(vi) Any other breach by or default of the President of the terms of this Employment Agreement as determined by a three quarters vote of the Board of Directors;
(vii) The inability of the Company to obtain at reasonable cost a bond covering the activities of the President; or
(viii) The willful and continued failure of the President to perform substantially the President’s duties with the Company or one of its affiliates (other than such failure resulting from incapacity due to physical or mental illness) after a written demand for substantial performance improvement is delivered the President by the Board of Directors which specifically identifies the manner in which the Board believes that the President has not substantially performed the President’s duties as determined by a three quarters vote of the Board of Directors.
For purposes of this provision, no act or failure to act, on the part of the President shall be considered "willful" unless it is done, or omitted to be done, by the President in bad faith or without reasonable belief that the President’s action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the President in good faith and in the best interests of the Company. The cessation of employment of the President shall not be deemed to be for Cause unless and until there shall have been delivered to the President a copy of a resolution duly adopted by the affirmative vote of not less than three quarters of the entire membership of the Board at a meeting the Board called and held for such purpose (after reasonable notice is provided to the President and the President is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the President is guilty of the conduct described in subparagraphs f (i) through f (viii) above, and specifying the particulars thereof in detail.
(ix) In the event of termination for cause pursuant to Section 6(f)(i) through Section 6(f)(viii) hereof, the President shall be entitled to receive any earned but unpaid base salary through the Termination Date. The rights and benefits the President may have under employee benefit plans and programs of the Company existing as of the date of such termination, if any, shall be determined in accordance with the terms of such plans and programs. Except as provided in Section 6(f)(ii) and otherwise by applicable law, upon termination pursuant to Section 6 f (i), all obligations of the Company to the President hereunder shall cease immediately.
(x) In the event that the Company terminates the employment of the President for cause the non-competition covenant set forth in Section 8 of this Agreement will be modified to allow the President to seek employment, including employment with a competitor company, but he shall not, for a period of one year after termination of his employment, directly or indirectly, in any capacity, solicit from or perform work related to financial, investment, lending, depository, or other financial services on behalf of any individual, trust, or estate, partnership, corporation or other business entity who is or has been in the twelve (12) months prior to the effective date of termination a customer or client of Bar Harbor Bankshares or any of its subsidiaries.
(xi) To the extent that the Company terminates the President for cause, and any breach may be cured by the President, he will be provided a 30 day period within which he may cure any default.
7. CONFIDENTIAL INFORMATION.
(a) Non-Disclosure. Except as specifically authorized by the Company in writing, from the date hereof and continuing forever, the President agrees not to:
(i) Disclose any Confidential Information to any individual or entity, or otherwise permit any person or entity to obtain or disclose any Confidential Information, or
(ii) Use any Confidential Information for the President’s own financial gain, whether individually or on behalf of another individual or entity (whether or not such other individual or entity is in any way employed by or affiliated with the Company). While not in any way limiting the generality of the foregoing, the prohibitions contained herein shall extend to any and all speeches and articles, and other similar forms of information dissemination, engaged or participated in by the President, whether individually or on behalf of, or in concert with, another individual or entity (whether or not such other individual or entity is in any way employed by or affiliated with the Company). The President, however, may disclose Confidential Information if and only to the extent required by a valid order or subpoena issued by a court or administrative agency of competent jurisdiction, provided that in such event the President shall promptly notify the Company and any subsidiary or affiliate of the Company to which the Confidential Information relates, at a time and in a manner calculated to afford the Company or its subsidiary or affiliate a reasonable opportunity to protect its interests in such Confidential Information. Nothing contained in this Section 7 (a) shall be construed as prohibiting the President from disclosing Confidential Information that is or has become known to the public generally or is otherwise in the public domain other than as a result of improper disclosure.
(b) Confidential Information. For purposes hereof, the term "Confidential Information" means any and all information and compilations of information, in whatever form or medium (including any copies thereof), relating to any part of the business of the Company, the business of any subsidiary or affiliate of the Company or of their customers, provided to the President, or which the President obtained or compiled or had obtained or compiled on his behalf, which information or compilations of information are not a matter of public record or generally known to the public, including without limitation,
(i) Financial information regarding the Company or any subsidiary or affiliate of the Company;
(ii) Personnel data, including compensation arrangements relating to the President or any other employee of the Company or any subsidiary or affiliate of the Company;
(iii) Internal plans, practices, and procedures of the Company or any subsidiary or affiliate of the Company;
(iv) The names, portfolio information, investment strategies, requirements, lending or deposit information, or any similar information of any customers, clients, or prospects of the Company or any subsidiary or affiliate of the Company;
(v) Business methods and marketing strategies of the Company or any subsidiary or affiliate of the Company;
(vi) Any other information expressly deemed confidential by the officers and directors of the Company; and
(vii) The terms and conditions of this Employment Agreement and any documents or instruments executed in connection therewith.
(c) The President shall not, without the prior written consent of the Company, use or disclose, or negligently permit any unauthorized person to use, disclose, or gain access to any Confidential Information.
(d) Upon termination of employment, the President hereby agrees to deliver promptly to the Company and its affiliates and subsidiaries all memoranda, notes, records, manuals or other documents, including all copies of such materials, containing Confidential Information, whether made or compiled by the President or furnished to him from any source by virtue of the President’s relationship with the Company or its subsidiaries or affiliates.
(e) Regardless of the reason for his cessation of employment, the President will furnish such information as may be in the President’s possession and cooperate with the Company or its affiliates or subsidiaries as may reasonably be requested in connection with any claims or legal actions in which the Company is or may become a party. The Company will reimburse the President for any reasonable out-of-pocket expenses the President incurs in order to satisfy his obligations under this clause.
8. NON-COMPETITION OBLIGATIONS. In consideration of the covenants of the Company contained herein, the President covenants and agrees with the Company that, during the "Non-Compete Period" (as hereinafter defined) and within a one hundred (150) "air" mile radius from Bar Harbor, Maine, the President shall not without specific written approval , directly or indirectly:
(a) Engage in any insurance, brokerage, trust, banking or other financial services as an owner, employee, consultant, representative, or in any other capacity;
(b) Directly or indirectly request or advise any past, present, or future customers of the Company to withdraw, curtail, or cancel his, her, or its business with the Company or any of its affiliated entities;
(c) Directly or indirectly cause, suggest, or induce others to call on any past, present, or future customers of the Company or any of its affiliated entities;
(d) Canvas, solicit, or accept any business on behalf of any other bank, insurance agency, trust, or other financial services business, other than the Company or any of its affiliated entities, from any past or present customer of the Company or any of its affiliated entities.
The "Non-Compete Period" shall commence on the date hereof and terminate one (1) year after the cessation of the President’s employment with the Company, regardless of reason, whether or not pursuant to this Agreement.
9. NO SOLICITATION OF EMPLOYEES. While employed by the Company, and for a period of twelve (12) months following cessation of his employment for any reason and by any party, the President shall not, directly or indirectly, by any means or device whatsoever, for himself or on behalf of, or in conjunction with, any other person, partnership, or corporation, solicit, entice, hire, or attempt to hire or employ any employee of the Company or any of its affiliated entities.
During this Agreement, the President shall not interview or negotiate employment with, or accept employment from, a competitor in the market area described in Section 8(a) above except with the written consent of the Company.
10. CHANGE OF CONTROL.
(a) If during the term of this Agreement there is a change in control of the Company, the President shall be entitled to receive a severance payment or services previously rendered to the Company in a lump sum as provided for herein (subject to Section 10 (b) below in the event that his employment is terminated by the Company, voluntarily or involuntarily, within one year after a change in control of the Company, unless such termination occurs by virtue of normal retirement, permanent and total disability, or death of the President. Subject to Section 10(b) below, the amount of this payment to the President shall equal two (2) times the President’s full base annual salary at the rate in effect at the time notice of termination is given, plus any incentive compensation payments that the President would have earned if his employment had continued through the then current fiscal year of the Company and any accrued but unused vacation time subject to the then existing Company policies and limitations.
(b) Notwithstanding any other provisions of this Agreement or of any other agreement, contract, or understanding previously or subsequently entered into by the President of the Company, except an agreement, contract, or understanding subsequently entered into that expressly modifies or excludes application of this Section 10(b) (the "Other Agreements"), and notwithstanding any formal or informal plan or other arrangement previously or subsequently adopted by the Company for the direct or indirect provision of compensation to the President (including groups or classes of participants or beneficiaries of which the President is a member), whether or not such compensation is deferred, is in cash, or is in the form of a benefit to or for the President (a "Benefit Plan"), the President shall not have any right to receive any payment or other benefit under this Section 10, any Other Agreement, or any Benefit Plan if such payment or benefit, taking into account all other payments or benefits to or for the President under this Agreement, all Other Agreements, and all Benefit Plans, would cause any payment to the President under this
Agreement to be considered a "parachute payment" within the meaning of Section 280G(B)(2) of the Internal Revenue Code of 1986 as amended (a "Parachute Payment"). In the event that the receipt of any such payment or benefit under this Agreement, any Other Agreement, or any Benefit Plan would cause the President to be considered to have received a Parachute Payment under this Agreement, then the President shall have the right, in his sole discretion, to designate those payments or benefits under this Agreement, any Other Agreement, or any Benefit Plans, which should be reduced or eliminated so as to avoid having the payment to the President under this Agreement be deemed to be a Parachute Payment.
(c) For purposes of this Agreement, a "Change in Control" of the Company shall be deemed to have occurred if:
(i) Any "Person" including a "group" (as such term is used in Section 13(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), as amended, becomes the "beneficial owner" (as determined pursuant to Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Bar Harbor Bankshares representing more than fifty percent (50%) of the combined voting power of the Company’s then outstanding securities, other than as a result of an issuance of securities initiated by the Company in the ordinary course of its business, or
(ii) The Company is party to a Business Combination (as hereinafter defined), unless, following consummation of the Business Combination, more than 50% of the outstanding voting securities of the resulting entity are beneficially owned, directly or indirectly, by the holders of the Company’s outstanding voting securities immediately prior to the Business Combination in substantially the same proportions as those existing immediately prior to the Business Combinations; or
(iii) The stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets to another person or entity which is not a wholly owned subsidiary of the Company.
(iv) For purposes of this Section (c), a "Business Combination" means any cash tender or exchange offer, merger, or other business combination, sale of stock, or sale of all or substantially all of the assets, or any combination of the foregoing transactions.
11. BINDING OBLIGATION of COMPANY and ANY SUCCESSOR IN INTEREST. The Company expressly agrees that it shall not merge or consolidate into or with another Financial Service Holding Company, Bank, firm or person until such Financial Services Holding Company, Bank, firm, or person expressly agrees, in writing, to assume and discharge the duties and obligations of Bar Harbor Bankshares, under this Agreement. The Company agrees to provide written notice of the existence of this Agreement and its contents to any potential successor as part of negotiations leading to a successor in interest. This Agreement shall be binding upon the parties hereto, their successors, beneficiaries, heirs, and personal representatives.
12. ENFORCEMENT. The President acknowledges that his breach or threatened or attempted breach of any provisions of Sections 7, 8, or 9 of this Agreement would cause irreparable harm to the Company not compensable in monetary damages and that the Company shall be entitled upon proof of a breach, in addition to all other applicable remedies, to a temporary and permanent injunction and a decree for specific performance of the terms of Sections 7, 8, or 9 without being required to prove damages or furnish any bond or other security. Nothing herein contained shall be construed as prohibiting the Company from pursuing any other remedy available to it for such breach or threatened or attempted breach. The President shall pay all enforcement costs, including reasonable attorneys’ fees, incurred by the Company in successful enforcement by temporary and permanent injunction of Section 7, 8, or 9.
13. REFORMATION. All the parties hereto acknowledge that the parties have carefully considered the nature and scope of such protection. The activities, period, and area covered are expressly acknowledged and agreed to be fair, reasonable, and necessary. To the extent that any covenant contained in Sections 7, 8, or 9 is held to be invalid, illegal, or unenforceable because of the extent of activities, duration of such covenant, the geographic area covered thereby or otherwise, the parties agree that the court making such determination shall reform such covenant to include as much of its nature and scope as will render it enforceable and, in its reduced form, said covenant shall be valid, legal and enforceable to the fullest extent of the law.
14. ASSIGNMENTS, SUCCESSORS AND ASSIGNS. The rights and obligations of the President hereunder are not assignable or delegable and any prohibited assignment or delegation will be null and void. The Company may assign its rights and delegate its obligations under this Agreement. The provisions hereof shall inure to the benefit of and be binding upon the permitted successors and assigns of the parties hereto.
15. GOVERNING LAW. This Agreement shall be interpreted under, subject to and governed by the substantive laws of the State of Maine, without giving effect to provisions thereof regarding conflict of laws.
16. COUNTERPARTS. This Agreement may be executed simultaneously in any number of counterparts, each of which will be deemed an original but all of which will together constitute one and the same instrument.
17. INVALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect any other provision hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision was omitted. Furthermore, in lieu of such illegal, invalid, or unenforceable provision here shall be added automatically as a part of this Agreement a provision as similar in terms to such illegal, invalid, or unenforceable provision as may be possible and be legal, valid, and enforceable.
18. EXCLUSIVENESS. This Agreement constitutes the entire understanding and agreement between the parties with respect to the employment by the Company of the President and supercedes and revokes any and all other agreements, oral or written, between the parties.
19. MODIFICATION WAIVER. This Agreement may not be modified or amended except in writing signed by the parties. No term or condition of this Agreement will be deemed to have been waived unless waived in writing by the party charged with waiver. A waiver shall operate only as to the specific term or condition waived and will not constitute a waiver of any other term or condition of this Agreement or as to any subsequent occurrence of the term or condition.
20. MEDIATION ANDARBITRATION. Except as otherwise expressly provided hereunder, the parties agree that any and all disputes arising out of the President’s employment, or cessation of employment, including but not limited to any dispute, controversy, or claim arising under any federal, state, or locale statue, law, ordinance or regulation or under this Agreement, shall be resolved exclusively by Alternative Dispute Resolution described in this Agreement ("ADR"). The initiation of ADR shall first require mediation and the parties agree to first try to settle any dispute through mediation. Mediation shall be initiated by either party by the serving of a written notice of intent to mediate (a "Mediation Notice") by one party upon the other. If no resolution has been mutually agreed through mediation within ninety (90) days of service of a Mediation Notice, then and only then may the dispute be submitted to arbitration. Arbitration shall be initiated by the serving of a written notice of intent to arbitrate (an "Arbitration Notice") by one party upon the other. Notwithstanding the foregoing, nothing in this Agreement shall be deemed to preclude the Company from seeking temporary or permanent injunctive relief and/or damages from a court of competent jurisdiction with respect to any breach of Sections 7, 8, and 9 of this Agreement.
(a). In the event that a party wishes to initiate ADR, a Mediation Notice must be served on the other party within 6 months from the date on which the claim arose. If the parties cannot mutually agree on a mediator, then a mediator shall be selected in accordance with the Employment Mediation Rules of the American Arbitration Association.
(b) In the event that mediation is unsuccessful and arbitration is initiated, it shall be conducted under the National Rules for the Resolution of Employment Disputes of the American Arbitration Association. There shall be a single arbitrator to be agreed upon by the parties, provided that, if the parties are unable to agree upon a single arbitrator, each party shall name an arbitrator and the two so named shall name a third arbitrator. The arbitration proceedings shall be heard by the arbitrator(s) and the decision of the arbitrator, or of a majority of the panel if one has been selected, shall be final and binding on the parties. Judgment upon the arbitration award may be entered in any court of competent jurisdiction. An Arbitration Notice must be served on the other party within one (1) year from the date on which the claim arose, and failure to bring such a claim within such one-year period shall constitute a waiver of such claim and an absolute bar to any further proceedings in any forum with respect to it. All mediation and arbitration proceedings shall be conducted in Bangor, Maine, unless the parties otherwise agree in writing.
( c ) The costs of the mediator shall be paid for entirely by the Company. The cost of the arbitrator(s) shall be borne equally by the parties. Each party shall be responsible for its own cost of representation and counsel.
21. Notices. All notices, requests, demands, waivers, and other communications required or permitted to be given under this Agreement will be in writing and will be deemed to have been duly given: (a) if delivered personally or sent by facsimile or electronic mail, on the date received, (b) if delivered by overnight courier, on the day after mailing, and (c) if mailed, five days after mailing with postage prepaid. Any such notice will be sent as follows:
To the President:
Joseph M. MurphyAt current home address of record
To the Company:
Bar Harbor Bankshares Fax Number: (207) 288-2811Attn: Human Resources Department82 Main StreetPO Box 400Bar Harbor, ME 04609 E-mail: msawyer@bhbt.com
With copies to:
Daniel G. McKay, Esq. Fax Number: (207) 942-3040Eaton Peabody80 Exchange StreetPO Box 1210Bangor, ME 04402-1210 E-mail: dmckay@eatonpeabody.com
22. SURVIVAL. The provisions of Sections 7, 8, 9, and 20, and all payment and other obligations of the parties, which by their terms are to be performed subsequent to termination, shall survive the termination of this Agreement and shall remain fully enforceable.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
COMPANY BAR HARBOR BANKSHARES
/s/ John P. Reeves
John P. Reeves, Chairman of the Board PRESIDENT AND CHIEF EXECUTIVE OFFICER
/s/ Joseph M. Murphy
Joseph M. Murphy
EXHIBIT 99(a)
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350)
The undersigned executive officer of Bar Harbor Bankshares (the "Registrant") hereby certifies that the Registrant’s Form 10-K for the period ended December 31, 2002, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained therein fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
/s/ Joseph M. Murphy
Name: Joseph M. MurphyTitle: Chief Executive Officer
Date: March 27, 2003
EXHIBIT 99(b)
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350)
The undersigned executive officer of Bar Harbor Bankshares (the "Registrant") hereby certifies that the Registrant’s Form 10-K for the period ended December 31, 2002, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained therein fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
/s/ Gerald Shencavitz
Name: Gerald ShencavitzTitle: Chief Financial Officer
Date: March 27, 2003