UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarter ended: September 30, 2004March 31, 2005 Commission File No. 841105-D
BAR HARBOR BANKSHARES
(Exact name of registrant as specified in its charter)
Maine | 01-0393663 |
(State or other jurisdiction of | (I.R.S. Employer |
PO Box 400 | |
82 Main Street, Bar Harbor, ME | 04609-0400 |
(Address of principal executive offices) | (Zip Code) |
(207) 288-3314
(Registrant's telephone number, including area code)
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 whether the Registrant is an accelerated filer (as defined in Exchange Act Rule12b-2).
YES: (X) NO: ( )NO: (X)
Number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date:
Class of Common Stock | Number of Shares Outstanding – |
$2.00 Par Value |
|
TABLE OF CONTENTS
Page No. | ||
PART I | FINANCIAL INFORMATION | |
Item 1. | FINANCIAL STATEMENTS (unaudited) | 3 |
Financial Statements: | ||
Consolidated Balance Sheets at | 3 | |
Consolidated Statements of Income for the | 4 | |
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Consolidated Statements of Changes in Shareholders' Equity for the |
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Consolidated Statements of Comprehensive (Loss) Income for the three-months ended March 31, 2005 and 2004 | 5 | |
Consolidated Statements of Cash Flows for the |
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Notes to Consolidated Interim Financial Statements |
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Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
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Item 4. | Controls and Procedures |
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PART II | OTHER INFORMATION | |
Item 1. | Legal Proceedings |
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
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Item 3. | Defaults Upon Senior Securities |
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Item 4. | Submission of Matters to a Vote of Security Holders |
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Item 5. | Other Information |
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Item 6. | Exhibits |
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Signatures |
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETSSEPTEMBER 30, 2004MARCH 31, 2005 AND DECEMBER 31, 20032004
(Dollars in thousands, except per share data)
(unaudited)
March 31, | December 31, | ||
Assets | |||
Cash and due from banks | $ 8,701 | $ 8,924 | |
Overnight interest bearing money market funds | 2 | 647 | |
Total cash and cash equivalents | 8,703 | 9,571 | |
Securities available for sale, at fair value | 163,429 | 176,337 | |
Investment in Federal Home Loan Bank stock | 10,500 | 10,500 | |
Loans | 457,766 | 448,478 | |
Allowance for loan losses | (4,799) | (4,829) | |
Loans, net of allowance for loan losses | 452,967 | 443,649 | |
Premises and equipment, net | 12,276 | 11,935 | |
Goodwill | 3,158 | 3,158 | |
Bank owned life insurance | 5,765 | 5,710 | |
Other assets | 7,139 | 5,951 | |
TOTAL ASSETS | $663,937 | $666,811 | |
Liabilities | |||
Deposits | |||
Demand deposits | $ 47,738 | $ 54,579 | |
NOW accounts | 60,646 | 63,535 | |
Savings and money market deposits | 131,726 | 139,179 | |
Time deposits | 144,094 | 140,979 | |
Total deposits | 384,204 | 398,272 | |
Short-term borrowings | 102,562 | 89,851 | |
Long-term borrowings | 116,501 | 117,072 | |
Other liabilities | 5,676 | 5,574 | |
TOTAL LIABILITIES | $608,943 | $610,769 | |
Shareholders' equity | |||
Capital stock, par value $2.00; authorized 10,000,000 shares; | 7,287 | 7,287 | |
Surplus | 4,002 | 4,002 | |
Retained earnings | 52,187 | 51,733 | |
Accumulated other comprehensive (loss) income: | |||
Net unrealized (depreciation) appreciation on securities available for sale | (386) | 1,118 | |
Less: cost of 564,146 shares and 564,155 shares of treasury stock at | (8,096) | (8,098) | |
TOTAL SHAREHOLDERS' EQUITY | 54,994 | 56,042 | |
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $663,937 | $666,811 |
The accompanying notes are an integral part of these unaudited consolidated interim financial statements.
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(Dollars in thousands, except per share data)
(unaudited)
Three Months Ended | |||
2005 | 2004 | ||
Interest and dividend income: | |||
Interest and fees on loans | $6,633 | $5,687 | |
Interest and dividends on securities and federal funds | 1,908 | 1,836 | |
Total interest and dividend income | 8,541 | 7,523 | |
Interest expense: | |||
Deposits | 1,291 | 998 | |
Short-term borrowings | 482 | 156 | |
Long-term borrowings | 1,457 | 1,554 | |
Total interest expense | 3,230 | 2,708 | |
Net interest income | 5,311 | 4,815 | |
Provision for loan losses | --- | 90 | |
Net interest income after provision for loan losses | 5,311 | 4,725 | |
Noninterest income: | |||
Trust and other financial services | 475 | 483 | |
Service charges on deposit accounts | 289 | 364 | |
Other service charges, commissions and fees | 50 | 56 | |
Credit card service charges and fees | 201 | 178 | |
Net securities gains | 21 | 193 | |
Income on interest rate swap agreements, net | --- | 495 | |
Other operating income | 67 | 72 | |
Total noninterest income | 1,103 | 1,841 | |
Noninterest expenses: | |||
Salaries and employee benefits | 2,614 | 2,434 | |
Occupancy expense | 307 | 288 | |
Furniture and equipment expense | 431 | 421 | |
Credit card expenses | 135 | 125 | |
Other operating expense | 1,296 | 1,329 | |
Total noninterest expenses | 4,783 | 4,597 | |
Income before income taxes | 1,631 | 1,969 | |
Income taxes | 418 | 533 | |
Net income | $1,213 | $1,436 | |
EARNINGS PER SHARE: | |||
Basic | $ 0.39 | $ 0.46 | |
Diluted | $ 0.38 | $ 0.45 |
The accompanying notes are an integral part of these unaudited consolidated interim financial statements.
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(Dollars in thousands, except per share data)
(unaudited)
September 30, | December 31, | ||
2004 | 2003 | ||
Assets | |||
Cash and due from banks | $ 14,998 | $ 14,199 | |
Overnight interest bearing money market funds | 3 | 270 | |
Total cash and cash equivalents | 15,001 | 14,469 | |
Securities: | |||
Available for sale, at fair value | 141,133 | 124,422 | |
Held to maturity (fair value $36,740 and $35,093 at | 35,064 | 33,965 | |
Total securities | 176,197 | 158,387 | |
Investment in Federal Home Loan Bank stock | 10,500 | 8,969 | |
Loans | 429,557 | 383,408 | |
Allowance for loan losses | (4,783) | (5,278) | |
Loans, net of allowance for loan losses | 424,774 | 378,130 | |
Premises and equipment, net | 11,954 | 11,410 | |
Goodwill | 3,158 | 300 | |
Bank owned life insurance | 5,646 | 5,488 | |
Other assets | 7,469 | 6,593 | |
TOTAL ASSETS | $654,699 | $583,746 | |
Liabilities | |||
Deposits | |||
Demand deposits | $ 60,630 | $ 49,880 | |
NOW accounts | 65,182 | 60,287 | |
Savings and Money Market deposits | 138,627 | 109,309 | |
Time deposits | 132,736 | 119,604 | |
Total deposits | 397,175 | 339,080 | |
Securities sold under repurchase agreements | 12,599 | 15,925 | |
Borrowings from Federal Home Loan Bank | 184,947 | 170,506 | |
Other liabilities | 5,315 | 5,120 | |
TOTAL LIABILITIES | 600,036 | 530,631 | |
Shareholders' equity | |||
Capital stock, par value $2.00; authorized 10,000,000 shares; | 7,287 | 7,287 | |
Surplus | 4,002 | 4,002 | |
Retained earnings | 50,893 | 48,746 | |
Accumulated other comprehensive income: | |||
Unrealized appreciation on securities and open derivative instruments and | 253 | 514 | |
Less: cost of 552,661 shares and 540,193 shares of treasury | (7,772) | (7,434) | |
TOTAL SHAREHOLDERS' EQUITY | 54,663 | 53,115 | |
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $654,699 | $583,746 |
Capital | Surplus | Retained | Accumulated | Treasury | Total | |
Balance December 31, 2004 | $7,287 | $4,002 | $51,733 | $ 1,118 | $(8,098) | $56,042 |
Net income | --- | --- | 1,213 | --- | --- | 1,213 |
Total other comprehensive loss | --- | --- | --- | (1,504) | --- | (1,504) |
Cash dividends declared ($0.21 per share) | --- | --- | (646) | --- | --- | (646) |
Purchase of treasury stock (9,356 shares) | --- | --- | --- | --- | (262) | (262) |
Stock options exercised (9,365 shares) | --- | --- | (113) | --- | 264 | 151 |
Balance March 31, 2005 | $7,287 | $4,002 | $52,187 | $ (386) | $(8,096) | $54,994 |
Balance December 31, 2003 | $7,287 | $4,002 | $48,746 | $ 514 | $(7,434) | $53,115 |
Net income | --- | --- | 1,436 | --- | --- | 1,436 |
Total other comprehensive income | --- | --- | --- | 176 | --- | 176 |
Cash dividends declared ($0.20 per share) | --- | --- | (621) | --- | --- | (621) |
Purchase of treasury stock (4,445 shares) | --- | --- | --- | --- | (119) | (119) |
Stock options exercised (6,744 shares) | --- | --- | (62) | --- | 176 | 114 |
Balance March 31, 2004 | $7,287 | $4,002 | $49,499 | $ 690 | $(7,377) | $54,101 |
The accompanying notes are an integral part of these unaudited consolidated interim financial statements.
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(Dollars in thousands)
(unaudited)
Three Months Ended | |||
March 31, | |||
2005 | 2004 | ||
Net income | $ 1,213 | $1,436 | |
Net unrealized (depreciation) appreciation on securities available for sale, net of | (1,264) | 215 | |
Net unrealized depreciation on interest rate swap agreements, net of tax of ($124) in 2005 | (241) | --- | |
Amortization (accretion) of net deferred loss (gain) related to interest rate swap agreements | 1 | (39) | |
Total other comprehensive (loss) income | (1,504) | 176 | |
Total comprehensive (loss) income | $ (291) | $1,612 |
The accompanying notes are an integral part of these unaudited consolidated interim financial statements.
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOMECASH FLOWS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2005 AND 2004 AND 2003
(Dollars in thousands, except per share data)thousands)
(unaudited)
Three Months Ended | Nine Months Ended | ||||
2004 | 2003 | 2004 | 2003 | ||
Interest and dividend income: | |||||
Interest and fees on loans | $6,100 | $5,840 | $17,542 | $17,525 | |
Interest and dividends on securities and federal funds | 2,155 | 1,649 | 5,900 | 5,367 | |
Total interest and dividend income | 8,255 | 7,489 | 23,442 | 22,892 | |
Interest expense: | |||||
Deposits | 1,120 | 1,041 | 3,191 | 3,346 | |
Short-term borrowings | 306 | 116 | 692 | 428 | |
Long-term borrowings | 1,517 | 1,571 | 4,608 | 4,632 | |
Total interest expense | 2,943 | 2,728 | 8,491 | 8,406 | |
Net interest income | 5,312 | 4,761 | 14,951 | 14,486 | |
Provision for loan losses | 30 | 120 | 150 | 420 | |
Net interest income after provision for loan losses | 5,282 | 4,641 | 14,801 | 14,066 | |
Noninterest income: | |||||
Trust and other financial services | 429 | 490 | 1,419 | 1,693 | |
Service charges on deposit accounts | 395 | 419 | 1,149 | 1,136 | |
Other service charges, commissions and fees | 64 | 62 | 179 | 161 | |
Credit card service charges and fees | 787 | 776 | 1,311 | 1,276 | |
Net securities gains | 239 | 103 | 432 | 868 | |
Net income on interest rate swap agreements | 507 | --- | 404 | --- | |
Other operating income | 77 | 69 | 256 | 223 | |
Total noninterest income | 2,498 | 1,919 | 5,150 | 5,357 | |
Noninterest expenses: | |||||
Salaries and employee benefits | 2,297 | 2,305 | 6,823 | 7,130 | |
Occupancy expense | 277 | 235 | 881 | 830 | |
Furniture and equipment expense | 432 | 447 | 1,260 | 1,147 | |
Credit card expenses | 581 | 499 | 944 | 829 | |
Other operating expense | 1,445 | 1,434 | 4,341 | 4,084 | |
Total noninterest expenses | 5,032 | 4,920 | 14,249 | 14,020 | |
Income before income taxes | 2,748 | 1,640 | 5,702 | 5,403 | |
Income taxes | 805 | 411 | 1,520 | 1,458 | |
Net income | $1,943 | $1,229 | $ 4,182 | $ 3,945 |
2005 | 2004 | |
Cash flows from operating activities: | ||
Net income | $ 1,213 | $ 1,436 |
Adjustments to reconcile net income to net cash provided by operating activities: | ||
Depreciation | 431 | 421 |
Amortization of core deposit intangible | 17 | 6 |
Provision for loan losses | --- | 90 |
Net realized gains on sale of securities available for sale | (21) | (177) |
Net realized gains on sale of securities held to maturity | --- | (16) |
Net income on interest rate swap agreements | --- | (328) |
Net amortization of bond premiums | 236 | 136 |
Venture capital fund investment impairment loss | 18 | 55 |
Income on bank owned life insurance | (55) | (50) |
Net change in other assets | (814) | (3,687) |
Net change in other liabilities | 102 | 2,820 |
Net cash provided by operating activities | 1,127 | 706 |
Cash flows from investing activities: | ||
Net receipt from branch acquisition | --- | 4,570 |
Proceeds from maturities, calls and principal paydowns of securities held to maturity | --- | 394 |
Purchases of securities available for sale | --- | (32,991) |
Proceeds from maturities, calls and principal paydowns of securities available for sale | 8,284 | 8,446 |
Proceeds from sale of securities held to maturity | --- | 491 |
Proceeds from sale of securities available for sale | 2,496 | 17,936 |
Net increase in Federal Home Loan Bank stock | --- | (804) |
Net loans made to customers | (9,318) | (10,017) |
Capital expenditures | (772) | (324) |
Net cash provided by (used in) investing activities | 690 | (12,299) |
Cash flows from financing activities: | ||
Net (decrease) increase in deposits | (14,068) | 3,801 |
Net decrease in securities sold under repurchase agreements and fed funds purchased | (650) | (935) |
Proceeds from Federal Home Loan Bank advances | 13,800 | 5,500 |
Repayment of Federal Home Loan Bank advances | (1,010) | (780) |
Purchases of treasury stock | (262) | (119) |
Proceeds from stock option exercises | 151 | 114 |
Payments of dividends | (646) | (621) |
Net cash (used in) provided by financing activities | (2,685) | 6,960 |
Net decrease in cash and cash equivalents | (868) | (4,633) |
Cash and cash equivalents at beginning of period | 9,571 | 14,469 |
Cash and cash equivalents at end of period | $ 8,703 | $ 9,836 |
Supplemental disclosures for cash flow information: | ||
Cash paid during the period for: | ||
Interest | $ 3,282 | $ 2,745 |
Income taxes | --- | --- |
Non-cash transactions: | ||
Net unrealized (depreciation) appreciation on securities available for sale, net of | $(1,264) | $ 215 |
Net unrealized depreciation on interest rate swap agreements, net of tax of ($124) | (241) | --- |
Amortization (accretion) of net deferred loss (gain) related to interest rate swap | 1 | (39) |
Acquired in branch purchase: | ||
Carrying value of loans | $ --- | $12,343 |
Carrying value of premises and equipment | --- | 980 |
Carrying value of core deposit intangible | --- | 391 |
Carrying value of deposits | --- | (21,100) |
Excess of fair value of assets over liabilities (goodwill) | --- | 2,816 |
$ --- | $ (4,570) |
EARNINGS PER SHARE:
Basic
$ 0.63
$ 0.39
$ 1.35
$ 1.25
Diluted
$ 0.61
$ 0.38
$ 1.30
$ 1.23
The accompanying notes are an integral part of these unaudited consolidated interim financial statements.
BAR HARBOR BANKSHARES AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEFOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003(Dollars in thousands)(unaudited)
Three Months Ended
September 30,2004
2003
Net income
$ 1,943
$ 1,229
Unrealized appreciation (depreciation) on securities available for sale, net of
reclassification adjustment, net of tax of $734 and $509 at September 30, 2004
and 2003, respectively1,425
(988)
Net unrealized depreciation on interest rate swap agreements
marked to market, net of tax of $1 and $47 at September 30, 2004 and
2003, respectively(1)
(90)
Accretion of net unrealized appreciation related to interest rate swap
agreements de-designated in 2004, net of tax of $2(4)
---
Total other comprehensive income (loss)
1,420
(1,078)
Total comprehensive income
$ 3,363
$ 151
Nine Months Ended
September 30,2004
2003
Net income
$ 4,182
$ 3,945
Unrealized depreciation on securities available for sale, net of reclassification
adjustment, net of tax of $104 and $815 at September 30, 2004 and 2003, respectively(203)
(1,582)
Net unrealized (depreciation) appreciation on interest rate swap agreements
marked to market, net of tax of $1 and $39 at September 30, 2004 and 2003, respectively(1)
76
Accretion of net unrealized appreciation related to interest rate swap agreements
de-designated in 2004, net of tax of $29(57)
---
Total comprehensive loss
(261)
(1,506)
Total comprehensive income
$ 3,921
$ 2,439
The accompanying notes are an integral part of these unaudited consolidated interim financial statements.
BAR HARBOR BANKSHARES AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITYFOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003(Dollars in thousands, except per share data)(unaudited)
Capital
StockSurplus
Retained
EarningsAccumulated Other Comprehensive Income
Treasury Stock
Total Shareholders’ Equity
Balance December 31, 2002
$7,287
$4,002
$45,994
$2,347
$(5,794)
$53,836
Net income
---
---
3,945
---
---
3,945
Total other comprehensive loss
---
---
---
(1,506)
---
(1,506)
Cash dividends declared ($0.57 per share)
---
---
(1,795)
---
---
(1,795)
Purchase of treasury stock (60,835 shares)
---
---
---
---
(1,238)
(1,238)
Stock options exercised (9,774 shares)
---
---
(58)
---
213
155
Balance September 30, 2003
$7,287
$4,002
$48,086
$ 841
$(6,819)
$53,397
Balance December 31, 2003
$7,287
$4,002
$48,746
$ 514
$(7,434)
$53,115
Net income
---
---
4,182
---
---
4,182
Total other comprehensive loss
---
---
---
(261)
---
(261)
Cash dividends declared ($0.60 per share)
---
---
(1,860)
---
---
(1,860)
Purchase of treasury stock (30,285 shares)
---
---
---
---
(801)
(801)
Stock options exercised (17,817 shares)
---
---
(175)
---
463
288
Balance September 30, 2004
$7,287
$4,002
$50,893
$ 253
$(7,772)
$54,663
The accompanying notes are an integral part of these unaudited consolidated interim financial statements.
BAR HARBOR BANKSHARES AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003(Dollars in thousands)(unaudited)
2004
2003
Cash flows from operating activities:
Net income
$ 4,182
$ 3,945
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
893
827
Amortization of core deposit intangible
39
---
Provision for loan losses
150
420
Net realized gains on sale of securities available for sale
(416)
(868)
Net realized gain on sale of security held to maturity
(16)
---
Net gain on interest rate swap agreements
(29)
---
Net amortization of bond premiums
833
175
Income on bank owned life insurance
(158)
(149)
Net change in other assets
(449)
383
Net change in other liabilities
195
(108)
Net cash provided by operating activities
5,224
4,625
Cash flows from investing activities:
Net payment for branch acquisition
4,528
---
Proceeds from maturity and principal pay downs of securities held to maturity
394
685
Purchases of securities available for sale
(96,544)
(94,664)
Purchases of securities held to maturity
(1,688)
(2,857)
Proceeds from maturities, calls and principal pay downs of securities available for sale
43,066
65,346
Proceeds from sale of securities held to maturity
491
---
Proceeds from sale of securities available for sale
35,763
35,845
Net increase in Federal Home Loan Bank stock
(1,531)
(1,041)
Net loans made to customers
(34,451)
(27,203)
Capital expenditures
(457)
(781)
Net cash used in investing activities
(50,429)
(24,670)
Cash flows from financing activities:
Net increase in deposits
36,995
12,991
Net decrease in securities sold under repurchase agreements
(3,326)
(1,641)
Proceeds from Federal Home Loan Bank advances
25,000
31,800
Repayment of Federal Home Loan Bank advances
(10,559)
(17,477)
Purchases of treasury stock
(801)
(1,238)
Proceeds from exercise of stock options
288
155
Payments of dividends
(1,860)
(1,795)
Net cash provided by financing activities
45,737
22,795
Net increase in cash and cash equivalents
532
2,750
Cash and cash equivalents at beginning of period
14,469
12,867
Cash and cash equivalents at end of period
$ 15,001
$15,617
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
$ 8,491
$ 8,406
Income taxes, net of refunds
935
1,458
Non-cash transactions:
Transfer from loans to other real estate owned
$ ---
$ (46)
Acquired other real estateowned
---
335
Unrealized depreciation on securities available for sale, net of tax of $104 and $815 at
September 30, 2004 and 2003, respectively(203)
(1,582)
Net unrealized (depreciation) appreciation on interest rate swap agreements marked to market,
net of $1 and $39, at September 30, 2004 and 2003, respectively(1)
76
Accretion of net unrealized appreciation related to interest rate swap agreements de-designated
in 2004, net of tax of $29(57)
---
Acquired in branch purchase:
Fair value of loans
$ 12,343
$ ---
Fair value of premises and equipment
980
---
Fair value of core deposit intangible
391
---
Fair value of deposits
(21,100)
---
Excess of fair value of assets over liabilities (goodwill)
2,858
---
Net payment
$ (4,528)
$ ---
The accompanying notes are an integral part of these unaudited consolidated interim financial statements.
BAR HARBOR BANKSHARES AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTSSeptember 30, 2004MARCH 31, 2005
(Dollars in thousands, except per share data)
(unaudited)
Note 1: Basis of Presentation
The accompanying consolidated interim financial statements are unaudited. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All inter-company transactions have been eliminated in consolidation. Amounts in the prior period financial statements are reclassified whenever necessary to conform withto current period presentation. The net income reported for the three and nine-monthsthree-months ended September 30, 2004March 31, 2005 is not necessarily indicative of the results that may be expected for the year ending December 31, 20042005 or any other interim periods.
The consolidated balance sheet at December 31, 20032004 has been derived from audited consolidated financial statements at that date. The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements included in the Registrant'sCompany’s Annual Report on Form 10-K for the year ended December 31, 2003,2004, and notes thereto.
Note 2: Management’s Use of Estimates
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, income tax estimates, and interest income recognition on loans, and the valuation of intangible assets.
Management believes theThe allowance for loan losses (the "allowance") at the Company’s wholly owned banking subsidiary Bar Harbor Bank & Trust (the "Bank") 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 provision for loan loss expense, is basedavailable to absorb losses on loans. The allowance is maintained at a level that, in management’s evaluationjudgment, is appropriate for the amount of risk inherent in the loan portfolio, given past and present conditions. Arriving at an appropriate level of allowance required in relation toinvolves a high degree of judgment. The determination of the adequacy of the allowance and provisioning for estimated inherent risklosses is evaluated regularly based on review of loss inloans, with particular emphasis on non-performing and other loans that management believes warrant special consideration. The ongoing evaluation process includes a formal analysis, which considers among other factors: the character and size of the loan portfolio. Management regularly evaluates the allowance for loan losses for adequacy by taking into consideration factors such as previous loss experience, the sizeportfolio, business and composition of the portfolio, current economic andconditions, real estate market conditions, collateral values, changes in product offerings or loan terms, changes in underwriting and/or collection policies, loan growth, previous charge-off experience, delinquency trends, nonperforming loan trends, the performance of individual loans in relation to contract terms, and estimated fair values of properties to be foreclosed.collateral. The use of different estimates or assumptions could produce different provisions for loan losses, and the amount and timing of realized losses and future allowance allocations could vary from current estimates. 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 Bank’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 Company estimates its income taxes for each period for which a statement of operationsincome is presented. This involves estimating the Company’s actual current tax liability, as well as assessing temporary differences resulting from differing timing of recognition of expenses, income and tax credits, for income tax return and financial reporting 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 past taxes paid and/or 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 September 30, 2004March 31, 2005 and December 31, 2003,2004, there was no valuation allowance for deferred tax assets. Deferred tax assets which are included in other assets on the consolidated balance sheet.
Interest income on loans is included inaccrued and credited to income as earned based uponon the unpaid principal balanceamount of the loan. The Company’s policy is to discontinue the accrual of interest, and to reverse the uncollected interest recordedloans outstanding. Residential real estate loans are generally placed on loans,non-accrual status when scheduled payments become contractuallythey reach 90 days past due, are in excessprocess of foreclosure, or sooner if judged appropriate by management. All consumer loans are generally placed on non-accrual when they reach 90 days or more past due, or sooner if judged appropriate by management. Secured consumer loans are written down to realizable value and unsecured consumer loans are charged-off upon reaching 120 days past due. Commercial real estate loans and commercial business loans that are 90 days or more past due are generally placed on non-accrual status, unless secured by sufficient cash or other assets immediately convertible to cash, and the loan is in the judgmentprocess of management,collection. Commercial real estate and commercial business loans may be placed on non-accrual status prior to the ultimate90 days delinquency date if considered appropriate by management. When a loan has been placed on non-accrual status, previously accrued and uncollected interest is reversed against interest on loans. A loan can be returned to accrual status when collectibility of principal or interest becomes doubtful.is reasonably assured and the loan has performed for a period of time, generally six months.
In connection with acquisitions, the Company generally records as assets on its consolidated financial statements both goodwill and identifiable intangible assets, such as core deposit intangibles. The Company evaluates whether the carrying value of its goodwill has become impaired, in which case the value is reduced through a charge to its earnings. Core depositGoodwill is evaluated for impairment at least annually, or upon a triggering event as defined by Statement of Financial Accounting Standards ("SFAS") No. 142, using several fair value techniques, such as discounted future cash flows and multiples of revenues/earnings. The valuation techniques contain estimates such as discount rate, projected future cash flows and time period in their calculations, all of which are susceptible to change based upon changes in economic conditions and other identifiablefactors. Identifiable intangible assets areconsist of core deposit intangibles amortized to expense over their estimated useful lives andon a straight-line method, which approximates the amount of economic benefits to the Company. These assets are reviewed for impairment at least annually, or whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The valuation techniques used byFurthermore, the Company to determine the carrying valuedetermination of tangible andwhich intangible assets acquired in acquisitions andhave finite lives is subjective, as is the estimated livesdetermination of identifiablethe amortization period for such intangible assets involve estimates for discount rates, projected future cash flows and time period calculations, all of which are susceptible to change based upon changes in economic conditions and other factors.assets. Any changes in the estimates used by the Company to determine the carrying value of its goodwill and identifiable intangible assets, or which otherwise adversely affect their value or estimated lives, would adversely affect the Company’s consolidated results of operations.
Note 3: Goodwill and Other Intangible Assets
A summary of goodwill, by subsidiary, capitalized on the Company’s consolidated balance sheet follows:
January 1, 2003 | Goodwill Acquired | September 30, 2003 | January 1, | Goodwill | March 31, | |||
Bar Harbor Bank & Trust | $375 | $ --- | $375 | $ 300 | $2,816 | $3,116 | ||
Total | $375 | $ --- | $375 | $ 300 | $2,816 | $3,116 | ||
January 1, | Goodwill | September 30, | ||||||
January 1, | Goodwill | March 31, | ||||||
Bar Harbor Bank & Trust | $300 | $2,858 | $3,158 | $3,158 | $ --- | $3,158 | ||
Total | $300 | $2,858 | $3,158 | $3,158 | $ --- | $3,158 |
During the first quarter of 2004, the Company acquired $2,858$2,816 in goodwill in connection with the acquisition by the Bank of a branch in Rockland, Maine by its wholly owned subsidiary, Bar Harbor Bank & Trust (the "Bank").Maine.
The Company has a finite-lived intangible asset capitalized on its consolidated balance sheet in the form of a core deposit intangible asset related to the Bank’s acquisition of the Rockland branch. The core deposit intangible asset is being amortized over an estimated useful life of six-years,six years, and is included in other assets on the September 30, 2004 consolidated balance sheet. There was no such intangible asset at December 31, 2003.sheets.
A summary of the core deposit intangible asset follows as of September 30,March 31, 2005 and December 31, 2004:
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(in thousands) | 2005 | 2004 | |
Core deposit intangibles: | |||
Gross carrying amount | $391 | $391 | |
Less: Accumulated amortization | 73 | 56 | |
Net carrying amount | $318 | $335 |
Amortization expense on the core deposit intangible asset is expected to total $17$50 for the remainder of 2004,2005, and $67 for each year 2005for years 2006 thru 2009.
Note 4: Earnings Per Share
Earnings per share have been computed in accordance with SFAS No. 128, "Earnings Per Share." Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity, such as the Company’s dilutive stock options.
The following is a reconciliation of basic and diluted earnings per share for the threethree-months ended March 31, 2005 and nine-months ended September 30,2004:
BAR HARBOR BANKSHARES AND SUBSIDIARIES
EARNINGS PER SHARE
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(in thousands, except number of shares and 2003:per share data)
(unaudited)
Three Months Ended | Nine Months Ended | Three Months Ended | ||||||
2004 | 2003 | 2004 | 2003 | 2005 | 2004 | |||
Net Income | $ 1,213 | $ 1,436 | ||||||
Computation of Earnings Per Share: | ||||||||
Weighted average number of capital stock shares outstanding | ||||||||
Basic | 3,100,189 | 3,201,712 | 3,102,464 | 3,150,461 | 3,078,933 | 3,104,121 | ||
Effect of dilutive stock options | 106,633 | 86,996 | 110,255 | 68,104 | 108,176 | 119,873 | ||
Diluted | 3,206,822 | 3,288,708 | 3,212,719 | 3,218,565 | 3,187,109 | 3,223,994 | ||
EARNINGS PER SHARE: | ||||||||
Basic | $ 0.63 | $ 0.39 | $ 1.35 | $ 1.25 | $ 0.39 | $ 0.46 | ||
Diluted | $ 0.61 | $ 0.38 | $ 1.30 | $ 1.23 | $ 0.38 | $ 0.45 |
Note 5: Stock Based Compensation
On October 3, 2000, the shareholders of the Company approved the Bar Harbor Bankshares and its Subsidiaries Incentive Stock Option Plan of 2000 thatfor officers and employees, which is described more fully in Notes 1 and 16Note 14 to the Consolidated Financial Statements in the Company’s 20032004 Annual Report on Form 10-K. The Company accounts
SFAS No. 123, "Accounting for Stock-Based Compensation" encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the plan undergrant date based on the recognitionvalue of the award and measurement principlesis recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. No stock-basedEmployees," whereby compensation costs have been reflected in net income, as all options granted undercost is the plan had an exerciseexcess, if any, of the quoted market price equal to the market value of the underlying common stock onat the grant date.date (or other measurement date) over the amount an employee must pay to acquire the stock upon exercise of the stock option.
The Company has elected to continue with the accounting methodology in Opinion No. 25 and, as a result, must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting had been applied. The pro forma disclosures include the effects of all awards granted. Had compensation costs for the plan beenCompany determined cost based on the fair value of the options at the grant dates consistent withdate for its stock options and expense related to the method described inemployee stock option plan under SFAS No. 123, the Company’sits net income and earnings per share data would have been reduced to the pro forma amounts indicated below (in thousands except for per-share data):below:
Earnings Per Share | |||
Three Months Ended September 30, 2004: | Net Income | Basic | Diluted |
As reported | $1,943 | $0.63 | $0.61 |
Deduct: Total stock-based employee compensation expense | 90 | 0.03 | 0.03 |
Pro forma | $1,853 | $0.60 | $0.58 |
Earnings Per Share | |||
Three Months Ended September 30, 2003: | Net Income | Basic | Diluted |
As reported | $1,229 | $0.39 | $0.38 |
Deduct: Total stock-based employee compensation expense | 77 | 0.02 | 0.02 |
Pro forma | $1,152 | $0.37 | $0.36 |
Earnings Per Share | |||
Nine Months Ended September 30, 2004: | Net Income | Basic | Diluted |
As reported | $4,182 | $1.35 | $1.30 |
Deduct: Total stock-based employee compensation expense | 329 | 0.11 | 0.10 |
Pro forma | $3,853 | $1.24 | $1.20 |
Earnings Per Share | |||
Nine Months Ended September 30, 2003: | Net Income | Basic | Diluted |
As reported | $3,945 | $1.25 | $1.23 |
Deduct: Total stock-based employee compensation expense | 234 | 0.07 | 0.07 |
Pro forma | $3,711 | $1.18 | $1.16 |
Earnings Per Share | |||
Three Months Ended March 31, 2005: | Net Income | Basic | Diluted |
As reported | $1,213 | $0.39 | $0.38 |
Deduct: Total stock-based employee compensation expense | 21 | 0.01 | 0.01 |
Pro forma | $1,192 | $0.38 | $0.37 |
Earnings Per Share | |||
Three Months Ended March 31, 2004: | Net Income | Basic | Diluted |
As reported | $1,436 | $0.46 | $0.45 |
Deduct: Total stock-based employee compensation expense | 18 | 0.01 | 0.01 |
Pro forma | $1,418 | $0.45 | $0.44 |
Note 6: Retirement Benefit Plans
The Company sponsors a post retirementlimited post-retirement benefit plan,program which providesfunds medical coverage and life insurance benefits to eligible employees. a closed group of retired employees who meet minimum age and service requirements. It is the Company's policy to record the cost of postretirement health care and life insurance plans based on actuarial estimates, which are dependent on claims and premiums paid. The cost of providing these benefits was accrued during the active service period of the employee.
The Company has non-qualified supplemental executive 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 net present value of payments associated with the agreements over the service periods of the participating officers. Interest costs continue to be recognized on the benefit obligations.
The Company also has non-qualified supplemental executive retirement agreementsplans for certain active and retiredexecutive officers. These plans provide a stream of future payments in accordance with individually defined vesting schedules upon retirement, termination, or in the event that the executive leaves the Company following a change of control event.
The following tables provide the net periodic benefit costs for the threethree-months ended March 31, 2005 and nine-months ended September 30, 2004 and 2003:2004:
Health Care and Life Insurance Benefits | Supplemental Executive Retirement Plans | ||||
Three Months Ended | 2004 | 2003 | 2004 | 2003 | |
Service Cost | $ --- | $ --- | $ 70 | $ 60 | |
Interest Cost | 20 | 21 | 38 | 34 | |
Amortization of Net Loss | (6) | (6) | --- | --- | |
Net Periodic Benefit Cost | $ 14 | $ 15 | $108 | $ 94 | |
Nine Months Ended | |||||
Service Cost | $ --- | $ --- | $210 | $179 | |
Interest Cost | 60 | 63 | 115 | 102 | |
Amortization of Net Loss | (18) | (18) | --- | --- | |
Net Periodic Benefit Cost | $42 | $ 45 | $325 | $281 |
Health Care | Supplemental Executive | ||||
2005 | 2004 | 2005 | 2004 | ||
Service cost | $--- | $--- | $43 | $ 70 | |
Interest cost | 18 | 21 | 50 | 38 | |
Amortization of actuarial gain | (4) | (6) | --- | --- | |
Net periodic benefit cost | $14 | $15 | $93 | $108 |
The Company is expected to contribute $454$371 to the foregoing plans in 2004.2005. As of September 30, 2004,March 31, 2005, the Company had contributed $343$114 to the plans.
Note 7: Commitments and ContingenciesContingent Liabilities
The Company is a party to financial instruments in the normal course of business to meet financing needs of its customers. These financial instruments include commitments to extend credit, unused lines of credit, and standby letters of credit.
ExposureCommitments to credit loss in the event of nonperformance by the counter-party to the financial instrument for commitments to makeoriginate loans, including unused lines of credit, 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 standby lettersmay require payment of credit is represented bya fee. Since many of the contractual amount of those instruments.commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company uses the same credit policy to make such commitments as it uses for on-balance-sheet items, such as loans. At September 30, 2004 and December 31, 2003, commitments to extend credit and unused lines of credit totaled $115,405 and $98,874, respectively. Since commitments to extend credit and unused lines of credit may expire without being fully drawn upon, these amounts do not necessarily represent future cash commitments. Collateral obtained upon funding of the commitment is determinedThe Bank evaluates each customer’s creditworthiness on a case-by-case basis usingbasis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower.
The Company guarantees the obligations or performance of customers by issuing standby letters of credit to third parties. These standby letters of credit are primarily issued in support of third party debt or obligations. The risk involved in issuing standby 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 credit origination, portfolio maintenance and management procedures in effect to monitor other credit and off-balance sheet instruments. Exposure to credit loss in the event of nonperformance by the counter-party to the financial instrument for standby letters of credit is represented by the contractual amount of those instruments. Typically, these standby letters of credit have terms of five years or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements. Standby letters
The following table summarizes the contractual amounts of credit totaled $1,155 at September 30, 2004commitments and $2,205 atcontingent liabilities as of March 31, 2005 and December 31, 2003. 2004:
March 31, | December 31, 2004 | |
Commitments to originate loans | $19,781 | $14,435 |
Unused lines of credit | $77,467 | $75,732 |
Un-advanced portions of construction loans | $ 6,558 | $ 7,336 |
Standby letters of credit | $ 1,284 | $ 1,155 |
As of September 30,March 31, 2005, and December 31, 2004, the fair value of the standby letters of credit waswere not significant to the Company’s consolidated financial statements.
Note 8: Financial Derivative Instruments
As part of its overall asset liability/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 certain assets and liabilities so that changes in interest rates do not have a significant effect on net income.
At September 30, 2004March 31, 2005 the CompanyBank had two outstanding derivative instruments with notional principal amounts totaling $20 million, both of which were interest rate swap agreements. The details are summarized as follows:
Description | Maturity | Notional Amount | Fixed Interest Rate | Variable Interest Rate |
Receive fixed rate, pay variable rate | 09/01/07 | $10,000 | 6.04% | Prime |
Receive fixed rate, pay variable rate | 01/24/09 | $10,000 | 6.25% | Prime |
Description | Maturity | Notional Amount | Fixed Interest Rate | Variable Interest Rate |
Receive fixed rate, pay variable rate | 09/01/07 | $10,000 | 6.04% | Prime (5.75%) |
Receive fixed rate, pay variable rate | 01/24/09 | $10,000 | 6.25% | Prime (5.75%) |
The CompanyBank 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 6.04% and 6.25%, respectively, over the term of each agreement.
Financial instruments are reviewed as part of the asset/liability management process and are factored into the Company’s overall interest rate risk position. The Company regularly reviews the credit quality of the counter-party from which the interest rate swap agreements have been purchased. The notional amounts of the agreements do not represent exposure to credit loss. The Company is exposed to credit loss only to the extent the counter-party defaults in its responsibility to pay interest under the terms of the agreements.
These interest rate swap agreements were designated as cash flow hedges at December 31, 2003 and had total unrealized gains of $86. The fair value of these instruments, net of tax, was recorded as a component of accumulated other comprehensive income on the consolidated balance sheet. Changes in fair value were recorded as a component of other comprehensive income. Current period net cash flows representing net amounts received from or paid to counter-parties were recorded as interest income.
During the first quarter of 2004, these interest rate swap agreements were de-designated as cash flow hedges and, from the time of de-designation, changes in their fair value and current period net cash flows representing net amounts received from or paid to counterparties agreements were recorded in the consolidated statement of income and included as part of non-interest income. The unrealized gain on these interest rate swap agreements at December 31, 2003 of $86 remained in accumulated other comprehensive income, net of tax, to beand is being accreted into interest income over the remaining terms of the respective swap agreements.
In July 2004, the Financial Accounting Standards Board ("FASB") issued guidance regarding SFAS No. 133 Implementation Issue No. G25, "Cash Flow Hedges: Using the First-Payments Received Technique in Hedging the Variable Interest Payments on a Group of Non-Benchmark-Rate-Based Loans", in which the FASB indicated the first-payments-received technique for identifying the hedged forecasted transactions (that is, the hedged interest payments) can be used in a cash flow hedge of the variable prime-rate-based or other variable non-benchmark-rate-based interest payments for a rolling portfolio of pre-payable interest-bearing loans, provided all other conditions for a cash flow hedge have been met. During the third quarter of 2004, the CompanyBank designated its interest rate swap agreements as cash flow hedges and, prospectively from the time of this designation, changes in their fair value are being recorded in accumulated other comprehensive income, while current period net cash flows representing net amounts received from or paid to counter-parties are recorded as interest income.
At September 30, 2004, DecemberMarch 31, 2003 and September 30, 2003,2005 the fair value ofunrealized gain (loss) on the interest rate swap agreements were $28, $86was ($590), compared with ($225) and $388, respectively,$328 at December 31 and March 31, 2004, respectively. Unrealized gains and losses are included in other assets on the consolidated balance sheet.sheets.
At September 30, 2004March 31, 2005 the net unrealized loss on these interest rate swap agreements included in accumulated other comprehensive income,loss, net of tax, amounted to $1. At December$389, compared with none at March 31, 20032004 when hedge accounting was not applied. Also included in accumulated other comprehensive loss at March 31, 2005, was a net deferred loss, net of tax, of $14 related to the de-designation and September 30, 2003re-designation of these swaps as cash flow hedges in 2004.
The change in the net unrealized gainsloss on these interest rate swap agreements included in accumulated other comprehensive income, net of tax, amounted to $57 and $256, respectively.
During the quarter ended September 30, 2004, the Company recorded in non-interest income unrealized appreciation of $428 representing a mark-to-market adjustmenttaxes, for interest rate swap agreements prior to their designation as cash flow hedges, compared with an unrealized loss of $728 recorded in the quarter ended June 30, 2004, and an unrealized gain of $328 recorded in the quarter ended March 31, 2004. 2005 is summarized below:
Balance December 31, 2004 | $(163) |
Net change in fair value | (241) |
Accretion and (amortization), net | 1 |
Balance March 31, 2005 | $(403) |
For the nine-monthsthree-months ended September 30,March 31, 2004, a period during which hedge accounting was not applied, the net unrealized gain on interest rate swap agreements recorded in non-interest income amounted to $29. No such amounts$328. During the year ended December 31, 2004 the total net unrealized gains on interest rate swap agreements recorded in non-interest income amounted to $29, during the periods in which hedge accounting was not applied. A summary of the total unrealized gains (losses) that were recorded in non-interest income during 2003.periods in which hedge accounting was not applied follows:
March 31, 2004 | June 30, 2004 | September 30, 2004 | Total |
$328 | $(727) | $428 | $29 |
For the three and nine-monthsthree-months ended September 30, 2004,March 31, 2005, the total net cash flows received from counter-partiescounterparties amounted to $89 and $386, respectively,$22, compared with $128 and $324$167 during the same periodsperiod in 2003. Of the $89 in2004. The net cash flows received from counter-partiescounterparties during the first quarter of 2005 were recorded in interest income (hedge accounting), whereas during the first quarter of 2004 the net cash flows were recorded in non-interest income (non-hedge accounting).
The Bank performs quarterly assessments of hedge effectiveness and measures any ineffective portion of its hedges as required by SFAS No. 133. The Bank did not recognize any amounts in earnings related to ineffectiveness of cash flow hedges during the three-months ended September 30, 2004, $79 was recorded in non-interest income and $10 in interest income. Of the $386 in net cash flows received from counter-parties during the nine-months ended September 30, 2004, $376 was recorded in non-interest income and $10 in interest income. The $324 in net cash flows received during the nine-months ended September 30, 2003 was recorded in interest income.March 31, 2005.
Note 9: Business Segments
An operating segment is defined as a component of a business for which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and evaluate performance. The Company has determined that its operations are solely in the community banking industry and include the traditional community banking services, including lending activities, acceptance of demand, savings and time deposits, business services, investment management, trust and third party brokerage services. These products and services have similar distribution methods, types of customers and regulatory responsibilities.
SFAS No. 131 "Disclosure about Segments of an Enterprise and Related Information" requires public companies to report certain financial information about operating segments for which such information is available and utilized by the chief operating decision maker in deciding how to allocate resources and in assessing performance. In prior reporting periods the Company had also included Financial Services as a business segment and, accordingly, provided segment reporting for that segment. As more fully described in Part I, Item 1 of the Company’s Annual Report on Form 10-K, and Part I, Item 2, Other Events of the Company’s March 31, 2004 Form 10-Q, in December 2003 the Company’s Board of Directors approved a restructuring plan for its wholly owned subsidiary, BTI Financial Group ("BTI"). The restructuring plan simplified and aligned BTI’s brand names and operating model with the Bank. During the first quarter of 2004 the principal elements of the plan were completed, with the results of all operations now viewed as a single strategic unit by the chief operating decision maker. For the year ended December 31, 2003 revenue from Financial Services represented only 5.8% of the Company’s total revenue. In these circumstances, Accordingly, disaggregated segment information is not required with respectpresented in the notes to investment management, trust and third party brokerage services provided by the Company.financial statements.
Note 10: Recently Issued Accounting Pronouncements
In July 2004, the Financial Accounting Standards Board ("FASB") issued guidance regarding SFAS No. 133 Implementation Issue No. G25, "Cash Flow Hedges: Using the First-Payments Received Technique in Hedging the Variable Interest Payments on a Group of Non-Benchmark-Rate-Based Loans", in which the FASB indicated the first-payments-received technique for identifying the hedged forecasted transactions (that is, the hedged interest payments) can be used in a cash flow hedge of the variable prime-rate-basedThe following information addresses new or other variable non-benchmark-rate-based interest payments for a rolling portfolio of pre-payable interest-bearing loans (or other interest-bearing financial assets), provided all other conditions for a cash flow hedge have been met. Entitiesproposed accounting pronouncements that choose to use the first-payments-received technique are still required by SFAS 133 (as amended) to assess the effectiveness of the cash flow hedging relationship and to recognize ineffectiveness in earnings, if any. The effective date of the guidance for each reporting entity is the first day of the first fiscal quarter beginning after August 9, 2004. Early application of the guidance covering this Implementation Issue is permitted. During the third quarter of 2004 the Company implemented this guidance and designated it prime-rate-based interest rate swap agreements as cash flow hedges. The adoption of this guidance did not have a significant impact on the Company's consolidated financial statements or results of operations for the periods ended September 30, 2004, however, prospectively the adoption of the guidance could have a significantan impact on the Company’s consolidated financial position.condition, results of operations, earnings per share, or cash flows.
Accounting For Share-Based Payments: In MarchDecember 2004, FASB issued SFAS No. 123 (Revised 2004), "Share-Based Payment" ("SFAS 123R") which requires companies to recognize in the FASB Emerging Issues Task Force ("EITF") reached a consensus on Issue 03-1, "The Meaningincome statement the grant-date fair value of Other Than Temporary Impairment (Issue 03-1)". The Task Force reached a consensus on an other-than-temporary impairment model for debtstock options and equity securities accounted forother equity-based compensation issued to employees, including employee stock purchase plans. Current disclosure provisions under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities and cost method investments. The basic model developed by the Task Force in evaluating whether an investment within the scope123 continue to apply prior to adoption of Issue 03-1 is other-than-temporarily impaired is as follows: Step 1: Determine whether an investment is impaired. An investment is considered impaired if its fair value is less than its cost. Step 2: Evaluate whether an impairment is other-than-temporary. For equity securities and debt securities that can contractually be prepaid or otherwise settled in such a way that the investor would not recover substantially all of its cost, an impairment is presumedSFAS 123R. In addition to be other-than-temporary unless: the investor has the ability and intent to hold the investment for a reasonable period of time sufficient for a forecasted market price recovery of the investment, and evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. For other debt securities, an impairment is deemed other-than-temporary if: the investor does not have the ability and intent to hold the investment until a forecasted market price recovery (may mean until maturity), or it is probable that the investor will be unable to collect all amounts due according to the contractual terms of the debt security. Step 3: If the impairment is other-than-temporary, recognize in earnings an impairment loss equal to the difference between the investments cost and its fair value. The fair value of the investment then becomes the new cost basis of the investment and cannot be adjusted for subsequent recoveries in fair value, unless required by other authoritative literature.
On September 30, 2004, the FASB issued FSP EITF Issue 03-01-1, which delayedstock option awards granted after the effective date, compensation expense on unvested equity-based awards that were granted prior to the effective date must be recognized in the consolidated income statement after the effective date.
SFAS No. 123R is effective in the first fiscal year beginning after June 15, 2005 (January 1, 2006 for the measurement and recognition guidanceCompany). The adoption of an impairment loss thatSFAS No. 123R is other-than-temporary (i.e. steps 2 and 3expected to decrease earnings per share by approximately $0.04 in 2006, based upon the current level of the impairment model) contained in paragraphs 10-20 of EITF 03-1. Application of these paragraphs is deferred pending issuance of proposed FSP EITF Issue 03-1a. This delay does not suspend the requirement to recognize other-than-temporary impairments as required by existing authoritative literature. The guidance in paragraphs 6 to 9 of EITF 03-1 (i.e. steps of the impairment model), as well as the disclosure requirements in paragraphs 21 and 22 have not been deferred and should be applied based on the transition provisions in EITF 03-1. Based on the composition of the investment portfolio held at September 30, 2004, EITF 03-1unvested options. SFAS No. 123R is not expected to have a material effect on the Company's financial position or results of operations.
Statement of Financial Accounting Standards ("SFAS") No. 133 Implementation Issue C13, "When a Loan Commitment Is Included in the Scope of Statement 133", requires commitments to originate mortgage loans that will be held for sale upon origination to be accounted for as derivatives, but does not provide guidance on how the fair value of those commitments should be measured. In a December 2003 speech, the SEC staff indicated it believes loan commitments are written options and therefore should never result in the recognition of an asset under SFAS No. 133. Rather, the staff indicated lenders should initially recognize a liability for loan commitments, with the offsetting debit recognized as a derivative loss to the extent a premium is not received from the potential borrower. The staff indicated it would not object to a registrants recognizing loan commitments as assets provided such registrant discontinues that practice for commitments entered into in the first reporting period beginning after March 15, 2004 and provided assets recorded on loan commitments entered into prior to that date are reversed when the related loan closes or the commitment expires. The guidance did not have a significant impact on the Company’s consolidated financial statementscondition or results of operations.
In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities, (or VIEs). The objective of this interpretation is to provide guidance on how to identify a VIE and determine when the assets, liabilities, non-controlling interests and results of operations of a VIE need to be included in the company’s consolidated financial statements. A company that holds variable interests in an entity will need to consolidate the entity if the company’s interest in the VIE is such that the company will absorb a majority of the VIE’s expected losses and/or receive a majority of the entity’s expected residual returns, if they occur. FIN 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders. FIN 46 was effective for all VIE’s created after January 31, 2003. However, the FASB postponed that effective dates to December 31, 2003. In December 2003, the FASB issued a revised FIN 46 (FIN 46 R), which has an effective date of March 31, 2004 for VIE’s created prior to February 1, 2003, except for special purpose entities, which much adopt either FIN 46 or FIN 46 R as of December 31, 2003. The adoption of FIN 46 did not have an impact on the Company's financial position or results of operations.cash flows.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and results of operations of the Company and its subsidiaries should be read in conjunction with the consolidated financial statements and notes thereto, and selected financial and statistical information appearing elsewhere in this report on Form 10-Q. The purpose of this discussion is to highlight significant changes in the financial condition and results of operations of the Company and its subsidiaries.
Certain amounts in the 2004 interim consolidated financial statements have been reclassified to conform to the presentation used in 2005.
Unless otherwise noted, all dollars are expressed in thousands, except per share data.
Use of Non-GAAP Financial Measures: Certain information is discussed on a fully taxable equivalent basis. Specifically, included in thirdfirst quarter 20042005 and 20032004 net interest income was $437$435 and $416,$363, respectively, of tax-exempt interest income from certain investment securities and loans. For the nine-months ended September 30, 2004 and 2003, the amount of tax-exempt income included in net interest income was $1,219 and $1,218, respectively. An amount equal to the tax benefit derived from this tax-exempt income has been added back to the interest income and net interest income totals discussed in this Management’s Discussion and Analysis, resulting in tax-equivalent adjustments of $193$202 and $179$154 in the thirdfirst quarter of 20042005 and 2003 respectively, and $531 and $522 in tax-equivalent adjustments for the nine-months ended September 30, 2004, and 2003, respectively. The analysis of net interest income tables included in this Form 10-Q provide a reconciliation of tax-equivalent financial information to the Company's consolidated financial statements, which have been prepared in accordance with U.S. 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. NetOther financial institutions commonly present net interest income is commonly presented by other financial institutions on a tax-equivalent basis. This adjustment is considered helpful in the comparison of one financial institution's net interest income to that of another institution, as each will have a different proportion of tax-exempt interest from their earning asset portfolios. Moreover, net interest income is a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average earning assets. For purposes of this measure as well, other financial institutions generally use tax-equivalent net interest income is generally used by institutions to provide a better basis of comparison from institution to institution. The Company follows these practices.
FORWARD LOOKING STATEMENTS DISCLAIMER
The following discussion,Certain statements, as well as certain other statementsdiscussions contained in this report on Form 10-Q, or incorporated herein by reference, contain statements which may be considered to be forward-looking within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. 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.
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, as well as factors that affect tourism, a major source of economic activity in the Company’s immediate market areas; |
(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 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 increase revenues and or control expenses; |
(vi) | The potential need to adapt to changes in information technology systems, on which the Company is highly dependant, could present operational issues or require significant capital spending; |
(vii) | Significant changes in the Company’s internal controls, or internal control failures; |
(viii) | Acts or threats of terrorism and actions taken by the United States or other governments as a result of such 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; |
(ix) | 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 |
(x) | The Company’s success in managing the risks involved in all of the foregoing matters. |
The forward lookingforward-looking statements contained herein represent the Company's judgment as of the date of this report on Form 10-Q, 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 succeeding discussion, or elsewhere in this report on Form 10-Q, except to the extent required by federal securities laws.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Management’s discussion and analysis of the Company’s financial condition are based on the Consolidated Financial Statements, which are prepared in accordance with U.S. generally accepted accounting principles. 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, 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 its December 31, 20032004 report on Form 10-K. The reader of the financial statements should review these policies to gain a greater understanding of how the Company’s financial performance is reported. 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 ("allowance") is a significant accounting estimate used in the preparation of the Company’s consolidated financial statements. The allowance, which is established through a provision for loan loss expense, is based on management’s evaluation of the level of allowance required in relation to the estimated inherent risk of loss 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 collateral. The use of different estimates or assumptions could produce different provisions for loan losses. A smaller provision for loan losses results in higher net income and when a greater amount of provisionsprovision for loan losses is necessary the result is lower net income. Refer to Part I, Item 2, Allowance for Loan Losses and Provision in this Reportreport on Form 10-Q, for further discussion and analysis concerning the allowance.
Income Taxes – The Company estimates its income taxes for each period for which a statement of income is presented. This involves estimating the Company’s actual current tax liability, as well as assessing temporary 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 historical taxes paid and 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 September 30, 2004March 31, 2005 and December 31, 2003,2004, there was no valuation allowance for deferred tax assets, which are included in other assets on the consolidated balance sheet.
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 any 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 - The valuation technique used by the Company to determine the carrying value of tangible and intangible assets acquired in acquisitions and the estimated lives of identifiable intangible assets involve estimates for discount rates, projected future cash flows and time period calculations, all of which are susceptible to change based upon changes in economic conditions and other factors. Any changes in the estimates used by the Company to determine the carrying value of its goodwill and identifiable intangible assets, or which otherwise adversely affect their value or estimated lives, would adversely affect the Company's results of operations. Refer to Note 2 of the consolidated financial statements in Part I, Item 1 of this report on Form 10-Q for further details of the Company’s accounting policies and estimates covering goodwill and other intangible assets.
SUMMARY OVERVIEW
The Company reported consolidated net income of $1,943 or fully diluted earnings per share of $0.61 for the three-months ended September 30, 2004, compared with $1,229$1,213 or fully diluted earnings per share of $0.38 for the three-months ended March 31, 2005 compared with $1,436 or fully diluted earnings per share of $0.45 for the same quarter in 2003,2004, representing increasesdecreases of $714$223 and $0.23,$0.07, or 58.1%15.5% and 60.5%14.6%, respectively. The annualized return on average assets ("ROA") and average shareholders’ equity ("ROE") amounted to 1.15%0.74% and 13.71%8.77%, respectively, compared with 0.87%0.97% and 9.29%10.88% for the same quarter in 2003.2004.
As more fully enumerated below, several factors contributed favorably to the Company’s thirddecline in first quarter performance2005 earnings compared with the samefirst quarter of 2004 was principally attributed to a decline in 2003, the more significant of which included: a $551 increase in net interest income; the recording of $428 a mark-to-market adjustment for unrealized appreciationincome on interest rate swap agreements;agreements related to a $136 increasemark-to-market adjustment of $328 recorded in the first quarter of 2004, and a $172 decline in net gains on the sale of investment securities;securities. In addition, during the first quarter of 2005 the Company recorded an employee severance payment of $238, made in connection with the Company’s previously announced resignation of Dean S. Read as President of the Bank. The foregoing items were offset in part by a $496 increase in net interest income and a $90 decline in the provision for loan losses.
For the nine-months ended September 30, 2004, consolidated net income amounted to $4,182 or fully diluted earnings per share of $1.30, compared with $3,945 or fully diluted earnings per share of $1.23 for the same period in 2003, representing increases of $237 and $0.07, or 6.0% and 5.7%, respectively. The ROA and ROE amounted to 0.87% and 9.52% respectively, compared with 0.95% and 9.85% for the first nine-months of 2003.
As more fully enumerated below, the more significant factors unfavorably impacting the Company’s year-to-date results of operationslosses compared with the same period in 2003 included: a declinefirst quarter of $436 in net gains on the sale of investment securities; a $317 increase in marketing and public relations costs principally related to the Company’s previously announced corporate re-branding and market research initiatives; other-than-temporary impairment write-downs of certain non-marketable equity investments amounting to $189 compared with none during 2003; and the recording of a $160 loss associated with certain trust activities. The foregoing items were offset in part by a $465 increase in net interest income and a $270 decline in the provision for loan losses.2004.
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 generated from earning assets and the interest expense incurredpaid on deposits and borrowed funds. Net interest income is entirely generated by the Bank. Fluctuations in market interest rates as well as volume and mix changes in earning assets and interest bearing liabilities can materially impact net interest income.
For the quarter ended September 30, 2004,March 31, 2005, net interest income on a fully tax equivalent basis amounted to $5,505,$5,513, compared with $4,940$4,969 during the thirdfirst quarter of 2003,2004, representing an increase of $565,$544, or 11.4%10.9%. The increase in net interest income was principally attributed to the $97,418 or 18.1%an increase in average earning assets of $62,466 or 11.0% and, to a lesser extent, a three basis point improvement in the net interest margin, when comparing the three-months ended September 30, 2004March 31, 2005 with the same period in 2003, as the net interest margin declined 20 basis points between periods.
For the nine-months ended September 30, 2004, net interest income on a fully tax-equivalent basis amounted to $15,482, compared with $15,008 during the same period in 2003, representing an increase of $474, or 3.2%. The increase in net interest income during the nine-months ended September 30, 2004 compared with the same period in 2003 was principally attributed to an $81,304 or 15.5% increase in average earning assets, as the net interest margin declined 41 basis points between these two periods.2004.
Factors contributing to the changes in net interest income and the net interest margin are further enumerated in the following discussion and analysis.
Net Interest Income Analysis: The following tables set forth an analysistable summarizes the Company’s average balance sheets and components of net interest income, by each major categoryincluding a reconciliation of interest earning assets and interest bearing liabilitiestax equivalent adjustments, for the threethree-months ended March 31, 2005 and nine-months ended September 30, 2004, and 2003, respectively:
AVERAGE BALANCE SHEET AND
ANALYSIS OF NET INTEREST INCOME
THREE MONTHS ENDEDSEPTEMBER 30,MARCH 31, 2005 AND 2004 AND 2003
2004 | 2004 | 2004 | 2003 | 2003 | 2003 | ||
Average | Interest | Average Rate | Average Balance | Interest | Average Rate | ||
Interest Earning Assets: | |||||||
Loans (1,3) | $422,640 | $6,108 | 5.75% | $375,792 | $5,850 | 6.18% | |
Taxable investment securities | 162,632 | 1,637 | 4.00% | 117,717 | 1,178 | 3.97% | |
Non-taxable investment securities (3) | 35,008 | 604 | 6.86% | 31,117 | 554 | 7.06% | |
Total Investments | 197,640 | 2,241 | 4.51% | 148,834 | 1,732 | 4.62% | |
Investment in Federal Home Loan Bank Stock | 11,726 | 89 | 3.02% | 8,969 | 68 | 3.01% | |
Fed Funds sold, money market funds, and time | 2,158 | 10 | 1.84% | 3,151 | 18 | 2.27% | |
Total Earning Assets | 634,164 | 8,448 | 5.30% | 536,746 | 7,668 | 5.67% | |
Non Interest Earning Assets: | |||||||
Cash and due from banks | 9,626 | 9,627 | |||||
Allowance for loan losses | (4,923) | (5,301) | |||||
Other Assets (2) | 31,342 | 27,014 | |||||
Total Assets | $670,209 | $568,086 | |||||
Interest Bearing Liabilities: | |||||||
Deposits | $333,319 | $1,120 | 1.34% | $277,408 | $1,041 | 1.49% | |
Securities sold under repurchase agreements | 10,215 | 29 | 1.13% | 12,145 | 37 | 1.21% | |
Other borrowings | 207,895 | 1,794 | 3.43% | 166,660 | 1,650 | 3.93% | |
Total Borrowings | 218,110 | 1,823 | 3.33% | 178,805 | 1,687 | 3.74% | |
Total Interest Bearing Liabilities | 551,429 | 2,943 | 2.12% | 456,213 | 2,728 | 2.37% | |
Rate Spread | 3.18% | 3.30% | |||||
Non Interest Bearing Liabilities: | |||||||
Demand Deposits | 57,610 | 50,203 | |||||
Other Liabilities | 4,785 | 8,611 | |||||
Total Liabilities | 613,824 | 515,027 | |||||
Shareholders' Equity | 56,385 | 53,059 | |||||
Total Liabilities and Shareholders' Equity | $670,209 | $568,086 | |||||
Net Interest Income and Net Interest Margin (3) | 5,505 | 3.45% | 4,940 | 3.65% | |||
Less: Tax Equivalent Adjustment | (193) | (179) | |||||
Net Interest Income | $5,312 | 3.33% | $4,761 | 3.52% |
AVERAGE BALANCE SHEET ANDANALYSIS OF NET INTEREST INCOMENINE MONTHS ENDEDSEPTEMBER 30, 2004 AND 2003
2004 | 2004 | 2004 | 2003 | 2003 | 2003 | ||
Average | Average | Average | Average | ||||
Balance | Interest | Rate | Balance | Interest | Rate | ||
Interest Earning Assets: | |||||||
Loans (1,3) | $409,197 | $17,567 | 5.73% | $363,075 | $17,556 | 6.46% | |
Taxable investment securities | 149,565 | 4,500 | 4.02% | 119,643 | 3,981 | 4.45% | |
Non-taxable investment securities (3) | 33,885 | 1,664 | 6.56% | 30,571 | 1,626 | 7.11% | |
Total Investments | 183,450 | 6,164 | 4.49% | 150,214 | 5,607 | 4.99% | |
Investment in Federal Home Loan Bank Stock | 10,595 | 205 | 2.58% | 8,609 | 202 | 3.14% | |
Fed Funds sold, money market funds, and time | |||||||
deposits with other banks | 2,955 | 37 | 1.67% | 2,995 | 49 | 2.19% | |
Total Earning Assets | 606,197 | 23,973 | 5.28% | 524,893 | 23,414 | 5.96% | |
Non Interest Earning Assets: | |||||||
Cash and due from banks | 8,477 | 7,993 | |||||
Allowance for loan losses | (5,231) | (5,215) | |||||
Other Assets (2) | 34,327 | 27,049 | |||||
Total Assets | $643,770 | $554,720 | |||||
Interest Bearing Liabilities: | |||||||
Deposits | $320,629 | $ 3,191 | 1.33% | $273,238 | $3,346 | 1.64% | |
Securities sold under repurchase agreements | 12,744 | 108 | 1.13% | 12,293 | 130 | 1.41% | |
Other borrowings | 196,968 | 5,192 | 3.52% | 163,461 | 4,930 | 4.03% | |
Total Borrowings | 209,712 | 5,300 | 3.38% | 175,754 | 5,060 | 3.85% | |
Total Interest Bearing Liabilities | 530,341 | 8,491 | 2.14% | 448,992 | 8,406 | 2.50% | |
Rate Spread | 3.14% | 3.46% | |||||
Non Interest Bearing Liabilities: | |||||||
Demand Deposits | 49,107 | 43,566 | |||||
Other Liabilities | 5,644 | 8,590 | |||||
Total Liabilities | 585,092 | 501,148 | |||||
Shareholders' Equity | 58,678 | 53,572 | |||||
Total Liabilities and Shareholders' Equity | $643,770 | $554,720 | |||||
Net Interest Income and Net Interest Margin (3) | 15,482 | 3.41% | 15,008 | 3.82% | |||
Less: Tax Equivalent Adjustment | (531) | (522) | |||||
Net Interest Income | $14,951 | 3.29% | $14,486 | 3.69% |
2005 | 2004 | ||||||
Average | Interest | Average | Average | Interest | Average | ||
Interest Earning Assets: | |||||||
Loans (1,3) | $450,943 | $6,642 | 5.97% | $392,883 | $ 5,696 | 5.83% | |
Taxable investment securities | 134,555 | 1,381 | 4.16% | 130,648 | 1,429 | 4.40% | |
Non-taxable investment securities (3) | 34,352 | 609 | 7.19% | 33,222 | 486 | 5.88% | |
Total Investments | 168,907 | 1,990 | 4.78% | 163,870 | 1,915 | 4.70% | |
Investment in Federal Home Loan Bank stock | 10,500 | 104 | 4.02% | 9,450 | 51 | 2.17% | |
Fed funds sold, money market funds, and time | |||||||
deposits with other banks | 1,243 | �� 7 | 2.28% | 2,924 | 15 | 2.06% | |
Total Earning Assets | 631,593 | 8,743 | 5.61% | 569,127 | 7,677 | 5.43% | |
Non Interest Earning Assets: | |||||||
Cash and due from banks | 7,347 | 8,787 | |||||
Allowance for loan losses | (4,830) | (5,265) | |||||
Other Assets (2) | 29,922 | 25,154 | |||||
Total Assets | $664,032 | $597,803 | |||||
Interest Bearing Liabilities: | |||||||
Deposits | $343,814 | $1,291 | 1.52% | $290,507 | $ 998 | 1.38% | |
Securities sold under repurchase agreements and fed funds purchased | 13,662 | 49 | 1.45% | 15,816 | 44 | 1.12% | |
Borrowings from Federal Home Loan Bank | 195,954 | 1,890 | 3.91% | 178,417 | 1,666 | 3.76% | |
Total Borrowings | 209,616 | 1,939 | 3.75% | 194,233 | 1,710 | 3.54% | |
Total Interest Bearing Liabilities | 553,430 | 3,230 | 2.37% | 484,740 | 2,708 | 2.25% | |
Rate Spread | 3.24% | 3.18% | |||||
Non Interest Bearing Liabilities: | |||||||
Demand Deposits | 48,773 | 44,907 | |||||
Other Liabilities | 5,728 | 15,061 | |||||
Total Liabilities | 607,931 | 544,708 | |||||
Shareholders' Equity | 56,101 | 53,095 | |||||
Total Liabilities and Shareholders' Equity | $664,032 | $597,803 | |||||
Net Interest Income and Net Interest Margin (3) | 5,513 | 3.54% | 4,969 | 3.51% | |||
Less: Tax Equivalent Adjustment | (202) | (154) | |||||
Net Interest Income | $5,311 | 3.41% | $4,815 | 3.40% |
(1) For purposes of these computations, non-accrual loans are included in average loans.
(2) For purposes of these computations, investment securities and available for sale securities are at amortized cost and net unrealized gains
(losses) on available-for-sale securities are recorded in other assets.
(3) For purposes of these computations, reported on a tax equivalent basis.
Net Interest Margin: The net interest margin, expressed on a tax-equivalent basis, represents the difference between interest and dividends earned on interest-bearing assets and interest paid to depositors and other creditors, expressed as a percentage of average earning assets.
The net interest margin 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.
During the three and nine-months ended September 30, 2004, the Bank continued to experience considerable margin erosion in the low interest rate environment compared with the same periods in 2003. The net interest margin amounted to 3.45% during the thirdfirst quarter of 2004 compared with 3.65% during the same quarter in 2003, representing a decline of 20 basis points. For the nine-months ended September 30, 20042005 the net interest margin amounted to 3.41%3.54% compared with 3.82% during3.51% in the same periodfirst quarter of 2004. Comparing the first quarter of 2005 with 2004, average earning asset yields increased 18 basis points while the average cost of funds increased 12 basis points.
The following table summarizes the net interest margin components, on a quarterly basis, over the past two years. Factors contributing to the changes in 2003, representingthe net interest margin are enumerated in the following discussion and analysis.
NET INTEREST MARGIN ANALYSIS
FOR QUARTER ENDED
2005 | 2004 | 2003 | ||||||||
1st Qtr | 4th Qtr | 3rd Qtr | 2nd Qtr | 1st Qtr | 4th Qtr | 3rd Qtr | 2nd Qtr | |||
Average | Average | Average | Average | Average | Average | Average | Average | |||
Interest Earning Assets: | ||||||||||
Loans (1,3) | 5.97% | 5.91% | 5.75% | 5.63% | 5.83% | 6.14% | 6.18% | 6.55% | ||
Taxable investment securities | 4.16% | 4.01% | 4.00% | 3.71% | 4.40% | 4.22% | 4.02% | 4.58% | ||
Non-taxable investment securities (2) | 7.19% | 6.95% | 6.86% | 6.91% | 5.88% | 6.03% | 7.06% | 7.09% | ||
Total Investments | 4.78% | 4.57% | 4.51% | 4.28% | 4.70% | 4.61% | 4.66% | 5.10% | ||
Investment in Federal Home Loan Bank stock | 4.02% | 3.49% | 3.02% | 2.47% | 2.17% | 2.79% | 3.01% | 3.16% | ||
Fed funds sold, money market funds, and time | ||||||||||
deposits with other banks | 2.28% | 2.33% | 1.84% | 1.28% | 2.06% | 1.75% | 2.27% | 1.99% | ||
Total Earning Assets | 5.61% | 5.48% | 5.30% | 5.14% | 5.43% | 5.63% | 5.68% | 6.06% | ||
Interest Bearing Liabilities: | ||||||||||
Deposits | 1.52% | 1.41% | 1.34% | 1.32% | 1.38% | 1.37% | 1.49% | 1.67% | ||
Securities sold under repurchase agreements and | 1.45% | 1.11% | 1.13% | 1.15% | 1.12% | 1.10% | 1.21% | 1.45% | ||
Other borrowings | 3.91% | 3.86% | 3.43% | 3.41% | 3.76% | 3.95% | 3.93% | 3.99% | ||
Total Borrowings | 3.75% | 3.65% | 3.33% | 3.28% | 3.54% | 3.70% | 3.74% | 3.83% | ||
Total Interest Bearing Liabilities | 2.37% | 2.23% | 2.12% | 2.10% | 2.25% | 2.27% | 2.37% | 2.53% | ||
Rate Spread | 3.24% | 3.25% | 3.18% | 3.04% | 3.18% | 3.36% | 3.31% | 3.53% | ||
Net Interest Margin (2) | 3.54% | 3.55% | 3.45% | 3.28% | 3.51% | 3.70% | 3.66% | 3.88% | ||
Net Interest Margin without Tax Equivalent Adjustments | 3.41% | 3.43% | 3.33% | 3.16% | 3.40% | 3.58% | 3.53% | 3.74% |
(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 are recorded in other assets.
(3) For purposes of these computations, reported on a decline of 41 basis points.tax equivalent basis.
The prolonged, historically low interest rate environment hasduring the past few years caused sharp yield declines on the Bank’s variable rate earning assets and accelerated prepayment speeds on fixed rate earning assets, driven in part by loan refinancing activity and accelerated cash flows from the investment securities portfolio. ComparingThe interest rate environment over the nine-months ended September 30, 2004 withpast few years caused considerable margin erosion given the same periodBank’s asset sensitive balance sheet; specifically, the decline in 2003,yields on earning assets occurred at a faster pace than the decline in the average yield oncost of interest bearing funds.
The Bank has been deliberate in its efforts to mitigate the interest rate risk associated with the addition of long term, fixed rate earning assets exceededto the decline in the rate paid onbalance sheet during a period of historically low interest bearing liabilities by 32 basis points. During the twelve months ended September 30, 2004, the Bank’s earning asset base continued to cycle into the current rate environment while most of the funding base had already reset to current interest rate levels or reached their assumed floors.
rates. Management believes the Bank’sits strategy of maintaining an asset sensitive balance sheet has contributed to the net interest margin declinedeclines experienced over the past year.two years. While an asset sensitive balance sheet pressures the net interest margin and net interest income in an extended flat or declining interest rate environment, it typically strengthens it in a rising rate environment, a scenario management anticipates isanticipated was more likely to occur. The Bank has been deliberate in its efforts to manage 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. Management believes that its current strategy of maintaining an asset sensitive balance sheet is important to the Company’s long-term success and such posture better positions it for rising interest rates and an improving economy.
In late June of 2004, the Board of Governors of the Federal Reserve System (the "Federal Reserve") began increasing short-term interest rates. As management anticipated,Over the three recentpast nine-months, the Fed funds targeted rate was increased seven times, ending the first quarter of 2005 at 2.75%. These rate increases in the Federal Funds rate totaling 75 basis points favorably impacted the Bank’s net interest margin during this period of time, with the three-months ended September 30, 2004. Foryield on average earning assets increasing 47 basis points to 5.61%, and the quarter ended September 30, 2004cost of interest bearing funds increasing only 27 basis points to 2.37%. Consequently, the Bank’s net interest margin was 3.45%increased to 3.54% in first quarter of 2005, compared with the two-year low of 3.28% experienced during the quarter ended June 30, 2004, representing an improvement of 1726 basis points.
The Bank’s interest rate sensitivity position is more fully described in Part I, Item 3 of this report on Form 10-Q, Quantitative and Qualitative Disclosures About Market Risk.
Interest Income: For the quarter ended September 30, 2004,March 31, 2005, total interest income, on a fully tax equivalent basis, amounted to $8,448$8,743 compared with $7,668$7,677 for the same quarter in 2003,2004, representing an increase of $780,$1,066, or 10.2%13.9%. For the nine-months ended September 30, 2004 total
The increase in interest income on a fully tax equivalentwas attributed to earning asset growth of $62,466 combined with an 18 basis amounted to $23,973 comparedpoint increase in average earning asset yields, when comparing the three-month period ended March 31, 2005 with $23,414 during the same period in 2003, representing an increase of $559, or 2.4%.
The increases in interest income were principally attributed to the growth in average earning assets between reporting periods, as earning asset yields posted declines of 37 and 68 basis when comparing the three and nine-month periods ended September 30, 2004 with the same periods in 2003.2004. Principally reflecting the Federal Reserve’s recent increases in short-term interest rates, the yield on average earning assets amounted to 5.28%5.61% during the current quarter ended September 30, 2004,March 31, 2005, compared with 5.14%5.43% during the same quarter ended June 30,in 2004.
As discussed above, the three and nine-month declines in total interest income attributed to lower yields were largely offset by growth in average earning assets. As depicted on the following rate / volume analysis tables, the volume of interest earning assets added to the balance sheet since the third quarter of 2003 contributed $2,824 to third quarter 2004 interest income, offset by a decline of $2,044 attributed to the impact of lower yields and interest rates. For the nine-months ended September 30, 2004, the volume of interest earning assets contributed $4,202 to interest income, offset by a decline of $3,643 attributed to the impact of lower yields and interest rates.
Interest Expense -Expense: Total interest expense for the quarter ended September 30, 2004March 31, 2005 amounted to $2,943$3,230 compared with $2,728$2,708 during the same quarter in 2003,2004, representing an increase of $215,$522, or 7.9%. For the nine-months ended September 30, 2004, total interest expense amounted to $8,491 compared with $8,406 during the same period in 2003, representing an increase of $85, or 1.0%19.3%.
The increase in interest expense during the three and nine-months ended September 30, 2004 was principally attributed to the increases$68,690 increase in average interest bearing liabilities amounting to $95,216 or 20.9%, and $81,349 or 18.1%, comparedcombined with the same periods in 2003, respectively. These increases were substantially offset by declinesa 12 basis point increase in the average cost of funds, which duringwhen comparing the three and nine-month periodsthree-month period ended September 30, 2004 amounted to 2.12% and 2.14%, comparedMarch 31, 2005 with 2.37% and 2.50% during the same periodsperiod in 2003, representing declines of 25 and 36 basis points, respectively.
2004. The declinesincrease in the average cost of interest bearing funds was principally attributed to the historically low interest rate environment, prompting management to reduce rates on non-maturity deposits while maturing time deposits were being replaced at prevailing lower rates. During the three and nine-months ended September 30, 2004, the total average cost of interest bearing deposits amounted to 1.34% and 1.33%, compared with 1.49% and 1.64% during the same periodsincreases in 2003, representing declines of 15 and 31 basis points, respectively.
During the three and nine-months ended September 30, 2004, the average cost of borrowings amounted to 3.33% and 3.38%, compared with 3.74% and 3.85% during the same periods in 2003, representing declines of 41 and 47 basis points, respectively. These declines were principally attributed to the replacement of maturing borrowed funds at prevailing low interest rates. The disproportionate rate of decline in the current quarter compared with the nine-months ended September 30, 2004, reflects the impact of recent interest rate increases by the Federal Reserve on the Bank’s short-term borrowing base.
Consistent with the Bank’s asset and liability management strategies, a portion of the Bank’s borrowings have longer maturities than the funding provided by traditional deposits in order to preserve the sensitivity of net interest income in a rising interest rate environment. While the use of longer maturity borrowings to fund earning assets naturally results in less net interest income, they more closely match the maturities of fixed rate earning assets being added to the balance sheet, and lessen the degree of exposure to interest rate risk.
As discussed above, the three and nine-month declines in total interest expense resulting from lower interest rates were largely offset by increases in interest bearing liabilities. As depicted on the rate / volume analysis tables below, the volume of interest bearing liabilities added to the balance sheet since the third quarter of 2003 contributed $1,820 to third quarter 2004 interest expense, offset by a reduction of $1,605 due to lower interest rates. For the nine-months ended September 30, 2004, the impact of lower interest rates reduced interest expense by $1,850, offset by an increase of $1,935 attributed to the volume of interest bearing liabilities.between periods.
Rate / Volume Analysis: The following tables settable sets 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 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
THREE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2005 VERSUS MARCH 31, 2004 VERSUS SEPTEMBER 30, 2003
INCREASES (DECREASES) DUE TO:
Average | Average | Net | |
Loans (1,2) | $2,230 | $(1,972) | $258 |
Taxable investment securities | 387 | 72 | 459 |
Non-taxable investment securities (2) | 142 | (92) | 50 |
Investment in Federal Home Loan Bank stock | 19 | 2 | 21 |
Fed Funds sold, money market funds, and time | 46 | (54) | (8) |
TOTAL EARNING ASSETS | $2,824 | $(2,044) | $780 |
Interest bearing deposits | 612 | (533) | 79 |
Securities sold under repurchase agreements | 19 | (27) | (8) |
Other borrowings | 1,189 | (1,045) | 144 |
TOTAL INTEREST BEARING LIABILITIES | $1,820 | $(1,605) | $215 |
NET CHANGE IN NET INTEREST INCOME | $1,004 | $ (439) | $565 |
Average | Average | Net | |
Loans (1,2) | $ 812 | $ 134 | $ 946 |
Taxable investment securities | 204 | (252) | (48) |
Non-taxable investment securities (2) | (2) | 125 | 123 |
Investment in Federal Home Loan Bank stock | 1 | 52 | 53 |
Fed funds sold, money market funds, and time deposits with other banks | (18) | 10 | (8) |
Total Earning Assets | $ 997 | $ 69 | $1,066 |
Interest bearing deposits | (1,189) | 1,482 | 293 |
Securities sold under repurchase agreements and fed funds purchased | (32) | 37 | 5 |
Borrowings from the Federal Home Loan Bank | 1,894 | (1,670) | 224 |
Total Interest Bearing Liabilities | $ 673 | $ (151) | $ 522 |
Net Change In Net Interest Income | $ 324 | $ 220 | $ 544 |
(1) For purposes of these computations, non-accrual loans are included in average loans.
(2)ReportedFor the purposes of these computations, interest income is reported on a tax-equivalent basis.
ANALYSIS OF VOLUME AND RATE CHANGES ON NET INTEREST INCOMENINE MONTHS ENDED SEPTEMBER 30,Provision for Loan Losses
For the three-months ended March 31, 2005, the Bank did not record a provision for loan losses, compared with $90 during the first quarter of 2004.
The provision for loan losses reflects the amount necessary to maintain the Allowance for Loan Losses ("allowance") at a level that, in management’s judgment, is appropriate for the amount of inherent risk of loss in the current loan portfolio. In prior reporting periods the allowance for loan losses incorporated loss estimates relating to borrowers in the Maine wild blueberry industry that were involved in extensive legal matters, which warranted recognition of increased credit risk. During the first quarter of 2005, these matters were, in the opinion of management, satisfactorily resolved, thus improving the overall credit risk profile of the Bank’s loan portfolio.
The Bank’s non-performing loans remained at low levels during the current quarter. Non-performing loans at March 31, 2005 amounted to $527, representing a decline of $196 or 27.1% compared with December 31, 2004, VERSUS SEPTEMBER 30, 2003INCREASES (DECREASES) DUE TO:
Average | Average | Net | |
Volume | Rate | Interest Income | |
Loans (1,2) | $2,813 | $(2,802) | $ 11 |
Taxable investment securities | 1,116 | (597) | 519 |
Non-taxable investment securities (2) | 219 | (181) | 38 |
Investment in Federal Home Loan Bank stock | 55 | (52) | 3 |
Fed Funds sold, money market funds, and time | |||
deposits with other banks | (1) | (11) | (12) |
TOTAL EARNING ASSETS | $4,202 | $(3,643) | $559 |
Interest bearing deposits | 733 | (888) | (155) |
Securities sold under repurchase agreements | 7 | (29) | (22) |
Other borrowings | 1,195 | (933) | 262 |
TOTAL INTEREST BEARING LIABILITIES | $1,935 | $(1,850) | $ 85 |
NET CHANGE IN NET INTEREST INCOME | $2,267 | $(1,793) | $474 |
(1) For purposesand a decline ofthese computations, non-accrual$1,185 or 69.2% compared with the same date in 2004. The allowance for loan losses expressed as a percentage of non-performing loansare includedstrengthened to 911% at March 31, 2005, compared with 668% and 301% at December 31 and March 31, 2004, respectively.The Bank's loan loss experience showed an improvement during the first three-months of 2005 compared with the same period in 2004. Net charge-offs amounted to $30, or annualized net charge offs to average
loans.(2) Reportedloans outstanding of 0.03%, compared with net charge-offs of $209, or annualized net charge offs to average loans outstanding of 0.21% during the three-months ended March 31, 2004.Although somewhat offset by the continued increases in the loan portfolio, as well as a variety of other risk related attributes, the improved credit risk related to borrowers in the Maine wild blueberry industry was the principal reason underlying the zero provision for the quarter ended March 31, 2005.
Refer to Part I, Item 2, Allowance for Loan Losses, in this report on form 10-Q for further discussion and analysis regarding the provision and allowance for loan losses.
Based upon the continued performance of the loan portfolio, combined with certain improvements with respect to specific credit relationships, the Bank did not record a
tax-equivalent basis.provision for loan losses during the first quarter of 2005. Refer to Part I, Item 2, Allowance for Loan Losses, in this report on Form 10-Qfor further discussion and analysis regarding the provision and allowance for loan losses.
Non-interest Income
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. For the quarter ended September 30, 2004,March 31, 2005, total non-interest income amounted to $2,498$1,103 compared with $1,919$1,841 for the same quarter in 2003,2004, representing an increasea decrease of $579,$738, or 30.2%40.1%.
Trust and Other Financial Services: For the nine-monthsthree months ended September 30, 2004, total non-interestMarch 31, 2005 income from trust and other financial services amounted to $5,150$475 compared with $5,357$483 during the same period in 2003,2004, representing a decline of $207,$8, or 3.9%1.7%.
Income from trust and financial services is principally derived from fee income based on a percentage of the market value of client assets under management and held in custody and, to a lesser extent, revenue from third-party brokerage services.
The decline in fee income was in part attributed to third-party brokerage activities, which generated lower trading volumes during the first quarter of 2005 compared with the same quarter in 2004.
At March 31, 2005, total managed assets at Bar Harbor Trust Services, a Maine chartered non-depository trust company and second tier subsidiary of the Company, stood at $198,362, compared with $196,079 and $177,179 at December 31 and March 31, 2004, respectively. While managed assets have increased on an overall basis, the revenue derived from trust and investment management services was essentially unchanged when comparing the first quarter of 2005 with the same quarter in 2004, reflecting pricing strategies designed to remain competitive while attracting new business.
Service Charges on Deposits: This income is principally derived from monthly deposit account maintenance and activity fees, overdraft fees, and a variety of other deposit account related fees.
Income generated from service charges on deposit accounts totaled $289 during the three-months ended March 31, 2005 compared with $364 during the same period in 2004, representing a decline of $75 or 20.6%.
As was the case during 2004, income generated from service charges on deposit accounts continued under pressure into the first quarter of 2005. Given aggressive competitive pricing in the markets served by the Bank, it has not increased its service charge fees on deposit accounts over the past few years, while customers have been closing or consolidating small balance accounts, migrating to relationship products that have lower fees, and reducing their volume of account overdraft activity.
The Bank expects aggressive competitive pricing of deposit products will continue in the future, as financial institutions compete for deposit balances and market share, and continue to offer a variety of "no fee" products. In the second quarter of 2005, the Bank increased selected fees on deposit accounts and anticipates this will help stem further declines in this particular source of non-interest income.
Credit Card Service Charges and Fees: This income is principally derived from the Bank’s merchant credit card processing services and, to a lesser extent, fees associated with its Visa credit card product.
During the three-months ended March 31, 2005 credit card service charges and fees amounted to $201, representing an increase of $23, or 12.9%, compared with the same period in 2004.
While merchant credit card processing profit margins have tightened and competition from large regional processors has intensified, the Bank has been able to generate higher levels of revenue through increased volumes of transactions, competitive pricing strategies, and the local customer-centric support offered by a community bank.
Net Gains on the Sale of Securities: During the three-months ended September 30, 2004March 31, 2005, net gains on the sale of securities amounted to $239$21 compared with $103$193 during the same period in 2003, representing an increase of $136, or 132.0%. During the nine-months ended September 30, 2004, net gains on the sale of securities amounted to $432 compared with $868 during the same period in 2003, representing a decline of $436, or 50.2%.$172. The interest rate environment during the first nine-monthsthree-months of 20042005 and characteristics of the Bank’s securities portfolio did not present as much opportunity or need for securities repositioning transactions, as was the case during the same period in 2003.2004.
There is no assurance that the recording of securities gains will continue in future reporting periods at 2004 and 2003 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. Bank management 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 the Bank’s needs for adequate liquidity.
Net Income on Interest Rate Swap Agreements: During the three and nine-months ended September 30, 2004,As part of its overall asset liability/management strategy, the Bank recorded net income onperiodically uses interest rate swap agreements amounting to $507minimize significant unanticipated fluctuations in earnings and $404, respectively, whereas no income or losses were recorded in non-interest income duringcash flows caused by interest rate volatility. At March 31, 2005 the same periods in 2003.Bank had two outstanding interest rate swap agreements with notional principal amounts totaling $20,000.
As more fully enumerated in Part I, Note 8 of the consolidated interim financial statements of this report on Form 10-Q, induring the first quarter of 2004, the CompanyBank de-designated its interest rate swap agreements as cash flow hedges. In prior reporting periods,hedges and, from the time of de-designation, changes in thetheir fair value of the interest rate swap agreements were recorded on the consolidated balance sheet in other comprehensive income, whileand current period net cash flows representing net amounts received from or paid to counter-parties were recorded as interest income. From the time of their de-designation, changes in their fair value and current period net cash flowscounterparties agreements were recorded in the consolidated statement of income and included as part of non-interest income, creating potential earnings volatility, consistent with volatility in the U.S. Treasury curve.income.
In July 2004, the Financial Accounting Standards Board ("FASB") issued guidance regarding SFAS No. 133 Implementation Issue No. G25, "Cash Flow Hedges: Using the First-Payments Received Technique in Hedging the Variable Interest Payments on a Group of Non-Benchmark-Rate-Based Loans", in which the FASB indicated the first-payments-received technique for identifying the hedged forecasted transactions (that is, the hedged interest payments) can be used in a cash flow hedge of the variable prime-rate-based or other variable non-benchmark-rate-based interest payments for a rolling portfolio of pre-payable interest-bearing loans, provided all other conditions for a cash flow hedge have been met. During the third quarter of 2004 the CompanyBank designated its interest rate swap agreements as cash flow hedges and, prospectively from the time of this designation, changes in their fair value are being recorded on the consolidated balance sheet in accumulated other comprehensive income, while current period net cash flows representing net amounts received from or paid to counter-parties are recorded as interest income.
DuringAs more fully discussed below, for the quarterthree-months ended September 30, 2004, the CompanyMarch 31, 2005, there were no income or losses recorded in non-interest income, an unrealized gain of $428 representing a mark-to-market adjustment for interest rate swap agreements prior to their designation as cash flow hedges, compared with an unrealized loss of $728 recorded$495 during the same period in 2004.
For the quarter ended June 30, 2004, and an unrealized gain of $328 recorded in the quarterthree-months ended March 31, 2004. These changes reflected the movements in the U.S Treasury yield curve between reporting periods. For the nine-months ended September 30, 2004,2005, the net unrealized (loss) gain on interest rate swap agreements totaled ($590), compared with $328 during the same period in 2004, reflecting the upward movement in the U.S. Treasury yield curve between these reporting periods. During the three months ended March 31, 2005 the net unrealized loss, net of tax, was recorded in accumulated other comprehensive income (hedge accounting), whereas during the same period in 2004 the net unrealized gain was recorded in non-interest income (non-hedge accounting).
For the three-months ended March 31, 2005, the total net cash flows received from counterparties amounted to $29. No$22, compared with $167 during the same period in 2004, reflecting a 1.75% increase in the Prime interest rate swap agreement mark-to-market gains or lossesbetween reporting periods. The net cash flows received from counterparties during the first quarter of 2005 were recorded in interest income (hedge accounting), whereas during the first quarter of 2004 the net cash flows were recorded in non-interest income during 2003.(non-hedge accounting).
Other Operating Income: For the three and nine-monthsthree-months ended September 30, 2004, the net cash flows received from counter-parties and recorded in non-interestMarch 31, 2005 total other operating income amounted to $79 and $376. During the nine-months ended September 30, 2003, there were no net cash flows received from counter-parties recorded in non-interest income.
The Bank’s interest rate swap agreements are discussed in further detail under Item 2 of this Form 10-Q, Derivative Instruments / Counter-party Risk and is incorporated herein by reference.
Trust and Other Financial Services: For the three and nine-months ended September 30, 2004 income from trust and other financial services amounted to $429 and $1,419$67, compared with $490 and $1,693$72 during the same periods in 2003, representing declines of $61 and $274, or 12.5% and 16.2%, respectively.
Income from trust and other financial services is principally derived from fee income related to the market value of client assets managed and held in custody and, to a lesser extent, third party brokerage services. The decrease in fee income in part reflects a decline in average managed assets when comparing the nine-months ended September 30, 2004 with the same period in 2003. Revenue from third party brokerage activities also posted three and nine-month declines compared with 2003 levels, principally reflecting lower trading volumes, including sales of mutual funds and annuity products.
At September 30, 2004, total managed assets at Bar Harbor Trust Services, a Maine non-depository trust company and second tier subsidiary of the Company, stood at $179,658, compared with $176,127 at December 31, 2003, and $171,017 at September 30, 2003.
Service Charges on Deposits: Income generated from service charges on deposit accounts totaled $395 and $1,149 during the three and nine-months ended September 30, 2004, representing a decrease of $24$5 or 5.7% and an increase of $13 or 1.1% compared with the same periods in 2003, respectively. The Bank has not increased its service charge fees on deposit accounts over the past few years, while customers have been closing and consolidating small accounts, moving to relationship products having lower fees, and reducing their volume of account overdrafts.6.9%.
Credit Card Service Charges and Fees: ThisOther operating income is principally generatedderived from merchant credit card processing fees. Duringbank-owned life insurance ("BOLI"), representing increases in the three and nine-months ended September 30, 2004 these feescash surrender value of life insurance policies on the lives of certain retired employees who had provided positive consent allowing the Bank to be the beneficiary of such policies. Income from BOLI amounted to $787 and $1,311 respectively, representing increases$55 in the first quarter of 1.4% and 2.7%2005 compared with $50 in the same periods in 2003.first quarter of 2004.
Non-interest Expense
For the three and nine-monthsthree-months ended September 30, 2004,March 31, 2005, total non-interest expenses amounted to $5,032 and $14,249$4,783 compared with $4,920 and $14,020$4,597 during the same periodsperiod in 2003,2004, representing increasesan increase of $112 and $229,$186, or 2.3% and 1.6%, respectively.4.1%.
Salaries and Employee Benefit Expenses: For the three and nine-monthsthree-months ended September 30, 2004,March 31, 2005, salaries and employee benefit expenses amounted to $2,297 and $6,823$2,614, compared with $2,305 and $7,130$2,434 during the same periodsperiod in 2003,2004, representing declinesan increase of $8 and $307,$180, or 0.4% and 4.3%, respectively.7.4%. The year-over-year declinesincrease in salaries and employee benefit expenses werewas principally attributed to lowerthe recording of an employee incentiveseverance payment of $238 made in connection with the Company’s previously announced resignation of Dean S. Read as President of the Bank, offset in part by lower compensation and staffing levels compared with the same periodsperiod in 2003.
Branch Office Integration Expenses: Included in first quarter and year-to date 2004 non-interest expenses were a variety of costs related to integration activities associated with the Bank’s acquisition of a branch office in the community of Rockland, Maine, amounting to approximately $120. These expenses are included in salaries and benefits, occupancy, furniture and equipment, and other operating expenses.2004.
Occupancy, Furniture and Equipment Expenses: For the three and nine-monthsthree-months ended September 30, 2004,March 31, 2005, occupancy, furniture and equipment expenses amounted to $709 and $2,141$738 compared with $682 and $1,977$709 during the same periodsperiod in 2003,2004, representing increasesan increase of $27 and $164,$29, or 4.0% and 8.3%, respectively.4.1%. The increases wereincrease was attributed in part to a number of factors including both one-time and ongoing operating expenses associated with the Bank’s acquisition of the Rockland branch office expenses associatedin the first quarter of 2004, combined with the Company’s re-branding initiative, and normal increases in a variety of occupancy related costs.
Other Operating Expenses: For the three and nine-monthsthree-months ended September 30, 2004,March 31, 2005, other operating expenses amounted to $1,445 and $4,341$1,296, compared with $1,434 and $4,084 during the same periods in 2003, representing increases of $11 and $257, or 0.8% and 6.3%, respectively.
Included in third quarter and year-to-date 2004 other operating expenses were a variety of costs associated with the Company’s previously announced corporate re-branding and market research initiatives. The Company introduced updated logos and simplified corporate identities, together with a comprehensive marketing program offering certain new banking product packages such as Home Plus and Ideal Checking. For the nine-months ended September 30, 2004 marketing and public relations expenses amounted to $651 compared with $334$1,329 during the same period in 2003,2004, representing an increasea decrease of $317,$33, or 94.9%2.5%.
Included in 2004 year-to-date other operating expenses were the write-down of certain non-marketable venture capital equity investment funds considered other-than-temporarily impaired amounting to $189, of which $15 was recorded during the third quarter. No impairment write-downs were recorded during 2003. These investment funds, originating as far back as 1987 and in some cases qualifying for Community Reinvestment Act credit, generally represent socially responsible venture capital investments in small businesses throughout Maine and New England. The total amount of the 2004 impairment write-downs represented 28.1% of their book value recorded at cost.
Includeddecline in year-to-date other operating expenses was a loss recordedattributed in part to certain costs incurred during the secondfirst quarter of 2004, at Bar Harbor Trust Services, amountingrelated to $160 andintegration activities associated with a trust account investment authorized by the beneficiaries of the trust, however subsequently deemed by management as inappropriate.
Provision For Loan Losses
During the three and nine-months ended September 30, 2004 the Bank recorded provisions for loan losses amounting to $30 and $150 compared with $120 and $420 during the same periods in 2003, representing decreases of $90 and $270, or 75.0% and 64.3%, respectively.
The provision for loan losses reflects the amount necessary to maintain the Allowance for Loan Losses ("allowance") at a level that, in management’s judgment, is appropriate for the amount of inherent risk of loss in the current loan portfolio. Non-performing loans have declined $644 and $703, or 43.1% and 45.3% compared with December 31, 2003 and September 30, 2003, respectively, and remain at low levels. The allowance for loan losses expressed as a percentage of non-performing loans strengthened to 563% at September 30, 2004, compared with 353% and 339% at December 31, 2003 and September 30, 2003. While year-to-date 2004 net charge-offs of $645 have shown an increase of $515 compared with the first nine-months of 2003, management does not consider these as being reflective of the overall credit quality of the loan portfolio, as $506 of year-to-date charge offs were attributed to two relationships and were adequately provided for in the Bank’s previously recorded allowance for loan losses.
Based upon the continued performance of the loan portfolio, combined with certain improvements with respect to specific credit relationships, the provision was decreased during the three and nine-months ended September 30, 2004 as compared with the same periods in the prior year as noted above. Refer to Part I, Item 2, Allowance for Loan Losses and Provision, in this Form 10-Qfor further discussion and analysis regarding the provision for loan losses, which is incorporated herein by reference.
Rockland branch acquisition.
Income Taxes
Income taxes amounted to $805 and $1,520$418 for the three and nine-monthsthree-months ended September 30,March 31, 2005, compared with $533 during the same period in 2004, representing increasesa decrease of $394 and $62,$115, or 95.9% and 4.3% compared with the same periods in 2003, respectively.21.6%. For the three-months ended September 30, 2004March 31, 2005 the increasepercentage decline in income taxes outpaced the increasedecline in pre-tax earnings principally due to non-taxable income generated from the Bank’s securities and loan portfolios bearing a smallerlarger percentage of income before income taxes than the comparable period in 2003.2004.
The Company's effective tax rate for the three and nine-month periodsthree-month period ended September 30, 2004March 31, 2005 amounted to 29.3% and 26.7%25.6%, compared with 25.1% and 27.0%27.1% for the same periodsperiod in 2003, respectively.2004. The income tax provisions for these periods are less than the expense that would result from applying the federallyfederal statutory rate of 34% to income before income taxes principally because of the impact of tax exempt interest income on certain investment securities, loans and bank owned life insurance. For the three-months ended September 30, 2004,March 31, 2005, the effective tax rate posted a decline compared with the same quarter in 2003,2004, principally due to non-taxable income bearing a smallerlarger percentage of income before income taxes than the comparable period in 2003.2004.
FINANCIAL CONDITION
Total Assets
The Company’s assets principally consist of loans and investment securities, which at September 30, 2004March 31, 2005 represented 65.6%68.9% and 26.9%24.6% of total assets, respectively. At September 30, 2004March 31, 2005 total assets amounted to $654,699$663,937 compared with $583,746$666,811 at December 31, 20032004 and $578,944$616,238 at September 30, 2003,March 31, 2004, representing increasesa decline of $70,953$2,874 or 0.4%, and $75,755,an increase of $47,699 or 12.2% and 13.1%7.7%, respectively.
The decrease in total assets from December 31, 2004 was attributed to a $12,908 decline in investment securities, as cash flows from the securities portfolio were redeployed to absorb the seasonal deposit outflows historically associated with the Bank’s market area, as well as funding first quarter 2005 loan growth of $9,288.
The increase in total assets from DecemberMarch 31, 20032004 was principally driven by a $46,149$52,207 or 12.0%12.9% increase in total loans, combined with a $17,810 or 11.2% increase in investment securities. The Company’s year- to-date asset growth waswhich were funded with a $58,095$20,223 or 17.1%5.6% increase in deposits, and an $11,115a $28,847 or 6.0%15.2% increase in borrowed funds.
Investment Securities
Loan PortfolioThe investment securities portfolio is primarily comprised of mortgage-backed securities issued by U.S. government agencies, U.S. government sponsored enterprises, and other corporate issuers. The portfolio also includes tax-exempt obligations of state and political subdivisions, and obligations of other U.S. government sponsored enterprises. The overall objective of the Bank’s strategy for the investment securities portfolio is to maintain an appropriate level of liquidity, diversify earning assets, manage interest rate risk, leverage the Bank’s strong capital position, and generate acceptable levels of net interest income.
At March 31, 2005, total investment securities amounted to $163,429, compared with $176,337 and $164,494 at December 31, 2004 and March 31, 2004, representing declines of $12,908 and $1,065, or 7.3% and 0.7%, respectively.
During the first quarter of 2005, cash flows from the securities portfolio, principally representing pay downs on mortgage-backed securities, were not re-invested. Cash flows from the portfolio were principally utilized to offset the seasonal deposit outflows associated with the Bank’s market area and, to a lesser extent, fund loan growth.
While the steady stream of cash flows from the securities portfolio have been reinvested over the past twelve-months, comparing March 31, 2005 with the same date in 2004 total investment securities remained essentially unchanged. These actions were taken in light of exceptionally strong loan growth, a flattening U.S. Treasury yield curve, still historically low market yields, and management’s expectation of higher yields in the not too distant future.
In light of the historically low interest rate environment over the past few years and the high degree of interest rate volatility, the Bank’s investment strategy has been principally focused on maintaining a securities portfolio with a relatively short average duration, thereby reducing the exposures associated with sustained increases in interest rates. This was accomplished through investments in securities with predictable cash flows and relatively short average lives, such as 10-year fully amortizing mortgage-backed securities and other high coupon mortgage-backed securities. The Bank’s strategy has been to position the securities portfolio defensively with a steady stream of future cash flows. While sacrificing some yield in the near-term, the Bank’s objectives were to maintain a reasonable level of net interest income, manage longer-term interest rate and market risk, and position the portfolio for a rising interest rate environment and an improving economy.
Loans
The loan portfolio is primarily secured by real estate in the counties of Hancock, Washington and Knox, Maine. The following table representssummarizes the components of the Bank's loan portfolio, net of deferred loan origination fees and costs, as of September 30, 2004, December 31, 2003 and September 30, 2003.
the dates indicated.
LOAN PORTFOLIO SUMMARY
September 30, | December 31, | September 30, | |
Real estate loans: | |||
Construction and development | $ 18,391 | $ 12,639 | $ 14,312 |
Mortgage | 350,573 | 323,554 | 304,536 |
Loans to finance agricultural | 15,106 | 11,719 | 11,772 |
Commercial and industrial loans | 31,715 | 19,167 | 30,144 |
Loans to individuals for household, | |||
family and other personal expenditures | 11,297 | 11,775 | 11,977 |
All other loans | 2,475 | 4,554 | 5,997 |
TOTAL LOANS | $429,557 | $383,408 | $378,738 |
Less: Allowance for possible loan losses | 4,783 | 5,278 | 5,265 |
NET LOANS | $424,774 | $378,130 | $373,473 |
March 31, | December 31, | March 31, | |||
Real estate loans: | |||||
Construction and development | $ 19,390 | �� $ 21,339 | $ 13,549 | ||
Mortgage | 372,284 | 362,702 | 332,827 | ||
Loans to finance agricultural production and | 14,485 | 15,077 | 14,661 | ||
Commercial and industrial loans | 37,417 | 35,574 | 28,490 | ||
Loans to individuals for household, | 10,862 | 11,156 | 11,454 | ||
All other loans | 2,943 | 2,153 | 3,770 | ||
Real estate loans under foreclosure | 385 | 477 | 808 | ||
TOTAL LOANS | $457,766 | $448,478 | $405,559 | ||
Less: Allowance for loan losses | 4,799 | 4,829 | 5,159 | ||
NET LOANS | $452,967 | $443,649 | $400,400 |
Total Loans: Total loans at September 30, 2004March 31, 2005 amounted to $429,557,$457,766, compared with $448,478 and $405,559 at December 31, 2004 and March 31, 2004, representing an increaseincreases of $46,149$9,288 and $52,207, or 12.0%2.1% and 12.9%, respectively.
Commercial loans represented 75.0% and 59.0% of total loan growth during the three and twelve-months ended March 31, 2005, respectively. Commercial loan originations have been particularly strong in Knox County, a new market area forged in 2004 by way of the Bank’s acquisition of a branch office in the community of Rockland, Maine. Additionally, in April of 2004, the Bank opened a loan production office in Bangor, Maine, augmenting the Company’s long-standing trust and financial services presence in this major market area. The Bangor loan production office has generated significant new commercial relationships, which benefited from a strong, locally based commercial lender. Bank management anticipates continued loan growth in these market areas.
At March 31, 2005 total consumer loans amounted to $283,863, representing increases of $1,511 and $21,796 compared with December 31, 2003,2004 and an increase of $50,819 or 13.4%, compared with September 30, 2003.
The increase in loan balances compared with DecemberMarch 31, 2003 reflects $12,343 in loans acquired in connection with the February 13, 2004, Rockland branch acquisition, principally consumer real estate loans.
Excluding the acquired Rockland branch loan portfolio, at September 30, 2004 total loans have increased $33,806 or 8.8% compared with December 31, 2003. Commercial lending contributed 62.7% to this growth while consumer lending contributed 37.3%.
respectively. Following record refinancing activity over the past two-years and a rise in interest rates, that began in the latter part of 2003, consumer real estate loan originations slowed during 2004 and this trend continued into the first nine-monthsquarter of 2004, but2005. However, consumer loan real estate loan growth continued as new purchase transactions accounted for an increasing proportion of the loan origination pipeline. In addition,originations. Additionally, home equity loan activity has been strong, accounting for almost half47.1% and 45.7% of the year-to-date 2004total increase in consumer real estate loans.loans during the three and twelve-months ended March 31, 2005, respectively.
LoanIn general, loan origination activity has benefited from a still-favorable market interest rate environment, a stable local economy, and initiatives designed to expand the Bank's product offerings and attract new customers while continuing to leverage its existing customer base.
At September 30, 2004March 31, 2005, consumer and commercial real estate loans comprised 85.7%85.6% of the loan portfolio, essentially unchanged compared with 87.4% at December 31 2003 and 83.9% at September 30, 2003.March 31, 2004. The continued strength in the local real estate markets, both residential and commercial, has led to historically high property values in the Bank'sBank’s market area. Recognizing the impact this trend may have on the loan portfolio and origination pipeline, the Bank periodically reviews its underwriting standards in an effort to ensure that the quality of the loan portfolio is not jeopardized by unrealistic loan to value ratios or debt service levels. To date, there has been no significant deterioration in the performance or risk characteristics of the real estate loan portfolio.
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 Director's 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, which 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 in full of all outstanding principal and interest is 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 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. There were no troubled debt restructurings in the loan portfolio during 2004 and this continued to be the case in the first quarter of 2005. The following table sets forth the details of non-performing loans at the dates indicated:
TOTAL NON-PERFORMING LOANS
September | December | September | |
Loans accounted for on a non-accrual basis: | |||
Real estate loans: | |||
Construction and development | $ 24 | $ 114 | $ 154 |
Mortgage | 652 | 1,113 | 1,173 |
Loans to finance agricultural production and other loans to farmers | 13 | 22 | 23 |
Commercial and industrial loans | 6 | 9 | 4 |
Loans to individuals for household, family and other personal expenditures | 25 | 37 | 31 |
Total non-accrual loans | 720 | 1,295 | 1,385 |
Accruing loans contractually past due 90 days or more | 130 | 199 | 168 |
Total non-performing loans | $850 | $1,494 | $1,553 |
Allowance for Loan Losses to non-performing loans | 563% | 353% | 339% |
Non-Performing to Total Loans | 0.20% | 0.39% | 0.41% |
MARCH 31, | DECEMBER 31, | MARCH 31, | |||
Loans accounted for on a non-accrual basis: | |||||
Real estate loans: | |||||
Construction and development | $ --- | $ --- | $ 114 | ||
Mortgage | 385 | 453 | 1,039 | ||
Loans to finance agricultural production and | --- | 13 | 15 | ||
Commercial and industrial loans | 80 | 80 | 327 | ||
Loans to individuals for household, | 22 | 26 | 27 | ||
Total non-accrual loans | 487 | 572 | 1,522 | ||
Accruing loans contractually past due 90 days or more | 40 | 151 | 190 | ||
Total nonperforming loans | $527 | $723 | $1,712 | ||
Allowance for loan losses to nonperforming loans | 911% | 668% | 301% | ||
Non-performing loans to total loans | 0.12% | 0.16% | 0.42% |
During the quarter ended September 30, 2004,March 31, 2005, non-performing loans remained at relatively low levels. The Bank attributes this success to a continued strengthening of its credit administration processes and underwriting standards, aided by a stable local economy and a still favorable interest rate environment. The Bank maintains a centralized loan collection and managed asset department, providing timely and effective collection efforts for problem loans.
At September 30, 2004,March 31, 2005, total non-performing loans amounted to $850,$527, or 0.20%0.12% of total loans, compared with $1,494$723 or 0.39%0.16% at December 31, 2003,2004, and $1,553$1,712 or 0.41%0.42% at September 30, 2003.March 31, 2004.
While the non-performing loan ratios continued to reflect the favorable quality of the loan portfolio during the three and nine-month periodsthree-month period ended September 30, 2004, theMarch 31, 2005, Bank management is cognizant of soft economic conditions overall, and believes it is managing credit risk accordingly. Future levels of non-performing loans may be influenced by economic conditions, including the impact of those conditions on the Bank's customers, interest rates, and other factors existing at the time. Management believes the economic activity and conditions in the local real estate markets will continue to be significant determinants of the quality of the loan portfolio in future periods and, thus, the Company’s results of operations and financial condition.
Other Real Estate Owned: When the Bank takes ownership of collateral property upon foreclosure of a real estate secured loan, the property is transferred from the loan portfolio to Other Real Estate Owned ("OREO") 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 at the time of the transfer. OREO is classified on the consolidated balance sheet with Other Assets. At September 30,March 31, 2005, there was no OREO, unchanged from December 31, 2004, OREO, included in other assets, amounted to $34,and compared with $34 at DecemberMarch 31, 2003 and $369 at September 30, 2003.2004.
Allowance for Loan Losses and Provision:Losses: 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 inherentamount of risk of lossinherent in the current loan portfolio.portfolio, and adequate to provide for estimated losses.
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 $695$138 as of September 30, 2004,March 31, 2005, compared with $1,258$93 as of December 31, 2003.2004. The related allowances for loan losses on these impaired loans amounted to $86$21 and $394,$14, as of September 30, 2004March 31, 2005 and December 31, 2003,2004, 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 could 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 Bank employs a comprehensive risk management structure to identify and manage the risk of loss. For consumer loans, the Bank identifies loan delinquency beginning at 10-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, or sooner, when that loss is quantifiable and reasonably assured. For commercial loans the Bank applies a risk grading system, which 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, on an aggregate basis, additional estimated losses are identified and deemed likely. 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 could vary from current estimates.
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 Bank’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 Bank's loan loss experience showed an increaseimprovement during the first nine-monthsthree-months of 20042005 compared with the same period in 2003.2004. Net charge-offs amounted to $645,$30, or annualized net charge offs to average loans outstanding of 0.21%0.03%, compared with net charge-offs of $130,$209, or annualized net charge offs to average loans outstanding of 0.05%0.21% during the nine-monthsthree-months ended September 30, 2003. Year-to-date 2004 net charge-offs have shown an increase of $515 compared with the first nine-months of 2003. The increase in net charge-offs was principally attributed to two relationships amounting to $506, and these were adequately provided for in the Bank’s previously recorded allowance for loan losses.March 31, 2004.
The following table details changes in the allowance for loan losses and summarizes loan loss experience by loan type for the nine-monththree-month periods ended September 30, 2004March 31, 2005 and 2003.2004.
ALLOWANCE FOR LOAN LOSSESNINETHREE MONTHS ENDEDSEPTEMBER 30,MARCH 31, 2005 AND 2004 AND 2003
2004 | 2003 | 2005 | 2004 | ||
Balance at beginning of period | $ 5,278 | $ 4,975 | $ 4,829 | $ 5,278 | |
Charge offs: | |||||
Commercial, finance agricultural, and other loans to farmers | 472 | 58 | |||
Commercial, financial, agricultural, other loans to farmers | 2 | 133 | |||
Real estate: | |||||
Construction and development | 35 | 4 | --- | --- | |
Mortgage | 65 | 121 | --- | 63 | |
Installments and other loans to individuals | 245 | 98 | 51 | 50 | |
Total charge offs | 817 | 281 | 53 | 246 | |
Recoveries: | |||||
Commercial, finance agricultural, and other loans to farmers | 56 | 20 | |||
Commercial, finance agricultural, other loans to farmers | 9 | 3 | |||
Real estate: | |||||
Construction and development | --- | --- | 5 | --- | |
Mortgage | 48 | 79 | --- | 27 | |
Installments and other loans to individuals | 68 | 52 | 9 | 7 | |
Total recoveries | 172 | 151 | 23 | 37 | |
Net charge offs | 645 | 130 | 30 | 209 | |
Provision charged to operations | 150 | 420 | --- | 90 | |
Balance at end of period | $ 4,783 | $ 5,265 | $ 4,799 | $ 5,159 | |
Average loans outstanding during Period | $409,197 | $363,075 | $450,943 | $392,883 | |
Annualized net charge offs to average loans outstanding | 0.21% | 0.05% | 0.03% | 0.21% |
The September 30, 2004In prior reporting periods the allowance calculation incorporatesincorporated loss estimates relating to loans to borrowers involved in the Maine wild blueberry industry, principally centered in Washington County, Maine. During the fourth quarter of 2003 certain legal matters developed regarding the blueberry industry, the uncertainties of which Bank management believed warranted recognition of certain increases in credit risk. While more recent developments appear favorable, at September 30, 2004During the first quarter of 2005, these matters were, in the opinion of management, satisfactorily resolved. At March 31, 2005 the adequacy analysis of the allowance incorporates management’sa revised estimate of inherent risk of loss with respect to this industry segment.
There were no material changes in loan concentrations during the three-month period ended September 30, 2004.March 31, 2005.
Based upon the process employed and giving recognition to all attendant factors associated with the loan portfolio, management considers the allowance for loan losses at September 30, 2004,March 31, 2005, to be appropriate for the risks inherent in the loan portfolio and resident in the local and national economy as of that date.
Investment Securities
The investment securities portfolio consists of mortgage-backed securities, United States Government agency securities, obligations of state and political subdivisions and, to a lesser extent, corporate bonds. The overall objective of the Bank’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.
At September 30, 2004, total investment securities amounted to $176,197, compared with $158,387 and $154,312 at December 31, 2003 and September 30, 2003, representing increases of $17,810 and $21,885, or 11.2% and 14.2%, respectively.
The majority of the 2004 growth in the investment securities portfolio occurred during the second quarter of 2004. Securities added to the portfolio predominately consisted of mortgage-backed securities with average durations ranging between two and three years. This action was taken as market yields climbed to a two-year high, presenting some long awaited opportunities for the Bank to increase its earning assets and leverage its strong capital position.
In light of the low interest rate environment over the past couple of years and the high degree of interest rate volatility, the Bank’s investment strategy has been focused on maintaining a securities portfolio with an overall relatively short average duration, thereby reducing the exposures associated with sustained increases in interest rates. This was accomplished through investments in securities with predictable cash flows and relatively short average lives such as, 10-year fully amortizing mortgage-backed securities and other high coupon mortgage-backed securities. The Bank’s strategy has been to position the securities portfolio defensively with a steady stream of future cash flows. While sacrificing some yield in the near-term, the Bank’s objectives were to maintain a reasonable level of net interest income, manage longer-term interest rate and market risk, and position the portfolio for a rising interest rate environment and an improving economy.
Securities held to maturity ("HTM") are those where the Bank has the positive intent and ability to hold until maturity. At December 31, 2003, the HTM portfolio consisted exclusively of long-term, tax-exempt municipal bonds, with one exception; namely, a $461 mortgage-backed security ("MBS") originally purchased in 2002 for Community Reinvestment Act ("CRA") benefits, amounting to $1,518. The underlying collateral consisted of low-income housing loans in the state of Maine. By their nature, CRA investments typically have higher purchase premiums because of the positive CRA effect. In this case, the original premium paid by the Bank amounted to $31. Subsequent to the purchase, the Bank’s primary regulator advised that the MBS did not qualify for CRA credit because the loans were not in the Bank’s immediate market area, in effect diminishing the value of the unamortized premium recorded on the Bank’s balance sheet. During the first quarter of 2004, the Bank sold the bond and realized a gain of $16, and no longer holds any MBS’s in its HTM portfolio.
Deposits
The most significant funding source for earning assets continues to be core customer deposits that are gathered through the Bank's retail branch network. network of eleven banking offices throughout Down East and Mid Coast Maine.
At September 30, 2004March 31, 2005 total deposits amounted to $397,175$384,204 compared with $339,080 and $335,006$398,272 at December 31, 2003 and September 30, 2003,2004, representing increasesa decrease of $58,095 and $62,169,$14,068, or 17.1% and 18.6%, respectively.3.5%.
A portion of the Bank’s deposit base has historically been seasonal in nature, with balances declining during winter and early spring while peaking in the fall. TheAs was the case during the first quarter of 2005, the seasonal outflow of deposits has typically been replaced with cash flows from the securities portfolio orand short-term borrowings.
The $58,095 increaseComparing March 31, 2005 with the same date in 2004, total deposits at September 30, 2004 compared with December 31, 2003increased $20,223, or 5.6%. While all categories of deposits showed increases, the overall growth in total deposits was principally attributed to $20,459 in deposits acquired in connection with the February 13, 2004, Rockland branch acquisition and $16,870 in depositscertificates of deposit obtained from the new institutional moneynational market, account offered to clientsrepresenting $16,904 of Bar Harbor Trust Services.
Excluding acquired Rockland branch office deposits and the new institutional money market account, total deposits at September 30, 2004 represented increases of $20,766 and $24,840, or 6.1% and 7.4%, compared with December 31, 2003 and September 30, 2003, respectively.
Depositdeposit growth has been led by savings and money market accounts, which increased $29,318 and $32,874, or 26.8% and 31.1% compared with December 31, 2003 and September 30, 2003, respectively. Management believes that depositor preference over the past year was that of greater liquidity, given general economic and overall market conditions.
during this period.
Borrowed Funds
Borrowed funds principally consist of advances from the Federal Home Loan Bank of Boston ("FHLB") and, to a lesser extent, securities sold under agreements to repurchase. BorrowingsAdvances from the FHLB are secured by stock in the FHLB, mortgage-backed securities, and blanket liens on 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'sBank’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 Bank’s ability to select desired amounts, terms and maturities on a daily basis.
At September 30,March 31, 2005 total borrowings amounted to $219,063 compared with $206,923 at December 31, 2004, representing an increase of $12,140, or 5.9%. The increase in borrowed funds was utilized to replace the seasonal deposit outflows associated with the Bank’s market area, as well as funding first quarter 2005 loan growth.
Comparing March 31, 2005 with the same date in 2004, total borrowings from the FHLB amountedincreased $28,847, or 15.2%. The increase in borrowings was utilized to $184,947 compared with $170,506 and $170,881 at December 31, 2003 and September 30, 2003, representing increases of $14,441 and $14,066, or 8.5% and 8.2%, respectively.fund loan growth, which outpaced deposit growth by $31,984 during this period.
At September 30, 2004,March 31, 2005, total borrowings from the FHLB expressed as a percent of total assets amounted to 28.2%33.0%, compared with 29.2%31.0% and 30.9% at December 31 2003 and 29.5% at the same date last year.March 31, 2004, 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 few years, the Bank has added longer-term borrowings to the balance sheet in order to hedge the interest rate risk associated with the growth in longer-term, fixed rate, earning assets generated during periods of 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 an improving economy. At September 30, 2004 the total borrowings with maturities exceeding three-years amounted to $97,249, or 49.2% of total borrowed funds.
The increase in borrowed funds from December 31, 2003 and September 30, 2003 levels was principally utilized to fund growth in the investment securities portfolio, as deposit growth was more than sufficient to fund loan growth during these periods of time. The increase in borrowed funds principally represented short term, fixed-rate advances from the FHLB, and did not have a significant impact on the Company’s interest rate sensitivity position. As more fully described in Part I, Item 3 of this report on Form 10-Q, Quantitative and Qualitative Disclosures About Market Risk, as of September 30, 2004,March 31, 2005, the Bank maintained its asset sensitive balance sheet.
Capital Resources
Consistent with its long-term goal of operating a sound and profitable organization, during the thirdfirst quarter of 20042005 the Company maintained its strong capital position and continued to be a "well capitalized" financial institution according to applicable regulatory standards. Management believes this to be vital in promoting depositor and investor confidence and providing a solid foundation for future growth.
The Company and its banking subsidiary are subject to the risk based capital guidelines administered by the Bank's principal regulators. The risk based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Under these guidelines, assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of risk weighted assets and off-balance sheet items. The guidelines require all banks and bank holding companies to maintain a minimum ratio of total risk based capital to risk weighted assets of 8%, including a minimum ratio of Tier I capital to total risk weighted assets of 4% and a Tier I capital to average assets of 4% ("Leverage Ratio"). Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a material effect on the Company's financial statements.
As of September 30, 2004,March 31, 2005, the Company and the Bank are considered well capitalized under the regulatory framework for prompt corrective action. Under the capital adequacy guidelines, a well capitalized institution must maintain a minimum total risk based capital to total risk weighted assets ratio of at least 10%, a minimum Tier I capital to total risk weighted assets ratio of at least 6%, and a minimum leverage ratio of at least 5%.
The following table sets forth the Company's regulatory capital at September 30, 2004March 31, 2005 and December 31, 2003,2004, under the rules applicable at that date.
September 30, 2004 | December 31, 2003 | March 31, 2005 | December 31, 2004 | |||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||
Total Capital to Risk Weighted Assets | $55,683 | 13.3% | $56,403 | 14.7% | $56,299 | 12.8% | $56,260 | 13.0% | ||
Regulatory Requirement | 33,532 | 8.0% | 30,694 | 8.0% | 35,125 | 8.0% | 34,588 | 8.0% | ||
Excess | $22,151 | 5.3% | $25,709 | 6.7% | $21,174 | 4.8% | $21,672 | 5.0% | ||
Tier 1 Capital to Risk Weighted Assets | $50,900 | 12.1% | $51,601 | 13.4% | $51,500 | 11.7% | $51,431 | 11.9% | ||
Regulatory Requirement | 16,766 | 4.0% | 15,347 | 4.0% | 17,562 | 4.0% | 17,294 | 4.0% | ||
Excess | $34,134 | 8.1% | $36,254 | 9.4% | $33,938 | 7.7% | $34,137 | 7.9% | ||
Tier 1 Capital to Average Assets | $50,900 | 7.6% | $51,601 | 8.9% | $51,500 | 7.8% | $51,431 | 7.7% | ||
Regulatory Requirement | 26,668 | 4.0% | 23,111 | 4.0% | 26,422 | 4.0% | 26,547 | 4.0% | ||
Excess | $24,232 | 3.6% | $28,490 | 4.9% | $25,078 | 3.8% | $24,884 | 3.75% |
The Company’s capital ratios have declined moderately since December 31, 2003. The decline was principally attributed to the Bank’s acquisition of the Rockland branch office and the overall growth in total assets.
The Company's principal source of funds to pay cash dividends and support its commitments is derived from Bank operations. The Company declared dividends in the aggregate amount of $620$646 and $595$621 during the three-months ended September 30,March 31, 2005 and 2004, and 2003, at a rate of $0.20$0.21 per share and $0.19$0.20 per share, respectively.
In March 2004, the Company announced its 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. As of September 30, 2004,March 31, 2005, the Company had repurchased 29,56059,276 shares of stock under the plan, or 9.5%19.1% of the total authorized, at a total cost of $782$1,612 and an average price of $26.46.$27.19. The Company records the repurchased shares as treasury stock.
The Company believes that a stock repurchase plan is a prudent use of capital at this time. Management anticipates the stock repurchase plan will be accretive to the return on average shareholders’ equity and earnings per share.
Contractual Obligations
The Company is a party to certain contractual obligations under which it is obligated to make future payments. These principally include borrowings from the FHLB, consisting of short and long-term fixed rate borrowings, and collateralized by all stock in the FHLB, a blanket lien on qualified collateral consisting primarily of loans with first mortgages secured by one-to-four family properties, and certain pledged investment securities. The Company has an obligation 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, Maine.
The following table summarizes the Company’s contractual obligations at September 30, 2004.March 31, 2005. Borrowings are stated at their contractual maturity due dates and do not reflect callable features, or amortizing principalcall features on certain borrowings.
CONTRACTUAL OBLIGATIONS
(Dollars in thousands)
Total Amount of | Payments Due Per Period | Payments Due By Period | ||||||||
Description | Obligations | <1 year | 1-3 years | 4-5 years | >5 years | Total Amount of Obligations | < 1 Year | 1-3 Years | 4-5 Years | > 5 Years |
Operating Leases | $ 24 | $ 24 | $ --- | $ --- | $ 12 | $ 12 | $ --- | $ --- | $ --- | |
Long-Term Debt | 184,947 | 55,311 | 32,387 | 49,065 | 48,184 | |||||
Borrowings from Federal Home Loan Bank | 204,636 | 88,135 | 42,086 | 35,836 | 38,579 | |||||
Securities sold under agreements to repurchase & fed funds purchased | 14,427 | 14,427 | --- | --- | --- | |||||
Total | $184,971 | $55,335 | $32,387 | $49,065 | $48,184 | $219,075 | $102,574 | $42,086 | $35,836 | $38,579 |
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 a variety of traditional third party contracts for support services. Examples of such contractual agreements would include services providing ATM, Visa Debit and Credit Card processing, trust services accounting support, student loan servicing, check printing, and the 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.
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.
At March 31, 2005 the Company’s off-balance sheet arrangements were limited to standby letters of credit. The Bank guarantees 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 involved in issuing standby 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 products. The amount of collateral obtained, if deemed necessary by the Bank upon issuance of a standby letter of credit, is based upon management's credit evaluation of the customer.
At March 31, 2005, commitments under existing standby letters of credit totaled $1,284, compared with $1,155 and $2,205 at December 31 and March 31, 2004, respectively. The fair value of the standby letters of credit was not significant as of the foregoing dates.
Off Balance Sheet Risk
The CompanyBank 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 extend credit and 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. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.
Since many of these 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 policies as it does for its balance sheet instruments. The amount of collateral obtained, if deemed necessary by the Bank upon the issuance of commitment, is based on management's credit evaluation of the customer.
The following table summarizes the Bank's commitments to extend credit:
March 31, | December 31, | March 31, | ||||
September 30, | December 31, | September 30, | ||||
Commitments to originate loans | $ 38,797 | $32,575 | $11,734 | $ 19,781 | $14,435 | $ 32,847 |
Unused lines of credit | 71,103 | 62,616 | 59,431 | 77,467 | 75,732 | 64,337 |
Un-advanced portions of construction loans | 5,505 | 3,683 | 5,083 | 6,558 | 7,336 | 3,190 |
Total | $115,405 | $98,874 | $76,248 | $103,806 | $97,503 | $100,374 |
Derivative Instruments / Counter-party Risk: As part of the Bankits overall asset liability/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 certain assets and liabilities so that changes in interest rates do not have a significant adverse effect on net income. Derivative instruments that management periodically uses as part of its interest rate risk management strategy include interest rate swap agreements. A policy statement, approved by the Board of Directors of the Bank, governs use of derivative instruments.
At September 30, 2004March 31, 2005 the Bank had two outstanding derivative instruments, both interest rate swap agreements. The details are summarized as follows:
Description | Maturity | Notional Amount | Fixed Interest Rate | Variable Interest Rate | Maturity | Notional Amount | Fixed Interest Rate | Variable Interest Rate |
Receive fixed rate, pay variable rate | 09/01/07 | $10,000 | 6.04% | Prime | 09/01/07 | $10,000 | 6.040% | Prime (5.75%) |
Receive fixed rate, pay variable rate | 01/24/09 | $10,000 | 6.25% | Prime | 01/24/09 | $10,000 | 6.250% | Prime (5.75%) |
The Bank is required to pay a counter-party monthly variable rate payments indexed to prime,Prime, while receiving monthly fixed rate payments based upon interest rates of 6.04% and 6.25%, respectively, over the term of each respective agreement.
The following table summarizes the contractual cash flows of the interest rate swap agreements outstanding at September 30, 2004,March 31, 2005, based upon the then current Prime interest rate of 4.75%5.75%:
Payments Due by Period | ||||||||
Payments Due by Period | ||||||||
Total | Less Than 1 Year | 1-3 Years | 3-5 Years | |||||
Total | Less Than 1 Year | 1-3 Years | 3-5 Years | |||||
Fixed payments due from counter-party | $4,624 | $1,229 | $2,410 | $985 | $3,807 | $1,229 | $2,064 | $514 |
Variable payments due to counter-party | 3,561 | 950 | 1,862 | 749 | ||||
Variable payments due to counter-party | 3,548 | 1,150 | 1,925 | 473 | ||||
Net cash flow | $1,063 | $ 279 | $ 548 | $236 | $ 259 | $ 79 | $ 139 | $ 41 |
The notional amounts of the agreements do not represent exposure to credit loss. The Bank is exposed to credit loss only to the extent the counter-party defaults in its responsibility to pay interest under the terms of the agreements. Management does not anticipate non-performance by the counter-party to the agreements, and regularly reviews the credit quality of the counter-party from which the instruments have been purchased.
As more fully enumerated in Part I, Note 8 of the consolidated financial statements in this report on Form 10-Q, during the third quarter of 2004, the Bank designated its interest rate swap agreements as cash flow hedges and, prospectively from the time of this designation, changes in their fair value are being recorded on the consolidated balance sheet in other comprehensive income, while current period net cash flows representing net amounts received from or paid to counter-parties are recorded in interest income. During the first quarter of 2004, these interest rate swap agreements had been de-designated as cash flow hedges and, from the time of de-designation, changes in their fair value and current period net cash flows related to these agreements were recorded in the consolidated statement of income and included as part of non-interest income.
At September 30, 2004, December 31, 2003 and September 30, 2003, the fair value of the interest rate swap agreements were $28, $86 and $388, respectively, and included in other assets on the consolidated balance sheet.
At September 30, 2004 the net unrealized loss on these interest rate swap agreements included in other comprehensive income, net of tax, amounted to $1. At December 31, 2003 and September 30, 2003 the net unrealized gains on these interest rate swap agreements included in other comprehensive income, net of tax, amounted to $57 and $256, respectively.
During the quarter ended September 30, 2004, the Company recorded in non-interest income unrealized appreciation of $428 representing a mark-to-market adjustment for interest rate swap agreements prior to their designation as cash flow hedges, compared with an unrealized loss of $728 recorded in the quarter ended June 30, 2004, and an unrealized gain of $328 recorded in the quarter ended March 31, 2004. For the nine-months ended September 30, 2004, the net unrealized gain on interest rate swap agreements recorded in non-interest income amounted to $29. No such amounts were recorded in non-interest income during 2003.
For the three and nine-months ended September 30, 2004, the total net cash flows received from counterparties amounted to $89 and $386, respectively, compared with $128 and $324 during the same periods in 2003. Of the $89 in net cash flows received from counterparties during the three-months ended September 30, 2004, $79 was recorded in non-interest income and $10 in interest income. Of the $386 in net cash flows received from counterparties during the nine-months ended September 30, 2004, $376 was recorded in non-interest income and $10 in interest income. The $324 in net cash flows received during the nine-months ended September 30, 2003 was recorded in interest income.
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 sheetarrangements" include any transactions, agreements, or other contractual arrangements to which an entity unconsolidated with the Company is a party, under which the Company has:
(i) Any obligation under certain guarantee contracts;
(ii) A retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets;
(iii) Any obligation under certain derivative instruments;
(iv) Any obligation under a material variable interest held by the Company in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the registrant, or engages in leasing, hedging, or research and development services with the Company.
At September 30, 2004 the Company had the following Off-Balance Sheet Arrangements:
Standby Letters of Credit: The Bank guarantees 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 involved in issuing standby 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 products. The amount of collateral obtained, if deemed necessary by the Bank upon issuance of a standby letter of credit, is based upon management's credit evaluation of the customer. At September 30, 2004, commitments under existing standby letters of credit totaled $1,155, compared with $2,205 at December 31, 2003 and $2,205 at September 30, 2003. The fair value of the standby letters of credit was not significant as of September 30, 2004, and December 31, 2003.
Other Off-Balance Sheet Arrangements: At September 30, 2004 the Company did not have any other "off-balance sheet arrangements".
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 Bank 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 Bank to employ strategies necessary to maintain adequate liquidity.
The Bank 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 Bank’s policy is to maintain its liquidity position at approximately 5% of total assets. At September 30, 2004,March 31, 2005, liquidity, as measured by the basic surplus/deficit model, was 5.6%3.9% over the 30-day horizon and 4.5% over the 90-day horizon. Including its available lines from the FHLB, at September 30, 2004 the Bank’s basic surplus amounted to 6.3% over the 30-day horizon and 5.6% over the 90-day horizon.
A portion of the Bank’s deposit base has been historically seasonal in nature, with balances typically declining in the winter months through late spring, during which period the Bank’s liquidity position tightens. During the first quarter of 2005 the Bank’s seasonal deposit outflows exceeded historical levels. These seasonal deposit outflows, combined with relatively strong first quarter loan growth, tightened the Bank’s liquidity position more than anticipated by management.
At September 30, 2004,March 31, 2005, the Bank had unused lines of credit and net unencumbered qualifying collateral availability to support its credit line with the FHLB totaling $63,598.approximating $48 million. The Bank also had capacity to borrow funds on a serviced basis utilizing certain un-pledged securities in its investment securities portfolio. The Bank’s loan portfolio and investment portfolio provide aprovides an additional source of contingent liquidity that could be accessed in a reasonable time period through pledging or sales. The Bank also has access to the national brokered deposit market.market, and has been using this funding source to bolster its liquidity position.
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.
The Bank 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.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and the accompanying Notes to the Consolidated Financial Statements presented elsewhere in this report have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation.
Unlike many industrial companies, substantially all of the assets and virtually all of the liabilities of the Company are monetary in nature. As a result, interest rates have a more significant impact on the Company’s performance than the general level of inflation. Over short periods of 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.
While the financial nature of the Company’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 increase, 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 the Company’s financial statements. Accordingly, any examination or analysis of the financial statements should take into consideration the possible effects of inflation.
Other Events
BTI Financial Group Re-structuring Plan: As previously reported in Part I, Item 1, page 8 and Part II, Item 7, page 23 of the Company’s 2003 Annual Report on Form 10-K, in the fourth quarter of 2003 the Company’s Board of Directors approved a re-structuring plan for its wholly owned financial services subsidiary, BTI Financial Group ("BTI"). The BTI restructuring plan is largely completed, including the filing of articles of dissolution for both Dirigo Investments, Inc. and BTI Financial Group.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates/prices, such as interest rates, foreign currency exchange rates, commodity prices and equity prices. Interest rate risk is the most significant market risk affecting the Company. Other types of market risk do not arise in the normal course of the Company’s business activities.
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 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 objectives in managing the Bank's 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 promisepromote sufficient reward for understood and controlled risk.
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 the Asset/Liability Committee ("ALCO") and the Bank’s Board of Directors.
The Bank's Asset Liability Management Policy, approved annually by the Bank’s 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.
The Bank utilizes an interest rate risk model widely recognized in the financial industry to monitor and measure interest rate risk. The model simulates the behavior of interest income and expense of all balance sheet 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 yield curve.
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 interest rate scenarios. Interest income and interest expense are then simulated under several hypothetical interest 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 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 September 30, 2004,March 31, 2005, over one and two yeartwo-year horizons and under different interest rate scenarios. In light of the Federal Funds rate of 1.75% on the date presented, the analysis incorporates a declining interest rate scenario of 100 basis points.
INTEREST RATE RISK
CHANGE IN NET INTEREST INCOME FROM THE FLAT RATE SCENARIOSEPTEMBER 30, 2004MARCH 31, 2005
-100 Basis Points | +200 Basis Points | +200 Basis Points | -100 Basis | +200 Basis | +200 Basis | |
Year 1 | ||||||
Net interest income change ($) | ($120) | $712 | $480 | $200 | ($114) | ($180) |
Net interest income change (%) | (0.54%) | 3.18% | 2.15% | 0.91% | (0.52%) | (0.82%) |
Year 2 | ||||||
Net interest income change vs. year one base ($) | ($38) | $2,002 | $1,512 | $106 | $821 | $473 |
Net interest income change vs. year one base (%) | (0.17%) | 8.95% | 6.76% | 0.48% | 3.74% | 2.16% |
The foregoing interest rate sensitivity modeling results indicate that the Bank’s balance sheet is about evenly matched over the twelve-month horizon and is positively positioned for an upward interest rate environment over twelve andthe twenty-four month horizons.horizon. Accordingly, Managementmanagement believes interest rate risk will not have a material adverse impact on future net interest income. Management also believes the balance sheet is welladequately positioned for a variety of interest rate scenarios, and would ultimately benefit from rising interest rates and an improving economy.
Assuming interest rates remain at or near their current levels and the Bank maintains a static balance sheet, the interest rate sensitivity simulation model suggests that the net interest margin will slowly trend upward, as most of the Bank’s asset base has already recycled into the current interest rate environment while most of the funding base has already reset to low interest rate levels. The upward trend principally results from the re-investment of security and loan cash flows into higher current interest rate levels. Although short-term market interest rates have risen with the recent increases in the Federal Funds rate, the Bank has successfully lagged the market with the pricing of deposit rates without anya material run-off in balances. However, margins could narrow if the Bank is eventually forcedprompted to increase deposit interest rates in response to competitive market pricing pressures. Management anticipates continued balance sheet growth will be needed to meaningfully increase the Bank’s current level of net interest income, should interest rates remain at current levels.
Assuming interest rates decline from current levels and the Bank maintains a static balance sheet, Managementmanagement believes net interest income will decline slightly but remain relatively stable over the one and two-year horizons. The interest rate sensitivity simulation model suggests that funding cost reductions will essentially keep pace with falling asset yields, without significantly impacting margins and net interest income, however, as funding costs reach their assumed floors, asset yields will continue to decline as cash flows from securities and loans are reinvested into the low rate environment and variable rate assets will adjust downward, resulting in lower levels of net interest income. Management anticipates continued balance sheet growth will be needed to sustainmeaningfully increase the Bank’s current level of net interest income, should interest rates decline.
While the simulated interest rate decline of 100 basis points would reduce net interest income, Management believes that such a decline in interest rates, or a Federal Funds Targeted rate of 0.75%, represents a scenario that is not likely to occur. Further, a repositioning of the balance sheet to manage such a decline, would likely have an adverse impact on net interest income inIn a rising or flat interest rate environment, scenarios Management believes are more likely to occur over the longer term.
In a rising rate environment with the Bank maintaining a static balance sheet, Managementmanagement anticipates net interest income will initially remain stable, but will begin increasingshowing meaningful increases over the one-yeartwo-year horizon and continue to increaseaccelerate in year two and subsequent years. The interest rate sensitivity simulation model suggests that as interest rates rise the Bank’s asset base will re-price more quickly than funding costs, principally due to a large floating rate loan base, combined with the re-investment of cash flows from the securities and loan portfolios in a higher interest rate environment. Over the two-year horizon and beyond, the model suggests 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.
Since the second quarterFrom June of 2004 through the period covered by this report,March 31, 2005, the U.S. Treasury yield curve (the "yield curve") has flattened substantially. While the Federal Reserve has increased short-term interest rates by 75175 basis points, the 10-year U.S. Treasury note has declined 7539 basis points from its 2004 high, thus flattening the yield curve by 150214 basis points. As previously discussed, managementManagement models the Bank’s interest rate risk sensitivity position under a variety of future interest rate scenarios, including a flattening of the yield curve. The interest rate sensitivity simulation model suggests that if short-term interest rates continue to rise and the yield curve flattens further, the Bank’s net interest income will begin increasingdecline mildly over the one-year horizon, andbut will continue to increase moderately in year two and subsequent years, but not to the same degree as would aan upward parallel shift in the yield curve. This increase is principally attributed to the Bank’s large floating rate loan base. Management believes continued increases in short-term interest rates will increasepressure net interest income in the near term, but will be favorably impacted over the two-year horizon and beyond, without continued balance sheet growth.
Managing the Bank’s interest rate risk sensitivity has been challenging during thisa period of historically low interest rates. As was anticipated by Management through use of the interest rate sensitivity model, the Bank’s net interest income was moderately impacted over the past twofew years and this trend continued into the first six-months of 2004. Management believes that were it not for the growth in earning assets during this period of time combined with strategies designed to adjust the posture of the balance sheet, net interest income would have posted declines. Following the recent short termseven short-term interest rate increases by the Federal Reserve since late June of 2004, as was anticipated by management through use of the interest rate sensitivity model, during the third quarter of 2004 the Bank’s first quarter 2005 net interest margin increased 17represented a 26 basis points,point increase compared with the second quarter ended June 30,of 2004.
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, prepayment speeds 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;assumed, the impact of interest rate change caps or floors on adjustable rate assets;assets, the potential effect of changing debt service levels on customers with adjustable rate loans;loans, depositor early withdrawals and product preference changes;changes, and other such variables. The sensitivity analysis also does not reflect additional actions that ALCOthe Bank’s asset and liability management committee might take in responding to or anticipating changes in interest rates.
ITEM 4. CONTROLS AND PROCEDURES
Company management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this quarterly report. Based on such evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and regulations and are operating in an effective manner. Company management intends to continue to review and document the Company’s disclosure controls and procedures, including internal controls and procedures for financial reporting, and may from time to time make changes to the disclosure controls and procedures to enhance their effectiveness and to help ensure that the Company’s systems evolve with its business.
No change in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
The Company and its subsidiaries are parties to certain ordinary routine litigation incidental to the normal conduct of their respective businesses, which in the opinion of Management will have no material effect on the Company's consolidated financial statements.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
(a) The following table sets forth the total number of shares of Company common stock, par value $2.00, unregistered securities, issued by the Company under the Bar Harbor Bankshares and its Subsidiaries Incentive Stock Option Plan of 2000 for each of the past three-years and for the three and nine-months ended September 30, 2004.None
Period | Total Number of | Average Price |
July 1, 2004 – September 30, 2004 | 3,403 | $16.18 |
January 1, 2004 -- September 30, 2004 | 17,817 | $16.11 |
January 1, 2003 – December 31, 2003 | 11,255 | $15.91 |
January 1, 2002 – December 31, 2002 | 5,241 | $15.41 |
January 1, 2001 – December 31, 2001 | --- | $ --- |
(b) None
(c) The following table sets forth information with respect to any purchase made by or on behalf of the Company or any "affiliated purchaser," as defined in Section 240.10b-18(a)(3) under the Securities Exchange Act of 1934, of shares of Company common stock during the indicated periods
Period | Total Number of | Average Price | Total Number of | Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs |
January 1 – 31, 2004 | 725 | $26.85 | 725 | 4,186 (1) |
February 1 – 29, 2004 | --- | --- | --- | --- |
March 1 – 31, 2004 | 3,720 | $26.80 | 3,720 | 306,280 (2) |
April 1 – 30, 2004 | 2,635 | $26.46 | 2,635 | 303,645 |
May 1 – 31, 2004 | 6,270 | $25.83 | 6,270 | 297,375 |
June 1 – 30, 2004 | 660 | $26.48 | 660 | 296,715 |
July 1 – 31, 2004 | 2,455 | $26.12 | 2,455 | 294,260 |
August 1 – 31, 2004 | 5,220 | $26.15 | 5,220 | 289,040 |
September 1 – 30, 2004 | 8,600 | $27.06 | 8,600 | 280,440 |
Period | Total Number of | Average Price | Total Number of | Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs |
January 1 – 31, 2005 | 1,975 | $28.34 | 1,975 | 258,105 |
February 1 – 28, 2005 | 1,457 | $27.98 | 1,457 | 256,648 |
March 1 – 31, 2005 | 5,924 | $27.94 | 5,924 | 250,724 |
Total | 9,356 | $28.03 | 9,356 | 250,724 |
(1) 725 shares traded on December 29, 2003 and settled on January 2, 2004 under the 1999 share repurchase program which expired on December 31, 2003.(2) In February 2004, the Company’s Board of Directors approved a program to repurchase up to 10% of the Company’s outstanding shares of common stock,
or approximately 310,000 shares. Purchases began March 4, 2004. This repurchase program is scheduled to terminate December 31, 2005, unless otherwise
extended by the Company.
Item 3: Defaults Upon Senior Securities None
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Item 4: Submission of Matters to a Vote of Security Holders None |
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Item 5: Other Information None |
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(i) The first tier of the 2005 incentive arrangement provides, in part, that if the Company's consolidated earnings for fiscal year 2005 reach $6,248 (9% over 2004 net earnings), then the above named exeuctive officers, along with certain other officers, will become eligible for a 10% salary incentive bonus. Fifty percent of this incentive compensation plan will be based on achievement of the corporate earnings goal of 9% above 2004 earnings and fifty percent based on an assessment of success in reaching specific individual goals. The total maximum award based on present salary levels -- at the 10% level for the named executives would be $36,400.
(ii) For fiscal year 2005 twenty-five cents of each net income dollar earned exceeding a 10% increase in earnings over 2004 levels will go into a pool to be disbursed among the named executive officer and certain other officers at the discretion of the Company's Board, based on individual contributions.
(iii) In addition, Mr. Hurley, President of Bar Harbor Trust Services and Senior Vice President of Bar Harbor Bank & Trust, is eligible for an incentive payment of $25,000 for fiscal year 2005 based upon Bar Harbor Trust Services achieving certain performance based standards as determined by the Company's Board of Directors.
Item 6: Exhibits |
(a) Exhibits.
EXHIBIT | ||
2 | 2.1 Plan of Acquisition, Reorganization, Agreement, Liquidation, | Incorporated by reference to Form S-14 filed with the Commission March 26, 1984 (Commission Number 2-90171). |
2.2 BTI Restructuring Plan | Incorporated by reference to Form 10-K, Part III, Item 15(a)(3), filed with the Commission March 29, 2004 (Commission Number 001-13349). | |
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| Articles of Incorporation 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 incorporated by reference to Form 10-K, Item 14 (a)(3) filed with the Commission March 28, 2002. (Commission Number 001-13349). | |
10 | 10.1 Infinex Investments third party brokerage agreement |
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10.2 Supplemental Executive Retirement Plan adopted by the | Incorporated by reference to Form 10-Q, Part II, Item 6, filed with the Commission November 13, 2003 (Commission File Number 001-13349). | |
10.3 Employment Contract for Joseph M. Murphy, Company President and
| Incorporated by reference to Form 10-K Item 15(a)(10.2), filed with the Commission May 27, 2003 (Commission File Number 001-13349). | |
10.4 Amendment to Employment Agreement, Change in Control, Confidentiality and Non-competition 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). | |
10.5 Change in Control, Confidentiality, and Non-competition Agreement between the Company and Gerald Shencavitz, | Incorporated by reference to Form 10-Q, Part II, Item 6, filed with the | |
10.6 Change in Control, Confidentiality, and Non-competition Agreement between the Bank and Dean S. Read, former President of | Incorporated by reference to Form 10-Q, Part II, Item 6, filed with the Commission November 13, 2003 (Commission File Number 001-13349). | |
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10.7 |
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| Incorporated by reference to Form 10-K, Item 14(a)(3) filed with the Commission March 28, 2002 (Commission File Number 001-13349). |
10.8 2005 Incentive Arrangements for Named Executive Officers Joseph M. Murphy, Gerry Shencavitz, and Daniel Hurley | Filed herewith. | |
10.9 Resignation Agreement and Release with Former Bank President Dean S. Read | Incorporated by reference to Form 10-K Item 15(10.11), filed with the Commission March 16, 2005 (Commission File Number 001-13349). | |
10.10 Deferred Compensation plans with former executives | Incorporated by reference to Form 10-K filed with the Commission March 31, 1987 (Commission File Number 0-13666). | |
31.1 | Rule 13a-14(a)/15d-14(a) Certifications Certification of Principal Executive Officer, dated November, 2004 | Filed |
31.2 | Rule 13a-14(a)/15d-14(a) Certifications Certification of Principal Financial Officer, dated November, 2004 | Filed |
32.1 | Section 1350 Certification of Chief Executive Officer | Filed |
32.2 | Section 1350 Certification of Chief Financial Officer | Filed |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BAR HARBOR BANKSHARES | |
/s/Joseph M. Murphy | |
Date: | Joseph M. Murphy |
Chief Executive Officer | |
/s/Gerald Shencavitz | |
Date: | Gerald Shencavitz |
Chief Financial Officer |