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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 2049
FORM 10-K
Annual Report pursuant to Section 15(d) of the Securities and Exchange Act of 1934 (fee required) for
For the fiscal year ended December 31, 2001.2002. Commission File No. 0-13666
BAR HARBOR BANKSHARES
(Exact name of registrant as specified in its charter)
Maine01-0393663
(State ofor other jurisdiction of (I.R.S. Employer
incorporation or organization: MaineIRS Employerorganization) Identification Number: 01-0393663Address: No.)
PO Box 400
82 Main Street, Bar Harbor, MEZip Code: 04609-0400
(Address of principal executive offices) (Zip Code)
(207) 288-3314
(Registrant’s telephone number, including area code: (207) 288-3314code)
Title of Class: Common Stock --- Par Value: $2.00 per share
(Securities registered pursuant to Section 12(g) of the Act:Title of Class: Common Stock. Par Value $2.00 per shareAct)
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 XXYES: (X) NO: ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definite proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K.( )
Based on the closing price of the common stock of the registrant, the aggregate market value of the voting stock held by non-affiliates of the registrant, as of March 19, 200225, 2003 is:
Common Stock, $2.00 par value $55,506,942-- $59,734,451
The number of voting shares outstanding of each of the registrant’s classes of common stock, as of March 19, 2002 is:
25, 2003 is:
Common Stock 3,246,020-- 3,163,901
Documents incorporated by Reference:
Proxy Statement for 20022003 annual meeting pursuant to Regulation 14A of the General Rules and Regulations of the Commission and filed with the Commission on March 26, 2002,27, 2003, is incorporated by reference into Part III of this report.
INDEX
1. | Business | 3-10 | Business | 3 - 11 |
2. | Properties | 11-12 | Properties | 12 - 13 |
3. | Legal Proceedings | 12 | Legal Proceedings | 13 |
4. | Submission of Matters to a Vote of Security Holders | 12 | Submission of Matters to a Vote of Security Holders | 13 |
5. | Market for Registrant’s Common Equity and Related Shareholder Matters | 12 | Market for Registrant’s Common Equity and Related Shareholder Matters | 14 |
6. | Selected Financial Data | 13 | Selected Financial Data | 15 |
7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 13-38 | Management’s Discussion and Analysis of Financial | 16 - 49 |
8. | Consolidated Financial Statements and Supplementary Data | 39-64 | Consolidated Financial Statements and Supplementary Data | 50 - 77 |
9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 64 | Changes in and Disagreements with Accountants on | 77 |
10. | Directors and Executive Officers of the Registrants | 65 | Directors and Executive Officers of the Registrants | 77 |
11. | Executive Compensation | 65 | Executive Compensation | 77 |
12. | Security Ownership of Certain Beneficial Owners and Management | 65 | Security Ownership of Certain Beneficial Owners and Management | 77 |
13. | Certain Relationships and Related Transactions | 65 | Certain Relationships and Related Transactions | 78 |
14. | Exhibits, Financial Statement Schedules and Reports on Form 8-K | 66-87 | Controls and Procedures | 78 |
15. | Exhibits, Financial Statement Schedules and Reports on Form 8-K | 79 - 96 |
PART I
ITEM 1. BUSINESS
ORGANIZATION
Bar Harbor Bankshares ("the Company") was incorporated January 19, 1984. As of March 19, 2002,25, 2003, the Company’s securities consisted of one class of common stock ("the Common Stock"), par value of $2.00 per share, of which there are 3,246,020 were 3,163,901 shares outstanding held of record by approximately 1,0881,056 shareholders. The Company has two primary, wholly-owned operating subsidiaries: Bar Harbor Banking and Trust Company ("the Bank"), a community bank which offers a wide range of deposit, loan, and related banking products; and BTI Financial Group ("BTI"), a financial services holding company that offersoffering brokerage, trust, private banking, financial planning and investment management services.services to individuals, businesses, not-for-profit organizations and municipalities.
The Company is a bank holding company ("BHC") registered under the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and is subject to supervision, regulation and examination by the Board of Governors of the Federal Reserve System (the "FRB"). The Company is also a Maine Financial Institution Holding Company for the purposes of the laws of the State of Maine, and as such is subject to the jurisdiction of the Superintendent (the "Superintendent") of the Maine Bureau of Financial Institutions ("BFI").
BANK
The Bank, originally founded in 1887 and now a direct, wholly owned subsidiary of the Company, is a Maine financial institution, and its deposits are insured by the Federal Deposit Insurance Corporation (the "FDIC") up to the maximum extent permitted by law. The Bank is subject to the supervision, regulation, and examination of the FDIC and the BFI. It is not a member of the Federal Reserve Bank.
The Bank has ten offices in coastal Maine, including its principal office located at 82 Main Street, Bar Harbor, as well as offices in Hancock County and adjacent Washington County, which represent the Bank’s principal market areas. The Hancock County offices, in addition to Bar Harbor, are located in Northeast Harbor, Southwest Harbor, Blue Hill, Deer Isle, Ellsworth, and Winter Harbor. The Washington County offices are located in Milbridge, Machias, and Lubec. The CompanyBank delivers its operations and technology services from its operations center located on Avery Lane in Ellsworth, Maine.
The Bank is a retail bank serving individual and corporate customers, retail establishments, seasonal lodging, campgrounds and restaurants. As a coastal bank, it serves the lobstering fishing, and aquaculturefishing industries. It also serves Maine’s wild blueberry industry through its Washington County offices. It operates in a competitive market that includes other community banks, savings institutions, and credit unions, and branch offices of statewide and interstate bank holding companies located in the Bank’s market area. The Bank continues to be one of the larger independent commercial banks in the Statestate of Maine.
The Bank has a broad deposit base and loss of any one depositor or closely aligned group of depositors would not have a materially adverse effect on its business. The banking business in the Bank’s market area historically has been seasonal, with lower deposits in the winter and spring and higher deposits in the summer and fall. These seasonal swings have been fairly predictable and have not had a materially adverse impact on the Bank. Approximately 84%86% of the Bank’s deposits are in interest bearing accounts. The Bank has paid, and anticipates that it will continue to pay, competitive interest rates on certificates of deposit, IRAs,Individual Retirement Accounts (IRAS), NOW and money market accounts and does not anticipate any material loss of these deposits. Deposit growth continues to be a challenge in the communities served by the Bank. From 1994 through 2001, the nation’s deposits grew at an annual rate of 4.61%, while Maine’s deposits grew at 2.72%.
The Bank emphasizes personal service to the community, with a concentration on retail banking. Customers are primarily individuals and small businesses for whom the Bank offers a wide variety of products and services. The Bank provides all of the normaltraditional banking services offered by a commercial bank, including checking accounts, NOW accounts, all forms of savings andaccounts, money market accounts, time deposit accounts, individual retirement accounts, safe deposit boxes, collections, travelers checks,bank by mail services, night depository services, internet banking services, direct deposit payroll services, automated teller services, credit cards, personal money orders, bank-by-mail and club accounts, drive-up facilities at all offices, anda variety of cash management services. The Bank also offers TeleDirect, an interactive voice response system through which customers can get product information, check balances and activity on their accounts as well as perform transfers between their own accounts. In February 2001, theThe Bank began offeringcontinues to offer free, on-line real-time Internet banking services through its dedicated website at www.bhbt.com. The Bank also has arrangements with other institutions for the provision of certain services, which it does not provide directly, such as computerized payroll services. Automated Teller Machines (ATMs) are located inat each of the ten branch locations, in addition to twothree machines in non-Bank locations. These ATMs access major networks for use of the Bank’s cards throughout the United States, including the Plus and NYCE systems as well as the major credit card networks. Drive-up facilities are available at all banking offices.
The Bank offers a comprehensive array of lending services, including consumer credit in the form of installment loans, overdraft protection (stand-by credit)(stand-by-credit), VISA credit card accounts, student loans, residential mortgage loans, and home equity loans. It offers business loans to individuals, partnerships, corporations, and other business entities for capital construction, the purchase of real estate purchases, working capital, and a broad range of other business purposes. Business loans are provided primarily to organizations and individuals in the tourist, hospitality, health care, blueberry, shipbuilding fishing, and aquaculturefishing industries as well as to other small toand mid-size businesses associated with small coastal communities. Certain larger loans, which exceed the Bank’s lending limits, are written on a participation basis with correspondent banks, withwhereby the Bank retainingretains only such portions of those loans that are within its lending limits.limits and credit risk tolerances. The Bank’s policy for lending limits is up to 20% of its equity to any borrower provided that the loans are secured, and approved by the Directors’ Loan Committee. This committee is chaired by a member of the Bank’s Board of Directors, Bernard K. Cough, and includes non-voting members of the Bank’s management and Board of Directors.
BTI
BTI Financial Group is a wholly owned subsidiary of the Company. It was incorporated on August 16, 1999, as the holding company for three operating subsidiaries: Bar Harbor Trust Services ("Trust"), a newly formed Maine corporation that performs thechartered trust functions formerly performed by the Trust Department of the Bank;company; Block Capital Management ("Block"), an SEC registered investment advisor; and Dirigo Investments, Inc. ("Dirigo"), an SECa National Association of Securities Dealers (NASD) registered broker-dealer. BTI is able to provide a comprehensive array of private banking, financial planning, investment management and trust services to individuals, businesses, not-for-profit organizations, and municipalities of varying assets size, and to provide the highest level of customized personal service. The staff includes credentialed investment and trust professionals with extensive experience.
Trust operates as a Maine chartered, non-depository trust company offeringoffers revocable, irrevocable, charitable remainder and testamentary trust management, and estate planning and management services such as probate, estate settlement, and tax return preparation. At December 31, 2001,2002, Trust had 1,300 accounts.837 accounts with assets totaling $202 million.
Block an SEC registered investment advisor, provides discretionary and non-discretionary investment advisory services for corporate and individual investment portfolios, personal trusts, individual and corporate retirement funds, and endowments for not-for-profit organizations. At December 31, 2001,2002, Block had $239$181 million in assets under management, primarily for clients of Trust.
Dirigo was purchased by BTI in January 2000. It is a registered broker/dealer andprincipally serves the brokerage needs principally of individuals, from first-time purchasers, to sophisticated investors. It also offers a line of life insurance, annuity, and annuity products.retirement products, as well as financial planning services. A third party processor provides Dirigo’s support and clearing services.
BTI’s central offices are located in a recently renovated, 22,000-square-foot office facility shared with the Bank, located at 135 High Street, Ellsworth, Maine. Dirigo, Trust, and Block maintain their principal offices at the Ellsworth facility and maintain additional offices at One Cumberland Place, Bangor, Maine. BTI also maintains offices in the headquarters building of the Bank in Bar Harbor, Maine.
COMPETITION
The Company competes principally in Down East coastal Maine, which can generally be characterized as a rural area. The Company considers its primary market areas to be in Hancock and Washington counties, each in the state of Maine. The combined population of these two counties is approximately 86,000 people, and their economies are based primarily on tourism, health care, aquaculture, agriculture and small local businesses, but are also supported by a large contingent of retirees. Major competitors in these market areas include local independent banks, local branches of large regional bank affiliates, thrift institutions and credit unions. Other competitors in the Company’s primary market area include insurance companies and financing affiliates of consumer durable goods manufacturers.
The Bank has been able to compete effectively with other financial institutions by emphasizing quality customer service, making decisions at the local level, maintaining long-term customer relationships, building customer loyalty, and providing products and services designed to address the specific needs of customers. However, no assurance can be given that the Bank will continue to be able to compete effectively with other financial institutions in the future.
The financial services landscape has changed considerably over the past five years in the Company’s primary market area. The subsidiaries of BTI each separately face significant competition for their services from local banks, and nonbanks, which may now or in the future may offer a similar range of services, as well as from a number of brokerage firms and investment advisors with offices in the Bank’sCompany’s market area. In addition, mostmany of these services are widely available to the Bank’s customers by telephone and over the Internet through firms located outside of the Bank’sCompany’s market area.
MANAGEMENT AND EMPLOYEES
The Company has four officers: Joseph M. Murphy, President and Chief Executive Officer; Gerald Shencavitz, Senior Vice President, Chief Financial Officer and Treasurer; Dennis K. Miller, Senior Vice President, Audit and Risk Management; and Judith W. Fuller, Corporate Secretary. Marsha C. Sawyer serves as the Clerk of the Company.
Joseph M. Murphy also serves as President and Chief Executive Officer of BTI. Dean S. Read serves as President and Chief Executive Officer of the Bank. Gerald Shencavitz serves as Chief Financial Officer of each of the Company’s subsidiaries, as well as Chief Operating Officer and Treasurer of the Bank. Other senior operating positions in the Company include Presidents of the BTI subsidiaries, and Senior Vice Presidents in charge of retail banking, lending, credit administration and human resources.
As of December 31, 2002, the Bank employed 152 full time and 26 part time employees and BTI employed 20 full-time and 2 part time employees, representing a full-time equivalent complement of 186employees of the Company
The Company maintains comprehensive employee benefit programs, which provide health, dental, long-term and short-term disability and life insurance. All Company employees are eligible for participation in the Bar Harbor Bankshares 401(k) plan and Profit Sharing Plan. Certain officers and employees of the Company may also participate in the Company’s 2000 stock option plan and/or have Supplemental Executive Retirement Agreements with the Company or the Bank.
The Company’s management believes that employee relations are good, and there are no known disputes between management and employees.
SUPERVISION AND REGULATION
The business in which the Company and its subsidiaries are engaged is subject to extensive supervision, regulation, and examination by various federal and state bank regulatory agencies, including the FRB, the FDIC, and the Superintendent, as well as other governmental agencies in the states in which the Company and its subsidiaries operate. The supervision, regulation, and examination to which the Company and its subsidiaries are subject are intended primarily to protect depositors and other customers, or are aimed at carrying out broad public policy goals, and are not necessarily for the protection of the shareholders.
Some of the more significant statutory and regulatory provisions applicable to banks and BHCs, to which the Company and its subsidiaries are subject, are described more fully below, together with certain statutory and regulatory matters concerning the Company and its subsidiaries. The description of these statutory and regulatory provisions does not purport to be complete and itis qualified in its entirety by reference to the particular statutory or regulatory provision. Any change in applicable law or regulation may have a material effect on the Company’s business and operations, as well as those of its subsidiaries. The Company’s shareholders generally are not subject to these statutory and regulatory provisions.
BHCs – Activities and Other Limitations.Bank Holding Company Act - As a registered BHC and a Maine financial institution holding company, the Company is subject to regulation under the BHC Act and Maine law and to examination and supervision by the FRB and the Superintendent, and is required to file reports with, and provide additional information requested by, the FRB and the Superintendent. The FRB has the authority to issue orders to BHCs to cease and desist from unsound banking practices and violations of conditions imposed by, or violations of agreements with, the FRB. The FRB is also empowered to assess civil money penalties against companies or individuals that violate the BHC Act or orders or regulations thereunder, to order termination of non-banking activities of non-banking subsidiaries of BHCs, and to order termination of ownership and control of a non-banking subsidiary of a BHC.
Various other laws and regulations, including Sections 23A and 23B of the Federal Reserve Act, as amended (the "FRA"), generally limit borrowings, extensions of credit, and certain other transactions between the Company and its non-bank subsidiaries and its affiliate insured depository institutions. Section 23A of the FRA also generally requires that an insured depository institution’s loans to non-bank affiliates be secured in appropriate amounts, and Section 23B of the FRA generally requires that transactions between an insured depository institution and its non-bank affiliates be on market terms. These laws and regulations also limit BHCs and their subsidiaries from engaging in certain tying arrangements in connection with any extension of credit, sale or lease of property, or furnishing of services.
The BHC Act prohibits a BHC from acquiring substantially all the assets of a bank or acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank, or increasing such ownership or control of any bank, or merging or consolidating with any BHC without prior FRB approval. Unless a BHC becomes a financial"financial holding company" (an "FHC") under the Gramm-Leach-Bliley Act ("GLBA"), as discussed below, the BHC Act also prohibits a BHC from acquiring a direct or indirect interest in or control of more than 5% of the voting shares of any company which is not a bank or BHC and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiary banks, except that it may engage in and may own shares of companies engaged in certain activities the FRB determined to be so closely related to banking or managing and controlling banks as to be a proper incident thereto. In addition, Maine law requires approval by the Superintendent prior to acquisition of more than 5% of the voting shares of a Maine financial institution or any financial institution holding company whichthat controls a Maine financial institution. The Superintendent also must approve acquisition by a Maine financial institution holding company of more than 5% of a financial institution or financial institution holding company domiciled outside of the State of Maine.
Federal Reserve Act - Various other laws and regulations, including Sections 23A and 23B of the Federal Reserve Act, as amended (the "FRA"), generally limit borrowings, extensions of credit, and certain other transactions between the Company and its non-bank subsidiaries and its affiliate insured depository institutions. Section 23A of the FRA also generally requires that an insured depository institution’s loans to non-bank affiliates be secured in appropriate amounts, and Section 23B of the FRA generally requires that transactions between an insured depository institution and its non-bank affiliates be on market terms. These laws and regulations also limit BHCs and their subsidiaries from engaging in certain tying arrangements in connection with any extension of credit, sale or lease of property, or furnishing of services.
Financial Services Modernization - The Gramm-Leach-Bliley Act ("GLBA"), which significantly altered banking laws in the United States, was signed into law in 1999. GLBA enabled combinations among banks, securities firms and insurance companies beginning in 2000. As a result of GLBA, many of the depression-era laws that restricted these affiliations and other activities that may be engaged in by banks and bank holding companies, were repealed. Under GLBA, bank holding companies are permitted to offer their customers virtually any type of service that is financial in nature or incidental thereto, including banking, securities underwriting, insurance (both underwriting and agency), and merchant banking.
The GLBAGramm-Leach-Bliley Act established a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the BHC Act framework to permit BHCs that qualify and elect to be treated as FHCsfinancial holding companies to engage in a range of financial activities broader than would be permissible for traditional BHCs that have not elected to be treated as FHCs, such as the Company. "Financial activities" is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the FRB, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.
In order to elect to become an FHC, a BHC must meet certain tests and file an election form with the FRB. To qualify, all of a BHC’s subsidiary banks must be well-capitalized and well-managed, as measured by regulatory guidelines. In addition, to engage in the new activities, each of the BHC’s banks must have been rated "satisfactory" or better in its most recent federal Community Reinvestment Act evaluation.
A BHC that elects to be treated as an FHC may face significant consequences if its banks fail to maintain the required capital and management ratings, including entering into an agreement with the FRB which imposes limitations on its operations and may even require divestitures. Such possible ramifications may limit the ability of a bank subsidiary to significantly expand or acquire less than well-capitalized and well-managed institutions. The Company has not elected to become an FHC.
Further, the GLBA permits state banks, to the extent permitted under state law, to engage in certain new activities whichthat are permissible for subsidiaries of an FHC. Further, theThe GLBA expressly preserves the ability of state banks to retain all existing subsidiaries. In order to form a financial subsidiary, a state bank must be well-capitalized, and such banks would be subject to certain capital deduction, risk management, and affiliate transaction rules. Also, the FDIC’s final rules governing the establishment of financial subsidiaries adopt the position that a state nonmember bank may only conduct through a financial subsidiary activities that a national bank could only engage in through a financial subsidiary, such as real estate development or investment, continue to be governed by the FDIC’s standard activities rules. Moreover, to mirror the FRB’s actions with respect to state member banks, the final rules provide that a state bank subsidiary that engages only in activities that the bank could engage in directly (regardless of the nature of the activities) will not be deemed to be a financial subsidiary.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.1994 - - The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 generally authorizes BHCs to acquire banks located in any state, possibly subject to certain state-imposed age and deposit concentration limits, and also generally authorizes interstate mergers, and to a lesser extent, interstate banking.
Declaration of Dividends.Dividends - According to its Policy Statement on Cash Dividends Not Fully Covered by Earnings (the "FRB Dividend Policy"), the FRB considers adequate capital to be critical to the health of individual banking organizations and to the safety and stability of the banking system. Of course, one of the major components of the capital adequacy of a bank or a BHC is the strength of its earnings and the extent to which its earnings are retained and added to capital, or paid to shareholders in the form of cash dividends. Accordingly, the FRB Dividend Policy suggests that banks and BHCs generally should not maintain their existing rate of cash dividends on common stock, unless the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends, and the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality, and overall financial condition. The FRB Dividend Policy reiterates the FRB’s belief that a BHC should not maintain a level of cash dividends to its shareholders that places undue pressure on the capital of bank subsidiaries, or that can be funded only through additional borrowings or other arrangements that may undermine the BHC’s ability to serve as a source of strength.
Under current Maine corporation law, a corporation’s board of directors may declare, and the corporation may pay, dividends on its outstanding shares in cash or other property, generally out of the corporation’s unreserved and unrestricted earned surplus, or out of the unreserved and unrestricted net earnings of the current fiscal year and the next proceeding fiscal year taken as a single period, except under certain circumstances, including when the corporation is insolvent, or when the payment of the dividend would render the corporation insolvent, or when the declaration would be contrary to the corporation’s charter. These same limitations generally apply to investor-owned, Maine financial institutions. Current Maine corporation law will be repealed and replaced effective July 1, 2003, with the new Maine Business Corporation Act (the "New Maine Act"). The New Maine Act adopts a simplified test for when the directors of a corporation may make distributions to its shareholders (subject to restriction by the articles of incorporation), namely, (1) the corporation’s assets must exceed its liabilities (plus any amounts payable to preferred classes of stock), and (2) the corporation must be able to pay its debts as they become due in the usual course of business (i.e., it must not be insolvent).
Federal bank regulatory agencies also have authority to prohibit banking institutions from paying dividends if those agencies determine that, based on the financial condition of the bank, such payment would constitute an unsafe or unsound practice.
Capital Requirements
FRB Guidelines.Adequacy Guidelines - The FRB has adopted capital adequacy guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a BHC and in analyzing applications to it under the BHC Act. The FRB’s capital adequacy guidelines apply on a consolidated basis to BHCs with consolidated assets of $150 million or more; thus, these guidelines apply to the Company on a consolidated basis.Company.
The FRB’s capital adequacy guidelines generally require BHCs to maintain total capital equal to 8% of total risk-adjusted assets and off-balance sheet items, with at least one-half of that amount consisting of Tier 1 or core capital and the remaining amount consisting of Tier 2 or supplementary capital. Tier 1 capital for BHCs generally consists of the sum of common stockholders’ equity and perpetual preferred stock (subject in the case of the latter to limitations on the kind and amount of such stocks which may be included as Tier 1 capital), less goodwill and other non-qualifying intangible assets. Tier 2 capital generally consists of hybrid capital instruments; perpetual preferred stock, which is not eligible to be included as Tier 1 capital; term subordinated debt and intermediate-term preferred stock; and, subject to limitations, general allowances for loan losses. Assets are adjusted under the risk-based guidelines to take into account different risk characteristics.
In addition to the risk-based capital requirements, the FRB requires BHCs to maintain a minimum leverage capital ratio of Tier 1 capital (defined by reference to the risk-based capital guidelines) to total assets of 3.0%. Total assets for this purpose do not include goodwill and any other intangible assets and investments that the FRB determines should be deducted from Tier 1 capital. The FRB has announced that the 3.0% leverage ratio requirement is the minimum for the strong BHCs without any supervisory, financial or operational weaknesses or deficiencies, or those whichthat are not experiencing or anticipating significant growth. All other BHCs are required to maintain a minimum leverage ratio of at least 4.0%. BHCs with supervisory, financial, operational, or managerial weaknesses, as well as BHCs that are anticipating or experiencing significant growth, are expected to maintain capital ratios well above the minimum levels.
At December 31, 2001,2002, and at the time of this report, the Company’s risk-based capital ratio and leverage ratio currently were well in excess of regulatory requirements, and its management expects these ratios to remain in excess of regulatory requirements. Separate, but substantially similar, capital requirements under FDIC regulations apply to the Company’s bank subsidiary, and these also exceed regulatory requirements.requirements at December 31, 2002.
Failure to meet capital guidelines could subject the Company or the Bank to a variety of FDIC corrective actions, including for example, (i) restricting payment of capital distributions and management fees, (ii) requiring that the appropriate federal banking agency monitor the condition of the institution and its efforts to restore its capital, (iii) requiring submission of a capital restoration plan, (iv) restricting the growth of the institution’s assets, and (v) requiring prior approval of certain expansion proposals.
Information concerning the Company and its subsidiaries with respect to capital requirements is incorporated by reference from thePart II, Item 7, section entitled "Capital Resources" and from Part II, Item 8, Notes to Consolidated Financial Statements, Note 13, "Shareholders’ Equity," of the notes to consolidated financial statements, each in this annual report on Form 10-K for the year ended December 31, 2001.2002.
Activities and Investments of Insured State-Chartered Banks.Banks - FDIC insured, state-chartered banks, such as the Bank, are also subject to similar restrictions on their business and activities. Section 24 of FDIA,the Federal Deposit Insurance Act ("FDIA"), generally limits the activities as principal and equity investments of FDIC-insured,FDIC insured, state-chartered banks to those activities that are permissible to national banks. In 1999, the FDIC substantially revised its regulations implementing Section 24 of the FDIA to ease the ability of state-chartered banks to engage in certain activities not permissible for national banks, and to expedite FDIC review of bank applications and notices to engage in such activities.
Safety and Soundness Standards – The Federal Deposit Insurance Corporation Improvement Act ("FDICIA"), as amended, directs each federal banking agency to prescribe safety and soundness standards for depository institutions relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate risk, asset growth, compensation, asset quality, earnings, and stock valuation. The Community Development and Regulatory Improvement Act of 1994 amended FDICIA by allowing federal banking agencies to publish guidelines rather than regulations covering safety and soundness.
Other Regulatory RequirementsFDICIA also contains a variety of other provisions that may affect the Company’s and the Bank’s operations, including reporting requirements, regulatory guidelines for real estate lending, "truth in savings" provisions, and the requirement that a depository institution give 90 days prior notice to customers and regulatory authorities before closing any branch.
Community Reinvestment – Pursuant to the Community Reinvestment Act ("CRA") and similar provisions of Maine law, regulatory authorities review the performance of the Company and the Bank in meeting the credit needs of the communities served by the Bank. The applicable regulatory authorities consider compliance with this law in connection with the applications for, among other things, approval for branches, branch relocations, and acquisitions of banks and bank holding companies. The Bank received a "satisfactory" rating at its most recent CRA examination May 28, 2002.
Customer Information Security.Security - The FDIC and other bank regulatory agencies have published final guidelines establishing standards for safeguarding nonpublic personal information about customers that implement provisions of the GLBA (the "Guidelines"). Among other things, the Guidelines require each financial institution, under the supervision and ongoing oversight of its Board of Directors or an appropriate committee thereof, to develop, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, to protect against any anticipated threats or hazards to the security or integrity of such information, and to protect against unauthorized access to, or use of such information that could result in substantial harm or inconvenience to any customer.
Privacy. The FDIC and other regulatory agencies have published final privacy rules pursuant to provisions of the GLBA ("Privacy Rules"). The Privacy Rules, which govern the treatment of nonpublic personal information about consumers by financial institutions, require a financial institution to provide notice to customers (and other consumers in some circumstances) about its privacy policies and practices, describe the conditions under which a financial institution may disclose nonpublic personal information to nonaffiliated third parties, and provide a method for consumers to prevent a financial institution from disclosing that information to most nonaffiliated third parties by "opting-out" of that disclosure, subject to certain exceptions.
USA Patriot Act. The USA Patriot Act of 2001 (the "Patriot Act"), designed to deny terrorists and otherothers the ability to obtain access to the United States financial system, has significant implications for depository institutions, broker-dealers, and other businesses involved in the transfer of money. The Patriot Act requires financial institutions to implement additional policies and procedures with respect to money laundering, suspicious activities, currency transaction reporting, and due diligence on customers. Implementation of the Patriot Act’s requirements will occur in stages, as rules regarding its provisions are finalized by government agencies.
Deposit Insurance. The FDIA does not require the FDIC to charge all banks deposit insurance premiums when the ratio of deposit insurance reserves to insured deposits is maintained above specified levels. However, as a result of general economic conditions and recent bank failures, it is possible that the ratio of deposit insurance reserves to insured deposits could fall below the minimum ratio that FDIA requires, which would result in the FDIC setting deposit insurance assessment rates sufficient to increase deposit insurance reserves to the required ratio. A resumption of assessments of deposit insurance premiums charged to well-capitalized institutions, such as the Company’s subsidiary bank, could have an effect on the Company’s net earnings. The Company cannot predict whether the FDIC will be required to increase deposit insurance assessments above their current levels.
MANAGEMENT AND EMPLOYEES
Securities Regulation. The common stock of the Company is registered with the U. S. Securities and Exchange Commission ("SEC") under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Act"). Accordingly, the Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the Act. On September 5, 2001,July 30, 2002, President George W. Bush signed into law the Company’s BoardSarbanes-Oxley Act of Directors announced its decision2002 (the "S-O Act"), which generally establishes a comprehensive framework to recruitmodernize and reform the oversight of public company auditing, improve the quality and transparency of financial reporting by those companies and strengthen the independence of auditors. The following are some, but not all, of the S-O Act’s significant reforms:
On February 28, 2002,certain periodic reports filed with the Company’s Board of Directors announcedSEC;
Dean S. Read continues to serve as President and Chief Executive Officeraudit committee is enhanced by barring committee members from accepting consulting fees or being affiliated persons of the Bank. In April 2000, he succeeded Sheldon F. Goldthwait who servedcompany other than in that capacitytheir capacities as board members;
In June 2001, the Company’s Board of Directors announced the appointment of Gerald Shencavitz, as Chief Financial Officer and Treasurer of the Company and each of its subsidiaries,other wrongful acts, as well as Chief Operating Officerextending the period during which certain types of lawsuits can be brought against the Company or its insiders.
In addition, Dirigo and Block are subject to certain Broker Dealer and Investment Adviser Regulations promulgated by the NASD and SEC.
Other Proposals. Other legislative and regulatory proposals regarding changes in banking, and the regulation of banks and other financial institutions, are regularly considered by the executive branch of the Bank. Mr. Shencavitz joinedfederal government, Congress and various state governments, including Maine and state and federal regulatory authorities. It cannot be predicted what additional legislative and/or regulatory proposals, if any, will be considered in the future, whether any such proposals will be adopted or, if adopted, how any such proposals would affect the Company in April of 1998 and served as Senior Vice President of Operations and Information Systems. He brings 26 years of financial services experience in finance and accounting, audit and risk management, operations, and information systems management toor the Company.
Other senior operating positions in the Company include presidents of the BTI subsidiaries, and senior Bank officers in charge of lending, retail banking, credit administration and human resources.
At December 31, 2001, the Company had 210 employees. On a full time equivalent basis, total employees at December 31, 2001, were 164.Bank.
STOCK DIVIDEND
On December 8, 1998, the Board of Directors of the Company declared a 100% stock dividend to owners of record as of December 28, 1998, payable on January 25, 1999. All share and per share data information included in the Form 10-K has been restated to reflect the 100% stock dividend.
FORWARD LOOKING STATEMENTS DISCLAIMER
The foregoing discussion, as well as certain other statement contained in this Form 10-K, or incorporated herein by reference, contain statements which may be considered to be forward-looking within the meaning of the Private Securities Litigation and Reform Act of 1995 (the "PSLRA"). You can identify these forward-looking statements by the use of words like "strategy," "expects," "plans," "believes," "will," "estimates," "intends," "projects," "goals," "targets," and other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts. For these statements, the Company claims the protection of the safe harbor for forward-looking statements provided by the PSLRA. 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 business of the Company and its subsidiaries which are subject to change based on the impact of various factors that could cause actual results to differ materially from those estimated. Those factors include but are not limited to: changes in general, economic and market conditions; the development of an interest rate environment that adversely affects the interest rate spread or other income anticipated from the operation and investments of the financial services group and/or the Bank; significant changes in the economic scenario from that anticipated which could materially change credit quality trends and the ability to generate loans; significant delay in or inability to execute strategic initiative designed to grow revenues and/or control expenses; and significant changes in accounting, tax, or regulatory practices or requirements. The Company disclaims any obligation to publicly update or revise any forward-looking statement contained in the foregoing discussion, or elsewhere in this Form 10-K.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The information set forth under this item is incorporated by cross-reference to the Company financial statements set forth below in Part II, Item 8 of this report.
AVAILABILITY OF INFORMATION
The Company makes available on its web site, which is located at http://www.bhbt.com, our annual report on Form 10-K on the date on which we electronically file the report with the Securities and Exchange Commission. Investors are encouraged to access this report and other information about our business and operations on our web site.
ITEM 2. PROPERTIES
The twelve parcels of real estate owned and utilized by the Company for its operations are described below:
1. The principal office of the Bank is located at 82 Main Street, Bar Harbor, Maine, and includes a building housing banking facilities and administrative offices and an adjacent 35-car customer parking lot. The building was renovated in 1998.
2. An office is located on Main Street, Northeast Harbor, Maine. This property consists of a building constructed in 1974 that underwent interior renovations in 1998 to better meet the Bank’s needs at that location.
3. An office is located on Main Street, Southwest Harbor, Maine. This property consists of a building constructed in 1975 that was added to, and renovated in 1989, to better meet the needs at that location.
4. An office is located on Church Street, Deer Isle, Maine. This property consists of a building constructed in 1974 that was added to and renovated in 1994 to better meet the needs at that location.
5. An office is located on Main Street, Blue Hill, Maine. This property consists of a building constructed in 1960 that was renovatedunderwent renovations in 1989 to better meet the needs at that location.
6. An office is located on Main Street, Milbridge, Maine. This property consists of a building constructed in 1974, to which a vestibule was added in 1994, to house an ATM that helps to better meet the needs at that location.
7. An office is located on Washington Street, Lubec, Maine. This property consists of a building constructed in 1990 and is adequate for the Bank’s needs at that location.
8. An office is located on High Street, Ellsworth, Maine. This property consists of a building constructed in 1982. The Bank is currently evaluating expansion of the Ellsworth office.
9. An office is located on Main Street, Winter Harbor, Maine. This property consists of a building constructed in 1995 and is adequate for the Bank’s needs at that location.
10. An office is located on Main Street, Machias, Maine. This property consists of a building that was purchased from Key Bank of Maine in May 1990, thatand was renovated in 1995 to better meet the Bank’s needs at that location.
11. An Operations Center is located on Avery Lane, Ellsworth, Maine, that houses the Bank’s operations check clearing, technology, training,departments and mail departments.data center. The building was constructed in 1996, with occupancy by the Bank taking place in January of 1997.
12. BTI owns and occupies a recently renovated 22,000-square-foot office building at 135 High Street, Ellsworth, Maine. Trust, Block, Dirigo, and the Bank occupy portions of this facility. This facility was renovated in 2001.
A parcel of land adjacent to the Blue Hill branch was purchased in 1981 but has not been developed. The Company also leases office space for Dirigo, Block, and Trust at One Cumberland Place in Bangor, Maine.Maine, under terms and conditions considered by management to be favorable to the Company. Other real estates include two out parcels, one improved, contiguous to the BTI Ellsworth location.
The Company believes that its offices are sufficient for its present operations. Additional information relating to the Company’s properties is set forth in Note 7 of the financial statements contained in this report and incorporated herein by reference.
The Bank also has twelve Automated Teller Machines (ATMs) located at ten of its branch officers,offices, plus three off-site ATMs located on Mount Desert Island, the primary market area it serves.
ITEM 3. LEGAL PROCEEDINGS
TwoThe Company previously reported that Paul G. Ahern, a former executive employees of BTI, one of whom also was a director of the Company and executive officer and employee of BTI, resigned theirall of his positions in January of 2002 and have since made monetary demands for severance benefits under theirhis employment agreements. Oneagreement. The disputes between the Company and Mr. Ahern regarding his demands under his employment agreement were submitted to a binding arbitration proceeding in order to determine the rights of the former employees has initiated an arbitration proceeding underparties. On November 4, 2002, the termsCompany received a written "Arbitration Award" in which the independent arbitrator in this matter found in favor of her employment agreement seeking a determination of her alleged right to severance payments. BTI disputes that either employee is entitled to the benefits that they have demanded. Both employees also have threatened other legal action against the Company and BTI butwith regard to all of Mr. Ahern’s claims under his employment agreement. This decision of the Company has not received notice that any legal proceedings have been formally instituted in connectionarbitrator with these matters.regard to Mr. Ahern’s employment agreement claims is binding and final.
The Company previously reported that Bonnie R. McFee, a former officer and employee of BTI and its subsidiary Dirigo Investments, resigned all of her positions in January 2002 and made demands for severance benefits under her employment agreement.
The disputes between the Company and Ms. McFee regarding her demands under her employment agreement have been submitted to a binding arbitration proceeding in order to determine the rights of the parties. The arbitration proceeding for Ms. McFee’s claims under her employment agreement was conducted during the week of March 3, 2003. A decision of the arbitrator has not been issued as of the date of this report.
As previously reported, Roselle M. Neely ("Neely") filed a complaint dated May 31, 2002 in the United States District Court for the District of Maine (the "Neely Complaint") naming the Company, the Bank, Trust, certain other subsidiaries, and certain existing or former management personnel as defendants. The complaint relates to a trust established by Mrs. Neely (the "Neely Trust"), for which Trust has acted as trustee since May 2000 and for which the Bank formerly acted as trustee. Mrs. Neely alleges in part that Trust improperly disregarded her investment instructions and that Block engaged in excessive trading for the purpose of generating commissions for its affiliated broker-dealer. She seeks an unspecified amount of money damages and punitive damages, plus interest and costs. The Company has filed an answer denying all allegations of wrongdoing, and is actively defending against these claims. The case presently is scheduled for trial in May 2003.
Mrs. Neely had also isfiled suit against the Bank and Trust in Probate Court in Penobscot County, Maine in January 2002, seeking to appoint a new corporate trustee for the Neely Trust. In that suit Mrs. Neely alleged that the Bank failed to give her notice of the appointment of Trust as a successor trustee. The suit was amended in June 2002 to add allegations similar to those contained in the Neely Complaint. The Bank and Trust denied all allegations of wrongdoing, and filed a counterclaim seeking declaratory judgment from the Probate Court. The suit was resolved with the consent of all parties in January 2003, through court approval of Trust’s resignation as trustee and pending appointment of a successor trustee.
The Company and its subsidiaries are also party to certain other ordinary routine litigation incidental to the normal conduct of its business,their respective businesses, which in the opinion of management will have no material effect on the Company’s consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.There were no matters submitted to a vote of the Company’s security holders in the fourth quarter of 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
High and low trades for each quarter of 20012002 and 20002001 are listed below per records from the American Stock Exchange, where the Company’s common stock is traded under the symbol BHB. Per share data information has been adjusted to reflect the 100% stock dividend described previously in Part I, Item 1 of this report.
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1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | |||||
High | Low | High | Low | High | Low | High | Low | |
2002 | $19.40 | $15.50 | $20.65 | $17.50 | $20.10 | $16.90 | $19.50 | $17.96 |
2001 | $15.50 | $14.00 | $15.88 | $14.15 | $18.15 | $15.51 | $18.90 | $15.45 |
As of March 1, 2002,25, 2003, there were 1,0881,056 registered holders of record of Bar Harbor Bankshares common stock.
Dividends paid by the Company in 20012002 and 2000:2001:
1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | Total | |
2002 | $0.19 | $0.19 | $0.19 | $0.19 | $0.76 | ||||
2001 | $0.19 | $0.19 | $0.19 | $0.19 | $0.19 | $0.19 | $0.19 | $0.76 | |
2000 | $0.19 | $0.19 | $0.19 |
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the last five years (Dollars
(Dollars in thousands, except per share data):
2001 | 2000 | 1999 | 1998 | 1997 | |
Balance Sheet totals | |||||
Total assets | $487,203 | $466,225 | $456,809 | $392,047 | $342,726 |
Total loans | 297,970 | 271,381 | 261,189 | 229,435 | 217,139 |
Total deposits | 291,833 | 278,076 | 281,708 | 266,448 | 251,903 |
Total equity | 52,538 | 50,507 | 49,145 | 46,861 | 42,462 |
Average assets | 468,249 | 471,572 | 428,555 | 363,657 | 344,554 |
Average equity | 53,409 | 49,550 | 48,131 | 44,172 | 39,472 |
Statement of income totals | |||||
Interest and dividend income | $ 33,892 | $ 35,333 | $ 31,952 | $ 29,211 | $ 28,518 |
Interest expense | 15,751 | 17,616 | 13,802 | 11,973 | 11,710 |
Net interest income | 18,141 | 17,717 | 18,150 | 17,238 | 16,808 |
Provision for loan losses | 2,000 | 952 | 474 | 336 | 620 |
Net interest income after | |||||
provision for loan losses | 16,141 | 16,765 | 17,676 | 16,902 | 16,188 |
Noninterest income | 7,520 | 7,066 | 5,854 | 5,688 | 5,001 |
Noninterest expense | 18,489 | 16,615 | 14,298 | 12,865 | 11,801 |
Applicable income taxes | 1,661 | 2,419 | 3,007 | 3,118 | 2,966 |
Net income | $ 3,511 | $ 4,797 | $ 6,225 | $ 6,607 | $ 6,422 |
Earnings per share: | |||||
Basic | $ 1.07 | $ 1.43 | $ 1.81 | $ 1.92 | $ 1.87 |
Diluted | $ 1.06 | $ 1.43 | $ 1.81 | $ 1.92 | $ 1.87 |
Return on total average assets | 0.75% | 1.02% | 1.45% | 1.82% | 1.86% |
Return on total average equity | 6.57% | 9.68% | 12.93% | 14.96% | 16.27% |
Average equity/average assets | 11.41% | 10.51% | 11.23% | 12.14% | 11.46% |
2002 | 2001 | 2000 | 1999 | 1998 | |
Balance Sheet Data | |||||
Total Assets | $553,818 | $ 487,203 | $ 466,225 | $456,809 | $392,047 |
Total Loans | 351,535 | 297,970 | 271,381 | 261,189 | 229,435 |
Total Investments | 162,300 | 142,073 | 154,464 | 160,785 | 131,285 |
Total Deposits | 322,015 | 291,833 | 278,076 | 281,708 | 266,448 |
Total Shareholders' Equity | 53,836 | 52,538 | 50,507 | 49,145 | 46,861 |
Average Assets | 518,939 | 468,249 | 471,572 | 428,555 | 363,657 |
Average Shareholders' Equity | 52,813 | 52,279 | 49,550 | 48,131 | 44,172 |
Results Of Operations | |||||
Interest and dividend income | $ 32,352 | $ 33,892 | $ 35,333 | $ 31,952 | $ 29,211 |
Interest expense | 12,775 | 15,751 | 17,616 | 13,802 | 11,973 |
Net interest income | 19,577 | 18,141 | 17,717 | 18,150 | 17,238 |
Provision for loan losses | 1,100 | 2,000 | 952 | 474 | 336 |
Net interest income after | |||||
provision for loan losses | 18,477 | 16,141 | 16,765 | 17,676 | 16,902 |
Noninterest income (including net security gains) | 6,413 | 7,520 | 7,066 | 5,854 | 5,688 |
Noninterest expense | 18,336 | 18,489 | 16,615 | 14,298 | 12,865 |
Pre-Tax Income | 6,554 | 5,172 | 7,216 | 9,232 | 9,725 |
Applicable income taxes | 1,742 | 1,661 | 2,419 | 3,007 | 3,118 |
Net income before accounting change | 4,812 | 3,511 | 4,797 | 6,225 | 6,607 |
Less: Accounting change | 247 | -- | -- | -- | -- |
Net income | $ 4,565 | $ 3,511 | $ 4,797 | $ 6,225 | $ 6,607 |
Earnings per share: | |||||
Basic before accounting change | $ 1.49 | $ 1.07 | $ 1.43 | $ 1.81 | $ 1.92 |
Accounting change | (0.07) | -- | -- | -- | -- |
Basic after accounting change | $ 1.42 | $ 1.07 | $ 1.43 | $ 1.81 | $ 1.92 |
Diluted before accounting change | $ 1.47 | $ 1.06 | $ 1.43 | $ 1.81 | $ 1.92 |
Accounting change | (0.07) | -- | -- | -- | - |
Diluted after accounting change | $ 1.40 | $ 1.06 | $ 1.43 | $ 1.81 | $ 1.92 |
Return on total average assets | 0.88% | 0.75% | 1.02% | 1.45% | 1.82% |
Return on total average equity | 8.64% | 6.72% | 9.68% | 12.93% | 14.96% |
Average equity/average assets | 10.18% | 11.16% | 10.51% | 11.23% | 12.14% |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of operations of the Company and its subsidiaries for the three-years ended December 31, 2002, should be read in conjunction with the consolidated financial statements and notes thereto, and selected financial and statistical information appearing elsewhere in this Form 10-K. The purpose of this discussion is to focus onhighlight significant changes in the financial condition and results of operations of the Company and its subsidiaries during the past three years.years, and provide supplemental information and analysis.
Certain information is discussed on a fully taxable equivalent basis. Specifically, included in 2002, 2001 and 2000 net interest income was $1,488, $499 and $327 of tax-exempt interest income from certain tax-exempt investment securities and loans, which effectively resulted in a reduction of the Company’s income tax expense of $613, $193, and $123 thousand, respectively. The discussion and analysis is intendedtables included on pages 30-32 of this Form 10-K provide a reconciliation of tax-equivalent financial information to supplement and highlight information contained in the accompanyingCompany’s consolidated financial statements, which have been prepared in accordance with Generally Accepted Accounting Principles. Management believes the disclosure of tax-equivalent net interest income information improves the clarity of financial analysis, and is particularly useful to investors in understanding and evaluating the selected financial data presented elsewherechanges and trends in this report. the Company’s results of operations.
Certain amounts in the 20002001 and prior years financial statements have been reclassified to conform with the presentation used in 2001 and prior years.2002.
Unless otherwise noted, all dollars are expressed in thousands except per share data.
FORWARD LOOKING STATEMENTS DISCLAIMER
The foregoing discussion, as well as certain other statements contained in this Form 10-K, or incorporated herein by reference, contain statements which may be considered to be forward-looking within the meaning of the Private Securities Litigation and Reform Act of 1995 (the "PSLRA"). You can identify these forward-looking statements by the use of words like "strategy," "expects," "plans," "believes," "will," "estimates," "intends," "projects," "goals," "targets," and other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts. For these statements, the Company claims the protection of the safe harbor for forward-looking statements provided by the PSLRA.
Investors are cautioned that forward-looking statements are inherently uncertain. Forward-looking statements include, but are not limited to, those made in connection with estimates with respect to the future results of operation, financial condition, and the business of the Company which are subject to change based on the impact of various factors that could cause actual results to differ materially from those projected or suggested due to certain risks and uncertainties. Those factors include but are not limited to:
(i) the Company’s success is dependant to a significant extent upon general economic conditions in Maine and Maine’s ability to attract new business;
(ii) the Company’s earnings depend to a great extent on the level of net interest income (the difference between interest income earned on loans and investments and the interest expense paid on deposits and borrowings) generated by the Bank and thus the Bank’s results of operations may be adversely affected by increases or decreases in interest rates;
(iii) the banking business is highly competitive and the profitability of the Company depends on the Bank’s ability to attract loans and deposits in Maine, where the Bank competes with a variety of traditional banking and nontraditional institutions such as credit unions and finance companies;
(iv) a significant portion of the Bank’s loan portfolio is comprised of commercial loans and loans secured by real estate, exposing the Company to the risks inherent in financings based upon analysis of credit risk, the value of underlying collateral, and other more intangible factors which are considered in making commercial loans and, accordingly, the Company’s profitability may be negatively impacted by judgment errors in risk analysis, by loan defaults, and the ability of certain borrowers to repay such loans during a downturn in general economic conditions;
(v) a significant delay in or inability to execute strategic initiatives designed to grow revenues and or control expenses; and
(vi) 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.
The forward looking statements contained herein represent the Company’s judgment as of the date of this Form 10-K, and the Company cautions readers not to place undue reliance on such statements. The Company disclaims any obligation to publicly update or revise any forward-looking statement contained in the foregoing discussion, or elsewhere in this Form 10-K, except to the extent required by federal securities laws.
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 accounting principles generally accepted in the United States. The preparation of such financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Management evaluates its estimates, including those related to the allowance for loan losses and review of goodwill for impairment, on an ongoing basis. Management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis in making judgments about the carrying values of assets that are not readily apparent from other sources. Actual results could differ from the amount derived from management’s estimates and assumptions under different assumptions or conditions.
Management believes the allowance for loan losses is a significant accounting estimate used in the preparation of the Company’s consolidated financial statements. The allowance for loan losses, which is established through a charge to the provision for loan losses, is based on management’s evaluation of the level of allowance required in relation to the probable loss exposure in the loan portfolio. Management regularly evaluates the allowance for loan losses for adequacy by taking into consideration factors such as previous loss experience, the size and composition of the portfolio, current economic and real estate market conditions and the performance of individual loans in relation to contract terms and estimated fair values of properties to be foreclosed. The use of different estimates or assumptions could produce different provisions for loan losses. Refer to the discussion of Credit Risk in the Risk Management section and Note 1 of the Notes to Consolidated Financial Statements for a detailed description of management’s estimation process and methodology related to the reserve for loan losses.
Management utilizes numerous techniques to estimate the value of various assets held by the Company. Management utilized various methods to determine the appropriate carrying value of goodwill as required under Statement of Financial Accounting Standards ("SFAS") No. 142. At december 31, 2002, the carrying value of goodwill amounted to $375. Goodwill from a purchase acquisition is subject to ongoing periodic impairment tests. Goodwill is evaluated for impairment using several standard valuation techniques including discounted cash flow analyses, as well as an estimation of the impact of business conditions. Different estimates or assumptions are also utilized to determine the appropriate carrying value of other assets including, but not limited to, premises and equipment, mortgage servicing rights, and overall collectibility of loans and receivables. The use of different estimates or assumptions could produce different estimates of carrying value.
SUMMARY FINANCIAL OVERVIEW
Net income for Bar Harbor Bankshares for the year ended December 31, 2001, was $3.5 million, representing $1.062002, amounted to $4,565, or $1.40 per fully diluted earnings per share of common stock. This comparescapital stock, compared with $4.8 million,$3,511 or $1.43$1.06 per fully diluted earnings per share in 2000.2001, representing increases of 30% and 32% respectively.
DuringSummary financial highlights for 2002 follow:
ASSET/LIABILITY MANAGEMENT
In managing its asset portfolios, the Bank utilizes funding and capital resources within well-defined credit, investment, interest rate and liquidity risk guidelines. Loans and investment securities are the Bank’s primary earning assets with additional capacity invested in money market instruments. Average earning assets were 93.3%94.0%, 93.4%93.0%, and 94.5%93.1% of total average assets during 2002, 2001 2000 and 1999,2000, respectively.
The Bank,Company, through its management of liabilities, attempts to provide stable and flexible sources of funding within established liquidity and interest rate risk guidelines. This is accomplished through core deposit products offered within the markets served, as well as through the prudent use of borrowed funds.
The Bank’sCompany’s objectives in managing its balance sheet are to preserve the sensitivity of net interest income to actual or potential changes in interest rates, and to enhance profitability through strategies that promise sufficient reward for understood and controlled risk. The Company is deliberate in its efforts to maintain adequate liquidity, under prevailing and forecasted economic conditions, and to maintain an efficient and appropriate mix of core deposits and borrowed funds.
EARNING ASSETS
AverageFor the year ended December 31, 2002, total average earning assets were $437,015 duringamounted to $487,811, compared with $435,410 and $438,878 in 2001 and 2000, representing an increase of 12.0% and a slight decrease of $3,290, or 0.75%0.8%, compared with 2000. In 2001 therespectively. The yield on total average earning assets was 7.76%amounted to 6.76% in 2002, compared with 8.02%7.83% and 7.89%8.08% in 2001 and 2000, representing declines of 107 and 1999,25 basis points respectively. Despite elevenTotal 2002 interest on earning assets amounted to $32,965, compared with $34,085 and $35,456 in 2001 and 2000, representing declines of $1,120 and $1,371, or 3.3% and 3.9%, respectively.
Over the past two years there have been twelve interest rate decreases resulting in a historical 475525 basis point drop in the federal funds targeted rate over this period. Further, during 2001,2002 there was a significant parallel shift in the yield curve, with the 2, 5, 10 and 30-year Treasury Bonds declining 160, 173, 134 and 78 basis points, respectively. The historically low interest rate environment has caused sharp yield declines on the Company’s yield on averagevariable rate earning assets, held relatively stable, posting a decrease of 26 basis points compared with 2000 and 13 basis points compared with 1999.
Total 2001 interestprepayment speeds on fixed rate earning assets amounted to $33,892, compared with $35,333increase dramatically. These were the principal factors underlying the 2002 decline in earning asset yields and $31,952 in 2000 and 1999, respectively. Total 2001total interest income on the Company’s total earning assets was $1,441, or 4.1%, less than that received in 2000, but $1,940, or 6.1%, greater compared with 1999.assets.
LOANS
Total Loans: At December 31, 2002 total loans amounted to $351,535, compared with $297,970 and $271,381 at December 31, 2001 amounted to $297,970 as compared with $271,381 at December 31,and 2000, representing an increaseincreases of $53,565 and $26,589, or 18.0% and 9.8%. respectively. The 2002 increase in total loans from 2000 is primarily attributableover 2001 was principally attributed to consumer real estate loans, which grew $21,498$35,909 or 16.8%24.0%, and ended the year at $149,559.$185,468. Home equity loans were the second largest contributor to 20012002 loan growth, posting an increase of $5,831$13,001 or 37.8%61.2% over the December 31, 20002001 total of $15,407.$21,238.
Construction and Development Loans: Total construction and development loans amounted to $16,270 at December 31, 2002 compared with $20,348 at December 31, 2001, compared with $12,297 at December 31, 2000, representing an increasea decrease of $8,051,$4,078, or 65.5%20.0%. Construction and development loans are principally consumer in nature and represent 6.8%4.6% of the loan portfolio at December 31, 2001.2002, compared with 6.8% at the prior year-end. The increasedecrease in 2001 balances is almost entirely2002 construction and development loans was generally attributable to consumertiming, as the balances from the prior year migrated from construction loans and reflects the strongstatus to completed homes with permanent financing arrangements. The construction loan demand experienced by the Bank, particularly during the second half of 2001.volume was not replaced.
Mortgage Loans: Mortgage loans, includingwhich include consumer and commercial, accountaccounted for 77.1%81.9% of total loans.loans at year-end, compared with 77.1% at December 31, 2001. At December 31, 20012002, total mortgage loans amounted to $229,634,$287,990, compared with $229,634 and $208,815 at December 31, 2001 and 2000, representing an increaseincreases of $58,356 and $20,819, or 25.4% and 10.0%. respectively. The increase in mortgage loans is almost entirely attributablewas principally attributed to strong consumer mortgage loan demandoriginations driven by refinancings, combined withhistorically low interest rates, accelerated refinancing activity, and a robust demand for real estate in the Bank’sCompany’s primary market area, Hancock County. Commercial mortgage loans on a net basis, remained relatively flatincreased $3,926 between the periods. During 2001, three large commercial mortgage loans approximating $4,600 paid out. These decreases were compensated for with net new commercial mortgage loan growth of $5,290.periods to $71,184, or 5.8%.
Loans to finance agricultural productionFinance Agricultural Production and otherOther Loans to Farmers: Agricultural loans to farmers amounted to $11,053 at December 31, 2002 compared with $7,149 at December 31, 2001, compared with $6,674 at December 31, 2000, representing a moderatean increase of $475.$3,904 or 54.6%. This category of loans represents 2.4%represented 3.1% of the portfolio at December 31, 20012002, compared with 2.4% at the prior year-end. The increase in 2002 balances was principally attributed to an increase in loans related to the blueberry industry in Washington County.
Commercial and includes certain aquaculture loans.
Industrial Loans: Commercial and industrial loans represent 7.4%represented 5.7% of the year-end loan portfolio. Commercialportfolio, compared with 7.4% and 8.7% at December 31, 2001 and 2000 respectively. At December 31, 2002 commercial and industrial loans totaled $20,010, compared with $22,158 at December 31, 2001 compared with $23,729 at December 31, 2000,the prior year-end, representing a decrease of $1,571,$2,148, or 6.6%9.7%. The decrease in commercial and industrial loans iswas principally attributed to certain loan payoffs that were not replaced with new loan growth. A continued tightening of credit standards combined with enhanced pricing strategies generally reduced the amount of unsecured or partially secured loans in this category of the portfolio.
Loans to individualsIndividuals for household, familyHousehold, Family and other personal expenditures (includingOther Personal Expenditures: Personal consumer loans, including credit card loans)loans and student loans, totaled $12,818 at December 31, 2002 compared with $13,918 at December 31, 2001, compared with $15,841 at December 31, 2000 representing a decrease of $1,923,$1,100, or 12.1%7.9%. This category of loans represent 4.7%represented 3.6% of the portfolio compared with 4.7% at December 31, 2001 loan portfolio.2001. The decline in balances from 2000 is2001 was generally attributed to the application of stricter credit underwriting standards, pay-downs, loan charge-offs, and customer debt consolidation resulting from the 2001a two year declining rate environment. Aggressive competition from the financing affiliates of consumer durable goods manufacturers has also tempered the growth in this particular category of loans.
All Other Loans: All other loans represent 1.2%represented 0.8% of the portfolio.portfolio at December 31, 2002 compared with 1.2% at the prior year-end. The balance of all other loans at December 31, 20012002 totaled $3,699$2,684 compared with $3,978$3,699 at December 31, 2000,2001, representing a decrease of $279,$1,015, or 7%27.4%. This category of loans principally include loans to government municipalities and not for profit organizations.
Real Estate Loans Under Foreclosure: Real estate loans under foreclosure represent 0.36%represented 0.2% of the year-endDecember 31, 2002 loan portfolio.portfolio compared with 0.4% at the prior year-end. At December 31, 2001,2002, real estate loans under foreclosure totaled $1,064$710 compared with $47$1,064 at December 31, 2000,2001, representing an increasea decrease of $1,017.$354, or 33.3%. At December 31, 2001,2002, real estate loans under foreclosure representwere represented by one commercial mortgage loanloans amounting to $194 $5 and tenconsumer mortgage loans totaling $870.$705. Anticipated losses are provided for in the Company’s allowance for loan losses. The increase in 2001 real estate under foreclosure balance is attributed to the formation of a managed asset group and acceleration of the Bank’s collection efforts relative to delinquent and/or troubled loans.
Loan Concentrations: Loan concentrations continuecontinued to reflect the Company’s business region. Approximately 11.6%At December 31, 2002, approximately 9.9% or $34.5$34,943 million of the loan portfolio is represented by loans to the hospitality industry. industry compared with 11.6% or $34,464 at December 31, 2001.
Loan interest income summary: In 2001Interest Income Summary: During 2002 the total average yield on loans amounted to 8.57%7.30%, compared with 8.83%8.58% and 8.76%8.85% in 2001 and 2000, representing declines of 128 and 199927 basis points, respectively. DespiteOver the historical 475 basis point droppast two years there have been twelve interest rate decreases in the Federal Funds targeted rate totaling 525 basis points. Consequently, the yields on short-term and variable rate loan products have declined precipitously during 2001,this period. Furthermore, during 2002 a significant parallel shift in the Bank’s yield on average loan balances posted a decrease of only 26 basis points comparedcurve occurred with 2000the five, ten and 19 basis points compared with 1999.thirty year Treasury Bonds declining to 2.73%, 3.81% and 4.78% at year-end, respectively. The principal reason for the Bank’s stable loan yields in a declininghistorically low interest rate environment results fromcaused a dramatic increase in both consumer and commercial loan refinancing activity. Consequently, a large portion of the preponderance of fixed rateCompany’s higher yielding loans in the portfolio which approximate 50%, combinedwere replaced with enhanced loan pricing strategies adopted over the past two years.loans at prevailing low interest rates.
Total interest income from loans amounted to $24,308$23,788 in 2002, compared with $24,355 in 2001, compared with $23,939 in 2000, representing an increasea decrease of $369,$567, or 1.5%2.3%. Loan volume contributed $1,023 to this increase, while theThe decrease in interest rates contributed $7,334 to this decline, while the increase in loan volume offset this amount by $654.$6,767.
Other Real Estate Owned: At December 31, 2002 other real estate owned amounted to $80 compared with $54 and $108 at December 31, 2001 amounted to $54, compared with $108 atand 2000 respectively. Two residential properties comprise the December 31, 2000, representing a decrease of $54, or 100%.2002 balance. When a real estate loan goes to foreclosure and the BankCompany purchases the property, the property is transferred from the loan portfolio to the Other Real Estate Owned (OREO) portfolio at its fair value. If the loan balance is higher than the fair value of the property, the difference is charged to the allowance for loan losses atprior to the time of the transfer. Along with using conservative fair market valuations of OREO properties, reserves are established to allow for selling expenses that can be reasonably estimated.
Mortgage servicing:Loan Servicing: As more fully disclosed in Note 6 to the financial statements, the BankCompany from time to time will sell mortgage loans to other institutions and investors. The sale of loans allows the bankCompany to make more funds available to customers in its servicing area, while the retention of servicing rights provides an additional source of income. At December 31, 2001,2002, the unpaid balance of mortgage loans serviced for others totaled $45,800$18,306 compared with $45,800 and $52,800 at December 31, 2001 and 2000, representing a decreasedecreases of $7,000, or 13.3%.60.0% and 13.2%, respectively. The decline in 20012002 balances iswas attributed to accelerated serviced mortgage loan prepayments, resulting from 20012002 loan refinancingsrefinancing activity prompted by historically low interest rates. Pursuant to the Bank’s asset/Company’s asset and liability management strategy, this run-off was not entirely replaced with additional sold loans.
SUMMARY OF LOAN PORTFOLIO AT DECEMBER 31
2001 | 2000 | 1999 | 1998 | 1997 | 2002 | 2001 | 2000 | 1999 | 1998 | |
Real estate loans | ||||||||||
Construction and development | $ 20,348 | $ 12,297 | $ 15,674 | $ 11,366 | $ 7,925 | $ 16,270 | $ 20,348 | $ 12,297 | $ 15,674 | $ 11,366 |
Mortgage | 229,634 | 208,815 | 195,645 | 168,258 | 158,592 | 287,990 | 229,634 | 208,815 | 195,645 | 168,258 |
Loans to finance agricultural | ||||||||||
production and other loans to farmers | 7,149 | 6,674 | 10,814 | 10,308 | 9,993 | |||||
Loans to finance agricultural production and other loans to farmers | 11,053 | 7,149 | 6,674 | 10,814 | 10,308 | |||||
Commercial and industrial loans | 22,158 | 23,729 | 22,561 | 22,778 | 23,696 | 20,010 | 22,158 | 23,729 | 22,561 | 22,778 |
Loans to individuals for household, | ||||||||||
family and other personal expenditures | 13,918 | 15,841 | 15,693 | 16,538 | 16,668 | |||||
Loans to individuals for household, family and other personal expenditures | 12,818 | 13,918 | 15,841 | 15,693 | 16,538 | |||||
All other loans | 3,699 | 3,978 | 282 | 138 | 209 | 2,684 | 3,699 | 3,978 | 282 | 138 |
Real estate under foreclosure | 1,064 | 47 | 520 | 49 | 56 | 710 | 1,064 | 47 | 520 | 49 |
TOTAL LOANS | 297,970 | 271,381 | 261,189 | 229,435 | 217,139 | $351,535 | $297,970 | $271,381 | $261,189 | $229,435 |
Less: Allowance for possible loan losses | 4,169 | 4,236 | 4,293 | 4,455 | 4,743 | 4,975 | 4,169 | 4,236 | 4,293 | 4,455 |
NET LOANS | $293,801 | $267,145 | $256,896 | $224,980 | $212,396 | $346,560 | $293,801 | $267,145 | $256,896 | $224,980 |
INVESTMENT SECURITIES
The investment securities portfolio, including Fed Funds Sold, money market funds and time deposits with other banks, represented 33.2% of the Company’s average interest earning assets during 2002 and generated 27.8% of total interest income.
The investment securities portfolio primarily consists of United States Government agency securities, obligations of state and political subdivisions, corporate bonds, and mortgage backed securities. The overall objective of the Bank’sCompany’s investment strategy for this portfolio is to maintain an appropriate level of liquidity, diversify earning assets, manage interest rate risk, and generate acceptable levels of net interest income. The investment securities portfolio is managed under the policy guidelines established by the Bank’s Board of Directors.
On January 1, 2001, the Bank,Company, as allowed under Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," repositioned a significant part of the investment portfolio from held to maturity to available for sale.
Total Investment Securities: At December 31, 2002 totalinvestment securities: Investment securities excluding Fed funds soldamounted to $162,300 compared with $142,073 and money market funds, totaled $133,609$154,464 at December 31, 2001 compared with $154,150 at December 31, 2000. This representsand 2000, representing an increase of $20,227 and a decrease of $20,541,$12,391, or 13.3%.14.2% and 8.0%, respectively. The 20012002 average investment securities balance amounted to $141,757,$162,099, compared with $168,611$151,682 in 2000. This represents a decrease2001, representing an increase of $26,854,$10,417, or 15.9%6.9%.
The decline in 2001 investment balances can be attributed to the 20012002 interest rate environment which prompted accelerated pay-downs on mortgage-backed securities and the exercise of callable features on other securities, the resulting portfolio run-off from which was not immediatelymore than replaced. In addition, investmentDuring 2002 the Company principally invested in securities that maturedwith relatively short duration and average lives, and securities with variable rate features. While sacrificing some yield in 2001 were not immediately replaced. The cash flows from the 2001 investment portfolio run-off were utilizednear term, the Company’s objective was to pay down borrowings and fund loan growth. During the fourth quartermaintain a reasonable level of 2001, the Bank refreshed its investment strategy and began rebuilding the investment securities portfolio balances. This activity continues into the first quarter of 2002.
The overall yield of the investment securities portfolio in 2001 was 6.43%, compared with 6.73% in 2000, representing a decline of 30 basis points. The decrease in yield is principally attributed to the exercise of callable features on the higher yielding investments and, to a lesser extent, investment purchases transacted in a rapidly decliningnet interest income, manage longer-term interest rate environment.risk and market risk, and position the portfolio for a rising rate environment in the near future.
Securities Available for Sale: The securities available for sale: Thissale portfolio is managed on a total return basis with the objective of exceeding the return that would be experienced if investing solely in U.S. Treasury instruments. This category of investments is used for liquidity purposes while simultaneously producing earnings. The designation of "available for sale" is made at the time of purchase, based upon management’s intent to hold the securities for an indefinite time; however, these securities would be available for sale in response to changes in market interest rates, related changes in the securities’ prepayment risk, needs for liquidity, or changes in the availability of and yield on alternative investments.
Investment securities classified as available for sale are reported at their fair value with unrealized gains or losses, net of taxes, excluded from earnings but shown separately as a component of shareholders’ equity. Gains and losses on the sale of securities available for sale are determined using the specific-identification method and are shown separately in the statement of income. Premiums and discounts are recognized in interest income using the interest method over the estimated life of the security.
Securities available for sale totaled $128,826 at December 31, 2002, compared with $106,743 at December 31, 2001, as compared with $37,844 at December 31, 2000, representing an increase of $68,899,$22,083, or 182%20.7%. Securities available for sale represent 79.9%represented 79.4% of the portfoliototal investment securities at December 31, 2001,2002, compared with 24.6%75.1% at December 31, 2000.2001. The December 31, 20012002 and 20002001 balances are stated net of fair value adjustments reflecting net unrealized gains of $3,284, and $2,587, andrespectively.
Net Securities Gains: For the year ended December 31, 2002, net unrealized losses of $115, respectively.
The increase in securities available forgains on the sale balances between periods is almost entirely attributed to a transfer of securities totaling $113,856 fromamounted to $450 compared with none in 2001 and 2000. The majority of 2002 sales were corporate securities amounting to $12,024. Changes in market interest rates during 2002 presented attractive opportunities for repositioning a relatively small portion of the portfolio, while maintaining an informed and reasonable level of balance sheet interest rate risk.
Securities Held to Maturity: The securities held to maturity to available for sale in January 2001, offset by securities that either matured, paid down, or were "called" throughout 2001.
Securities held to maturity: This portfolio is managed for yield and earnings generation, liquidity through cash flow, and interest rate risk characteristics within the framework of the entire balance sheet.
Investment securities held to maturity are those where the Company has the positive intent and ability to hold until maturity. Held to maturity investments are reported at their aggregate cost, adjusted for amortization of premiums and accretion of discounts that are recognized in interest income using the interest method. Premiums are amortized cost. to the earliest call date, while discounts are accreted to maturity.
Securities held to maturity totaled $31,545 at December 31, 2002, compared with $26,866 at December 31, 2001 as compared withand $116,306 at December 31, 2000, representing a decreasean increase of $4,679, or 17.4% and $89,440, or 76.9%. Securities held to maturity represent 20.1%represented 19.4% of the portfoliototal investment securities as of December 31, 2001,2002, compared with 75.4%%18.9% and 75.2% at December 31, 2000. At December 31, 2001 and 2000, investments held to maturity had net unrealized losses of $1,923 and $61 respectively.
The decrease in securities held to maturity balances between periods isin 2001 compared with 2000 was attributed to a transfer of securities totaling $113,856 from held to maturity to available for sale in January 2001, offset by the addition of approximately $25,000$25,109 of bank qualified municipal bond purchases in the fourth quarter of 2001 that were classified as held to maturity.
At December 31, 2002, investments held to maturity had net unrealized gains of $532, compared with unrealized losses of $1,923 and $61 at December 31, 2001 and 2000, respectively.
At December 31, 2002, investments held to maturity portfolio had a weighted average expected life of 9.7 years, a modified duration of 8.6 years, and was yielding 7.10%.
Other securities:Securities: Other securities consist of money market funds, overnight Federal funds sold, time deposits with other banks and other non-marketable securities. The 20012002 average balance of other securities amounted to $11,530,$6,461, compared with $694$11,530 in 2000,2001, representing an increasea decrease of $10,836.$5,069, or 44.0%. The 2001 increase2002 decrease was principally attributed to the temporary investment of excess liquidity in 2001 resulting from seasonal deposit flows and accelerated investment portfolio run-off and, to a lesser extent,run-off.
Investment Securities Interest Income: During 2002 the pre-funding needs related to investment transactions in the fourth quarter. At December 31, 2001, other securities totaled $8,464. Thetotal yield on otherthe investment securities portfolio amounted to 5.66%, compared with 6.41% and 6.83% in 2001 and 2000, representing declines of 75 and 42 basis points, respectively. The declining interest rate environment over the past two years has resulted in a significant increase in prepayment speeds on high coupon mortgage backed securities, an acceleration of premium amortization, and the exercise of call features on certain securities. Securities replaced or added to the investment securities portfolio in 2002 were primarily variable rate or had short average lives and, consequently, lower yields.
Total interest income from investment securities amounted to 4.09%$9,177 in 2002, compared with $9,730 in 2001, compared with 5.76%and $11,464 in 2000.2000, representing decreases of $553, or 5.7%, and $1,734, or 15.1%, respectively. The decrease in interest rates contributed $1,462 at the 2002 decline, while the increase in volume offset this amount by $909.
INVESTMENTS HELD TO MATURITY AT DECEMBER 31
(at book value)
2001 | 2000 | 1999 | 2002 | 2001 | 2000 | |
Obligations of U.S. Government Agencies | $ -- | $ 2,407 | $ 4,002 | $ -- | $ -- | $ 2,407 |
Obligations of State and Political Subdivisions | 26,866 | 2,442 | 4,422 | 30,182 | 26,866 | 2,442 |
Mortgage backed Securities | ||||||
U.S. Government agencies | -- | 81,990 | 93,014 | |||
Other-MBS | -- | 13,968 | 14,636 | |||
Mortgage Backed Securities | ||||||
U. S. Government Agencies | 1,363 | -- | 81,990 | |||
Other – MBS | -- | -- | 13,968 | |||
Other | -- | 15,499 | 12,757 | -- | -- | 15,499 |
Total | $26,866 | $116,306 | $128,831 | $31,545 | $26,866 | $116,306 |
INVESTMENTS AVAILABLE FOR SALE AT DECEMBER 31
(at fair value)
2001 | 2000 | 1999 | 2002 | 2001 | 2000 | |
Obligations of U.S. Government Agencies | $ 9,660 | $ 34,379 | $ 28,155 | $ 13,668 | $ 9,660 | $ 34,379 |
Mortgage-backed Securities: | ||||||
U.S. Government agencies | 67,400 | 2,243 | 2,334 | |||
Other | 12,521 | -- | -- | |||
Mortgage Backed Securities | ||||||
U. S. Government Agencies | 77,305 | 67,400 | 2,243 | |||
Other – MBS | 17,597 | 12,521 | -- | |||
Other | 17,162 | 1,222 | 1,201 | 20,256 | 17,162 | 1,222 |
Total | $106,743 | $37,844 | $31,690 | $128,826 | $106,743 | $37,844 |
MATURITY SCHEDULE FOR INVESTMENTS
HELD TO MATURITY AT DECEMBER 31, 20012002
(at book value)
One | Greater than | Greater | One Year Or Less | Greater Than One Year to Five Years | Greater Than Five Years to Ten Years | Greater Than Ten Years | ||
Year | One | Five | Than | |||||
Or | Year to | Years to | Ten | |||||
Less | Five years | Ten years | Years | |||||
Mortgage Backed Securities: | ||||||||
U. S. Government Agencies | $ -- | $ -- | $ -- | $ 1,363 | ||||
Average Yield | 0% | 0% | 0% | 6.37% | ||||
Obligations of State and Political Subdivisions | $ -- | $ -- | $ 1,209 | $ 25,657 | -- | 943 | 655 | 28,574 |
Average Yield | 0% | 0% | 3.97% | 5.87% | 0% | 3.70% | 3.80% | 5.20% |
Total | $ -- | $ -- | $1,209 | $25,657 | $ -- | $ 943 | $ 665 | $29,937 |
Held to maturity securities are included based upon the final maturity date of the security. At December 31, 2001, the held to maturity securities portfolio had weighted average expected life of 12.46 years, a modified duration of 10.15 years and was yielding an average of 5.47% on a non-tax equivalent basis.
MATURITY SCHEDULE FOR INVESTMENTS
AVAILABLE FOR SALE AT DECEMBER 31, 20012002
(at fair value)
One Year | Greater than One Year to Five years | Greater than Five Years to Ten years | Greater Than Ten Years | One Year or Less | Greater Than One Year to Five Years | Greater Than Five Years to Ten Years | Greater Than Ten Years | |
Obligations of U.S. Government Agencies | $ 7,829 | $ 1,831 | $ -- | $ -- | ||||
Obligations to U. S. Government Agencies | $1,762 | $ 5,538 | $ 3,366 | $ 3,002 | ||||
Average Yield | 7.03% | 7.46% | 0% | 0% | 7.46% | 4.40% | 5.16% | 5.17% |
U.S. Government Agencies – Mortgage Backed | 9 | 1,430 | 13,816 | 52,145 | ||||
Mortgage Backed Securities: | ||||||||
U. S. Government Agencies | 106 | 3,135 | 11,561 | 62,503 | ||||
Average Yield | 8.50% | 7.03% | 6.31% | 6.79% | 6.00% | 6.60% | 6.14% | 6.20% |
Other – Mortgage Backed Securities | -- | -- | 3,267 | 9,254 | ||||
Mortgage Backed Securities: | ||||||||
Other | -- | -- | 1,733 | 15,864 | ||||
Average Yield | 0% | 0% | 6.69% | 6.65% | 0% | 0% | 6.91% | 6.66% |
Other Bonds | 1,772 | 11,846 | 544 | 3,000 | 104 | 5,632 | -- | 14,520 |
Average Yield | 6.45% | 6.55% | 8.50% | 3.00% | 5.75% | 6.79% | 0% | 3.97% |
Total | $9,610 | $15,107 | $17,627 | $64,399 | $1,972 | $14,305 | $16,660 | $95,889 |
Available for sale securities are included based upon the final maturity date of the security. At December 31, 2001, the available for sale securities portfolio had an average expected life of 3.97 years, a modified duration of 2.97 years and was yielding an average of 6.51%.
The BankCompany does not hold any securities for a single issuer, other than U. S. Government agencies, where the aggregate book value of the securities exceed 10% of the Bank’s shareholders’ equity.
FUNDING SOURCES
The Bank utilizes various traditional sources of funding to support its earning asset portfolios. Average total funding in 20012002 amounted to $409,959,$460,625, compared with $419,316 in 2000, representing a decrease of $9,357, or 2.23%.
Deposits: Average 2001 balances of deposits, including non-interest bearing, NOW, savings and time deposits, amounted to $279,923, compared with $280,613 in 2000. This represents a decrease of $690, or 0.25%. The decline$409,959 in 2001, average deposit balances was led by non-interest bearing accounts, which decreased $1,519,representing an increase of $50,666, or 3.44%, compared with 2000, offset by increases in interest bearing accounts, particularly money market accounts.12.4%.
Management attributes the drop in 2001Deposits: During 2002, total average deposits in part,accounted for 65.9% of the funding required to pricing strategies implemented in late 2000. The absence of 2001 deposit growth was somewhat mitigated by revenue from service charges on deposit accounts, which increased $500 or 36.6% compared with 2000, and the improvement insupport the Company’s net interest margin from 4.02% in 2000 to 4.15% in 2001.
earning asset portfolios. At December 31, 2001,2002 total deposits amounted to $291,833,$322,015, compared with $291,833 and $278,076 at December 31, 2001 and 2000, representing increases of $30,182 and $13,757, or 10.3% and 4.9%, respectively. Average 2002 deposit balances amounted to $303,475, compared with $279,923 in 2001, representing an increase of $13,757,$23,552, or 4.9%8.4%. This
The increase in 2002 deposits was led by money market and savings accounts, whichposting a year-over-year increase of $17,842 or 19.6%, and ending the year at $108,982. Depositor preference during 2002 appeared to be that of greater liquidity, given general economic and market conditions. NOW accounts also showed solid growth in 2002, ending the year at $50,172, or 9.8% higher than December 31, 2001.
Time deposits, excluding brokered funds, ended the year at $91,140$110,872 compared with $73,776$108,896 at December 31, 2000,2001, representing an increase of $17,364,$1,976 or 23.5%1.8%. The sluggish growth in savings accounts is entirely attributedthis category of deposits was presumably due to money market accounts, which are classified with savings. The growth in money market accounts was partially offset by a $11,838 decline in time accounts, presumably because of depositors’ unwillingness to commit to longer-termlonger term fixed rate investments at historically low rates.
The increase inNon-interest bearing demand deposits ended the year at $46,001, representing a decline of $111, or 0.2%, compared with December 31, 2001,2001. Demand deposits represented 14.2% of total deposits asat December 31, 2002, compared with 15.8% at the 2001 average balance is principally attributed to the absence of growth experienced during the first half of 2001. Pricing strategies implemented in late 2000 caused portfolio run off, particularly with respect to non-relationship accounts with premium rates.prior year-end.
Time deposits in denominations of $100 thousand andor greater totaled $13,905$15,185 at December 31, 2001,2002 compared with $20,294$13,905 at the prior year-end,same date last year, representing a decreasean increase of $6,389,$1,280 or 31.5%9.2%. The Bank had no2002 increase was attributed to the purchase of $5,988 in long-term brokered deposits during 2001 and 2000.at rates considered favorable to the Company. Total brokered deposits at December 31, 2002 amounted to $5,988, or 1.9% of total deposits, compared with none in the prior year.
Borrowed Funds: Borrowed funds consist of securities sold under agreement to repurchase agreements and borrowings from the Federal Home Loan Bank (FHLB). Advances from the FHLB are secured by stock in the FHLB, U.S. Treasury and Agency notes, mortgage-backed securities, and qualifying first mortgage loans.
Borrowed funds are principally utilized to support the Bank’s investment securities portfolio and, to a lesser extent, fund loan growth. Borrowed funds also provide a means to help manage balance sheet interest rate risk.risk, given the Company’s ability to select desired terms and maturities.
At December 31, 2002, total borrowed funds amounted to $170,501, compared with $136,059 and $131,318 at December 31, 2001 and 2000, representing increases of $34,442 and $4,741, or 25.3% and 3.6%, respectively. Average 20012002 borrowed funds balances amounted to $130,036,$157,150, compared with $138,703$130,036 in 2000, representing a decrease of $8,667, or 6.2%. At December 31, 2001, borrowed funds totaled $136,059, compared with $131,318 at the prior year-end, representing an increase of $4,741,$27,114, or 3.6%20.8%.
The declineincrease in 2001 average borrowed funds balances primarily resulted fromduring 2002 was principally utilized to fund loan growth and to a lesser extent growth in the decline in 2001Company’s investment securities balances. Accelerated cash flows from the Bank’s investment securities portfolio were utilized to pay down advances from the FHLB and provided funding for loan growth. The $4,741 increase in 2001 year-end balances over 2000 resulted from investment security transactions in the fourth quarter of 2001 that were partially funded with borrowings.portfolio.
As of December 31, 2001,2002, total short-term borrowings, including repurchase agreements, wereamounted to $47,943, compared with $46,159 as compared withand $86,318 at December 31, 2001 and 2000 representing a decrease of $40,159, or 46.5%. Short-termrespectively. Conversely, long-term borrowings from the FHLB decreased from $74,152 at December 31, 2000 to $31,0002002 totaled $122,558, compared with $89,900 and $45,000 at December 31, 2001 and 2000, representing a decreaseincreases of $43,152, or 58.2%. Conversely, average long36.3% and 99.8%, 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 two years, new borrowings and the replacement of scheduled maturities were predominately redirected to longer- term advances from the FHLB increased from $24,040 during 2000 to $83,936 in 2001, representing an increase of $59,896, or 249%. At December 31, 2001, long-term FHLB advances stood at $89,900, compared with $45,000 at December 31, 2000, representing an increase of $44,900, or 99.8%.
During 2001, scheduled maturities of short-term FHLB advances were replaced with long-term advancesFHLB. This strategy was in response to opportunities presented by historically low interest rates and, more importantly, the addition and/or replacement of approximately $40,000 of long-term, fixed rate assets toon the balance sheet. This restructuring was accomplished while maintaining the Bank’s interest rate profile within established asset and liability policies and guidelines.
At December 31, 2001 the Company had available $22,411 in unused lines of credit from the FHLB.
Interest Expense Summary: TotalFor the year ended December 31, 2002, total interest expense wasamounted to $12,775, compared with $15,751 in 2001, and $17,616 in 2000, representing a decreasedecreases of $2,976, or 18.9%, and $1,865, or 10.6% as10.5%, respectively. The total cost of the Company’s interest bearing liabilities amounted to 3.06% in 2002, compared with 2000.4.29% and 4.70% during 2001 and 2000, representing declines of 123 and 41 basis points, respectively.
Declining interest rates over the past two years was the principal factor underlying the decreases in the Company’s cost of interest bearing funds and total interest expense. The decreasedecline in interest rates contributed $2,935$7,091 to the 2002 decrease in interest expense, while increased levels of interest-bearing liabilities offset this amount by $1,070. The cost of interest-bearing liabilities was 4.29% in 2001, compared with 4.70% in 2000, representing a decrease of 41 basis points.$4,115.
SUMMARY OF DEPOSIT PORTFOLIO
2001 | 2000 | 1999 | 2002 | 2001 | 2000 | |||||||
Average | Average | Average | Average | Average | Average | Average | Average | Average | Average | Average | Average | |
Demand deposits | $ 42,661 | -- | $ 44,180 | $ 43,103 | $ 43,673 | -- | $ 42,661 | -- | $ 44,180 | -- | ||
NOW accounts | 43,758 | 0.82% | 44,260 | 0.99% | 44,115 | 1.29% | 48,739 | 0.60% | 43,758 | 0.82% | 44,260 | 0.99% |
Savings accounts | 77,002 | 2.73% | 76,189 | 3.06% | 77,021 | 3.04% | 95,514 | 1.71% | 77,002 | 2.73% | 76,189 | 3.06% |
Time deposits | 116,502 | 5.01% | 115,984 | 5.38% | 110,854 | 4.93% | 115,549 | 3.42% | 116,502 | 5.01% | 115,984 | 5.38% |
Total deposits | $279,923 | $280,613 | $275,093 | $303,475 | $279,923 | $280,613 |
MATURITY SCHEDULE FOR TIME DEPOSITS $100 THOUSAND OR MORE
DECEMBER 31, 20012002
Three Months | Over Three Months | Over Six Months Through | Over Twelve Months | Over Three Months | Over Six Months Through | Over Twelve Months |
$3,659 | $4,049 | $4,549 | $1,648 | |||
$1,739 | $2,298 | $4,754 | $6,394 |
CAPITAL RESOURCES
Consistent with its long-term goal of operating a sound and profitable organization, Bar Harbor Bankshares continues to be a "well capitalized" company according to regulatory standards. In 2001,2002, the Company continued to maintain a strong capital position, which is vital in promoting depositor and investor confidence and providing a solid foundation for future growth. Historically, most of the Company’s capital requirements have been provided through retained earnings and this continues to be the case.
On December 8, 1998, the board of directors of the Company declared a 100% stock dividend to owners of record as of December 28, 1998, payable on January 25, 1999. All share and per share data included in the Form 10-K have been restated to reflect the 100% stock dividend.
In November 1999, Bar Harbor Bankshares announced a stock buyback plan. The boardBoard of directorsDirectors of the Company has authorized the open market and privately negotiated purchases of up to 10% of the Company’s outstanding shares of common stock, or 344,000 shares, withshares. The Board of Directors has authorized the continuance of this program continuing through December 31, 2002.2003. As of December 31, 2001,2002, the Company had repurchased 186,314269,154 shares of stock under this plan, at a total cost of $2,993$4,561 and an average price of $16.06.$16.94. The Company holds the repurchased shares as treasury stock.
The Company has historically paid regular quarterly cash dividends on its common stock. In the third quarter of 1999, the Company increased its quarterly dividend from $0.17 per share to $0.19 per share. Quarterly dividends have continued at this rate through 2001.2002. Each quarter the board of directors declares the payment of regular quarterly cash dividends, subject to adjustment from time to time, based on the Company’s earnings outlook and other relevant factors.
The Company’s principal source of funds to pay cash dividends and support its commitments is derived from its banking subsidiary, Bar Harbor Banking and Trust Company. As discussed herein, above under "Supervision and Regulation,""Regulatory Matters" the Bank’s principal regulatory agency, the FDIC, currently limits Bank dividends to current earnings excluding securities gains while maintaining a Tier 1 leverage capital ratio of 8%8.0%, without prior approval. The Bank is in full compliance with these requirements and does not anticipate any impact on its ability to pay future dividends at historical levels.
During 2001,2002, the Company’s shareholders’ equity grew $2,031,$1,298, or 4%2.5%, to $52,538, after the payment of $2,490$2,445 in shareholder dividends, stock repurchases of $773,$1,563, and including $1,783,an increase of $640, net of tax, in value through market appreciation of the securities available for sale portfolio.and derivative instruments.
At December 31, 2001,2002, the Company’s total risk based capital was $52,950$53,434 or 16.8%14.5% of risk-weighted assets, compared with $52,950 and 16.8% at December 31, 2001, and $53,235 and 18.0% at December 31, 2000, and $51,659 and 18.4% at December 31, 1999.2000. Tier I capital to risk-weighted assets was $48,819 or 13.2% at December 31, 2002, compared with $49,017, or 15.6% at December 31, 2001, compared withand $49,538, or 16.8% at December 31, 2000, and $48,148, or 17.1% at December 31, 1999.2000. The ratio of Tier I capital to average weighted assets, or leverage ratio, at December 31, 20012002 was 10.3% as8.9%, compared with 10.3% in 2001 and 10.6% in 2000 and 11.2% in 1999.2000.
As depicted in Note 13 to the financial statements, the Bank’s capital ratios exceed all regulatory requirements for a "well capitalized" bank.
While total capital and Tier I capital balances grew 2.5% and 1.8% respectively since 1999,Over the past two years the Company’s capital ratios have shown a moderate decline. The purchase of $2,993$2,340 of stock pursuant to the Company’s stock buyback plan, and the funding of 2000 and 2001 operating losses at BTI, Financial Groupand dividend payout ratios of 53.6% and 70.9% in 2002 and 2001 respectively, all contributed to the decline.
Except as may be noted in "Supervision and Regulation" herein above, or "Regulatory Matters" herein below, there are no known trends, events or uncertainties nor any recommendations by any regulatory authority that are reasonably likely to have a material effect on the Company’s liquidity, capital resources, or operating results.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is the principal component of the Company’s income stream and represents the difference or spread between interest and loan fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates as well as volume and mix changes in earning assets and interest bearing liabilities can materially impact net interest income. Net interest income is entirely generated by the Bank. Net interest income, after the provision for possible loan losses, represents 68.2%represented 74.9% of total income.2002 revenue, compared with 68.5% and 70.5% in 2001 and 2000, respectively.
NetFor the year ended December 31, 2002, net interest income foramounted to $20,190 compared with $18,334 and $17,840 in 2001 and 2000, representing increases of $18,141 was $424,$1,856 and $494, or 2.4%, higher than that recognized in 200010.1% and virtually the same as the $18,150 earned in 1999.2.8% respectively. The 2001 increase in 2002 net interest income was achieved despiteentirely attributed to a decrease$52,401 increase in average earning assets from $440,305between periods, as the 2002 net interest margin declined seven basis points to 4.14% compared with 2001. The net interest margin in 2000 amounted to $437,0154.06%.
Of the $1,856 increase in 2001. The2002 net interest income, $3,561 was attributed to increased volume, offset by $1,705 due to changes in interest rates.
As more fully enumerated under the "earning assets" discussion in this report, the declining interest rate environment over the past two years has had a relatively significant impact on the Company’s earning asset yields and the cost of its interest bearing funds. During 2002, the yield on average earning assets declined by 26amounted to 6.76%, compared with 7.83% and 8.08% in 2001 and 2000, representing declines of 107 and 25 basis points, in 2001 to 7.76%, whilerespectively. Likewise, the cost of interest bearing liabilities declinedamounted to 3.06% in 2002, compared with 4.29% and 4.70% in 2001 and 2000, representing declines of 123 and 41 basis points, to 4.29%. Ofrespectively.
Over the $424 increase in net interest income, $1,822 was due to changes in interest rates, offset by a $1,398 decline due to decreased volume. The net interest margin was 4.15% in 2001, 4.02% in 2000 and 4.48% in 1999.
Interest rates declined sharply throughout 2001, directly influenced by a 475 basis point drop inpast two years the Federal funds targeted rate. The declining interest rate environment resulted in a 26 basis point decrease in the Company’s yield on earning assets to 7.76%. Likewise, the Company’s cost of interest bearing funds also dropped, butliabilities has declined at a faster rate than the yields on interest earning assets, posting a decrease of 4116 basis points faster in 2002 and 16 basis points faster in 2001. These differentials helped support the relative stability of the Company’s net interest margin during this period, without increasing its exposure to 4.29%. These dynamics, together with refreshed loanrising rates over the longer term. The Company attributes this success to timely and depositeffective pricing strategies, implemented byorchestrated within well-established asset/liability management policies and the Company, wereoverall management of balance sheet interest rate risk.
AVERAGE BALANCE SHEET AND
ANALYSIS OF NET INTEREST INCOME
For the year ended December 31, 2002
Average | Interest | Average | |
Interest Earning Assets: | |||
Loans (1,3) | $325,712 | $23,788 | 7.30% |
Investment securities(3) | 155,638 | 9,023 | 5.80% |
Federal Funds sold, money market funds, and time | |||
deposits with other banks | 6,461 | 154 | 2.38% |
Total Investments | 162,099 | 9,177 | 5.66% |
Total Earning Assets | 487,811 | 32,965 | 6.76% |
Non Interest Earning Assets: | |||
Cash and due from banks | 10,913 | ||
Other assets (2) | 20,215 | ||
Total Assets | $518,939 | ||
Interest Bearing Liabilities: | |||
Deposits | $259,802 | $ 5,880 | 2.26% |
Securities sold under repurchase agreements | 13,124 | 288 | 2.19% |
Other borrowings | 144,026 | 6,607 | 4.59% |
Total borrowings | 157,150 | 6,895 | 4.39% |
Total Interest Bearing Liabilities | 416,952 | 12,775 | 3.06% |
Non Interest Bearing Liabilities: | |||
Demand deposits | 43,673 | ||
Other liabilities | 5,501 | ||
Total Liabilities | 466,126 | ||
Shareholders' equity | 52,813 | ||
Total Liabilities and Shareholders' Equity | $518,939 | ||
Net Interest Income and Net Interest Margin (3) | 20,190 | 4.14% | |
Less: Tax Equivalent Adjustment | (613) | ||
Net Interest Income | $19,577 | 4.01% |
(1) For purposes of these computations, non-accrual loans are included in average loans.
(2) For purposes of these computations, unrealized gains (losses) on available-for-sale securities and allowance for loan losses are recorded in other assets.
(3) For purposes of these computations, reported on a driving factor underlyingtax equivalent basis.
AVERAGE BALANCE SHEETS AND
ANALYSIS OF NET INTEREST INCOME
For the increaseyear ended December 31, 2001
Average | Interest | Average | |
Interest Earning Assets: | |||
Loans (1,3) | $283,728 | $24,355 | 8.58% |
Investment securities(3) | 140,152 | 9,258 | 6.61% |
Federal Funds sold, money market funds, and time | |||
deposits with other banks | 11,530 | 472 | 4.09% |
Total Investments | 151,682 | 9,730 | 6.41% |
Total Earning Assets | 435,410 | 34,085 | 7.83% |
Non Interest Earning Assets: | |||
Cash and due from banks | 11,767 | ||
Other assets (2) | 21,072 | ||
Total Assets | $468,249 | ||
Interest Bearing Liabilities: | |||
Deposits | $237,262 | $ 8,298 | 3.50% |
Securities sold under repurchase agreements | 13,348 | 519 | 3.89% |
Other borrowings | 116,688 | 6,934 | 5.94% |
Total Borrowings | 130,036 | 7,453 | 5.73% |
Total Interest Bearing Liabilities | 367,298 | 15,751 | 4.29% |
Non Interest Bearing Liabilities: | |||
Demand deposits | 42,661 | ||
Other liabilities | 6,011 | ||
Total Liabilities | 415,970 | ||
Shareholders' equity | 52,279 | ||
Total Liabilities and Shareholders' Equity | $468,249 | ||
Net Interest Income and Net Interest Margin (3) | 18,334 | 4.21% | |
Less: Tax Equivalent Adjustment | (193) | ||
Net Interest Income | $18,141 | 4.17% |
(1) For purposes of these computations, non-accrual loans are included in 2001average loans.
(2) For purposes of these computations, unrealized gains (losses) on available-for-sale securities and allowance for loan losses are recorded in other assets.
(3) For purposes of these computations, reported on a tax equivalent basis.
AVERAGE BALANCE SHEET AND
ANALYSIS OF NET INTEREST INCOME
For the year ended December 31, 2000
Average | Interest | Average | |
Interest Earning Assets: | |||
Loans (1,3) | $271,000 | $23,992 | 8.85% |
Investment securities(3) | 167,184 | 11,424 | 6.83% |
Federal Funds sold, money market funds, and time | |||
deposits with other banks | 694 | 40 | 5.76% |
Total Investments | 167,878 | 11,464 | 6.83% |
Total Earning Assets | 438,878 | 35,456 | 8.08% |
Non Interest Earning Assets: | |||
Cash and due from banks | 13,598 | ||
Other assets (2) | 19,096 | ||
Total Assets | $471,572 | ||
Interest Bearing Liabilities: | |||
Deposits | $236,433 | $ 9,008 | 3.81% |
Securities sold under repurchase agreements | 11,479 | 544 | 4.74% |
Other borrowings | 127,224 | 8,064 | 6.34% |
Total Borrowings | 138,703 | 8,608 | 6.21% |
Total Interest Bearing Liabilities | 375,136 | 17,616 | 4.70% |
Non Interest Bearing Liabilities: | |||
Demand deposits | 44,180 | ||
Other liabilities | 2,706 | ||
Total Liabilities | 422,022 | ||
Shareholders' equity | 49,550 | ||
Total Liabilities and Shareholders' Equity | $471,572 | ||
Net Interest Income and Net Interest Margin (3) | 17,840 | 4.06% | |
Less: Tax Equivalent Adjustment | (123) | ||
Net Interest Income | $17,717 | 4.04% |
(1) For purposes of these computations, non-accrual loans are included in average loans.
(2) For purposes of these computations, unrealized gains (losses) on available-for-sale securities and allowance for loan losses are recorded in other assets.
(3) For purposes of these computations, reported on a tax equivalent basis.
RATE/VOLUME ANALYSIS
The following tables set forth a summary analysis of the relative impact on net interest income of changes in the average volume of interest earning assets and the improvementinterest bearing liabilities, and changes in average rates on such assets and liabilities. The income from tax-exempt assets has been adjusted to a fully tax equivalent basis, thereby allowing a uniform comparisons to be made. Because of the Company’snumerous simultaneous volume and rate changes during the periods analyzed, it is not possible to precisely allocate changes to volume or rate. For presentation purposes, changes which are not solely due to volume changes or rate changes have been allocated to these categories in proportion to the relationships of the absolute dollar amounts of the change in each.
ANALYSIS OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME
TWELVE MONTHS ENDED DECEMBER 31, 2002 VERSUS DECEMBER 31, 2001 net interest margin from 4.02%
INCREASES (DECREASES) DUE TO:
Average Volume | Average Rate | Net Interest Income | |
Loans (1, 2) | $6,767 | $(7,334) | $ (567) |
Taxable investment securities | (458) | (1,390) | (1,848) |
Non-taxable investment securities (2) | 1,530 | 83 | 1,613 |
Federal funds sold, money market funds, and time deposits with other banks | (163) | (155) | (319) |
TOTAL EARNING ASSETS | 7,676 | (8,796) | (1,120) |
Deposits | 872 | (3,290) | (2,418) |
Securities sold under repurchase agreements | (9) | (222) | (231) |
Other borrowings | 3,252 | (3,579) | (327) |
TOTAL INTEREST BEARING LIABILITIES | 4,115 | (7,091) | (2,976) |
NET CHANGE IN INTEREST INCOME (2) | $3,561 | $(1,705) | $1,856 |
(1) For purposes of these computations, non-accrual loans are included in average loans.
(2) For purposes of these computations, reported on a tax-equivalent basis.
ANALYSIS OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME
TWELVE MONTHS ENDED DECEMBER 31, 2001 VERSUS DECEMBER 31, 2000 to 4.15%
INCREASES (DECREASES) DUE TO:
Average | Average | Net | |
Loans (1,2) | $ 1,023 | $ (660) | $ 363 |
Taxable investment securities | (2,029) | (266) | (2,295) |
Non-taxable investment securities (2) | 171 | (42) | 129 |
Federal funds sold, money market funds, and Time deposits with other banks | 440 | (8) | 432 |
TOTAL EARNING ASSETS | (395) | (976) | (1,371) |
Deposits | 32 | (742) | (710) |
Securities sold under repurchase agreements | (243) | (268) | (25) |
Other borrowings | (649) | (481) | (1,130) |
TOTAL INTEREST BEARING LIABILITIES | (374) | (1,491) | (1,865) |
NET CHANGE IN INTEREST INCOME (2) | $ (21) | $ 515 | $ 494 |
(1) For purposes of these computations, non-accrual loans are included in 2001.average loans.
(2) For purposes of these computations, reported on a tax-equivalent basis.
Other Operating Income and Expenses
In addition to net interest income, non-interest income is a significant source of revenue for Bar Harbor Banksharesthe Company and an important factor in the Company’sits results of operations. Likewise, non-interest expense represents a significant category of expense for the Company, second only to interest expense.
TotalFor the year ended December 31, 2002, total non-interest income amounted to $6,413, compared with $7,520 and $7,066 in 2001 compared with $7,066 inand 2000, representing a decrease of $1,107, or 14.7%, and an increase of $454, or 6.4%. Total, respectively.
For the year ended December 31, 2002, total non-interest expense amounted to $18,336, compared with $18,489 and $16,615 in 2001 compared with $16,615 inand 2000, representing a decrease of $153 and an increase of $1,874, or 0.8% and 11.3%., respectively.
As more fully disclosed in Note 8 to the consolidated financial statements, the Company manages and operates two major lines of business: Community Banking and Financial Services. The following discussion and analysis of other operating income and expenses focuses on each business segment separately:
Community Banking
Years Ended December 31, 2002, 2001, and 2000
2001 | 2000 | Change($) | Change(%) | 2002 | 2001 | 2000 | |
Non-interest income | $ 4,214 | $ 5,768 | $(1,554) | (26.9%) | $ 4,298 | $ 4,214 | $ 5,768 |
Non-interest expense | $13,344 | $12,652 | $ 692 | 5.5% | $14,221 | $13,344 | $12,652 |
Non-interest income:Income: Non-interest income from Community Banking represents 55%represented 67.0% of Bar Harbor Bankshares’the Company’s total 2002 non-interest income, compared with 56.0% and 81.6% in 2001 non-interest income. In 2001,and 2000, respectively.
For the year ended December 31, 2002, the Bank’s total non-interest income amounted to $4,214,$4,298, compared with $4,214 and $5,768 in 2001 and 2000, representing an increase of $84 and a decrease of $1,554, or 2.0% and 26.9%., respectively.
The increase in 2002 non-interest income was attributed to $450 in net gains on the sale of investment securities, compared with none during 2001. Changes in market interest rates during 2002 presented attractive opportunities to reposition a relatively small portion of the Bank’s investment securities portfolio. There is no assurance that the recording of securities gains will continue in future reporting periods at 2002 levels. It is important to note, however, that the available for sale investment securities portfolio is managed on a total return basis, in concert with well-structured asset/liability management policies. The Bank will continue to respond to changes in market interest rates, changes in securities pre-payment or extension risk, changes in the availability of and yields on alternative investments, and its needs for liquidity.
Offsetting the increase in 2002 income from securities gains was a $381, or 20.4%, decline in service charges on deposit accounts compared with 2001. In December of 2000 the Bank implemented various product and service fee enhancements and improved its management over fee waivers. These actions substantially improved non-interest income during the first half of 2001. However, as was generally anticipated, the initial impact on fee income was not fully sustained in the months following implementation, as many low balance accounts were either consolidated or closed, and certain customer habits, including overdraft activity, showed substantial change. Led by a decline in mortgage loan servicing fees, other fee income also declined in 2002, decreasing $213 from 2001 levels.
Included in the Bank’s 2000 non-interest income is $1,960, representing the gain on the sale of the Bank’s trust business to its affiliate, BTI Financial Group. As depicted in Note 8 to the consolidated financial statements, this non-interest income is eliminated fromin the consolidated totals for Bar Harbor Bankshares.consolidation of the Company’s financial statements. Excluding this one-time event from the 2000 totals,results, the Bank’s 2001 non-interest income increased $406, or 10.7%. The improvement in the Bank’s 2001 non-interest income iswas principally attributed to product and service fee enhancements implemented in late 2000, and improved management of customer service charges.
Non-interest expense:Expense: Non-interest expense from Community Banking represents 72%represented 77.6% of Bar Harbor Bankshares’the Company’s total 2002 non-interest expense, compared with 72.2% and 76.1% in 2001 non-interest expense. In 2001,and 2000, respectively.
For the year ended December 31, 2002, the Bank’s total non-interest expense amounted to $13,344,$14,221, compared with $13,344 and $12,652 in 2001 and 2000, representing an increaseincreases of $877 and $692, or 6.6% and 5.5%, respectively.
The increase in 2002 non interest expense was principally attributed to employee compensation increases, increases in subsidized employee health insurance, deferred executive compensation, and certain additions to the Bank’s workforce. The year-over-year increase in salaries and employee benefits amounted to $818, or 12.6%. Charitable contributions during 2002 were also higher than 2001 levels, increasing $76 to a total of $183, or 2.15% of the Bank’ total pre-tax income.
Salaries and employee benefit expenses accountaccounted for $496, or 3.9%,a substantial portion of the total2001 increase in 2001 non-interest expenses. This increase wasexpenses compared with 2000, and were principally attributed to staff additions in customer service, credit administration, and operational areas of the Bank. Also contributing to the 2001 increase in non-interest expense was increasedthe software depreciation of $157, primarily due toresulting from the conversion of all core applications to a new and improved integrated platform during 2000 and the implementation of on-line, real-time internet banking applications in early 2001. Other areas showing moderate increases are training and staff development, marketing and occupancy expenses.
Financial Services
Years Ended December 31, 2002, 2001, and 2000
2001 | 2000 | Change($) | Change(%) | 2002 | 2001 | 2000 | |
Non-interest income | $3,407 | $3,243 | $ 164 | 5.1% | $2,352 | $3,407 | $3,243 |
Non-interest expense | $4,979 | $3,857 | $1,122 | 29.1% | $3,720 | $4,979 | $3,857 |
Non-interest income:Income: Non-interest income from financial services represents 45%Financial Services (BTI Financial Group) represented 36.7% of Bar Harbor Bankshares’the Company’s total 2002 non-interest income, compared with 45.3% and 45.9% in 2001 net interest income. In 2001,and 2000, respectively.
For the year ended December 31, 2002, total non-interest income at BTI Financial Group (BTI) amounted to $3,407,$2,352, compared with $3,407 and $3,243 in 2001 and 2000, representing a decrease of $1,055 and an increase of $164, or 31.0% and 5.1%., respectively. Included in 2001 non-interest income is an adjustment of $322 representing a full accrual of fee income. Excluding this adjustment, total 2001 non-interest income decreased $158 or 4.9% compared with 2000.
The decline in 20012002 non-interest income iswas principally attributed to a significant decline in the market value of assets under management at Block Capital Management (Block) and Bar Harbor Trust Services (BHTS)(Trust). Fees charged to clients are derived principally from the market values of assets managed. At December 31, 2001,2002, assets under management totaled $239,000$180,774, compared with $305,000$238,679 and $305,474 at December 31, 2001 and 2000, representing a decreasedeclines of $66,000,$57,905 and $66,795, or 21.6%. This decrease is24.3% and 21.9%, respectively. The two-year decline in managed assets was principally attributed to the significant declines in the stock and bond markets throughout the year. Excluding the one-time accounting adjustment, 2001 non-interest income at Block and BHTS declined $260.
Partially offsetting themarket over this same period. The decline in 2001managed assets was also attributed to lost business, as investor confidence has been seriously eroded by depressed securities markets, corporate scandals, troubled economies both here and abroad, and overall geo-political tensions and uncertainties.
For the year ended December 31, 2002, total revenue at Block and BHTS were increasesTrust amounted to $1,822, compared with $2,673 in fee income generated by2001, and $2,611 in 2000, representing a decrease of $851, or 31.8%, and an increase of $62 or 2.4%, respectively.
Restrained investor confidence, particularly in the retail brokerage sector, also impacted 2002 performance at Dirigo, BTI’s full service brokerage subsidiary,subsidiary. After posting a 2001 revenue increase of $157, or 26.0%, 2002 revenue at Dirigo Investments. Total 2001 non-interest incomeinvestments declined. For the year ended December 31, 2002, total revenue at Dirigo amounted to $734,$464, compared with $589$760 in 2000,2001, representing an increasea decrease of $145,$296, or 25%38.9%. TheIt is anticipated that the 2001 expansion of Dirigo’s market area via the opening of an office in Bangor, Maine, the additionstrengthening of professional brokerage staff during 2002, and the transferongoing expansion of certain client accounts from Block and BHTS, were the driving factors underlying the increase inits product offerings, will have a stabilizing impact on Dirigo’s 2001 non-interest income.future revenue.
BTI parent recognized $43 non-interest income in 2000, comprised of $26 rental income and $17 from gains on sale of assets.
Non-interest expense:Expense: Non-interest expense from financial services represents 28%Financial Services represented 20.3% of Bar Harbor Bankshares’the Company’s total 2002 non-interest expense, compared with 26.9% and 23.2% in 2001 non-interest expense. Total 2001and 2000, respectively.
For the year ended December 31, 2002, total non-interest expense at BTI amounted to $4,979,$3,720, compared with $4,979 and $3,857 in 2001 and 2000, representing a decrease of $1,259 and an increase of $1,122, or 25.3% and 29.1%., respectively.
Included in 2001 non-interest expense is a one time restructuring charge of $618 recorded in the fourth quarter, primarily as a result of management changes within BTI. Excluding the restructuring charge, 2001 non-interest expense amounted to $4,361, representing an increase of $504 compared with 2000, or 13.1%. Likewise, without considering the 2001 restructuring charge, BTI’s total 2002 non-interest expense declined $641, or 14.7%.
The decline in 2002 non-interest expense was attributed to a number of factors. Salaries and employee benefit expenses declined $343, or 16.9%, and were principally the result of management and staffing changes. Marketing expense declined $270 from 2001 levels, and was principally attributed to large scale marketing campaigns conducted in early 2001, shortly following the formation of BTI, and to a lesser extent, more effective utilization of marketing dollars during 2002. Expense reductions were achieved in a variety of other operating areas as BTI pursued austerity initiatives to more closely match expenses with revenues. Offsetting a portion of the 2002 expense reductions was a $210 increase in occupancy costs associated with the purchase and renovation of a new BTI headquarters complex and occupied in May 2001, and the expansion of office facilities in Bangor, Maine.
The increase in 2001 non-interest expense isover 2000 was principally attributed to salaries and employee benefits expense, which increased $425 or 26.5% compared with 2000. In 2001, BTI expanded its marketexpenses, start up marketing and added staff to its offices in Bangor, Maine. Staff was also added in connectionlegal expenses, and occupancy costs associated with the expansion of productsBTI.
In response to declining revenues and services, sucheroding profitability, BTI implemented a variety of expense reduction measures in the fourth quarter of 2002. It is anticipated these measures will further reduce BTI’s current year operating expenses and favorably impact its future profitability.
Accounting Change: During the first half of 2002 the Company completed its implementation of SFAS No. 142, "Goodwill and Other Intangible Assets," which requires goodwill to be tested for impairment rather than amortized over a period of time. The Company estimated the value of goodwill utilizing several standard valuation techniques, including discounted cash flows, as financial planning and insurance. The increase in professional staff is expected to have a positive impact on future revenues.
Occupancy expenses also showed a significant increase in 2001, primarilywell as a resultan estimation of the purchaseimpact of current business conditions on the long-term value of the goodwill carried on the balance sheet. Management and renovationthe Board of Directors determined the impact of the overall deterioration of the stock and bond markets on investor activities within its target market area had negatively impacted the value of the Company’s goodwill balance related the acquisition of Dirigo. This resulted in an estimation of impairment of $247, net of tax. As depicted in Note 21 of the Company’s financial statements, the Company recorded an after tax charge of $247 in the first quarter of 2002.
Included in BTI’s new headquarters complex2001 non-interest expense is $73, representing the amortization of Dirigo goodwill. Pursuant to SFAS No. 142, no goodwill amortization expense was recorded in Ellsworth, Maine. Total 2001 occupancy expense2002.
Income Taxes
The Company’s effective income tax rate in 2002 amounted to $302,26.6%, compared with $13232.1% and 33.5% in 2000, representing an increase of $170, or 128%. Increased marketing expenses associated with the start up and expansion of the BTI network also contributed to the increase in total 2001 non-interest expense.
AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOMEFor the year ended December 31, 2001
Average Balance | Interest | Yield/Rate | |
ASSETS | |||
Loans | $ 283,728 | $ 24,308 | 8.57% |
Taxable investment securities | 135,278 | 8,741 | 6.46% |
Non-taxable investment securities | 6,479 | 371 | 5.73% |
Federal funds sold and money market funds | 11,530 | 472 | 4.09% |
Total interest-earning assets | 437,015 | $ 33,892 | 7.76% |
Non-interest earning assets: | |||
Total cash and due from banks | 11,767 | ||
Allowance for possible loan losses | (4,131) | ||
Bank premises and equipment | 12,895 | ||
Other assets | 10,703 | ||
TOTAL ASSETS | $468,249 | ||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||
Interest bearing demand deposits | $ 43,758 | $ 361 | 0.82% |
Savings deposits | 77,002 | 2,102 | 2.73% |
Time deposits | 116,502 | 5,835 | 5.01% |
Repurchase agreements and short term borrowings | 46,100 | 2,722 | 5.90% |
Long term borrowings | 83,936 | 4,731 | 5.64% |
Total interest bearing liabilities | 367,298 | $ 15,751 | 4.29% |
Non-interest bearing liabilities: | |||
Non interest bearing demand deposits | 42,661 | ||
Other liabilities | 4,881 | ||
Shareholders' equity | 53,409 | ||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $468,249 | ||
NET EARNING ASSETS | $ 69,717 | ||
NET INTEREST INCOME/NET INTEREST SPREAD | $ 18,141 | 3.47% | |
NET INTEREST MARGIN | 4.15% | ||
NET INCOME | $ 3,511 | ||
DIVIDENDS PAID IN CURRENT YEAR | $ 2,490 | ||
RETURN ON AVERAGE ASSETS | 0.75% | ||
RETURN ON AVERAGE EQUITY | 6.57% | ||
DIVIDEND PAYOUT RATIO | 70.92% | ||
EQUITY CAPITAL TO ASSETS RATIO | 11.41% |
AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOMEFor the year ended December 31, 2000
Average Balance | Interest | Yield/Rate | |
ASSETS | |||
Loans | $ 271,000 | $23,939 | 8.83% |
Taxable investment securities | 165,529 | 11,168 | 6.74% |
Non-taxable investment securities | 3,082 | 186 | 6.03% |
Federal funds sold and money market funds | 694 | 40 | 5.76% |
Total interest-earning assets | 440,305 | $35,333 | 8.02% |
Non-interest earning assets: | |||
Total cash and due from banks | 13,598 | ||
Allowance for possible loan losses | (4,222) | ||
Bank premises and equipment | 10,302 | ||
Other assets | 11,589 | ||
TOTAL ASSETS | $471,572 | ||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||
Interest bearing demand deposits | $ 44,260 | $ 439 | 0.99% |
Savings deposits | 76,189 | 2,331 | 3.06% |
Time deposits | 115,984 | 6,238 | 5.38% |
Repurchase agreements and short term borrowings | 114,663 | 6,995 | 6.10% |
Long term borrowings | 24,040 | 1,613 | 6.71% |
Total interest bearing liabilities | 375,136 | $17,616 | 4.70% |
Non-interest bearing liabilities: | |||
Non interest bearing demand deposits | 44,180 | ||
Other liabilities | 2,706 | ||
Shareholders' equity | 49,550 | ||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $471,572 | ||
NET EARNING ASSETS | $ 65,169 | ||
NET INTEREST INCOME/NET INTEREST SPREAD | $17,717 | 3.32% | |
NET INTEREST MARGIN | 4.02% | ||
NET INCOME | $ 4,797 | ||
DIVIDENDS PAID IN CURRENT YEAR | $ 2,554 | ||
| |||
RETURN ON AVERAGE ASSETS | 1.02% | ||
RETURN ON AVERAGE EQUITY | 9.68% | ||
DIVIDEND PAYOUT RATIO | 53.24% | ||
EQUITY CAPITAL TO ASSETS RATIO | 10.51% |
AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOMEFor the year ended December 31, 1999
Average Balance |
Interest | Yield/Rate | |
ASSETS | |||
Loans | $ 248,708 | $21,777 | 8.76% |
Taxable investment securities | 149,698 | 9,798 | 6.55% |
Non-taxable investment securities | 5,332 | 316 | 5.92% |
Federal funds sold and money market funds | 1,128 | 61 | 5.41% |
Total interest-earning assets | 404,866 | $31,952 | 7.89% |
Non-interest earning assets: | |||
Total cash and due from banks | 11,450 | ||
Allowance for possible loan losses | (4,781) | ||
Bank premises and equipment | 7,960 | ||
Other assets | 9,060 | ||
TOTAL ASSETS | $428,555 | ||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||
Interest bearing demand deposits | $ 44,115 | $ 480 | 1.29% |
Savings deposits | 77,021 | 2,338 | 3.04% |
Time deposits | 110,854 | 5,471 | 4.93% |
Repurchase agreements and short term borrowings | 74,640 | 3,930 | 5.26% |
Long term borrowings | 28,662 | 1,583 | 5.52% |
Total interest bearing liabilities | 335,292 | $13,802 | 4.12% |
Non-interest bearing liabilities: | |||
Non interest bearing demand deposits | 43,103 | ||
Other liabilities | 2,029 | ||
Shareholders' equity | 48,131 | ||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $428,555 | ||
NET EARNING ASSETS | $ 69,574 | ||
NET INTEREST INCOME/NET INTEREST SPREAD | $18,150 | 3.77% | |
NET INTEREST MARGIN | 4.48% | ||
NET INCOME | $ 6,225 | ||
DIVIDENDS PAID IN CURRENT YEAR | $ 2,476 | ||
RETURN ON AVERAGE ASSETS | 1.45% | ||
RETURN ON AVERAGE EQUITY | 12.93% | ||
DIVIDEND PAYOUT RATIO | 39.78% | ||
EQUITY CAPITAL TO ASSETS RATIO | 11.23% |
RATE/VOLUME ANALYSIS
The following tables represent a summary of the 2001 and 2000, changesrespectively. The decline in the effective income tax rate was principally attributed to increases in the Company’s tax-exempt interest earned and interest paid as a resultincome, primarily resulting from the addition of changes in rates and changes in volumes.
For each category of earning assets and interest bearing liabilities, information is provided with respect to changes attributable to change in rate (change in rate multiplied by prior year volume) and change in volume (change in volume multiplied by prior year rate). The change in interest due to both volume and rate has been allocated to volume and rate changes in proportiontax-exempt securities to the relationships of the absolute dollar amounts of the change in each.Company’s investment securities portfolio.
YEAR-ENDED DECEMBER 31, 2001COMPARED TO DECEMBER 31, 2000INCREASES (DECREASES) DUE TO:
Volume | Rate | Net | |
Loans | $ 1,023 | $ (654) | $ 369 |
Taxable investment securities | (1,982) | (445) | (2,427) |
Non-taxable investment securities | 194 | (9) | 185 |
Federal funds sold and money market funds | 437 | (5) | 432 |
TOTAL EARNING ASSETS | $ (328) | $(1,113) | $ (1,441) |
Deposits | $ 48 | $ (758) | $ (710) |
Repurchase agreements and short term borrowings | (4,464) | (2,019) | (6,483) |
Long term borrowings | 5,486 | (158) | 5,328 |
TOTAL INTEREST BEARING LIABILITIES | 1,070 | (2,935) | (1,865) |
NET CHANGE IN INTEREST INCOME | $(1,398) | $ 1,822 | $ 424 |
YEAR-ENDED DECEMBER 31, 2000COMPARED TO DECEMBER 31, 1999INCREASES (DECREASES) DUE TO:
Volume | Rate | Net | |
Loans | $ 1,985 | $ 177 | $ 2,162 |
Taxable investment securities | 1,075 | 295 | 1,370 |
Non-taxable investment securities | (140) | 10 | (130) |
Federal funds sold and money market funds | (25) | 4 | (21) |
TOTAL EARNING ASSETS | $ 2,895 | $ 486 | $ 3,381 |
Deposits | $ 160 | $ 559 | $ 719 |
Repurchase agreements and short term borrowings | 2,360 | 705 | 3,065 |
Long term borrowings | (279) | 309 | 30 |
TOTAL INTEREST BEARING LIABILITIES | 2,241 | 1,573 | 3,814 |
NET CHANGE IN INTEREST INCOME | $ 654 | $(1,087) | $(433) |
RISK MANAGEMENT
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,Senior Credit Officer, the Directors Loan Committee, and the Bank’s Board of Directors. Management follows a policy of continually identifying, analyzing and grading credit risk inherent in the loan portfolio. An ongoing independent review, subsequent to management’s review, of individual credits is performed by an independent loan review function whichthat 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 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 (NPLs) – Non performing: Non-performing loans include loans on non-accrual status, loans which have been treated as troubled debt restructurings and loans past due 90 days or more and still accruing interest.
The following table sets forth the details of non-performing loans forover the last five years.
NON-PERFORMINGNON-ACCRUAL LOANSFIVE-YEAR SUMMARYAND ACCRUING PAST DUE 90 DAYS OR MORE
AT DECEMBER 31
2001 | 2000 | 1999 | 1998 | 1997 | 2002 | 2001 | 2000 | 1999 | 1998 | |
Loans accounted for on a | ||||||||||
non-accrual basis | $ 2,191 | $ 6,907 | $ 2,016 | $ 1,744 | $ 3,236 | $ 986 | $2,191 | $6,907 | $2,016 | $1,744 |
Accruing loans contractually | ||||||||||
past due 90 days or more | 151 | 1,206 | 706 | 1,710 | 774 | 188 | 151 | 1,206 | 706 | 1,710 |
Troubled debt restructurings | 0 | 0 | ||||||||
Total | $2,342 | $8,113 | $2,722 | $3,454 | $4,010 | |||||
Total Non-Performing Loans | $1,174 | $2,342 | $8,113 | $2,722 | $3,454 | |||||
Percent of Total Loans | 0.79% | 2.99% | 1.04% | 1.51% | 1.85% | |||||
Ratios: | ||||||||||
Allowance for loan losses to total loans | 1.42% | 1.40% | 1.56% | 1.64% | 1.94% | |||||
Non-performing to total loans | 0.33% | 0.79% | 2.99% | 1.04% | 1.51% | |||||
Allowance for loan losses to non-performing loans | 424% | 178% | 52% | 158% | 129% |
At December 31, 2001, loans accounted for on a non-accrual basis amountedThe Company continued to $2,191, or 0.74% of total loans, compared with $6,907, or 2.54%, at the prior year-end. The 2001 decrease in non-accrual loans amounted to $4,716, or 68.3%.
At December 31, 2001, totalmaintain its non-performing loans amountedat significantly lower levels than in prior years and attributes this improvement to $2,342, or 0.79%a strengthening of total loans, compared with $8,113, or 2.99%, atits credit administration processes and underwriting standards, aided by a healthy local economy. During 2000, the prior year-end. The 2001 decrease in non-performing loans amounted to $5,771, or 71.1%. At December 31, 2001, non-performing loans as a percent of total loans stood at its lowest level over the past five years.
In 2001, the BankCompany established a centralized loan collection and workoutmanaged asset department, and enhanced collection efforts for problem loans.
Over the past two years, the ratio of non-performing loans to total loans declined 266 basis points and, upgraded its collection efforts. The Bank also strengthened its credit administration functionas of December 31, 2002, stood at their lowest level in six years. Non-performing loans declined $1,168 or 49.9% in 2002, following a decline of $5,771 or 71.1% in 2001. At December 31, 2002, total non-performing loans amounted to $1,174, or 0.33% of total loans, compared with $2,342 or 0.79% at the prior year-end, and continued tightening credit quality standards throughout the organization. $8,113 or 2.99% at December 31, 2000.
The 2001 reduction in non-performing loans iswas principally attributed to one relationship with non-accruing aggregate outstanding loans at December 31, 2000, of $3,100, of which $1,000 was charged off and the balance repaid fromupon asset liquidation, a $700 repayment by one particular customer, and other loans brought current, particularly consumer loans.current.
At December 31, 2002, the Company’s allowance for loan losses expressed as a percent of non-performing loans was 424%, compared with 178% and 52% at December 31, 2001 and 2000, respectively.
Allowance for possible loan lossesLoan Losses and provision:Provision: The allowance for possible 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, is, in management’s judgment, is appropriate for the amount of risk inherent in the loan portfolio, given past, present and expected conditions, and adequate to provide for probable losses that have already occurred. Reserves are established for specific loans including impaired loans, a pool of reserves based on historical charge-offs by loan types, and supplemental reserves to reflect current economic conditions, industry specific risks, and other observable data. Loan loss provisions are recorded, and the allowance is increased, when loss is identified and deemed likely.
Specific reserves for impaired loans are determined in accordance with SFAS No. 114, "Accounting by Creditors For Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors For Impairment of a Loan-Income Recognition and Disclosures."
The amount of loans considered to be impaired totaled $986 as of December 31, 2002, compared with $2,191 and $6,907 as of December 31, 2001 and $6,907 as of December 31, 2000.2000, respectively. The related allowances for loan losses on these impaired loans werewas $120, $517 and $2,200 as of December 31, 2002, 2001 and 2000, respectively. The amount of interest income not recorded on impaired loans was $183, $182 and $220 as of December 31, 2002, 2001 and 2000, respectively.
No portion of the allowance is restricted to any loan or group of loans, and the entire allowance is available to absorb realized losses. The amount and timing of realized losses and future allowance allocations may vary from current estimates.
Management recognizes that early and accurate recognition of risk is the best means to reduce credit losses and maximize earnings. The BankCompany employs a comprehensive risk management structure to identify and manage the risk of loss. For consumer loans, the BankCompany identifies loan delinquency beginning at 21-day delinquency and provides appropriate follow-up by written correspondence or personal contact. Non-residential mortgage consumer losses are recognized no later than the point at which a loan is 120 days past due. Residential mortgage losses are recognized during the foreclosure process when that loss is quantifiable and reasonably assured. For commercial loans the BankCompany applies a risk grading system. This system stratifies the portfolio and allows management to focus itsappropriate 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 and the allowance is increased when loss is identified and deemed likely.
While management uses available information to recognize losses on loans, changing economic conditions and the economic prospects of the borrowers may necessitate future additions or reductions to the allowance. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’sCompany’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 principal regulatory agency, the FDIC, conducted an examination during the second quarter of 2001. In connection with its review, the Bank agreed to increase the provision, implement a classified asset reduction plan, revise its credit administration plan, and implement certain revisions to its asset appraisal procedures. The foregoing actions, in management’s judgment, have been satisfactorily completed.
The following table, Summary of Loan Loss Experience, includes an analysis of the changes to the allowance for possible loan loss for the past five years.
SUMMARY OF LOAN LOSS EXPERIENCE
2001 | 2000 | 1999 | 1998 | 1997 | 2002 | 2001 | 2000 | 1999 | 1998 | |
Balance at beginning of period | $ 4,236 | $ 4,293 | $ 4,455 | $ 4,743 | $ 4,293 | $ 4,169 | $ 4,236 | $ 4,293 | $ 4,455 | $ 4,743 |
Charge offs: | ||||||||||
Commercial, financial, agricultural, others | 416 | 253 | 445 | 217 | 102 | |||||
Real estate mortgages | 1,434 | 170 | 58 | 113 | 27 | |||||
Installments and other loans to individuals | 454 | 800 | 385 | 458 | 456 | |||||
Commercial,financial | ||||||||||
agricultural, others | 111 | 1,416 | 253 | 445 | 217 | |||||
Real estate: | ||||||||||
Construction and development | -- | -- | ||||||||
Mortgage | 176 | 434 | 170 | 58 | 113 | |||||
Installments and other loans | ||||||||||
to individuals | 195 | 454 | 800 | 385 | 458 | |||||
Total charge offs | 2,304 | 1,223 | 888 | 788 | 585 | 482 | 2,304 | 1,223 | 888 | 788 |
Recoveries: | ||||||||||
Commercial, financial, agricultural, others | 96 | 136 | 51 | 40 | 169 | |||||
Real estate mortgages | 74 | 7 | 60 | 21 | 154 | |||||
Installments and other loans to individuals | 67 | 71 | 141 | 103 | 92 | |||||
Commercial,financial | -- | -- | ||||||||
agricultural, others | 121 | 96 | 136 | 51 | 40 | |||||
Real estate: | ||||||||||
Construction and development | -- | -- | ||||||||
Mortgage | 4 | 74 | 7 | 60 | 21 | |||||
Installments and other loans | ||||||||||
to individuals | 63 | 67 | 71 | 141 | 103 | |||||
Total recoveries | 237 | 214 | 252 | 164 | 415 | 188 | 237 | 214 | 252 | 164 |
Net charge offs | 2,067 | 1,009 | 636 | 624 | 170 | 294 | 2,067 | 1,009 | 636 | 624 |
Provision charged to operations | 2,000 | 952 | 474 | 336 | 620 | 1,100 | 2,000 | 952 | 474 | 336 |
Balance at end of period | $ 4,169 | $ 4,236 | $ 4,293 | $ 4,455 | $ 4,743 | $ 4,975 | $ 4,169 | $ 4,236 | $ 4,293 | $ 4,455 |
Average loans outstanding during period | $ 279,721 | $271,000 | $248,708 | $224,406 | $217,295 | $325,712 | $283,728 | $271,000 | $248,708 | $224,406 |
Net charge offs to average loans outstanding | ||||||||||
during period | 0.74% | 0.37% | 0.26% | 0.28% | 0.08% | |||||
Net charge offs to average loans | ||||||||||
outstanding during period | 0.09% | 0.73% | 0.37% | 0.26% | 0.28% |
NetThe Company’s loan charge off experience improved significantly during 2002. For the year ended December 31, 2002 net loans charged off amounted to $294, compared with $2,067 in 2001 were $2,067, or 0.74%and $1,009 in 2000, representing a decrease of average loans during the period. This represents$1,773 and an increase of $1,058, over the prior year when net charge-offs totaled $1,009, or 0.37% of average loans. Recoveries in 2001 on loans previously charged off were $237 as compared with $214 in 2000.
85.8% and 104.9%, respectively. The 2001 increase in loan charge-offs includesincluded one large credit exceeding $1,000.
For the year ended December 31, 2002, the Company provided $1,100 to the allowance for loan losses, compared with $2,000 in 2001, representing a decrease of $900, or 45%. The provision for loan losses ("provision") in 2002 was 0.34% of average loans, in 2001 was 0.70%, and in 2000 was $952, or 0.35% of average loans. The 2002 decrease in the provision for loan losses was attributed, in part, to one large credit exceeding $1,000 that was charged off in 2001, the second quarter. Increased installment loan charge offs in 2000 over those in 1999 are principally attributed to losses on two relationships.
The provision for loan losses ("provision") in 2001 was $2,000 or 0.71%repayment of total average loans. In 2000, the provision was $952, or 0.35% of averagecertain previously classified loans, while in 1999 the provision was $474, or 0.19% of average loans.
Theand an overall strengthening of the Company’s credit administration function and the tightening of credit underwriting standards in general resultedquality in the identification of risk and probable losses associated with certain loans in theloan portfolio. Portfolio characteristics and decliningrelatively stable economic conditions also contributed to the increasedlower provision in 2001.
No portion of the allowance is restricted to any loan or group of loans, and the entire allowance is available to absorb realized losses. The amount and timing of realized losses and future allowance allocations may vary from current estimates.2002.
The following table presents the five-year breakdown of the allowance for loan losses by loan type at December 31, 2001, 2000, 1999, 1998, and 1997.each respective year-end.
ALLOCATION OF ALLOWANCE FOR POSSIBLE LOAN LOSSES
(at December 31)
2001 | 2000 | 1999 | 1998 | 1997 | 2002 | 2001 | 2000 | 1999 | 1998 | |||||||||||
Amount | Percent of Loans in Each Category to Total loans | Amount | Percent of Loans in Each Category to Total loans | Amount | Percent of Loans in Each Category to Total loans | Amount | Percent of Loans in Each Category to Total loans | Amount | Percent of Loans in Each Category to Total loans | |||||||||||
Amount | Percent of Loans in Each Category to Total loans | Amount | Percent of Loans in Each Category to Total loans | Amount | Percent of Loans in Each Category to Total loans | Amount | Percent of Loans in Each Category to Total loans | Amount | Percent of Loans in Each Category to Total loans | |||||||||||
Commercial,financial, | $1,387 | 9.84% | $1,563 | 13.00% | $ 578 | 12.78% |
| 14.42% |
|
| ||||||||||
Real estate mortgages | 1,660 | 84.25% | 2,060 | 79.61% | 1,927 | 81.10% | 1,240 | 78.31% | 1,716 | 76.71% | ||||||||||
Installments and | 855 | 4.67% | 560 | 5.91% | 1,109 | 6.01% | 323 | 7.21% | 536 | 7.68% | ||||||||||
Commercial, financial, and agricultural | $1,737 | 8.84% | $1,387 | 9.84% | $1,563 | 11.20% | $ 578 | 12.78% | $1,010 | 14.42% | ||||||||||
Real estate mortgages: | ||||||||||||||||||||
Real estate-construction | 266 | 4.63% | 135 | 6.83% | 115 | 4.53% | 143 | 6.00% | 78 | 4.95% | ||||||||||
Real estate-mortgage | 1,992 | 82.12% | 1,525 | 77.42% | 1,945 | 76.96% | 1,784 | 75.10% | 1,162 | 73.36% | ||||||||||
Installments and other loans | ||||||||||||||||||||
to individuals | 531 | 3.65% | 855 | 4.67% | 560 | 5.91% | 1,109 | 6.01% | 323 | 7.21% | ||||||||||
Other | -- | 1.24% | -- | 1.48% | 183 | 0.11% | 180 | 0.06% | -- | 0.10% | -- | 0.76% | -- | 1.24% | -- | 1.48% | 183 | 0.11% | 180 | 0.06% |
Unallocated | 267 | 0.00% | 53 | 0.00% | 496 | 0.00% | 1,702 | 0.00% | 744 | 0.00% | 449 | 0.00% | 267 | 0.00% | 53 | 0.00% | 496 | 0.00% | 1,702 | 0.00% |
TOTAL | $4,169 | 100.00% | $4,236 | 100.00% | $4,293 | 100.00% | $4,455 | 100.00% | $4,743 | 100.00% | $4,975 | 100.00% | $4,169 | 100.00% | $4,236 | 100.00% | $4,293 | 100.00% | $4,455 | 100.00% |
At December 31, 2001,2002, the loan loss adequacy analysis resulted in a need for specific reserves of $2,805,$3,555, general reserves of $584,$850, impaired reserves of $517,$120, and other reserves of $263.$450. Specific reserves are determined by way of individual review of commercial loan relationships in excess of $250, combined with reserves calculated against total outstandings by category using the company’sCompany’s historical loss experience and other observable data.
General reserves account for the risk and probable loss inherent in certain pools of industry and geographic concentration within the loan portfolio. Loan concentrations continue to reflect the Company’s business region. The loan portfolio includes $34,464$34,943 of loans to the hospitality industry, or 11.6%9.9% of total loans, compared with $31,242,$34,464, or 11.4%11.6%, at December 31, 2000.2001. There were no major changes in loan concentrations in 2001 and no significantduring 2002. However, changes were made to the allowance for possible loancalculation to incorporate loss estimates relating to emerging issues in the blueberry industry, to which the Company has extended credit, and principally centered in Washington County, Maine. Over the past two to three years, blueberry inventories have grown as increased supplies have exceeded demand both here and abroad and prices have softened. As of December 31, 2002, approximately $300 has been included in the allowance representing management’s estimate of inherent losses were made inassociated with this particular regard.industry segment.
Management reviews impaired loans to insure such loans are transferred to nonaccrualnon-accrual and written down when necessary. The review includes specific reviewsanalysis of commercial relationships over $250. Smaller homogeneous loans are not individually reviewed, but are reserved collectively. Impaired reserves consider all consumer loans that are over 90 days past due and impaired commercial loans which are fully reserved within the specific reserves via individual review and specific allocation of potential loss for loans relationships over $250, and pool reserves for smaller impaired loans. The Bank had no troubled debt restructurings at December 31, 2001,2002, and all of its impaired loans were considered collateral dependent and were adequately reserved. Total reserves against impaired loans were $517$120 at December 31, 2001.2002.
Loan delinquency levels have remained at low levels for several consecutive months.during 2002. However, existing loan documentation and/or structural weaknesses for certain loans written in prior years continue to impede collection efforts in certain cases and have impacted probable losses. These weaknesses are historical in nature and do not necessarily reflect current loan underwriting and documentation standards. The extent of these problems in the entire loan portfolio is not entirely known; however, it is known that such problems exist and, accordingly, the allowance for loan losses incorporates this knowledge.
The Bank’sBased upon the process employed and giving recognition to all attendant factors associated with the loan portfolio, the Company considers the allowance for loan losses declined slightly from December 31, 2000; however, the allowance at December 31, 2001, represents a higher percentage of delinquent and non-performing loans than in the preceding year. Management believes that the allowance at December 31, 2001, is2002 to be appropriate for the risks inherent in the loan portfolio, and resident in the local and national economy as of that date.
Market Risk – Quantitative and Qualitative Disclosures
Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign exchange rate risk and commodity price risk, do nonot arise in the normal course of the Company’s business activities.
The responsibility for balance sheet risk management oversight is the function of the Bank’s Asset/Liability Committee ("ALCO"), chaired by the chief financial officerChief Financial Officer and composed of various members of corporate senior management. ALCO meets regularly to review balance sheet structure, formulate strategy in light of current and expected economic conditions, adjust product prices as necessary, implement policy, monitor liquidity, and review performance against guidelines established to control exposure to the various types of inherent risk.
Interest rate risk can be defined as an exposure to movement in interest rates that could have an adverse impact on the Bank’s net interest income. Interest rate risk arises naturally from the imbalance in the re-pricing, maturity and/or cash flow characteristics of assets and liabilities. Management’s objectives are to measure, monitor and develop strategies in response to the interest rate risk profile inherent in the Bank’s balance sheet.
The Bank’s interest rate risk measurement and management techniques incorporate the re-pricing and cash flow attributes of balance sheet and off balance sheet instruments as they relate to current and potential changes in interest rates. The level of interest rate risk, measured in terms of the potential future effect on net interest income, is determined through the use of modeling and other techniques under multiple interest rate scenarios. Interest rate risk is evaluated in depth on a quarterly basis and reviewed by ALCO and the Board of Directors.
The Bank’s Asset Liability Management Policy, approved annually by the Board of Directors, establishes interest rate risk limits in terms of variability of net interest income under rising, flat and decreasing rate scenarios. It is the role of ALCO to evaluate the overall risk profile and to determine actions to maintain and achieve a posture consistent with policy guidelines.
Interest rate risk is monitored through the use of two complementary measures: static gap analysis ("gap") and earnings simulation modeling. While each measurement may have its limitations, taken together they form a reasonably comprehensive view of the magnitude of the Bank’s interest rate risk, the level of risk over time, and the quantification of exposure to changes in certain interest rate relationships.
The Bank utilizes an interest rate risk model widely recognized in the financial industry to monitor and measure interest rate risk. The Bank also utilizes an outside consultant to perform rate shocks of its balance sheet, and to perform a variety of other analysis for the ALCO. The model simulates the behavior of interest income and expense of all on and off-balance sheet instruments under different interest rate scenarios together with a dynamic future balance sheet. Interest rate risk is measured in terms of potential changes in net interest income based upon shifts in the yield curve.
Interest rate gap analysis provides a static view of the maturity and re-pricing characteristics of the Bank’s on and off-balance sheet positions. Gap is defined as the difference between assets and liabilities re-pricing or maturing within specified periods. An asset-sensitive position, or "positive gap", indicates that there are more rate sensitive assets than rate-sensitive liabilities re-pricing or maturing within a specified time period, which would imply a favorable impact on net interest income during periods of rising interest rates. Conversely, a liability-sensitive position, or "negative gap", generally implies a favorable impact on net interest income during periods of falling interest rates. There are certain limitations inherent in static gap analysis. These limitations include the fact that it is a static measurement and it does not reflect the degrees to which interest earning assets and interest bearing liabilities may respond non-proportionally to changes in market interest rates. Although the ALCO reviews all assumptions used in the model in detail, assets and liabilities do not always have clear re-pricing dates, and re-pricing may occur earlier or later than assumed in the model.
The Bank’s static interest rate sensitivity gap is pictured below:
INTEREST RATE RISK
CUMULATIVE STATIC GAP POSITION
December 31, 2002 and 2001
One Day | Over Six Months To One Year | One Year | Over Five Years | |
December 31, 2002 | $61,072 | $94,368 | $146,814 | $ 3 |
December 31, 2001 | $ (7,081) | $10,131 | $100,118 | $ (1) |
$ Change | $68,153 | $84,237 | $ 46,696 | $ 4 |
The interest rate risk sensitivity model requires that assets and liabilities be broken down into components as to fixed, variable, and adjustable interest rates, as well as other homogeneous groupings, which are segregated as to maturity and type of instrument. The model includes assumptions about how the balance sheet is likely to evolve through time and in different interest rate environments. The model uses contractual re-pricing dates for variable products, contractual maturities for fixed rate products, and product specific assumptions for deposits accounts, such as money market accounts, that are subject to re-pricing based on current market conditions. Re-pricing margins are also determined for adjustable rate assets and incorporated in the model. Investment securities and borrowings with call provisions, are examined on an individual basis in each rate environment to estimate the likelihood of a call. Prepayment assumptions for mortgage loans and mortgage backed securities are developed from industry median estimates of prepayment speeds, based upon similar coupon ranges and seasoning. Cash flows and maturities are then determined, and for certain assets, prepayment assumptions are estimated under different rate scenarios. Re-pricing margins are also determined for adjustable rate assets. Interest income and interest expense are then simulated under several rate conditions including:
Changes in net interest income based upon the foregoing simulations are measured against the flat interest rate scenario and actions are taken in order to maintain the balance sheet interest rate risk within established policy guidelines. In addition to the parallel simulation, interest rate risk is regularly measured under various non-parallel yield curve shifts, pricing, and balance sheet assumptions.
The following table summarizes the bank’sBank’s net interest income sensitivity analysis as of December 31, 2002, over one and two year horizons. In light of the Federal Funds Rate of 1.25% on the date presented, the analysis incorporates a declining interest rate scenario of 100 basis points, compared with 200 basis points as shown at December 31, 2001. The table also summarizes net interest income sensitivity under a non-parallel shift in the yield curve, whereby short term interest rates rise 200 and 400 basis points, a scenario which management believes is more likely, given the current shape of the yield curve.
INTEREST RATE RISK
CHANGE IN NET INTEREST INCOME FROM THE FLAT RATE SCENERIO
DECEMBER 31, 2002
-100 Basis Points | +200 Basis Points | +200 Basis Points | +400 Basis Points | |
Year 1 | ||||
Net interest income change ($) | ($386) | $546 | $291 | $818 |
Net interest income change (%) | (1.97%) | 2.78% | 1.48% | 4.17% |
Year 2 | ||||
Net interest income change vs. year 1 base ($) | ($2,429) | $877 | $123 | $1,758 |
Net interest income change vs. year 1 base (%) | (12.37%) | 4.47% | 0.63% | 8.96% |
The following table summarizes the Banks net interest income sensitivity analysis as of December 31, 2001, and 2000, utilizing a 200 basis point changedecline in interest rates over one and two year horizons, with a 200 and 300 basis point change presented as ofincrease in interest rates. This simulation assumed a parallel shift in the current period.yield curve.
INTEREST RATE RISK
CHANGE IN NET INTEREST INCOME FROM THE FLAT RATE SCENERIO
DECEMBER 31, 2001
-200 basis points | +200 basis points | +300 basis points | -200 Basis Points | +200 Basis Points | +300 Basis Points | |
Year 1 | ||||||
Net interest income change ($) | ($894) | $487 | $692 | ($894) | $487 | $692 |
Net interest income change (%) | (4.89%) | 2.66% | 3.78% | (4.89%) | 2.66% | 3.78% |
Year 2 | ||||||
Net interest income change ($) | ($3,529) | $1,159 | $1,386 | |||
Net interest income change (%) | (19.29%) | 6.34% | 3.78% | |||
Net interest income change vs. year one base ($) | ($3,529) | $1,159 | $1,386 | |||
Net interest income change vs. year 1 base (%) | (19.29%) | 6.34% | 3.78% |
Based on the information and assumptions in effect at December 31, 2002, management believes that a 200 basis point increase in interest rates over the next 12 months would increase net interest income $546, or 2.78% in 2003, and $877, or 4.47% in 2004. Should short-term interest rates rise and the yield curve flatten, management believes that a 200 basis point increase over the next 12 months would increase net interest income by $291, or 1.48%, and that a 400 basis point increase during this same period would increase net interest income by $818, or 4.17%. Extending this scenario to a twenty-four month horizon, and assuming no additional movement in rates in 2004, management believes net interest income would increase $123 and $1,758 in 2003 and 2004, or 0.63% and 8.96%, respectively.
INTEREST RATE RISKCHANGE IN NET INTEREST INCOME FROM THE FLAT RATE SCENERIODECEMBERBased on the information and assumptions in effect at December 31, 20002002, management believes that a 100 basis point decrease in interest rates over the next two years would decrease net interest income $386, or 1.97% in 2003, and $2,429, or 12.37% in 2004. While the simulated decline in year two falls outside of the Bank’s policy target of 10.0%, management believes that a 100 basis point decline in interest rates, or a Federal Funds Targeted rate of 0.25%, represents a scenario that is not likely to occur. Further, a repositioning of the balance sheet to hedge such a decline, would adversely impact net interest income in a rising rate environment, a scenario management believes is more likely to occur over the longer term.
-200 basis points | +200 basis points | |
Year 1 | ||
Net interest income change ($) | ($62) | ($275) |
Net interest income change (%) | (0.36%) | (1.61%) |
Year 2 | ||
Net interest income change ($) | $18 | ($125) |
Net interest income change (%) | 0.11% | (0.73%) |
Managing the Bank’s interest rate risk sensitivity has been challenging during this period of historically low interest rates. During 2002, the yield curve showed a relatively sharp, downward, parallel shift. As was anticipated by management through use of the model, the Bank’s 2002 net interest income was moderately impacted and, were it not for the growth in earning assets, would have resulted in a year-over-year decline.
At December 31, 2002, the Bank continued to maintain a moderately asset sensitive balance sheet, positioning itself for an eventual rise in interest rates. Should interest rates remain flat for an extended period of time, and assuming no earning asset growth and a static balance sheet, management believes that net interest income will continue showing slight to moderate declines. Management expects short- term interest rates may be susceptible to further declines during 2003, with the balance of the yield curve holding relatively constant. Management believes that the current level of interest rate risk is acceptable.
The Bank engages an independent consultant to periodically review its interest rate risk position and the reasonableness of assumptions used, with periodic reports provided to the Bank’s Board of Directors. At December 31, 2002, there were no significant differences between the views of the independent consultant and Management regarding the Bank’s interest rate risk exposure.
The preceding sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including: the nature and timing of interest rate levels and yield curve shape, prepayments on loans and securities, deposit rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cashflows,cash flows, and others. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences might change.
As market conditions vary from those assumed in the sensitivity analysis, actual results may also differ due to: prepayment/refinancing levels deviating from those assumed, the impact of interest rate change caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals, and product preference changes, and other such variables. The sensitivity analysis also does not reflect actions that ALCO might take in responding to or anticipating changes in interest rates.
When appropriate, ALCO may use off-balance sheetDerivative instruments such asand hedging activities: As part of the Bank’s overall interest rate floors, capsrisk management strategy, management periodically uses derivative instruments to minimize significant unplanned fluctuations in earnings and swaps to hedgecash flows caused by interest rate volatility. The Bank’s interest rate risk management strategy involves modifying the re-pricing characteristics of certain assets and liabilities so that changes in interest rates do not have a significant adverse effect on net interest income, the net interest margin and cash flows. Derivative instruments that management periodically uses as part of its interest rate risk position.management strategy include interest rate swaps, caps and floors. A policy statement, approved by the boardBoard of directorsDirectors of the Bank, governs use of these instruments. During 2001
At December 31, 2002, the Bank had one derivative instrument outstanding, an interest rate swap, compared with none at the prior year-end. The details are summarized as follows:
Description | Maturity | Notional Amount | Fixed Interest Rate | Variable Interest Rate | Hedge Pool |
Receive fixed rate, pay variable rate. | 4/26/04 | $10,000 | 6.425% | Prime | Home Equity Loans |
The $10 million interest rate swap hedges a defined pool of the Bank’s home equity loans yielding an interest rate of prime, which at December 31, 2002 was 4.25%. The bank is required to pay a counter- party monthly variable rate payments indexed to prime, while receiving monthly fixed rate payments based upon an interest rate of 6.425% over the term of the agreement.
The credit risk associated with the interest rate swap agreement is the risk of non-performance by the counter-party to the agreement. However, management does not anticipate non-performance by the counter-party, and 2000, there were no off-balance sheet instrumentsmonitors risk through its asset/liability management policies and procedures.
The interest rate swap agreement, which qualifies as a cash flow hedge, has an original maturity of two years and as of December 31, 2002 had an unrealized gain of $272 thousand. In accordance with the Statement of Financial Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 137, and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", the unrealized gain is recorded in place.the statement of condition with the offset recorded in the statement of other comprehensive income. The use of the interest rate swap agreement increased interest income by $119 during 2002.
Liquidity Risk
Liquidity is measured by the Company’s ability to meet short-term cash needs at a reasonable cost or minimal loss. The Company seeks to obtain favorable sources of liabilities and to maintain prudent levels of liquid assets in order to satisfy varied liquidity demands. Besides serving as a funding source for maturing obligations, liquidity provides flexibility in responding to customer initiated needs. Many factors affect the Company’s ability to meet liquidity needs, including variations in the markets served by its network of offices, its mix of assets and liabilities, reputation and credit standing in the marketplace, and general economic conditions.
The Company actively manages its liquidity position through target ratios established under itits asset/liability management policy. Continual monitoring of these ratios, both historical and through forecasts under multiple rate scenarios, allows the Company to employ strategies necessary to maintain adequate liquidity.
The Company uses a basic surplus/deficit model to measure its liquidity over 30- and 90-day time horizons. The relationship between liquid assets and short-term liabilities that are vulnerable to non-replacement are routinely monitored. The Company’s policy is to maintain its liquidity position at a minimum of 5% of total assets. At December 31, 2001,2002, liquidity, as measured by the basic surplus/deficit model, was 5.7%9.0% for the 30-day horizon and 6.1% for the 90-day horizon. IncludingA portion of the Company’s deposit bases is seasonal in nature, with balances typically declining in the Winter months through late Spring, during which period the Company’s liquidity position tightens.
At December 31, 2002, the Company had $15,414 in unused lines of credit, and qualifying collateral availability to support a $28,000 increase in its line of credit atwith the Federal Home Loan Bank, basic surplus stood at 10.4%.Bank. The Company also had capacity to borrow funds on a serviced basis utilizing certain un-pledged securities.
The Company maintains a liquidity contingency plan approved by the Bank’s Board of Directors. This plan addresses the steps that would be taken in the event of a liquidity crisis, and identifies other sources of liquidity available to the Company.
Off-Balance Sheet RiskRisks
Commitments to extend credit: The Company makes contractual commitments to extend credit and extends lines of credit, which are subject to the Company’s credit approval and monitoring procedures. As more fully described in Note 17 to the financial statements, at December 31, 20012002 and 2000,2001, commitments to extend credit in the form of loans, including unused lines of credit and commitments to originate loans, amounted to $67,595$71,142 and $36,111$67,595 respectively. Increases in the unused lines of credit on home equity loans, combined with commercial lines of credit at year end,year-end, are responsible for the $31,484$3,547 increase in unused lines and commitments compared with 2000.2001. In the opinion of management, there are no material commitments to extend credit that represent unusual risks.
Letters of credit and stand-by letters of credit: The BankCompany guarantees the obligations or performance of customers by issuing letters of credit and 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 letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers, and they are subject to the same origination, portfolio maintenance and management procedures in effect to monitor other credit and off-balance sheet products. At December 31, 20012002 and 2000,2001, outstanding letters of credit and standby letters of credit totaled $2,800 and $5,059 and $3,626 respectively.
Counter-party risk: Pursuant to its asset/liability management policy, the Bank may enter into interest rate swap and floor agreements under which the Bank and the swap or floor counter-party would be obligated to exchange interest payments on notional principal amounts. For swap and floor transactions, the contract or notional amount does not represent exposure to credit loss. The Bank would be exposed to risk should the counter-party default in its responsibility to pay interest under the terms of the swap or floor agreement. The Bank controls counter-party risk through credit approvals, limits, and monitoring procedures. DuringAs more fully described herein under market risk, at December 31, 2002 the Company had one derivative instrument outstanding, an interest rate swap with a notional amount of $10 million, compared with none during 2001 and 2000,2000. At December 31, 2002 and 2001, there were no interest rate swapscaps or floor agreements in place.
REGULATORY MATTERS
InAs previously reported, the Bank in the third quarter of 2001, the Bank entered into an agreement ("Agreement") with its principal regulators, the FDIC and the BFI.
Pursuant to that Agreement, the Bank has increased its allowance for loan losses, developed a classified asset reduction plan for certain commercial relationships, revised its credit administration plan, implemented certain revisions in its asset appraisal procedures, established a minimum capital threshold of 8% or 3% above the regulatory minimum of 5% for "well capitalized" banks, improved certain account reconciliation procedures, addressed certain weaknesses in its information systems, improved its procedures to ensure its compliance with the "Bank Secrecy Act," and initiated a long termlong-term strategic planning process which is currently underway.has recently been completed and will be refreshed at least annually. The Bank has also implemented a policy of paying dividends to its parent, the Company, only from current earnings, exclusive of gains on the sale of securities, without prior approval of its principal regulators.
The Bank is providing updates covering the status of the foregoing items to its principal regulators on a quarterly basis. In management’s judgment, the Bank is adequately addressing the matters set forth in the Agreement.
Recently Issued Accounting Standards
The Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," requires that goodwill reflected on the Company’s balance sheet be no longer amortized to earnings, but instead be reviewed for impairment. The amortization of goodwill ceases upon adoption of the statement. The Company will adoptadopted SFAS No. 142 effective January 1, 2002. The Company determined that goodwill was impaired as of January 1, 2002, the date of adoption, and the impairment loss, net of taxes, was recognized as a cumulative effect of a change in accounting principle in the Company’s Consolidated Statement of Income.
AtSFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS No. 146 requires the recognition of certain costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS No. 147, "Acquisitions of Certain Financial Institutions" amends SFAS 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions" to exclude from its scope most acquisitions of financial institutions. Such transactions should be accounted for in accordance with SFAS No. 141, "Business Combinations". SFAS No 147 is effective on October 1, 2002.
SFAS No. 148 contains enhanced disclosure requirements for stock-based compensation. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 31, 2001, the Company had $750 of goodwill stated under "other assets" on its balance sheet, related to the acquisition of Dirigo Investments, Inc., in January 2000. In connection with the preparation15, 2002. Adoption of the 2001Statement in 2002 had no impact on the Company’s consolidated financial statements, management has evaluated the impact of adopting SFAS No. 142 and considered the potential effects of timing, application,condition and results of operations.
Statement of Position (SOP) 01-6, "Accounting by Certain Entities (Including Entities with Trade Receivables) That Lend to or Finance the new goodwill impairment testing methodology.Activities of Others," was issued in December 2001. The SOP is effective for financial statements issued for fiscal years beginning after December 15, 2001. The SOP reconciles and conforms the accounting and financial reporting provisions established by various Audit and Accounting Industry Guides. Adoption of this Statement had no impact on the Company’s consolidated financial condition and results of operations.
WhileThe Company does not expect the Company has determined that goodwill is fairly stated at December 31, 2001, it has not determinedadoption of these standards to have a material affect on the impact, if any,financial condition and results of adopting SFAS No.142 on January 1, 2002.operations of the Company.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Bar Harbor Bankshares
We have audited the accompanying consolidated balance sheets of Bar Harbor Bankshares and Subsidiaries as of December 31, 20012002 and 2000,2001, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2001.2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with U. S. generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bar Harbor Bankshares and Subsidiaries as of December 31, 20012002 and 2000,2001, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2001,2002, in conformity with U.S. generally accepted accounting principles.
As discussed in Notes 1 and 21 to the consolidated financial statements, the Company changed its method of accounting for goodwill in 2002 in accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets".
/s/ BERRY, DUNN, McNEIL & PARKER
Portland, Maine
February 22, 200214, 2003
CONSOLIDATED BALANCE SHEETS
BAR HARBOR BANKSHARES AND SUBSIDIARIES
DECEMBER 31, 2001,2002, AND 20002001
(Dollars in thousands)
2001 | 2000 | 2002 | 2001 | |
Assets | ||||
Cash and due from banks | $ 17,355 | $ 10,580 | $ 11,529 | $ 17,355 |
Securities: |
| |||
Available for sale, at market | 106,743 | 37,844 | 128,826 | 106,743 |
Held to maturity (market value $24,943 and $116,245 | ||||
at December 31, 2001 and 2000, respectively) | 26,866 | 116,306 | ||
Held to maturity (market value $32,077 and $24,943 at | ||||
December 31, 2002 and 2001, respectively) | 31,545 | 26,866 | ||
Other securities | 8,464 | 314 | 1,929 | 8,464 |
Total securities | 142,073 | 154,464 | 162,300 | 142,073 |
Loans | 297,970 | 271,381 | 351,535 | 297,970 |
Allowance for possible loan losses | (4,169) | (4,236) | ||
Allowance for loan losses | (4,975) | (4,169) | ||
Loans, net of allowance | 293,801 | 267,145 | 346,560 | 293,801 |
Premises and equipment | 12,954 | 11,996 | ||
Premises and equipment, net | 11,313 | 12,118 | ||
Goodwill | 375 | 750 | ||
Other assets | 21,020 | 22,040 | 21,741 | 21,106 |
TOTAL ASSETS | $487,203 | $466,225 | $553,818 | $487,203 |
Liabilities | ||||
Deposits | ||||
Demand deposits | $ 46,112 | $ 42,527 | $ 46,001 | $ 46,112 |
NOW accounts | 45,685 | 41,039 | 50,172 | 45,685 |
Savings deposits | 91,140 | 73,776 | 108,982 | 91,140 |
Time deposits | 108,896 | 120,734 | 116,860 | 108,896 |
Total deposits | 291,833 | 278,076 | 322,015 | 291,833 |
Securities sold under repurchase agreements | 15,159 | 12,166 | 13,943 | 15,159 |
Borrowings from Federal Home Loan Bank | 120,900 | 119,152 | 156,558 | 120,900 |
Other liabilities | 6,773 | 6,324 | 7,466 | 6,773 |
TOTAL LIABILITIES | 434,665 | 415,718 | 499,982 | 434,665 |
Commitments and contingent liabilities (Notes 13, 16, 17, and 18) | ||||
Commitments and contingent liabilities (Notes 13, 14, 16, 17, 18) | ||||
Shareholders' equity | ||||
Capital stock, par value $2.00; authorized 10,000,000 shares; | ||||
issued 3,643,614 shares | 7,287 | |||
issued 3,643,614 shares in 2002 and 2001. | 7,287 | |||
Surplus | 4,002 | 4,002 | ||
Retained earnings | 43,875 | 42,854 | 45,994 | 43,875 |
Accumulated other comprehensive income (loss) | ||||
Unrealized appreciation (depreciation) on securities | ||||
available for sale, net of taxes of $880 and ($39) at | ||||
December 31, 2001 and December 31, 2000, respectively | 1,707 | (76) | ||
Less: cost of 386,314 shares and 337,500 shares | ||||
of treasury stock at December 31, 2001 and 2000, | ||||
Accumulated other comprehensive income: | ||||
Unrealized appreciation on securities available for sale, | ||||
net of taxes of $1,117 and $880 at December 31, 2002 | ||||
and 2001, respectively | 2,167 | 1,707 | ||
Unrealized appreciation on derivative instruments, net of taxes | 180 | -- | ||
Less: cost of 463,913 shares and 386,314 shares | ||||
of treasury stock at December 31, 2002 and 2001, | ||||
respectively | (4,333) | (3,560) | (5,794) | (4,333) |
TOTAL SHAREHOLDERS' EQUITY | 52,538 | 50,507 | 53,836 | 52,538 |
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $487,203 | $466,225 | $ 553,818 | $487,203 |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
BAR HARBOR BANKSHARES AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 2002, 2001 2000 AND 19992000
(Dollars in thousands, except per share data)
2001 | 2000 | 1999 | 2002 | 2001 | 2000 | |
Interest and dividend income: | ||||||
Interest and fees on loans | $ 24,308 | $23,939 | $21,777 | $23,754 | $ 24,308 | $ 23,939 |
Interest and dividends on securities and federal funds | 9,584 | 11,394 | 10,175 | 8,598 | 9,584 | 11,394 |
Total interest and dividend income | 33,892 | 35,333 | 31,952 | 32,352 | 33,892 | 35,333 |
Interest expense: | ||||||
Deposits | 8,298 | 9,008 | 8,289 | 5,880 | 8,298 | 9,008 |
Short-term borrowings | 2,722 | 550 | 830 | 770 | 2,722 | 550 |
Long-term borrowings | 4,731 | 8,058 | 4,683 | 6,125 | 4,731 | 8,058 |
Total interest expense | 15,751 | 17,616 | 13,802 | 12,775 | 15,751 | 17,616 |
Net interest income | 18,141 | 17,717 | 18,150 | 19,577 | 18,141 | 17,717 |
Provision for possible loan losses | 2,000 | 952 | 474 | |||
Net interest income after provision for possible loan losses | 16,141 | 16,765 | 17,676 | |||
Provision for loan losses | 1,100 | 2,000 | 952 | |||
Net interest income after provision for loan losses | 18,477 | 16,141 | 16,765 | |||
Noninterest income: | ||||||
Trust and other financial services | 3,407 | 3,200 | 2,707 | 2,261 | 3,407 | 3,200 |
Service charges on deposit accounts | 1,864 | 1,653 | 1,010 | 1,483 | 1,864 | 1,364 |
Other service charges, commissions and fees | 438 | 746 | 616 | 225 | 438 | 1,035 |
Credit card service charges and fees | 1,528 | 1,426 | 1,381 | 1,654 | 1,528 | 1,426 |
Other operating income | 283 | 41 | 132 | 340 | 283 | 41 |
Net securities gains | -- | -- | 8 | 450 | -- | |
Total noninterest income | 7,520 | 7,066 | 5,854 | 6,413 | 7,520 | 7,066 |
Noninterest expenses: | ||||||
Salaries and employee benefits | 8,534 | 7,937 | 6,834 | 9,235 | 8,534 | 7,937 |
Occupancy expense | 1,100 | 865 | 683 | 1,111 | 1,100 | 865 |
Furniture and equipment expense | 1,510 | 1,680 | 1,301 | 1,535 | 1,510 | 1,680 |
Credit card expenses | 1,209 | 1,162 | 1,247 | 1,224 | 1,209 | 1,162 |
Other operating expense | 6,136 | 4,971 | 4,233 | 5,231 | 6,136 | 4,971 |
Total noninterest expenses | 18,489 | 16,615 | 14,298 | 18,336 | 18,489 | 16,615 |
Income before income taxes | 5,172 | 7,216 | 9,232 | |||
Income before income taxes and cumulative effect of accounting change | 6,554 | 5,172 | 7,216 | |||
Income taxes | 1,661 | 2,419 | 3,007 | 1,742 | 1,661 | 2,419 |
NET INCOME | $ 3,511 | $ 4,797 | $ 6,225 | |||
NET INCOME PER SHARE | ||||||
Basic | $ 1.07 | $ 1.43 | $ 1.81 | |||
Diluted | $ 1.06 | $ 1.43 | $ 1.81 | |||
Net income before cumulative effect of accounting change | 4,812 | 3,511 | 4,797 | |||
Cumulative effect of change in accounting for goodwill, net of tax of $128 | (247) | -- | ||||
Net Income | $ 4,565 | $ 3,511 | $ 4,797 | |||
Weighted average number of capital stock shares | ||||||
outstanding | ||||||
Computation of Net Income Per Share: | ||||||
Weighted average number of capital stock shares outstanding | ||||||
Basic | 3,279,043 | 3,360,770 | 3,441,080 | 3,219,377 | 3,279,043 | 3,360,770 |
Effect of dilutive employee stock options | 32,118 | -- | 50,743 | 32,118 | -- | |
Diluted | 3,311,161 | 3,360,770 | 3,441,080 | 3,270,120 | 3,311,161 | 3,360,770 |
NET INCOME PER SHARE: | ||||||
Basic before cumulative effect of accounting change | $ 1.49 | $ 1.07 | $ 1.43 | |||
Cumulative effect of change in accounting for goodwill, net of income tax benefit | (0.07) | -- | -- | |||
Basic | $ 1.42 | $ 1.07 | $ 1.43 | |||
Diluted before cumulative effect of accounting change | $ 1.47 | $ 1.06 | $ 1.43 | |||
Cumulative effect of change in accounting for goodwill, net of income tax benefit | (0.07) | -- | ||||
Diluted | $ 1.40 | $ 1.06 | $ 1.43 | |||
Dividends per share | $0.76 | $0.72 | $ 0.76 | $ 0.76 | $ 0.76 |
The accompanying notes are an integral part of these consolidated financial statements.
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 2000 AND 19992000
(Dollars in thousands, except per share data)
Capital Stock | Surplus | Retained Earnings | Net Unrealized Appreciation (Depreciation) on Securities Available for Sale | Treasury Stock | Total Shareholders' Equity | Accumulated | ||||||
Other | Total | |||||||||||
Balance December 31, 1998 | $7,287 | $ 4,002 | $36,862 | $ 50 | $(1,340) | $ 46,861 | ||||||
Capital | Retained | Comprehensive | Treasury | Shareholders' | ||||||||
Net income 1999 | -- | -- | 6,225 | -- | -- | 6,225 | ||||||
Net unrealized depreciation on securities |
| |||||||||||
available for sale, net of tax benefit of $549 | -- | -- | -- | (1,065) | -- | (1,065) | ||||||
Total comprehensive income | -- | -- | 6,225 | (1,065) | -- | 5,160 | ||||||
Cash dividends declared ($0.72 per share) | (2,476) |
|
| (2,476) | ||||||||
Purchase of treasury stock (22,100 shares) | -- | -- | -- | -- | (400) | (400) | ||||||
Stock | Surplus | Earnings | Income | Stock | Equity | |||||||
Balance December 31, 1999 | 7,287 | 4,002 | 40,611 | (1,015) | (1,740) | 49,145 | $ 7,287 | $ 4,002 | $ 40,611 | $ (1,015) | $ (1,740) | $ 49,145 |
| ||||||||||||
Net income 2000 | -- | -- | 4,797 | -- | -- | 4,797 | - | - | 4,797 | - | - | 4,797 |
Net unrealized appreciation on securities |
| |||||||||||
available for sale, net of tax of $484 | -- | -- | -- | 939 | -- | 939 | - | - | - | 939 | - | 939 |
Total comprehensive income | -- | -- | 4,797 | 939 | -- | 5,736 | - | - | 4,797 | 939 | - | 5,736 |
Cash dividends declared ($0.76 per share) |
| (2,554) |
| (2,554) | (2,554) | (2,554) | ||||||
Purchase of treasury stock (115,400 shares) | -- | -- | -- | -- | (1,820) | (1,820) | - | - | - | - | (1,820) | (1,820) |
Balance December 31, 2000 | 7,287 | 4,002 | 42,854 | (76) | (3,560) | 50,507 | $ 7,287 | $ 4,002 | $ 42,854 | $ (76) | $ (3,560) | $ 50,507 |
| ||||||||||||
Balance December 31, 2000 | $ 7,287 | $ 4,002 | $ 42,854 | $ (76) | $ (3,560) | $ 50,507 | ||||||
Net income 2001 | -- | -- | 3,511 | -- | -- | 3,511 | - | - | 3,511 | - | - | 3,511 |
Cumulative effect to record unrealized depreciation on | ||||||||||||
securities held to maturity transferred to securities | ||||||||||||
available for sale, net of tax benefit of $14 | -- | -- | -- | (28) | -- | (28) | ||||||
available for sale | - | - | - | (28) | - | (28) | ||||||
Net unrealized appreciation on securities | ||||||||||||
available for sale, net of tax of $933 | -- | -- | -- | 1,811 | -- | 1,811 | ||||||
available for sale, net of tax of $ 933 | - | - | - | 1,811 | - | 1,811 | ||||||
Total comprehensive income | -- | -- | 3,511 | 1,783 | -- | 5,294 | - | - | 3,511 | 1,783 | - | 5,294 |
Cash dividends declared ($0.76 per share) | (2,490) |
| (2,490) | (2,490) | (2,490) | |||||||
Purchase of treasury stock (48,814 shares) | -- | -- | -- | -- | (773) | (773) | - | - | - | - | (773) | (773) |
Balance December 31, 2001 | $7,287 | $4,002 | $43,875 | $1,707 | $(4,333) | $52,538 | $ 7,287 | $ 4,002 | $ 43,875 | $ 1,707 | $ (4,333) | $ 52,538 |
Balance December 31, 2001 | $ 7,287 | $ 4,002 | $ 43,875 | $ 1,707 | $ (4,333) | $ 52,538 | ||||||
Net income 2002 | - | - | 4,565 | - | - | 4,565 | ||||||
Net unrealized appreciation on securities | - | |||||||||||
available for sale, net of tax of $ 237 | - | - | - | 460 | - | 460 | ||||||
Net unrealized appreciation on derivative instruments | ||||||||||||
marked to market, net of tax of $ 93 | - | - | - | 180 | - | 180 | ||||||
Total comprehensive income | - | - | 4,565 | 640 | - | 5,205 | ||||||
Cash dividends declared ($0.76 per share) | - | - | (2,445) | - | - | (2,445) | ||||||
Purchase of treasury stock (82,840 shares) | - | - | - | - | (1,563) | (1,563) | ||||||
Stock options exercised (5,241 shares) | - | - | (1) | - | 102 | 101 | ||||||
Balance December 31, 2002 | $ 7,287 | $ 4,002 | $ 45,994 | $ 2,347 | $ (5,794) | $ 53,836 |
The accompanying notes are an integral part of these consolidated financial statements.
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 2000 AND 19992000
(Dollars in thousands)
2001 | 2000 | 1999 | 2002 | 2001 | 2000 | |
Cash flows from operating activities: | ||||||
Net income | $ 3,511 | $ 4,797 | $ 6,225 | $ 4,565 | $ 3,511 | $ 4,797 |
Adjustments to reconcile net income to net cash | ||||||
provided by operating activities: | ||||||
Depreciation | 1,482 | 1,202 | 980 | 1,117 | 1,482 | 1,202 |
Deferred income taxes | 111 | 26 | (180) | (129) | 111 | 26 |
Provision for loan losses | 2,000 | 952 | 474 | 1,100 | 2,000 | 952 |
(Gain) loss on sale of other real estate owned | (25) | (12) | 15 | |||
Net change in loans held for sale | -- | -- | 1,018 | |||
Net securities gains | -- | -- | (8) | |||
Gain on sale of other real estate owned | (4) | (25) | (12) | |||
Realized gain on sale of securities available for sale | (450) | -- | -- | |||
Net amortization (accretion) of bond premiums (discounts) | (97) | 89 | 179 | 16 | (97) | 89 |
Loss on sale of premises and equipment | -- | 95 | 70 | -- | -- | 95 |
Goodwill impairment loss | 375 | -- | -- | |||
Net change in other assets | 39 | (2,757) | (1,854) | (563) | 39 | (2,757) |
Net change in other liabilities | 449 | 2,210 | (412) | 693 | 449 | 2,210 |
Net cash provided by operating activities | 7,470 | 6,602 | 6,507 | 6,720 | 7,470 | 6,602 |
| ||||||
Cash flows from investing activities: | ||||||
Purchases of securities held to maturity | (25,109) | (5,213) | (45,592) | (4,527) | (25,109) | (5,213) |
Proceeds from maturity and principal paydowns of | ||||||
Proceeds from maturity and principal pay downs of | ||||||
securities held to maturity | 810 | 17,626 | 26,475 | 237 | 810 | 17,626 |
Proceeds from call of securities held to maturity | -- | -- | 3,250 | |||
Purchases of securities available for sale | (5,000) | (6,808) | (20,465) | (92,391) | (5,000) | (6,808) |
Proceeds from maturity and principal paydowns of |
| |||||
Proceeds from maturities, calls, and principal pay downs of | ||||||
securities available for sale | 25,280 | 99 | 1,525 | 45,025 | 52,639 | 2,099 |
Proceeds from call of securities available for sale | 27,359 | 2,000 | 3,500 | |||
Proceeds from sale of securities available for sale | 26,025 | -- | -- | |||
Net decrease (increase) in other securities | (8,150) | (1,949) | 23 | 6,535 | (8,150) | (1,949) |
Net loans made to customers | (28,756) | (11,290) | (32,472) | (53,859) | (28,756) | (11,290) |
Capital expenditures | (2,440) | (4,953) | (1,546) | (312) | (2,440) | (4,953) |
Proceeds from sale of other real estate owned | 76 | 44 | 115 | 4 | 76 | 44 |
Proceeds from sale of fixed assets | -- | 100 | 7 | -- | -- | 100 |
Net cash used in investing activities | (15,930) | (10,344) | (65,180) | (73,263) | (15,930) | (10,344) |
Cash flows from financing activities: | ||||||
Net increase (decrease) in deposits | 13,757 | (3,632) | 15,260 | 30,182 | 13,757 | (3,632) |
Net change in securities sold under repurchase agreements | 2,993 | 3,359 | 715 | (1,216) | 2,993 | 3,359 |
Proceeds from Federal Home Loan Bank advances | 69,900 | 104,500 | 103,000 | 258,125 | 69,900 | 104,500 |
Repayment of Federal Home Loan Bank advances | (63,632) | (62,383) | (56,000) | (222,467) | (63,632) | (62,383) |
Net change in short-term borrowed funds | (4,520) | (36,000) | (85) | -- | (4,520) | (36,000) |
Purchase of treasury stock | (773) | (1,820) | (400) | (1,563) | (773) | (1,820) |
Proceeds from stock issuance | 101 | -- | -- | |||
Payments of dividends | (2,490) | (2,554) | (2,476) | (2,445) | (2,490) | (2,554) |
|
| |||||
Net cash provided by financing activities | 15,235 | 1,470 | 60,014 | 60,717 | 15,235 | 1,470 |
| ||||||
Net increase (decrease) in cash and cash equivalents | 6,775 | (2,272) | 1,341 | (5,826) | 6,775 | (2,272) |
Cash and cash equivalents at beginning of year | 10,580 | 12,852 | 11,511 | 17,355 | 10,580 | 12,852 |
| ||||||
Cash and cash equivalents at end of year | $ 17,355 | $10,580 | $ 12,852 | $ 11,529 | $ 17,355 | $10,580 |
Supplemental disclosures of cash flow information | ||||||
Cash paid during the year for: | ||||||
Interest | $ 15,978 | $17,606 | $ 13,807 | $ 12,754 | $ 15,978 | $17,606 |
Income taxes, net of refunds | $ 2,080 | $ 2,200 | $ 3,133 | $ 1,382 | $ 2,080 | $ 2,200 |
Non-cash transactions |
|
| ||||
Transfer from loans to other real estate owned | $ 100 | $ 89 | $ 82 | $ 100 | $ 100 | $ 89 |
Transfer of securities from held to maturity to available for sale | $113,856 | -- | -- | -- | $113,856 | -- |
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED STATEMENTS
BAR HARBOR BANKSHARES AND SUBSIDIARIES
December 31, 2002, 2001, and 2000
(amounts in tables are in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Bar Harbor Bankshares, ("the Company"), through its wholly-owned subsidiaries, Bar Harbor Banking and Trust Company ("the Bank"), and BTI Financial Group ("BTI"), provides a full range of banking, trust, financial management, and investment services to individual and corporate customers throughout eastern Maine. These banking services are available in each of its ten branch locations while BTI subsidiaries are in three locations. The Bank and BTI are subject to the regulations of certain federal and state agencies and undergo periodic examinations by those regulatory authorities.
Basis of Financial Statement Presentation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles for financial institutions and with the instructions to Form 10-K of the Securities Exchange Act of 1934. Certain amounts in the 20002001 and prior years’ financial statements have been reclassified to conform with the presentation used in 2001 and prior years.2002.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and the carrying value of real estate owned, management obtains independent appraisals for significant properties.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Bar Harbor Bankshares and its wholly-owned subsidiaries, Bar Harbor Banking and Trust Company and BTI Financial Group. All significant intercompany balances and transactions have been eliminated in the accompanying consolidated financial statements.
Comprehensive Income
Comprehensive income includes both net income and other comprehensive income. Other comprehensive income includes the changechanges in unrealized gains and losses on securities available for sale and derivative instruments, and is disclosed net of related income taxes in the consolidated statements of changes in shareholders’ equity.
Cash and Due from Banks
The Bank is required to comply with various laws and regulations of the Federal Reserve Bank, which require that the Bank maintain certain amounts of cash on deposit, and is restricted from investing those amounts. At December 31, 2002, the reserve requirement was $150. In the normal course of business, the Bank has funds on deposit at other financial institutions in amounts in excess of the $100,000$100 that is insured by the Federal Deposit Insurance Corporation.
Securities Available for Sale
Securities available for sale consist of certain securities to be held for indefinite periods of time, which are reported at fair value with unrealized gains and losses reported as a separate component of shareholders' equity, net of the related tax effect. Gains and losses on the sale of securities available for sale are determined using the specific-identification method and are shown separately in the statement of income. Premiums and discounts are recognized in interest income using the interest method over the estimated life of the security.
Securities Held to Maturity
Debt securities that the Bank has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts that are recognized in interest income using the interest method over the period to maturity or earliest call date.
Other Securities
Other securities include non-marketable securities carried at cost, and money market funds reported at fair value.
Loans
Loan origination fees and certain direct loan origination costs are deferred and recognized in interest income as an adjustment to the loan yield over the life of the related loans.
Interest on loans is accrued and credited to income based on the principal amount of loans outstanding. The accrual of interest income is discontinued when, in the opinion of management, full collection of principal, interest, and fees is in question. If, in the opinion of management, a loan on non-accrual is determined to be creditworthy, it may be placed back on accrual status. Interest income on impaired loans is reported on a cash basis when received. Loans 30 days or more past due are considered delinquent.
A loan is considered impaired when it is probable that the Bank will not collect all amounts due according to the contractual terms of the loan agreement. The carrying values of impaired loans, primarily those on a nonaccruingnon-accruing status, are periodically adjusted to reflect cash payments, revised estimates of future cash flows, and increases in the present value of expected cash flows due to the passage of time. Cash payments representing interest income are reported as such. Other cash payments are reported as reductions in carrying value, while increases or decreases due to changes in estimates of future payments and due to the passage of time are reported as provision for loan losses.
The allowance for possible loan losses is maintained at a level adequate to absorb probable losses. Management determines the adequacy of the allowance based upon reviews of individual credits, recent loss experience, current economic conditions, the risk characteristics of the various categories of loans and other pertinent factors. Credits deemed uncollectible are charged to the allowance. Provisions for creditloan losses and recoveries on loans previously charged off are added to the allowance.
Mortgage Servicing Rights
Mortgage servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets. Capitalized servicing rights are reported in other assets and are amortized into non-interestnoninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to unamortized cost. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance to the extent that fair value is less than the capitalized value of the rights.
Premises and Equipment
Premises and equipment and related improvements are stated at cost less accumulated depreciation. Depreciation is computed by the straight-line and accelerated methods over the estimated useful lives of the related assets.
Other Real Estate Owned (OREO)
Real estate acquired in satisfaction of a loan is reported in other assets. Properties acquired by foreclosure or deed in lieu of foreclosure are transferred to OREO and recorded at the lower of cost or fair market value less estimated costs to sell based on appraised value at the date actually or constructively received. Loan losses arising from the acquisition of such property are charged against the allowance for loan losses. Subsequent reductions in market value below the carrying costs are changedcharged to other operating expenses.
Goodwill
Effective January 1, 2002, the Company discontinued amortization of goodwill in accordance with SFAS Nos. 142 and 147. Prior to 2002, goodwill was being amortized using the straightline method over ten and fifteen years. In accordance with SFAS No. 142, goodwill will be reviewed for impairment on an annual basis and if certain conditions occur.
Income Taxes
Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Principal temporary differences occur with respect to pension and other postretirement benefits, depreciation, unrealized gains and losses on securities, and the provision for loan losses.
Derivative Financial Instruments Designated as Hedges
The Bank recognizes derivatives in the consolidated balance sheet at fair value. The Bank has an interest rate agreement which qualifies as a cash flow hedge pursuant to SFAS No. 133. The Bank formally documents relationships between hedging instruments and hedging items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Bank also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows or fair values of hedged items. Changes in fair value of a derivative that is highly effective and that qualifies as a cash flow hedge are recorded in other comprehensive income and are reclassified into earnings when the forecasted transaction or related cash flows affect earnings. The Bank discontinues hedge accounting when it determines that the derivative is no longer highly effective in offsetting changes in cash flows of the hedged item, that is unlikely that the forecasted transaction will occur, or that the designation of the derivative as a hedging instrument is no longer appropriate.
Financial Instruments with Off-balance Sheet Risk
In the ordinary course of business the Bank has entered into off-balance sheet financial instruments consisting of commitments to extend credit, commitments under credit-card arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.
Statements of Cash Flows
For purposes of the statements of cash flows, the Bank considers cash on hand and amounts due from banks as cash and cash equivalents.
Earnings Per Share
Basic earnings per share is calculated by dividing net earnings by the number of weighted average shares outstanding for the year. Diluted earnings per share reflects the effect of stock options outstanding at the end of the period.
Stock Options
The Bar Harbor Bankshares and its Subsidiaries Incentive Stock Option Plan (ISO) for officers and employees was established October 3, 2000, providing for the issuance of up to 450 thousand shares of common stock. The purchase price of the stock covered by each option shall be its fair market value, which must be equal to at least 100% of the fair market value on the date such option is granted. Initial grants were made in 2001 totaling 225 thousand. During 2002 there were 162 thousand additional grants issued, bringing the total to 387 thousand options granted, all having a 5-7 year vesting schedule. No option shall be granted after October 3, 2010, ten years after the effective date of the ISO.
The Company accounts for these options in accordance with the Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." As the exercise price of each option equals the market price of the Company’s stock on the date of grant, no compensation cost has been recognized for the plan. Had compensation costs for the plan been determined based on the fair value of the options at the grant dates consistent with the method described in SFAS No. 123, "Accounting for Stock-Based Compensation," the Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands except for per-share data):
2002 | Earnings Per Share | ||
Net Income | Basic | Diluted | |
As reported | $4,565 | $1.42 | $1.40 |
Deduct: Total stock-based employee compensation |
95 |
0.03 |
0.03 |
Pro forma | $4,470 | $1.39 | $1.37 |
Weighted-average fair value of options granted during the year | $1.71 |
2001 | Earnings Per Share | ||
Net Income | Basic | Diluted | |
As reported | $3,511 | $1.07 | $1.06 |
Deduct: Total stock-based employee compensation |
55 |
0.02 |
0.02 |
Pro forma | $3,456 | $1.05 | $1.04 |
Weighted-average fair value of options granted during the year | $2.98 |
The fair value of each option is estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted-average assumptions used for all grants; dividend yield of 3.93% in 2002 and 4.22% in 2001, risk-free interest rate of 2.23% in 2002 and 3.62% in 2001, expected life of 3.5 years, and expected volatility of 11% in 2002 and 27% in 2001.
Fair Value Disclosures
The Company in estimating its fair market value disclosures for financial instruments used the following methods and assumptions:
Cash, cash equivalents, and cash surrender value of life insurance: The carrying amounts reported in the balance sheets approximate their fair values.
Securities available for sale, securities held to maturity and other securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The carrying value of other securities approximates fair market.value.
Loans receivable: For variable rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. The fair value of other loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
Deposits: The fair value of demand deposits, NOW accounts and savings accounts is the amount payable on demand. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered in the Bank's market for deposits of similar remaining maturities.
Borrowings: The carrying amounts of federal funds purchased, borrowingssecurities sold under repurchase agreements, and other short-term borrowings maturing within 90 days approximate their fair values.
The fair values of the Bank's long-term borrowings (other than deposits) are estimated using discounted cash flow analyses, based on quoted market rates.
Accrued interest: The carrying amounts of accrued interest approximate their fair values.
Interest Rate Swap: The fair value for the interest rate swap is based on quoted market prices.
Off-balance sheet instruments: The Bank's off-balance sheet instruments consist of loan commitments. Fair values for loan commitments have not been presented, as the value is not material to the Company’s financial statements due to the short-term nature of the underlying commitments.
Impact of Recently Issued Accounting Standards
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137, and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," are effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. These statements set accounting and reporting standards for derivative instruments and hedging activities. They require an entity to recognize all derivatives as either assets or liabilitiesEffective in 2002, the balance sheet and measure those instruments at fair value. These statements had no impact onFASB issued the Company, as it has not engaged in any derivative transactions.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," is effective for transfers occurring after March 31, 2001. SFAS No. 140 replaces SFAS No. 125. This statement had no material impact to the Company’s consolidated financial condition and results of operations.
SFAS No. 141, "Business Combinations," improves the transparency of the accounting and reporting for business combinations by requiring that all business combinations be accounted for under a single method – the purchase method. Use of the pooling-of-interests method is no longer permitted. SFAS No. 141 requires that the purchase method be used for business combinations initiated after June 30, 2001. The Company is not impacted by this statement at this time.following:
SFAS No. 142, "Goodwill and Other Intangible Assets," requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The amortization of goodwill ceasesceased upon adoption of the Statement, which will bewas adopted by the Company as of January 1, 2002. The Company has not determined the impact of adopting SFAS No. 142.
SFAS No. 143,146, "Accounting for Asset Retirement Obligations,Costs Associated with Exit or Disposal Activities," addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS 146 requires the recognition of costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. This Statement had no impact on the Company’s consolidated financial condition and results of operations.
SFAS No. 144,147, "Acquisitions of Certain Financial Institutions," amends SFAS No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions," to exclude from its scope most acquisitions of financial institutions. Such transactions should be accounted for in accordance with SFAS No. 141, "Business Combinations." This Statement had no impact on the ImpairmentCompany’s consolidated financial condition and results of operations.
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," contains enhanced disclosure requirements for stock-based compensation. Adoption of the Statement in 2002 had no impact on the Company’s consolidated financial condition and results of operations.
Statement of Position (SOP) 01-6, "Accounting by Certain Entities (Including Entities with Trade Receivables) That Lend to or DisposalFinance the Activities of Long-Lived Assets,Others," provide guidance concerningwas issued in December 2001. The SOP is effective for financial statements issued for fiscal years beginning after December 15, 2001. The SOP reconciles and conforms the recognitionaccounting and measurementfinancial reporting provisions established by various Audit and Accounting Industry Guides. Adoption of an impairment loss for certain types of long-lived assets and obligations associated with the retirement of tangible long-lived assets. Management does not expect these statements to affectthis Statement had no impact on the Company’s consolidated financial condition and results of operations.
2. INVESTMENT SECURITIES
The amortized cost of investment securities and their approximate fair values at December 31, 2002 and 2001 and 2000 follows:
December 31, 2001
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |
Available for Sale: | ||||
Obligations of U.S. Government agencies | $ 9,477 | $ 183 | $ -- | $ 9,660 |
Mortgage-backed securities - | ||||
U.S. Government agencies | 65,831 | 1,596 | 27 | 67,400 |
Mortgage-backed securities – Other | 12,244 | 291 | 14 | 12,521 |
Other bonds | 16,604 | 558 | -- | 17,162 |
Total securities available for sale | $104,156 | $2,628 | $ 41 | $106,743 |
Held to Maturity: | ||||
Obligations of States of the U. S. and political subdivisions thereof | $ 26,866 | $ -- | $ 1,923 | $ 24,943 |
Total securities held to maturity | $ 26,866 | $ -- | $1,923 | $ 24,943 |
December 31, 2000
2002 | ||||||||
Gross | Estimated | |||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated | Amortized | Unrealized | Fair | |
Available for Sale: | Cost | Gains | Losses | Value | ||||
Obligations of U.S. Government Agencies | $ 34,424 | $ 131 | $ 176 | $ 34,379 | ||||
Mortgage-backed securities - | ||||||||
Obligations to U.S. Government Agencies | $13,624 | $ 44 | $ - | $ 13,668 | ||||
Mortgage-backed securities: | ||||||||
U.S. Government agencies | 2,235 | 8 | -- | 2,243 | 74,597 | 2,787 | 79 | 77,305 |
Marketable equity securities | 1,300 | -- | 78 | 1,222 | ||||
Other | 17,339 | 261 | 3 | 17,597 | ||||
Other bonds | 19,982 | 294 | 20 | 20,256 | ||||
Total securities available for sale | $ 37,959 | $139 | $254 | $ 37,844 | $125,542 | $ 3,386 | $ 102 | $ 128,826 |
Held to Maturity: | ||||||||
Obligations of U.S. Government Agencies | $ 2,407 | $ -- | $ 13 | $ 2,394 | ||||
Mortgage-backed securities - | ||||||||
U.S. Government agencies | 81,990 | 460 | 533 | 81,917 | ||||
Mortgage-backed securities - Other | 13,968 | 103 | 145 | 13,926 | ||||
Obligations of states of the U.S. and political | ||||||||
subdivisions thereof | 2,442 | 11 | 30 | 2,423 | $ 30,182 | $ 627 | $ 124 | $ 30,685 |
Mortgage-backed securities: | ||||||||
U.S. Government agencies | 1,363 | 29 | - | 1,392 | ||||
Total securities held to maturity | $ 31,545 | $ 656 | $ 124 | $ 32,077 | ||||
2001 | ||||||||
Gross | Estimated | |||||||
Amortized | Unrealized | Fair | ||||||
Available for Sale: | Cost | Gains | Losses | Value | ||||
Obligations to U.S. Government Agencies | $ 9,477 | $ 183 | $ - | $ 9,660 | ||||
Mortgage-backed securities | ||||||||
U.S. Government agencies | 65,831 | 1,596 | 27 | 67,400 | ||||
Other | 12,244 | 291 | 14 | 12,521 | ||||
Other bonds | 15,499 | 152 | 66 | 15,585 | 16,604 | 558 | - | 17,162 |
Total securities available for sale | $104,156 | $ 2,628 | $ 41 | $ 106,743 | ||||
Held to Maturity: | ||||||||
Obligations of states of the U.S. and political | ||||||||
subdivisions thereof | $ 26,866 | $ - | $ 1,923 | $ 24,943 | ||||
Total securities held to maturity | $116,306 | $726 | $787 | $116,245 | $ 26,866 | $ - | $ 1,923 | $ 24,943 |
At December 31, 2001,2002, the amortized cost and estimated fair value of securities held to maturity and securities available for sale (other than marketable equity securities) are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Securities Available for Sale
Amortized Cost | Estimated Fair Value | |
Due in one year or less | $ 9,457 | $ 9,601 |
Due after one year through five years | 13,134 | 13,677 |
Due after five years through ten years | 490 | 544 |
Due after ten years | 3,000 | 3,000 |
Mortgage-backed securities | 78,075 | 79,921 |
$104,156 | $106,743 |
December 31, 2002 | ||
Amortized | Estimated | |
Due in one year or less | $ 1,850 | $ 1,866 |
Due after one year through five years | 10,900 | 11,170 |
Due after five years through ten years | 3,345 | 3,366 |
Due after ten years | 17,511 | 17,522 |
Mortgage-backed securities | 91,936 | 94,902 |
$125,542 | $128,826 |
Securities Held to Maturity
Amortized Cost | Estimated Fair Value | |
Due after one year through five years | $ 910 | $ 911 |
Due after five years through ten years | 300 | 297 |
Due after ten years | 25,656 | 23,735 |
$26,866 | $24,943 |
December 31, 2002 | ||
Amortized | Estimated | |
Due after one year through five years | $ 943 | $ 971 |
Due after five years through ten years | 665 | 665 |
Due after ten years | 28,574 | 29,049 |
Mortgage-backed securities | 1,363 | 1,392 |
$31,545 | $32,077 |
For the years ended December 31, 2002, 2001 and 2000, proceeds from sales of securities available for sale were $26 million, $0, and $0, respectively. Gross realized gains amounted to $456 thousand and gross realized losses amounted to $6 thousand in 2002. There were no sales of securities available for sale or held to maturity in 2002, 2001, 2000 or 1999.and 2000. U.S. Government securities having a carrying value of approximately $21.1 million at December 31, 2002, and $20.5 million at December 31, 2001 and $29.0 million at December 31, 2000 are pledged to secure certain deposits and for other purposes as required by law. Market values for these securities at December 31, 2002 and 2001 and 2000 were $21.0$22.2 million and $28.8$21.0 million, respectively.
3. LOANS
The following table shows the composition of the Bank’s loan portfolio as of December 31, 20012002 and 2000:
2001:
2001 | 2000 | 2002 | 2001 | |
Commercial loans: | ||||
Real Estate- variable rate | $ 62,204 | $ 65,349 | $ 67,071 | $ 62,204 |
Real Estate- fixed rate | 5,054 | 6,367 | 4,113 | 5,054 |
Other - variable rate | 29,403 | 24,008 | 30,667 | 29,403 |
Other | 14,404 | 13,264 | 14,470 | 14,404 |
111,065 | 108,988 | 116,321 | 111,065 | |
Tax Exempt: | ||||
Variable rate | 95 | 249 | - | 95 |
Fixed rate | 1,548 | 3,376 | 2,286 | 1,548 |
1,643 | 3,625 | 2,286 | 1,643 | |
Consumer: | ||||
Real Estate- variable rate | 58,437 | 69,075 | 55,977 | 58,437 |
Real Estate- fixed rate | 91,122 | 58,986 | 129,491 | 91,122 |
Home equity | 21,238 | 15,407 | 34,239 | 21,238 |
Installment | 6,250 | 7,906 | 5,019 | 6,250 |
Other | 7,818 | 8,280 | 7,832 | 7,818 |
184,865 | 159,654 | 232,558 | 184,865 | |
|
| |||
Real estate under foreclosure | 1,064 | -- | 710 | 1,064 |
Deferred origination fees, net | (667) | (886) | (340) | (667) |
Allowance for loan losses | (4,169) | (4,236) | (4,975) | (4,169) |
$293,801 | $267,145 | $ 346,560 | $ 293,801 |
At December 31, 20012002, and 2000,2001, loans on non-accrual status totaled $2.2 million$986 and $6.9 million,$2,191, respectively. In addition to loans on non-accrual status at December 31, 20012002 and 2000,2001, the Bank had loans past due greater than 90 days, and still accruing interest, totaling $151 thousand$188 and $1.2 million,$151, respectively. The Bank continues to accrue interest on these loans because it believes collection of the interest due is reasonably assured.
The Bank makes single family and multi-family residential loans, commercial real estate loans, commercial loans, and a variety of consumer loans. The Bank’s lending activities are conducted in eastern Maine. Because of the Bank’s proximity to Acadia National Park, a large part of the economic activity in the area is generated from the hospitality business associated with tourism. At December 31, 2001,2002, approximately $34.5 million$34,943 of loans were made to companies in the hospitality industry. Loans for commercial and real estate development totaled $11.8 million$7,256 at December 31, 2001.2002. The loan portfolio at December 31, 20012002 and 20002001 consisted of 58%54% and 65%58% variable rate loans, respectively.
Changes in the allowance for possible loan losses for each of the three years ended December 31 were as follows:
2001 | 2000 | 1999 | |
Balance, beginning of year | $ 4,236 | $ 4,293 | $4,455 |
Provision for loan losses | 2,000 | 952 | 474 |
Loans charged off | 2,304 | 1,223 | 888 |
Less: recoveries on loans previously charged off | 237 | 214 | 252 |
Net loans charged off | 2,067 | 1,009 | 636 |
Balance, end of year | $4,169 | $4,236 | $4,293 |
2002 | 2001 | 2000 | |
Balance, beginning of year | $4,169 | $4,236 | $4,293 |
Provision for loan losses | 1,100 | 2,000 | 952 |
Loans charged off | 482 | 2,304 | 1,223 |
Less: recoveries on loans previously charged off | 188 | 237 | 214 |
Net loans charged off | 294 | 2,067 | 1,009 |
Balance, end of year | $4,975 | $4,169 | $4,236 |
Information pertaining to impaired loans at December 31 is as follows:
2001 | 2000 | 1999 | |
Investment in impaired loans | $2,191 | $6,907 | $2,016 |
Portion of impaired loan balance for which | |||
an allowance for possible loan losses is allocated | $2,191 | $6,907 | $2,016 |
Portion of allowance for possible loan losses allocated | |||
to the impaired loan balance | $ 517 | $2,200 | $ 642 |
Interest not recorded on impaired loans at year end | $ 182 | $ 220 | $ 46 |
2002 | 2001 | 2000 | |
Investment in impaired loans | $ 986 | $2,191 | $6,907 |
Portion of impaired loan balance for which | $ 986 | $2,191 | $6,907 |
Portion of allowance for loan losses allocated | $ 120 | $ 517 | $2,200 |
Interest not recorded on impaired loans at year end | $ 183 | $ 182 | $ 220 |
Average balance of impaired loans | $1,379 | $4,287 | $3,885 |
5. LOANS TO RELATED PARTIES
In the ordinary course of business, the Bank has granted loans to certain officers and directors and the companies with which they are associated. All such loans and commitments to lend were made under terms that are consistent with the Bank’s normal lending policies.
Loans to related parties at December 31, which in aggregate exceed $60,000, were as follows:
2001 | 2000 | 2002 | 2001 | 2000 | |
Beginning balance | $ 7,663 | $ 6,212 | $8,806 | $7,663 | $6,212 |
New loans | 3,071 | 1,541 | 5,260 | 3,071 | 1,541 |
Less: repayments | 1,545 | 4,388 | 4,676 | 1,545 | 4,388 |
Ending balance | $9,189 | $3,365 | $9,390 | $9,189 | $3,365 |
Balances have been adjusted to reflect changes in status of directors and officers for each year presented.
6. MORTGAGE SERVICING
The Bank originates residential real estate mortgages both for portfolio and for sale into the secondary market. Certain loans are sold to institutional investors such as the Federal Home Loan Mortgage CorprationCorporation (Freddie Mac). Under loan sale and servicing agreements with the investor, the Bank generally continues to service the residential real estate mortgages. The Bank pays the investor an agreed-upon rate on the loan which, including a guarantee fee paid to Freddie Mac, is less than the interest rate the Bank receives from the borrower. The Bank, as a fee for servicing the residential real estate mortgages, retains the difference. As required by SFAS No. 140, the Bank capitalizes mortgage servicing rights at their fair value upon sale of the related loans. Capitalized servicing rights at December 31, 2002 and 2001 were $61,835 and 2000 were $170,028, and 171,616 respectively. Amortization expense totaled $110,511, $115,900, and $90,600 for 2002, 2001, and 2000, respectively.
Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balance of mortgage loans serviced for others was $45.8$18.3 million and $52.8$45.8 million at December 31, 20012002 and 2000,2001, respectively.
7. PREMISES AND EQUIPMENT
The detail of premises and equipment is as follows:
2001 | 2000 | |
Land | $ 1,296 | $ 655 |
Buildings and improvements | 11,755 | 11,481 |
Furniture and equipment | 8,143 | 6,697 |
21,194 | 18,833 | |
Less: accumulated depreciation | (8,240) | (6,837) |
$12,954 | $11,996 |
2002 | 2001 | |
Land | $ 1,296 | $ 1,296 |
Buildings and improvements | 11,834 | 11,755 |
Furniture and equipment | 7,005 | 6,773 |
20,135 | 19,824 | |
Less: accumulated depreciation | (8,822) | (7,706) |
$11,313 | $12,118 |
8. LINE OF BUSINESS REPORTING
The Company manages and operates two major lines of business: Community Banking and Financial Services. Community Banking includes lending and deposit-gathering activities and related services to businesses and consumers. Financial Services, which was formed in January 2000, consists of broker-dealer operations, trust services, and investment portfolio management. The business lines are identified by the entities through which the product or service is delivered.
The reported lines of business results reflect the underlying core operating performance within the business units. Other is comprised of intercompany eliminations. Information is not presented for 1999 as the Financial Services segment did not become operative until January 2000 and it is impractical to restate corresponding information for 1999. Substantially all of the Company’s assets are part of the Community Banking line of business. Selected segment information is included in the following table.
The following tables represent the business lines through which the products or services were delivered for the years ended December 31, 2002, 2001, and 2000.
Year Ended December 31, 2001
Community Banking | Financial Services | Other | Consolidated Totals | |||||
Year Ended December 31, 2002 | Community | Financial | Other | Consolidated | ||||
Net interest income | $ 18,105 | $ 36 | $ -- | $ 18,141 | $19,551 | $ 26 | $ - | $ 19,577 |
Provision for loan losses | 2,000 | -- | -- | 2,000 | 1,100 | - | - | 1,100 |
Net interest income after provision | 16,105 | 36 | -- | 16,141 | 18,451 | 26 | - | 18,477 |
Noninterest income | 4,214 | 3,407 | (101) | 7,520 | 4,298 | 2,352 | (237) | 6,413 |
Noninterest expenses | 13,344 | 4,979 | 166 | 18,489 | ||||
Income (loss) before income taxes | 6,975 | (1,536) | (267) | 5,172 | ||||
Noninterest expense | 14,221 | 3,720 | 395 | 18,336 | ||||
Income(loss) before income taxes | 8,528 | (1,342) | (632) | 6,554 | ||||
Income taxes (benefit) | 2,273 | (521) | (91) | 1,661 | 2,413 | (456) | (215) | 1,742 |
Net income (loss) | $ 4,702 | $(1,015) | $(176) | $ 3,511 | ||||
Net income(loss) before cumulative effect of accounting | 6,115 | (886) | (417) | 4,812 | ||||
Cumulative effect of change in accounting for goodwill, | - | ( 247) | - | (247) | ||||
Net income(loss) | $ 6,115 | $ (1,133) | $ (417) | $ 4,565 | ||||
Year Ended December 31, 2001 | Community | Financial | Other | Consolidated | ||||
Net interest income | $18,105 | $ 36 | $ - | $ 18,141 | ||||
Provision for loan losses | 2,000 | - | - | 2,000 | ||||
Net interest income after provision | 16,105 | 36 | - | 16,141 | ||||
Noninterest income | 4,214 | 3,407 | (101) | 7,520 | ||||
Noninterest expense | 13,344 | 4,979 | 166 | 18,489 | ||||
Income(loss) before income taxes | 6,975 | (1,536) | (267) | 5,172 | ||||
Income taxes (benefit) | 2,273 | (521) | (91) | 1,661 | ||||
Net income(loss) | $ 4,702 | $ (1,015) | $ (176) | $ 3,511 |
Year Ended December 31, 2000
Community Banking | Financial Services | Other | Consolidated Totals | |||||
Year Ended December 31, 2000 | Community | Financial | Other | Consolidated | ||||
Net interest income | $17,688 | $ 26 | $ 3 | $ 17,717 | $17,688 | $ 26 | $ 3 | $17,717 |
Provision for loan losses | 952 | -- | -- | 952 | 952 | -- | 952 | |
Net interest income after provision | 16,736 | 26 | 3 | 16,765 | 16,736 | 26 | 3 | 16,765 |
Noninterest income | 5,768 | 3,243 | (1,945) | 7,066 | 5,768 | 3,243 | (1,945) | 7,066 |
Noninterest expense | 12,652 | 3,857 | 106 | 16,615 | 12,652 | 3,857 | 106 | 16,615 |
Income (loss) before income taxes | 9,852 | (588) | (2,048) | 7,216 | ||||
Income(loss) before income taxes | 9,852 | (588) | (2,048) | 7,216 | ||||
Income taxes (benefit) | 3,294 | (199) | (676) | 2,419 | 3,294 | (199) | (676) | 2,419 |
Net income (loss) | $ 6,558 | $ (389) | $(1,372) | $ 4,797 | ||||
Net income(loss) | $ 6,558 | $ (389) | $(1,372) | $ 4,797 |
9. DEPOSITS
The aggregate amount of short-term jumbo certificates of deposit, each with a minimum denomination of $100,000, was $15.1 million and $13.9 million in 2002 and $20.3 million in 2001, and 2000, respectively.
At December 31, 2001,2002, the scheduled maturities of time deposits are as follows:
2002 | $ 81,361 |
2003 | 5,303 |
2004 | 4,810 |
2005 | 2,391 |
2006 and thereafter | 1,546 |
Individual Retirement Accounts (IRAs) without scheduled maturities | 13,485 |
$108,896 |
2003 | $ 64,268 |
2004 | 13,913 |
2005 | 10,477 |
2006 | 4,530 |
2007 and thereafter | 9,283 |
Individual Retirement Accounts (IRAs) | 14,389 |
$116,860 |
10. REPURCHASE AGREEMENTS
Securities sold under agreements to repurchase generally mature within one to four days from the transaction date.
Information concerning securities sold under agreements to repurchase for 2002, 2001, and 2000 is summarized as follows:
2001 | 2000 | 1999 | |
Average daily balance during the year | $13,342 | $11,479 | $ 8,264 |
Average interest rate during the year | 3.89% | 4.74% | 4.48% |
Maximum month-end balance during the year | $16,203 | $16,788 | $11,209 |
Amount outstanding at end of year | $15,159 | $12,166 | $ 8,807 |
2002 | 2001 | 2000 | |
Average daily balance during the year | $13,124 | $13,342 | $11,479 |
Average interest rate during the year | 2.20% | 3.89% | 4.74% |
Maximum month-end balance during the year | $15,717 | $16,203 | $16,788 |
Amount outstanding at end of year | $13,943 | $15,159 | $12,166 |
Securities underlying the agreements at year end were under the Bank’s control and were as follows:
2001 | 2000 | 1999 | |
Carrying value | $18,772 | $28,970 | $25,111 |
Estimated fair value | $19,250 | $28,828 | $24,714 |
2002 | 2001 | 2000 | |
Carrying value | $13,834 | $18,772 | $28,970 |
Estimated fair value | $14,624 | $19,250 | $28,828 |
11. ADVANCES FROM THE FEDERAL HOME LOAN BANK (FHLB)
A summary of advances from the FHLB is as follows:
Total Principal | Range of | Maturity |
$ 31,000 | 1.79% to 6.76% | 2002 |
5,000 | 4.62% to 5.84% | 2003 |
4,700 | 3.27% to 5.09% | 2004 |
10,000 | 5.99% | 2005 |
70,200 | 4.04% to 5.95% | 2006-2011 |
$120,900 |
Total Principal | Range of | Maturity |
$ 74,152 | 5.48% to 7.26% | 2001 |
14,000 | 6.04% to 6.76% | 2002 |
3,000 | 5.84% | 2003 |
28,000 | 4.80% to 5.99% | 2005-2010 |
$119,152 |
Total | Range of | Maturity |
$ 34,000 | 1.35% to 5.84% | 2003 |
7,000 | 1.21% to 5.09% | 2004 |
11,643 | 3.14% to 5.99% | 2005 |
6,400 | 3.57% to 5.66% | 2006 |
97,515 | 1.29% to 5.95% | 2007-2012 |
$ 156,558 | ||
Total | Range of | Maturity |
�� $ 31,000 | 1.79% to 6.76% | 2002 |
5,000 | 4.62% to 5.84% | 2003 |
4,700 | 3.27% to 5.09% | 2004 |
10,000 | 5.99% | 2005 |
70,200 | 4.04% to 5.95% | 2006-2011 |
$120,900 |
All FHLB advances are fixed-rate instruments except for two amortizing advances totaling $5 million maturing in November 2011.instruments. Advances are payable at their call dates or final maturity.
TheAt December 31, 2002, the Bank has $53$57 million in callable advances with maturity dates ranging from 2005 to 2011.
In addition to the above outstanding advances, other FHLB funds available to the Bank at December 31, 2001,2002, totaled approximately $22.4$10.4 million. Pursuant to a collateral agreement with the FHLB, advances are collateralized by all stock in the FHLB. Qualifying first mortgage loans, loans guaranteed by the U. S. Government, multi-family loans, U.S. Government debentures, U.S. Government mortgage-backed securities, and non-Government mortgage-backed securities collateralized by 1-4 family loans totaling $150.5 million are available as collateral for FHLB advances.
12. INCOME TAXES
The current and deferred components of income tax expense are as follows:
2001 | 2000 | 1999 | |
Current |
| ||
Federal | $1,476 | $2,307 | $3,086 |
State | 74 | 86 | 101 |
1,550 | 2,393 | 3,187 | |
Deferred | 111 | 26 | (180) |
$1,661 | $2,419 | $3,007 |
2002 | 2001 | 2000 | |
Current | |||
Federal | $1,781 | $1,476 | $2,307 |
State | 90 | 74 | 86 |
1,871 | 1,550 | 2,393 | |
Deferred | (129) | 111 | 26 |
$1,742 | $1,661 | $2,419 |
The actual tax expense differs from the expected tax expense computed by applying the applicable U. S. Federal corporate income tax rate to income before income taxes and cumulative effect of accounting change as follows:
2001 | 2000 | 1999 | |
Computed tax expense | $1,758 | $2,453 | $3,139 |
Increase (reduction) in income taxes | |||
resulting from: | |||
Officers' life insurance | (80) | (69) | (53) |
Tax exempt interest | (168) | (95) | (146) |
State taxes, net of federal benefits | 57 | 56 | 66 |
Other | 94 | 74 | 1 |
$1,661 | $2,419 | $3,007 |
2002 | 2001 | 2000 | |
Computed tax expense | $2,229 | $1,758 | $2,453 |
Increase (reduction) in income taxes resulting from: | |||
Officers’ life insurance | (74) | (80) | (69) |
Tax exempt interest | (455) | (168) | (95) |
State taxes, net of federal benefit | 70 | 57 | 56 |
Other | (28) | 94 | 74 |
$1,742 | $1,661 | $2,419 |
The tax effects of temporary differences that give rise to deferred income tax assets and liabilities are as follows:
2001 | 2001 | 2000 | 2000 | |
Assets | Liabilities | Assets | Liabilities | |
Allowance for possible loan losses on |
|
| ||
loans and other real estate owned | $ 1,100 | $ -- | $ 1,281 | $ -- |
Deferred compensation | 676 | -- | 682 | -- |
Postretirement benefit obligation | 549 | -- | 547 | -- |
Unrealized appreciation (depreciation) |
|
| ||
on securities available for sale | -- | 880 | 39 | -- |
Depreciation of premises and equipment | -- | 267 | -- | 274 |
Other | 385 | 226 | 131 | 114 |
$2,710 | $1,373 | $2,680 | $388 |
2002 | 2001 | |||
Asset | Liability | Asset | Liability | |
Allowance for loan losses | $1,390 | $1,100 | ||
Deferred compensation | 733 | 676 | ||
Postretirement benefit obligation | 546 | 549 | ||
Unrealized appreciation on securities | 1,117 | 880 | ||
Unrealized appreciation on derivative instruments | 93 | |||
Depreciation | 320 | 267 | ||
Other | 379 | 275 | 385 | 226 |
$3,048 | $1,805 | $2,710 | $1,373 |
As of December 31, 20012002 and 2000,2001, the net deferred income tax asset amounted to $1.3 million and $2.3 million, respectively, and is included in other assets in the balance sheet. No valuation allowance for deferred taxes was required at December 31, 20012002 or 2000.2001.
13. SHAREHOLDERS’ EQUITY
On December 28, 1998, the Board of Directors declared a two-for-one stock dividend effected as a stock split to all shareholders of record as of that date, which was payable on January 25, 1999. All share and per share data included in this annual report have been restated to reflect the stock dividend.
Bar Harbor Bankshares’ subsidiary, Bar Harbor Banking and Trust Company, has the ability to pay dividends to the parent subject to the minimum regulatory capital requirements. At December 31, 20012002 the amount available for dividends, while maintaining the regulatory minimum, was approximately $27.8$23.9 million. The Bank’s principal regulatory agency, the Federal Deposit Insurance Corporation, currently limits Bank dividends to current earnings excluding securities gains while maintaining a Tier I leverage capital ratio of 8%, without prior FDIC approval.
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory frameworks for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgment by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital to risk-weighted assets and average assets. Management believes, as of December 31, 2001,2002, that the Bank exceeds all capital adequacy requirements to which it is subject. As of December 31, 2001,2002, the most recent notification from the federal regulators categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that the management believes have changed the Bank’s category.
The Bank’s actual capital amounts and ratios are also presented in the following table:
Actual | For Capital Adequacy Purposes | To be Well Capitalized | ||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |
As of December 31, 2001 | ||||||
Total Capital | ||||||
(To Risk-Weighted Assets) | ||||||
Consolidated | $52,950 | 16.8% | $25,154 | 8.0% | N/A | |
Bank | $47,053 | 15.1% | $24,860 | 8.0% | $31,075 | 10.0% |
Tier 1 Capital | ||||||
(To Risk-Weighted Assets) | ||||||
Consolidated | $49,017 | 15.6% | $12,577 | 4.0% | N/A | |
Bank | $43,166 | 13.9% | $12,430 | 4.0% | $18,645 | 6.0% |
Tier 1 Capital | ||||||
(To Average Assets) | ||||||
Consolidated | $49,017 | 10.3% | $18,997 | 4.0% | N/A | |
Bank | $43,166 | 9.2% | $18,733 | 4.0% | $23,416 | 5.0% |
|
|
|
|
|
|
|
As of December 31, 2000 | ||||||
Total Capital | ||||||
(To Risk-Weighted Assets) | ||||||
Consolidated | $53,235 | 18.0% | $23,617 | 8.0% | N/A | |
Bank | $43,398 | 16.4% | $23,170 | 8.0% | $28,964 | 10.0% |
Tier 1 Capital | ||||||
(To Risk-Weighted Assets) | ||||||
Consolidated | $49,538 | 16.8% | $11,808 | 4.0% | N/A | |
Bank | $43,778 | 15.1% | $11,585 | 4.0% | $17,378 | 6.0% |
Tier 1 Capital | ||||||
(To Average Assets) | ||||||
Consolidated | $49,538 | 10.6% | $18,744 | 4.0% | N/A | |
Bank | $43,778 | 9.4% | $18,550 | 4.0% | $23,187 | 5.0% |
Actual | Minimum | Minimum | ||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |
As of December 31, 2002 | ||||||
Total Capital (to risk-weighted assets) | ||||||
Consolidated | $53,434 | 14.5% | $29,510 | 8.0% | N/A | |
Bank | $48,636 | 13.3% | $29,214 | 8.0% | $36,518 | 10.0% |
Tier 1 Capital (to risk-weighted assets) | ||||||
Consolidated | $48,819 | 13.2% | $14,755 | 4.0% | N/A | |
Bank | $44,066 | 12.1% | $14,607 | 4.0% | $21,911 | 6.0% |
Tier 1 Capital (to average assets) | ||||||
Consolidated | $48,819 | 8.9% | $21,894 | 4.0% | N/A | |
Bank | $44,066 | 8.1% | $21,738 | 4.0% | $27,172 | 5.0% |
Actual | Minimum | Minimum | ||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |
As of December 31, 2001 | ||||||
Total Capital (to risk-weighted assets) | ||||||
Consolidated | $52,950 | 16.8% | $25,154 | 8.0% | N/A | |
Bank | $47,053 | 15.1% | $24,860 | 8.0% | $31,075 | 10.0% |
Tier 1 Capital (to risk-weighted assets) | ||||||
Consolidated | $49,017 | 15.6% | $12,577 | 4.0% | N/A | |
Bank | $43,166 | 13.9% | $12,430 | 4.0% | $18,645 | 6.0% |
Tier 1 Capital (to average assets) | ||||||
Consolidated | $49,017 | 10.3% | $18,997 | 4.0% | N/A | |
Bank | $43,166 | 9.2% | $18,733 | 4.0% | $23,416 | 5.0% |
At December 31, 20012002 and 2000,2001, the Company and its banking subsidiary, Bar Harbor Banking and Trust Company, were in compliance with all applicable regulatory requirements and had capital ratios in excess of federal regulatory risk-based and leverage requirements.
In November of 1999, the Board of Directors authorized the repurchase of up to 10% of the Company’s outstanding shares of stock or approximately 344,000 shares.shares, and has authorized the continuance of this program through December 31, 2003. The purchase can take place either through the open market or in privately negotiated transactions and at market prices. As of December 31, 2001,2002, a total of 186,314269,154 shares were purchased for an average per share price of $16.06.$16.94.
14. EMPLOYEE BENEFIT PLANS
The Company has two non-qualified supplemental retirement plansagreements for certain retired officers. The agreements provide supplemental retirement benefits payable in installments over a period of years upon retirement or death. The Company recognizesrecognized the costsnte present value of payments associated with the agreements over the service periods of the participating officers. In 1999,For 2002, 2001, and 2000, the Company modified one of the non-qualified supplemental retirement plans for the benefit of a key employee approaching retirement, resulting in a one-time expense of $639,700. For 2001, 2000, and 1999, theinterest expense of these supplemental retirement agreements was $142, $142, and $104, respectively.
The Company Board of Directors has authorized the Company, subject to any applicable regulatory requirements, to enter into supplemental executive retirement plans was $219,974, $111,909,with Joseph M. Murphy, President and $866,200, respectively.CEO of the Company and BTI, Gerry Shencavitz, Chief Financial Officer of the Company and Dean S. Read, President and CEO of the Bank. The terms of those supplemental retirement plans have not been finalized as of the date of this report, but are expected to provide for a stream of future payments in accordance with a defined vesting schedule upon retirement of the named executives, or in the event that the executive leaves the Company following a change in control. The Company has accrued amounts in accordance with generally accepted accounting principles, to provide for estimated future payment obligations under the supplemental retirement plans once finalized and effective. As of December 31, 2002, the Company had accrued $328 for this purpose. Implementation of these supplemental executive retirement plans is subject to compliance with any applicable regulatory requirements review and final approval by the Company’s Board of Directors, and execution and delivery by the Company and the named executive officers, of formal agreements.
401(k) PLAN
The Company has a 401(k) plan available to full-time employees. For the years ended December 31, 2002, 2001, and 2000, the Company contributed $321, $244, and 1999, the Bank contributed $244,345, $240,809, and $186,200,$241, respectively.
15. POSTRETIREMENT BENEFITS
The Company sponsors a postretirement benefit plan, which provides medical and life insurance coverage to all eligible employees. The cost of providing these benefits is accrued during the active service period of the employee. Net periodic postretirement benefit cost includes the following components:
2001 | 2000 | 1999 | |
Service costs of benefits earned | $ -- | $ -- | $ 19 |
Interest cost on accumulated postretirement benefit obligation | 84 | 77 | 103 |
Amortization | (27) | (41) | (38) |
Net periodic postretirement benefit cost | $ 57 | $ 36 | $ 84 |
2002 | 2001 | 2000 | |
Interest cost on accumulated postretirement benefit obligation | $ 84 | $ 84 | $ 77 |
Amortization | (23) | (27) | (41) |
Net periodic postretirement benefit cost | $ 61 | $ 57 | $ 36 |
It is the Company’sCompany's policy to fund the cost of postretirement health care and life insurance plans as claims and premiums are paid.
Change in benefit obligations: | 2001 | 2000 | 1999 |
Benefit obligation at beginning of year | $ 1,234 | $ 1,127 | $ 1,493 |
Service costs of benefits earned | -- | -- | 19 |
Interest cost on accumulated postretirement |
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benefit obligation | 84 | 77 | 103 |
Amortization | (3) | 94 | (121) |
Benefits paid | (68) | (64) | (54) |
Effect of curtailment | -- | -- | (313) |
Benefit obligation at end of year | 1,247 | 1,234 | 1,127 |
Unrecognized gain at end of year | 367 | 376 | 512 |
Accrued benefit cost included in other liabilities | $1,614 | $1,610 | $1,639 |
During 1999, the Board of Directors approved the restructuring of the Company’s retiree health benefit plan, which reduced its future liability by $313,000.
Change in benefit obligations: | 2002 | 2001 | 2000 |
Benefit obligation at beginning of year | $1,247 | $1,234 | $1,127 |
Interest cost on accumulated postretirement benefit obligation | 84 | 84 | 77 |
Amortization | (17) | (3) | 94 |
Benefits paid | (79) | (68) | (64) |
Benefit obligation at end of year | $1,235 | $1,247 | $1,234 |
Unrecognized gain at end of year | $ 346 | $ 367 | $ 376 |
Accrued benefit cost included in other liabilities | $1,581 | $1,614 | $1,610 |
The accumulated postretirement benefit obligation (APBO) was determined using a 7% weighted average discount rate. The health care cost trend rates were 12% in 2002, gradually declining to 6% after 12 years and remaining at that level thereafter. An increase in the health care trend of 1% would increase the APBO by approximately $88,900$89 and the net periodicperiod cost by $33,100.$6. A decrease in the health care trend of 1% would decrease the APBO by approximately $78,600$78 and the net periodic cost by $21,100.$6.
16.
The Bar Harbor Bankshares and its Subsidiaries Incentive Stock Option Plan (ISO) for officers and employees was established October 3, 2000, providing for the issuance of up to 450,000 shares of common stock. The purchase price of the stock covered by each option shall be its fair market value, which must be equal to at least 100% of the fair market value on the date such option is granted. Initial options for 224,808 shares were granted during 2001 and are subject to a seven-year vesting schedule. No option shall be granted after October 3, 2010, ten years after the effective date of the ISO.
The Company accounts for these options in accordance with the Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." As the exercise price of each option equals the market price of the Company’s stock on the date of grant, no compensation cost has been recognized for the plan. Had compensation costs for the plan been determined based on the fair value of the options at the grant dates consistent with the method described in SFAS No. 123, "Accounting for Stock-Based Compensation," the Company’s 2001 net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands except for per-share data):
Earnings Per Share | |||
Net Income | Basic | Diluted | |
As reported | $3,511 | $1.07 | $1.06 |
Pro forma | $3,456 | $1.05 | $1.04 |
The fair value of each option is estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted-average assumptions used for all grants; dividend yield of 4.22%, risk-free interest rate of 3.62%, expected life of 3.5 years, and expected volatility of 27%.
A summary of the status of the plan as of December 31, 2002, and 2001, and changes during the year then ended is presented below.
2002 | 2001 | |||
Number of | Weighted Average | Number of | Weighted Average | |
Outstanding at the beginning of the year | 224,808 | $15.43 | -- | $ -- |
Granted during the year | 161,602 | 17.17 | 224,808 | 15.43 |
Exercised during the year | (5,241) | 15.41 | -- | -- |
Forfeited during the year | (55,064) | 15.41 | -- | -- |
Outstanding at end of year | 326,105 | $16.30 | 224,808 | $15.43 |
Exercisable at year end | 29,598 | 10,830 |
The following information applies to options outstanding at December 31, 2002:
Options Outstanding | Options Exercisable | ||||
Range of |
Number of | Weighted Average |
Weighted Average |
Number | Weighted Average |
$15.40 - $19.20 | 326,105 | 8.70 years | $16.30 | 29,598 | $15.43 |
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The following information applies to options outstanding at December 31, 2001:
Options Outstanding | Options Exercisable | Options Outstanding | Options Exercisable | |||||||
Range of Exercise Price |
Number of Shares | Wtd. Average Remaining Contractual life | Wtd. Average Exercise Price |
Number of Shares | Exercise Price |
Number of | Weighted Average |
Weighted Average |
Number | Weighted Average |
$15.40 - $17.75 | 224,808 | 8.75 | $15.43 | 10,830 | $15.40 | 224,808 | 8.75 years | $15.43 | 10,830 | $15.40 |
17. FINANCIAL INSTRUMENTS
The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to originate loans and standby letters of credit.
Commitments to originate loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case by case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the borrower.
The Bank’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for its balance sheet instruments.
The notional or contract amount for financial instruments with off-balance sheet risk are:
2001 | 2000 | |
Commitments to originate loans | $16,563 | $ 4,500 |
Unused lines of credit | $45,453 | $25,126 |
Standby letters of credit | $ 5,059 | $ 3,626 |
Unadvanced portions of construction loans | $ 5,579 | $ 6,485 |
2002 | 2001 | 2000 | |
Commitments to originate loans | $19,981 | $16,563 | $ 4,500 |
Unused lines of credit | $49,107 | $45,453 | $25,126 |
Standby letters of credit | $ 2,800 | $ 5,059 | $ 3,626 |
Unadvanced portions of construction loans | $ 2,054 | $ 5,579 | $ 6,485 |
The Bank uses derivative instruments as partial hedges against large fluctuations in interest rates. The Bank uses interest rate swap instruments to hedge against potentially lower yields on the variable prime rate loan category in a declining rate environment. If rates were to decline, resulting in reduced income on the adjustable rate loans, there would be an increased income flow from the interest rate swap instrument.
Financial instruments are reviewed as part of the asset/liability management process. The financial instruments are factored into the Bank’s overall interest rate risk position. The Bank regularly reviews the credit quality of the counterparty from which the instruments have been purchased.
As of December 31, 2002, the Bank had a $10 million (notional principal amount) swap contract in which the Bank is hedging prime-based home equity loans to a fixed rate of 6.425%. The interest rate swap matures in April 2004. The interest rate swap is recorded in other assets at its fair value of $272, with the change in fair value recorded in other comprehensive income, net of tax. At December 31, 2001, the Company held no derivative instruments.
The estimated fair values of the Bank’s financial instruments were as follows:
December 31, 2001 | December 31, 2000 | |||
Carrying Value | Fair Value | Carrying Value | Fair Value | |
Financial assets: | ||||
Cash and cash equivalents | $ 17,355 | $ 17,355 | $ 10,580 | $ 10,580 |
Securities available for sale | 106,743 | 106,743 | 37,844 | 37,844 |
Securities held to maturity | 26,866 | 24,943 | 116,306 | 116,245 |
Other securities | 8,464 | 8,464 | 314 | 314 |
Cash surrender value of life insurance | 5,057 | 5,057 | 4,817 | 4,817 |
Loans receivable | 293,801 | 294,778 | 267,145 | 270,623 |
Interest receivable | 2,797 | 2,797 | 3,585 | 3,585 |
Financial liabilities: | ||||
Deposits | 291,833 | 291,220 | 278,076 | 277,819 |
Securities sold under repurchase | ||||
agreements | 15,159 | 15,159 | 12,166 | 12,166 |
Borrowings | 120,900 | 118,657 | 119,152 | 119,152 |
Interest payable | 727 | 727 | 950 | 950 |
December 31, 2002 | December 31, 2001 | |||
Carrying | Fair | Carrying | Fair | |
Financial Assets: | ||||
Cash and cash equivalents | $ 11,529 | $ 11,529 | $ 17,355 | $ 17,355 |
Securities available for sale | 128,826 | 128,826 | 106,743 | 106,743 |
Securities held to maturity | 31,545 | 32,077 | 26,866 | 24,943 |
Other securities | 1,929 | 1,929 | 8,464 | 8,464 |
Cash surrender value of life insurance | 5,278 | 5,278 | 5,057 | 5,057 |
Loans receivable | 346,560 | 355,812 | 293,801 | 294,778 |
Interest receivable | 2,796 | 2,796 | 2,797 | 2,797 |
Derivative instrument (swap) | 272 | 272 | -- | -- |
Financial liabilities: | ||||
Deposits | 322,015 | 324,028 | 291,833 | 291,220 |
Securities sold under repurchase agreements | 13,943 | 13,943 | 15,159 | 15,159 |
Borrowings | 156,558 | 161,311 | 120,900 | 118,657 |
Interest payable | 763 | 763 | 727 | 727 |
18. LEGAL CONTINGENCIES
Various legal claims arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Company’s consolidated financial statements.
19. QUARTERLY SUMMARIZED FINANCIAL DATA (UNAUDITED)
Year 2001 | 1 | 2 | 3 | 4 | Year |
Interest and dividend income | $ 8,672 | $8,465 | $ 8,495 | $ 8,260 | $ 33,892 |
Interest expense | 4,477 | 4,279 | 3,715 | 3,280 | 15,751 |
Net interest income | 4,195 | 4,186 | 4,780 | 4,980 | 18,141 |
Provision for loan losses | 200 | 1,200 | 250 | 350 | 2,000 |
Noninterest income | 1,848 | 1,692 | 2,125 | 1,855 | 7,520 |
Noninterest expense | 4,195 | 4,144 | 4,813 | 5,337 | 18,489 |
Income before income taxes | 1,648 | 534 | 1,842 | 1,148 | 5,172 |
Income taxes | 558 | 157 | 627 | 319 | 1,661 |
Net income | $1,090 | $ 377 | $1,215 | $ 829 | $ 3,511 |
Basic earnings per share | $ 0.33 | $ 0.12 | $ 0.37 | $ 0.25 | $ 1.07 |
Diluted earnings per share | $ 0.33 | $ 0.11 | $ 0.37 | $ 0.25 | $ 1.06 |
Year 2000 | 1 | 2 | 3 | 4 | Year |
Interest and dividend income | $ 8,546 | $ 8,830 | $ 8,849 | $ 9,108 | $ 35,333 |
Interest expense | 4,041 | 4,456 | 4,549 | 4,570 | 17,616 |
Net interest income | 4,505 | 4,374 | 4,300 | 4,538 | 17,717 |
Provision for loan losses | 163 | 163 | 163 | 463 | 952 |
Noninterest income | 1,362 | 1,596 | 2,192 | 1,916 | 7,066 |
Noninterest expense | 3,789 | 4,464 | 4,580 | 3,782 | 16,615 |
Income before income taxes | 1,915 | 1,343 | 1,749 | 2,209 | 7,216 |
Income taxes | 631 | 441 | 605 | 742 | 2,419 |
Net income | $1,284 | $ 902 | $1,144 | $1,467 | $ 4,797 |
Basic earnings per share | $ 0.38 | $ 0.27 | $ 0.34 | $ 0.44 | $ 1.43 |
Diluted earnings per share | $ 0.38 | $ 0.27 | $ 0.34 | $ 0.44 | $ 1.43 |
Year 2002 | 1 | 2 | 3 | 4 | Year |
Interest and dividend income | $7,964 | $7,992 | $8,207 | $8,189 | $32,352 |
Interest expense | 3,148 | 3,208 | 3,267 | 3,152 | 12,775 |
Net interest income | 4,816 | 4,784 | 4,940 | 5,037 | 19,577 |
Provision for loan losses | 300 | 300 | 275 | 225 | 1,100 |
Noninterest income | 1,340 | 1,494 | 2,116 | 1,463 | 6,413 |
Noninterest expense | 4,197 | 4,491 | 5,120 | 4,528 | 18,336 |
Income before income taxes | 1,659 | 1,487 | 1,661 | 1,747 | 6,554 |
Income taxes | 449 | 360 | 514 | 419 | 1,742 |
Net income before accounting change | 1,210 | 1,127 | 1,147 | 1,328 | 4,812 |
Cumulative effect of accounting change, net of tax | (247) | -- | -- | -- | (247) |
Net income | $ 963 | $1,127 | $1,147 | $1,328 | $4,565 |
Earnings per share: | |||||
Basic before cumulative effect of accounting change | $ 0.37 | $ 0.35 | $ 0.35 | $ 0.42 | $ 1.49 |
Cumulative effect of accounting change, net of tax | $(0.07) | $ -- | $ -- | $ -- | $ (0.07) |
Basic | $ 0.30 | $ 0.35 | $ 0.35 | $ 0.42 | $ 1.42 |
Diluted before cumulative effect of accounting change | $ 0.37 | $ 0.34 | $ 0.35 | $ 0.41 | $ 1.47 |
Cumulative effect of accounting change, net of tax | $(0.07) | $ -- | $ -- | $ -- | $ (0.07) |
Diluted | $ 0.30 | $ 0.34 | $ 0.35 | $ 0.41 | $ 1.40 |
Year 2001 | 1 | 2 | 3 | 4 | Year |
Interest and dividend income | $8,672 | $8,465 | $8,495 | $8,260 | $33,892 |
Interest expense | 4,477 | 4,279 | 3,715 | 3,280 | 15,751 |
Net interest income | 4,195 | 4,186 | 4,780 | 4,980 | 18,141 |
Provision for loan losses | 200 | 1,200 | 250 | 350 | 2,000 |
Noninterest income | 1,848 | 1,692 | 2,125 | 1,855 | 7,520 |
Noninterest expense | 4,195 | 4,144 | 4,813 | 5,337 | 18,489 |
Income before income taxes | 1,648 | 534 | 1,842 | 1,148 | 5,172 |
Income taxes | 558 | 157 | 627 | 319 | 1,661 |
Net income | $1,090 | $ 377 | $1,215 | $ 829 | $ 3,511 |
Earnings per share: | |||||
Basic | $ 0.33 | $ 0.12 | $ 0.37 | $ 0.25 | $ 1.07 |
Diluted | $ 0.33 | $ 0.11 | $ 0.37 | $ 0.25 | $ 1.06 |
20. PARENT ONLY CONDENSED FINANCIAL STATEMENTS
The condensed financial statements of Bar Harbor Bankshares as of December 31, 20012002 and 2000,2001, and for each of the three years in the period ended December 31, 2001,2002, are presented below:
BALANCE SHEETS
December 31
2001 | 2000 | 2002 | 2001 | |
Cash | $ 219 | $ 647 | $ 334 | $ 219 |
Investment in subsidiaries | 51,711 | 49,026 | 52,620 | 51,711 |
Premises | 747 | 758 | 746 | 747 |
Other assets | 2 | 76 | 160 | 2 |
Total assets | $52,679 | $50,507 | $ 53,860 | $ 52,679 |
Liabilities and Shareholders’ Equity | $52,679 | $50,507 | ||
Liabilities & Shareholders' Equity | $ 53,860 | $ 52,679 |
STATEMENTS OF INCOME
Years Ended December 31
2001 | 2000 | 1999 | 2002 | 2001 | 2000 | |
Dividend income from subsidiaries | $5,296 | $11,055 | $4,406 | $ 5,369 | $ 5,296 | $11,055 |
Equity in undistributed earnings of subsidiaries(1) | (1,609) | (6,108) | 1,819 | (387) | (1,609) | (6,108) |
Bankshares expenses | (176) | (150) | -- | |||
Bankshares expenses, net of tax benefit | (417) | (176) | (150) | |||
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Net income | $3,511 | $4,797 | $6,225 | $ 4,565 | $ 3,511 | $ 4,797 |
(1) Amount in parentheses represents the excess of dividends over net income of subsidiaries.
STATEMENTS OF CASH FLOWS
Years Ended December 31
2001 | 2000 | 1999 | 2002 | 2001 | 2000 | |
Cash flow from operating activities: | ||||||
Net income | $3,511 | $ 4,797 | $ 6,225 | $ 4,565 | $ 3,511 | $ 4,797 |
Adjustments to reconcile net income to cash | ||||||
provided by operating activities: | ||||||
Depreciation | 11 | -- | -- | 7 | 11 | -- |
(Increase) decrease in other assets | 74 | (76) | (100) | |||
Dividends in excess of earnings (equity in undistributed earnings) of subsidiaries | 1,609 | 6,108 | (1,819) | |||
(Increase)decrease in other assets | (77) | 74 | (76) | |||
Equity in undistributed earnings of subsidiaries | 387 | 1,609 | 6,108 | |||
Net cash provided by operating activities | 5,205 | 10,829 | 4,306 | 4,882 | 5,205 | 10,829 |
Cash flows from investing activities: | ||||||
Additional investments in subsidiaries | (2,370) | (6,835) | -- | (854) | (2,370) | (6,835) |
Capital expenditures | -- | (758) | -- | (6) | -- | (758) |
Net cash used in investing activities | (2,370) | (7,593) | -- | (860) | (2,370) | (7,593) |
Cash flows from financing activities: | ||||||
Purchase of treasury stock | (773) | (1,820) | (400) | (1,563) | (773) | (1,820) |
Dividends paid | (2,490) | (2,554) | (2,476) | |||
Proceeds from stock issuance | 101 | -- | ||||
Dividend paid | (2,445) | (2,490) | (2,554) | |||
Net cash used in financing activities | (3,263) | (4,374) | (2,876) | (3,907) | (3,263) | (4,374) |
Net increase (decrease) in cash and cash equivalents | (428) | (1,138) | 1,430 | |||
Net increase (decrease) in cash | 115 | (428) | (1,138) | |||
Cash and cash equivalents, beginning of year | 647 | 1,785 | 355 | 219 | 647 | 1,785 |
Cash and cash equivalents, end of year | $ 219 | $ 647 | $1,785 | $334 | $219 | $ 647 |
21. GOODWILL
The following is the effect on net income and earnings per share if amortization of goodwill had not been recorded in each period presented.
2002 | 2001 | 2000 | |
Reported net income | $4,565 | $3,511 | $4,797 |
Add: Goodwill amortization (net of tax) | -- | 48 | 47 |
Adjusted net income | $4,565 | $3,559 | $4,844 |
Basic earnings per share: | |||
Reported | $ 1.42 | $1.07 | $1.43 |
Add: Goodwill amortization (net of tax) | -- | 0.01 | 0.01 |
Adjusted basic earnings per share | $ 1.42 | $1.08 | $1.44 |
Diluted earnings per share: | |||
Reported net income | $ 1.40 | $1.06 | $1.43 |
Add: Goodwill amortization (net of tax) | -- | 0.01 | 0.01 |
Adjusted diluted earnings per share | $ 1.40 | $1.07 | $1.44 |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item is incorporated by reference from the sections entitled "Management of the Company", and "Executive Officers", and Section 16(a) "Beneficial Ownership Reporting Compliance" in the 2002 Proxy Statement for the Annual Meeting of Shareholders, which is filed with the Securities and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference from the section entitled "Compensation of Directors and Executive Officers" in the 2002 Proxy Statement for the Annual Meeting of Shareholders, which is filed with the Securities and Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference from the section entitled "Voting Securities and Principal Holders thereof" and "Equity Compensation Plan Information" in the 2002 Proxy Statement for the Annual Meeting of Shareholders, which is filed with the Securities and Exchange Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference from the section entitled "Transactions with Directors, Officers, and Principal Shareholders" in the 2002 Proxy Statement for the Annual Meeting of Shareholders, which is filed with the Securities and Exchange Commission.
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of Company management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.
Disclosure controls and procedures means controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. While the Company believes that its disclosure controls and procedures are effective, it intends to continue to examine, refine and formalize its disclosure controls and procedures and to monitor ongoing developments in this area.
There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these internal controls subsequent to the date the Company carried out this evaluation.
ITEM 14.15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements Filed herewith at Item 8.
2. Financial Statement Schedules Filed herewith at Item 8
3. Exhibits:
EXHIBIT NUMBER | ||
2 | Plan of Acquisition, Reorganization Agreement, Liquidation, or Succession | Incorporated by reference to Form S-14 filed with the Commission March 26, 1984 (Commission Number 2-90171). |
3 | (a) Articles of (b) Bylaws | (a) Articles as amended July 11, 1995, are incorporated by reference to Form S-14 filed with the Commission March 26, 1984 (Commission Number 2-90171). Bylaws as amended to date are filed herewith. (b) Bylaws as amended to date are incorporated by reference to Form 10-K, Item 14(a)(3) filed with the Commission March 28, 2002. (Commission Number 001-13349). |
10 | Material Contracts | |
10.1 | (a) Deferred Compensation Plans (b) Board Authorized Supplemental Executive Retirement Plan disclosures for Joseph M. Murphy, President and Chief Executive Officer of the Company and BTI, Gerald Shencavitz, Company Chief Financial Officer, and Dean Read, Bank President and Chief Executive Officer. | (a) Incorporated by reference to Form 10-K filed with the Commission March 31, 1987 (Commission Number 0-13666). (b) The Company Board of Directors has authorized the Company, subject to any applicable regulatory requirements, to enter into supplemental executive retirement plans with Joseph M. Murphy, President and CEO of the Company and BTI, Gerry Shencavitz, Chief Financial Officer of the Company and Dean S. Read, President and CEO of the Bank. The terms of those supplemental retirement plans have not been finalized as of the date of this report, but are expected to provide for a stream of future payments in accordance with a defined vesting schedule upon retirement of the named executives, or in the event that the executive leaves the Company following a change in control. The Company has accrued amounts in accordance with generally accepted accounting principles, to provide for estimated future payment obligations under the supplemental retirement plans once finalized and effective. As of December 31, 2002, the Company had accrued sufficient funds for this purpose. Implementation of these supplemental executive retirement plans is subject to compliance with any applicable regulatory requirements and to review and final approval by the Company’s Board of Directors, and execution and delivery by the Company and the named executive officers, of formal agreements. |
10.2 |
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10.3 | Incentive Stock Option Plan of 2000 |
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13 | Annual Report to Shareholders | Filed herewith |
21 | Subsidiaries of the Registrant | Incorporated by reference to Form 10-K, Item 14(a)(21) filed with the Commission March 28, 2002. Commission Number 001-13349. |
99 | (a) Certification of Chief Executive Officer under 18 U.S.C. Sec. 1350. (b) Certification of Chief Financial Officer under 18 U.S.C. Sec. 1350. | (a) Filed (b) Filed herewith. |
(b) Reports on Form 8-K
Current reports on Form 8-K have been filed on September 5, 2001, is incorporated by reference, regarding Board of Directors decision to undertake search for a new Company CEO.during the last quarter as follows:
Date Filed | Item Number | Description |
12/17/02 | 5 | Continuation of Company’s Stock Repurchase Plan. |
11/08/02 | 5 | Reporting binding decision of independent arbitrator in connection with certain disputes between the Company and Paul Ahern, a former Director of the Company and executive officer of BTI. Announcing completion of investigation by independent director committee and finding of Board of Directors that no material corrective actions to be taken in connection with the investigation. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
March 26, 200227, 2003 BAR HARBOR BANKSHARES
(Registrant)
/s//s/ Joseph M. Murphy
Joseph M. Murphy
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Thomas A. Colwell | /s/ Joseph M. Murphy |
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Joseph M. Murphy | |
| Director, President and |
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Chief Executive Officer |
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| March |
/s/ | |
Bernard K. Cough, Director | |
March 27, 2002 | /s/ John P. Reeves |
| John P. Reeves |
| Chairman, Board of Directors |
/s/Martha Todd Dudman | March |
Martha Todd Dudman, Director | |
March 27, 2003 | |
/s/ Dean S. Read | |
Dean S. Read, Director | |
/s/ Dwight L. Eaton | March 27, 2002 |
Dwight L. Eaton, Director | |
March 27, 2002 | |
/s/ | |
Gerald Shencavitz | |
/s/Ruth S. Foster | Senior Vice President, Chief Financial Officer |
Ruth S. Foster, Director | and Treasurer |
March |
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March | |
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/s/Cooper F. Friend | /s/Scott G. Toothaker |
Cooper F. Friend, Director |
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March |
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CERTIFICATION
I, Joseph M. Murphy, certify that:
Date: March 27, 2003 /s/ Joseph M. Murphy
Joseph M. Murphy
President and Chief
Executive Officer
CERTIFICATION
I, Gerald Shencavitz, certify that:
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of
registrant’s board of directors or persons performing the equivalent function:
6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with respect to
significant deficiencies and material weaknesses.
Date: March 27, 2003 /s/Gerald Shencavitz
Gerald Shencavitz
Chief Financial Officer
EXHIBIT 310.2
FORM OF EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made and entered into this 3rdday of January, 2003, by and between BAR HARBOR BANKSHARESBYLAWS
Article IName, Location, Type of Corporation, Seal
Sec. 1.1 Name.
The name of this, a Maine corporation iswith its headquarters located in Bar Harbor, BanksharesMaine (hereinafter referred to as the "Company""the Company").
Sec 1.2 Location.
The principal place of business of the Company is Bar Harbor, Maine. The Company may have additional offices elsewhere within or without the State of Maine.
Sec. 1.3 Type of Corporation.
The Company is a financial institution holding company, organized under the Maine Business Corporation Act.
Sec. 1.4 Corporate Seal.
The corporate seal of the Company shall be circular in form, and shall be engraved as follows:
Bar Harbor Bankshares
1984
Sec. 1.5 ClerkM.
The Clerk of the Corporation shall beMURPHY, a resident of the State of Maine. The initial Clerk shall be named in the Articles of Incorporation and shall serve until his or her resignation or removal from office or until a successor is elected by voteMount Desert, Maine (hereinafter "the President").
In consideration of the Boardmutual promises, covenants, and agreements made herein, receipt and sufficiency of Directors.which are hereby acknowledged, the parties, intending to be legally bound hereby, agree as follows:
1. EMPLOYMENT. The Clerk shall keep, in a book kept for such purposes,Company hereby employs the records of all meetings of the directorsPresident, and the Board of Directors and shall perform such duties and have such powers as are prescribed by the Act. The Clerk shall have custody of the corporate seal and may affix the same on documents requiring it, and attest to the same.
Article II
Capital Stock
Sec. 2.1 Authorized Capital Stock.
The authorized capital of Bar Harbor Bankshares shall consist of ten million (10,000,000) shares of common stock, par value $2.00 per share, total par value Twenty Million Dollars, ($20,000,000). With the prior approval of the Maine Superintendent of Banking and subject to restrictions imposed by applicable law, the Company may issue shares of capital stock for lawful purposes and may repurchase shares for the purpose of reducing its outstanding stock.
Sec. 2.2 Stock Certificates.
Each stockholder shall be entitled to a certificate certifying the number of shares of capital stock owned by the stockholder. Each certificate shall be signed by the President or a Vice President and by the Treasurer or an Assistant Treasurer. Signatures of the officers of the Company on the certificate may be facsimile so long as the manual signature of an authorized officer of the Transfer Agent appears. A certificate which has been prepared with facsimile signatures may continue to be used even though an officer whose signature appears thereon has ceased to be an officer of the Company.
Sec. 2.3 Transfers of Stock. Transfer Agent.
Transfer of stock shall be made only upon the transfer books of the Transfer Agent, as from time to time designated by the Board of Directors. Before a new certificate is issued, the old certificate shall be surrendered for cancellation or satisfactory evidence provided of its loss or destruction.
Sec. 2.4 Stockholder to be Registered.
Only those persons whose names are registered on the books of the Transfer Agent shall be entitled to be treatedhereby accepts employment by the Company as the holdersPresident and Chief Executive Officer of the stock standing in their respective names. The Company shall not be bound to recognize any equitable or other claim to or interest in any shareBar Harbor Bankshares, on the part of any other person, whether or not itterms and conditions specified herein.
2. TERM. The President’s employment shall have express or other notice thereof, except as expressly provided by the laws of Maine.
Sec. 2.5 Loss or Destruction of Certificate.
In case of loss or destruction of any certificate of stock, another may be issued in its place upon proof of such loss or destruction and upon the giving of such satisfactory assurance of indemnity to the Company and/or to the Transfer Agent as the Company may reasonably require.
Sec. 2.6 Assessability of Stock.
The Capital stock of the Company, when duly issued, shall be fully paid and forever non-assessable.
Article IIIMeeting of Stockholders
Sec. 3.1 Annual Meeting.
The annual meeting of the stockholders (the Annual Meeting) shall be held during the month of October in each year, or in such other month as the Board of Directors may determine, on a day and at a time designated in the notice for the meeting. The Annual Meeting shall be held at Bar Harbor, Maine or at such other location within the State of Maine as may be designated in the notice. At the Annual Meeting, the stockholders shall elect one-third (as nearly as may be) of the Board of Directors for a term of threetwo (2) years commencing on the date of this agreement and shall transact such other business as may properly be brought before the meeting.
Sec. 3.2 Special Meetings.
Special meetings of the stockholders may be called byending January 3, 2005, unless sooner terminated. The Company agrees to notify the President by the Chief Executive Officer, by the Chairman of the Board of Directors, by a majority of the Board of Directors or of the Executive Committee, or by the holders of not less than 30% of the shares of capital stock entitled to vote at the meeting.
Sec. 3.3 Notice of Meetings.
3.3.1 Time of Notice. Written notice of the Annual Meetingone hundred and of any special meeting shall be delivered to each stockholder of record entitled to vote at such meeting not less than ten (10) nor more than sixty (60)eighty days (180) prior to the date fixed for the meeting. Notice shall be deemed delivered when deposited with postage prepaid in the United States mail, addressed to the stockholder at the address appearing on the stock transfer books of the transfer agent.
Sec. 3.3.2 Special Meetings. Upon written request transmitted in person or by registered or certified mail to the President or the Clerk by any person entitled under Section 3.2 to call a special meeting of the stockholders, such officer shall deliver to the stockholders entitled thereto, notice of such meeting as provided herein which notice shall fix a date for the meeting, not less than ten (10) nor more than sixty (60) days after receipt of such request.
Sec. 3.3.3 Adjournment. The presiding officer may adjourn any meeting if (i) no quorum is present, (ii) in the judgment of the Board of Directors information relevant to the matters to be acted upon has not been made available to the stockholders in a sufficiently timely manner to allow full consideration thereof, or (iii) the Board of Directors otherwise determines that adjournment is in the best interests of the Company. When a meeting of stockholders is adjourned for whatever reason for thirty (30) days or more, notice of the reconvening of the adjourned meeting shall be given as provided by Section 3.3.1 hereof. Notice of the reconvening of a meeting adjourned for less than thirty (30) days need not be given if the time and place of the reconvening of the adjourned meeting are announced at the meeting at which the adjournment is taken unless a new record date is fixed for the reconvening of the meeting. At the reconvened meeting the stockholders may transact any business which might have been transacted at the meeting at which the adjournment was taken.
Sec. 3.4 Record Date.
For the purpose of determining stockholders entitled to notice of or to vote at any meeting of the stockholders or any adjournment thereof or entitled to receive payment or a dividend or other distribution or in order to make a determination of stockholders for any other purpose, the Board of Directors shall fix in advance a record date for any such determination of stockholders. Such date shall not in any case be more than sixty (60) days, and not less than ten (10) days, prior to the date designated for the meeting or the payment of the dividend or distribution.
Sec. 3.5 Stockholder List.
The Clerk shall, in advance of each meeting of stockholders, prepare a complete list of the stockholders entitled to vote at that meeting and any adjournment thereof. The list shall be made available at the office of the Clerk for inspection by any stockholder during usual business hours for a period of ten (10) days prior to the date designated for the meeting. The list shall be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any stockholder at all times during the meeting. Failure to comply with the requirements of this section shall not affect the validity of any action taken at any meeting, but if there has not been substantial compliance with the requirements of this section, the meeting shall, upon demand in person or by proxy of any stockholder seeking to inspect the required list, be adjourned until the requirements of this section have been met.
Sec. 3.6 Quorum at Meetings.
The presence in person or by proxy of the holders of not less than a majority of the shares entitled to vote at any meeting shall constitute a quorum for that meeting, and except where a larger percentage is required by the Company's Articles of Incorporation or by law, action at any meeting at which a quorum is present may be taken by the affirmative vote of the holders or representatives of a majority of the stock present or represented.
Sec. 3.7 Matters to be Considered at Annual Meeting.
Only such matters as shall have been properly brought before the Annual Meeting shall be considered. To be considered as properly brought before the Annual Meeting, an item of business must be (i) specified in the notice of the meeting, (ii) otherwise properly brought before the meeting by, or at the direction of, the Board of Directors, or (iii) otherwise properly brought before the meeting by any holder of record (both as of the time such proposal is given to the stockholders as set forth below and as of the record date for the meeting in question) of any shares of capital stock of the Company entitled to vote at the Annual Meeting who complies with requirements set forth in this Section 3.7.
In addition to all other applicable requirements, in order for business to be properly brought before an Annual Meeting by a stockholder of record, such stockholder must give timely notice as required by this Section 3.7 to the Clerk of the Company and must be present at the Annual Meeting at which the matter is to be considered, either in person or through a representative. Notice by a stockholder proposing a matter for consideration at an Annual Meeting must be delivered to, or mailed to and received by, the Company at its principal executive offices not less than 120 days prior to the anniversary date of the immediately preceding Annual Meeting or the date on which the next Annual Meeting is scheduled to occur (provided that notice of such date has been provided to stockholders or has been publicly announced), whichever date is later. Any such notice shall set forth, as to each matter proposed to be brought before the Annual Meeting, the reasons for considering such business at the Annual Meeting, the name and address of the stockholder proposing such business, the number of shares of the Company’s capital stock beneficially owned by such stockholder, and any material interest of the stockholder in the matter proposed to be brought before the Annual Meeting.
If the Board of Directors, or a designated committee thereof, determines that any stockholder proposal was not made in a timely fashion in accordance with the provisions of this Section 3.7 or that the information provided in the noticeit does not fulfillintend to extend the information requirements of this Section 3.7 in any material respect, such proposal shall not be presented for action at the Annual Meeting for which it was proposed.President’s employment.
In the absence of such a determinationnotice of intent not to extend this Agreement by the Board of Directors,Company, the presiding officer atAgreement shall be deemed automatically extended in additional one-year terms. After the Annual Meeting shall determine whetherinitial extension, the stockholder proposal meets the requirementsCompany agrees to a like notice period and subsequent extensions of this Section 3.7Agreement until and if he or she determines that such requirements have not been met, such proposalunless the Company and the President shall not be presented for action atmutually agree to modify the Annual Meeting.
Article IVBoardterms of Directors
Sec. 4.1 Managementthis Agreement. During any extension of Company.
Subject tothis Agreement, as provided herein, all other provisions of these Bylaws,this Agreement shall remain in effect.
Upon expiration of this Agreement, pursuant to a notice of intention not to extend, the business and affairs ofPresident’s employment by the Company shall be managed by its Board of Directors (the Board). Each director shall hold office for the duration of his/her termcease and until his/her successor shall have been duly elected and qualified or until his/her earlier resignation, removal, death or incapacity.
Sec. 4.2 Number, Residence, Election, Qualifying Shares.
The Board of Directors shall consist of not fewer than nine (9) nor more than twenty-seven (27) personsno severance payments such as determined by the Board prior to each Annual Meeting, No decrease in the number of Directors shall have the effect of shortening the term of an incumbent Director. The term of each director shall be three years (or such shorter term as may be necessary in order to comply with the maximum age limitationsthose set forth in Section 4.4 of these Bylaws) and at each Annual Meeting the stockholders shall elect one-third of the total number of directors, (as nearly as may be), for a term not to exceed three years and, if necessary, to fill any vacancies in the delegations not subject to election at that meeting. Subject to the limitation of the maximum number of directors, at any time between the annual meetings, the directors may elect not more than two additional directors to serve until the next Annual Meeting. No person6 shall be eligible to serve as a director unless he/she isdue provided, however, that the actual and beneficial owner of shares of common stock of the company with a par value of at least One Thousand Dollars (Qualifying Shares) provided, nonetheless, that a person who does not own the requisite number of Qualifying Shares may nonetheless be elected as a director provided that he or she becomes the actual and beneficial owner of such Qualifying Shares within one year from the date he or she first was elected. Qualifying Shares may not be encumbered.
Sec. 4.3 Director's Oath.
Upon election or re-election, the directors shall be sworn to the proper discharge of their duties and each shall take an oath that his/her Qualifying Shares are unencumbered and that such shares will remain unencumbered during his/her term of office.
Sec. 4.4 Maximum Age.
The maximum age of a director shall be seventy-five years (75) for directors born prior to 1932 and shall be seventy (70) years for directors born in 1932 or later. No person shall stand for election or re-election to the Board of Directors for a term during which the age of such person would exceed the maximum age provided by this section.
Sec. 4.5. Regular Meetings of Directors.
The Board shall hold regular meetings at least quarterly at a time and place designated by the Board.
Sec. 4.6 Quorum.
At any regular or special meeting of the Board, a quorum shall consist of not less than a majority of the Board, but less than a quorum shall have the power to adjourn from time to time until the next duly called meeting.
Sec. 4.7 Director Nominations.
Only persons nominated in accordance with the proceduresobligations set forth in Sections 7, 8, and 9 shall survive termination of this Section 4.7 shall be eligible for election as directors at an Annual Meeting. Nominations of candidates for election as Directors of the Company at an Annual Meeting may be made (i) at the direction of the Board of Directors, or (ii) by any holder of record of any shares of capital stock of the Company entitled to vote at such Annual Meeting (both as of the time notice of such nomination is given by the stockholder as set forth below and as of the record date for the Annual Meeting) who complies with the procedures set forth in this Section 4.7.
Nominations other than those made by, or at the direction of, the Board of Directors, shall be made in the manner prescribed in Section 3.7 with respect to stockholder proposals generallyAgreement and shall be considered at an Annual Meeting only if the applicable requirements of Section 3.7 have been met. Notwithstanding the foregoing, in the event that the number of Directors to be elected at an Annual Meeting is proposed to be increased pursuant to a recommendation of the Board of Directors, nominations which otherwise comply with the requirements of this Section 4.7 shall be deemed timely if notice thereof is given not later than the close of business on the 15th day following the date on which stockholders were given notice of such increase or on which a public announcement of such increase was made, whichever is later.remain fully enforceable.
Any stockholder seeking to make a nomination, or his representative, must be present in person at the Annual Meeting at which the nomination is to be considered.
Sec. 4.8 Vacancies in Board.
Vacancies in the Board may be filled by vote of a majority of the remaining directors at any meeting of the Board. Any person elected to fill a vacancy shall hold office for the unexpired term of his/her predecessor and until his/her successor has been duly elected and qualified.
Sec. 4.9 Meetings by Telephone.
Members of the Board or of any committee mayparticipate in a meeting through use of a conference telephone or similar communications equipment, so long as all directors participating in such meeting can hear one another. Participation in a meeting pursuant to this paragraph shall be deemed to constitute presence in person at such meeting.
Sec. 4.10 Compensation of Directors.
Directors shall receive such reasonable compensation for meetings actually attended as from time to time shall be determined by the Board, and directors may be reimbursed for reasonable expenses actually incurred while engaged in the business of the Company.
Sec. 4.11 Annual Meeting of Directors.
A meeting of the Board of Directors (Annual Meeting of Directors) shall be held immediately following the Annual Meeting and no notice of such meeting shall be necessary in order legally to constitute the meeting, provided a majority of the members of the Board shall be present. At the Annual Meeting of Directors, the Board shall elect or appoint the officers described in Section 5.1 hereof and may appoint such other officers and committees as the business of the Bank may require. All such officers and committees shall exercise such powers and duties as may be assigned to them from time to time byEither the Board or the Chief Executive Officer.
Sec. 4.12 Executive Committee.President may terminate the President’s employment at any time for any reason, subject to the provisions of Section 6 of this Agreement.
At the Annual Meeting of Directors, the Board 3. RESPONSIBILITIES and OTHER ACTIVITIES. The President shall designate from among its number an Executive Committee consisting of not less than two members including thebe employed as President and Chief Executive Officer and such additional members as the Board may determine. The Executive Committee shall have all of the powers of the Board of Directors in regard to the ordinary operations of the business of the Company when the Board is not in session, subject to any specific vote of the Board. The Executive Committee shall meet at such times and places as may be designated by the Chief Executive Officer. A majority of the members of the Executive Committee shall constitute a quorum at any meeting thereof. Vacancies in the Executive Committee may be filled by majority vote of the Board of Directors at any meeting of the Directors and any person chosen shall hold office until the next Annual Meeting of Directors and until his/her successor has been duly elected and qualified.
Sec. 4.13 Other Committees.
The Board may elect or appoint such other committees as it may deem necessary or convenient to the operations of the Company and consistent with applicable law may assign such duties to such committees as it deems appropriate. A majority of the members of any such committee shall constitute a quorum for the purpose of conducting the business of that committee.
Article VOfficers
Sec. 5.1 Offices to be Filled, Election, Oath, Compensation, Vacancies, Bonds.
The Board of Directors shall elect annually from its membership a President and a Chief Executive Officer (who may be the President)Bar Harbor Bankshares, and shall also elect a Treasurer (who need not be a member ofundertake the Board). The Board may elect from its membership a Chairman of the Board. To the extent permitted by law, any person may hold two or more offices. In addition to the foregoing officers, the Board of Directors may appoint one of more Vice Presidents (one of whom may be designated as Executive Vice President), a Secretary, one or more Assistant Treasurersoverall management, responsibilities, and such other officers as the Board may from time to time determine. The officers shall exercise such powers as may be authorized by the Board of Directors to the extent the same are not in conflict with the specific powers hereinafter authorized. Subject to contract rights, if any, as they or any of them may have, the President, the Chief Executive Officer, the Chairman and, the Treasurer shall serve at the pleasure of the Board and until their successors shall have been duly elected and qualified. Other officers shall serve at the pleasure of the Chief Executive Officer.
The Board may at its discretion fill any vacant office for the period remaining until the next Annual Meeting of Directors and may at its discretion fill other offices which become vacant.
The Board may require security for the fidelity and faithful performance of duties of its officers, employees and agents in such amounts as the Board shall deem necessary.
Sec. 5.2 Duties of Officers
5.2.1 Chief Executive Officer. The Chief Executive Officer shall preside at all meetings of the stockholders and in the absence of a Chairman of the Board, at meetings of the Board of Directors and the Executive Committee. He/she shall make an annual report to the stockholders of the affairs of the Company. He/she shall at all times exercise such general authority, discretion and supervision over all of the affairs of the Company as its interest and security may require. In all cases where the duties of the subordinate officers and agents of the Company are not specifically prescribed by the Bylaws or by resolution of the Board, such subordinate officers and agents shall perform their duties under the general direction of the Chief Executive Officer. In the case of death, absence or disability of the Clerk, Secretary or Treasurer, the Chief Executive Officer shall exercise such of their powers as are not inconsistent with these Bylaws until the Board appoints a successor. He/she shall perform such other duties as may be provided in the Bylaws or as may be assigned to him/her from time to time by the Board of Directors.
5.2.2 President. The President shall perform such duties as may be specifically designated by the Chief Executive Officer or by the Board of Directors.
5.2.3 Executive Vice President. The Executive Vice President, if any, shall perform such duties as may be specifically designated by the Chief Executive Officer or by the Board of Directors.
5.2.4 Vice Presidents. All other Vice Presidents shall perform such duties as may be assigned to them from time to time by the Chief Executive Officer, or in his/her absence, by the Board or the Executive Committee.
5.2.5 Treasurer, Assistant Treasurer. The Treasurer shall have the custody of all monies and securities of the Company and shall keep regular and proper books of accounts as directed by the Board. He/she shall have power to endorse all checks, drafts, notes and orders for money which may be payable to the Company or its order and shall disburse funds of the Company in payment of the just demands against the Company or as may be ordered by the Board, taking proper vouchers for such disbursements. He shall render to the Company from time to time as may be required of him/her an account of all his/hertransactions as Treasurer and of the financial condition of the Company. He/sheshall perform all duties incident to his/her office or which are properly required of him/her an account of all his/her transactions as Treasurer and of the financial condition of the Company. He/she shall perform all duties incidentrelated to this office or which are properly required of him/her by the Board.
The Treasurer, the Chief Executive Officer and such other officersposition as may be designated by the Board shall have the power, without further special authority, to execute deeds or other security instruments that may be necessary to secure authorized borrowings.
The Clerk and the Treasurer shall each have the custody of the seal of the Company and each shall have the power to affix the same to certificates of stock and to other documents and instruments, the execution of which in the name of the Company may be required.
The Assistant Treasurers, if any, unless otherwise directed by the Board, the Executive Committee or the Chief Executive Officer, shall each have and may exercise all of the powers of the Treasurer in his/her absence, and the Assistant Treasurers may also exercise all of the powers of the Treasurer in his/her absence, and the Assistant Treasurers may also exercise such additional powers as may be assigned by the Treasurer or as may be specifically designated by the Chief Executive Officer, by the Executive Committee or by the Board.
5.2.6 Secretary. The Secretary shall record or cause to be recorded the proceedings and actions of all meetings of the Board of Directors and the Executive Committee and shall perform such other duties as may be assigned by the Board.
Article VIDividends, Fiscal Year
Sec. 6.1 Dividends.
Dividends of cash, capital stock of the Company or other property may be declared by the Board of Directors in its discretion from such funds and/or accounts as may be lawfully available therefore.
Sec. 6.2 Fiscal Year.
The Fiscal year of the Company shall be the calendar year.
Article VIIIndemnification
Sec. 7.1 General.
Subject to Section 7.4 of this Article VII, the Company shall in all cases indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, trustee, partner, fiduciary, employee or agent of another corporation, limited liability company, partnership, joint venture, trust, pension or other employee benefit plan or other enterprise, against expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement to the extent actually and reasonably incurred by that person in connection with such action, suit or proceeding; provided that no indemnification may be provided for any person with respect to any matter as to which that person shall be been finally adjudicated:
The termination of any action, suit or proceeding by judgment, order or conviction adverse to that person, or by settlement or plea of nolo contendere or its equivalent, shall not of itself create a presumption that such person did not act honestly or in the reasonable belief that his or her action was in or not opposed to the best interests of that plan or trust or its participants or beneficiaries and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful.
Sec. 7.2 Derivative Actions.
Notwithstanding any provision of Section 7.1 and 7.4, the Company shall not indemnify any person with respect to any claim, issue or matter asserted by or in the right of the Company as to which that person is finally adjudicated to be liable to the Company unless the court in which the action, suit or proceeding was brought shall determine that, in view of all the circumstances of the case, that person is fairly and reasonably entitled to indemnity for such amounts as the court shall deem reasonable.
Sec. 7.3 Special right to Indemnification in Certain Cases.
Any provisions of Section 7.1, 7.2 or 7.4 to the contrary notwithstanding, to the extent that a director, officer, employee or agent of the Company, or any other person whom the Company has authority to indemnify under Section 7.1, has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 7.1 or 7.2, or in defense of any claim, issue or matter therein, that person shall be indemnified against expenses, including attorney’s fees, actually and reasonably incurred in connection therewith. The right to indemnification granted by this subsection may be enforced by a separate action against the Company, if an order for indemnification is not entered by a court in the action, suit or proceeding wherein that director, officer, employee, agent or other person was successful on the merits or otherwise.
Sec. 7.4 Determination in Specific Cases.
Any indemnification under Section 7.1 unless ordered by a court or required by these Bylaws, shall be made by the Company only as authorized in each specific case upon a determination that indemnification of any director, officer, employee, agent or other person is consistent with the terms of this Article VII. Such determination shall be made by the Board of Directors by a majority vote of a quorum consisting of directors who are not seeking indemnification or, if such a quorum is not obtainable, or even if obtainable, if a quorum of disinterested directors so directs, by independent legal counsel in a written opinion. Such a determination once made may not be revoked and, upon the making of that determination, the director, officer, employee, agent or other person may enforce the indemnification against the Company by a separate action notwithstanding any attempted or actual subsequent action by the Board of Directors.
Sec. 7.5 Advancement of Expenses.
Expenses incurred in defending a civil, criminal, administrative or investigative action, suit or proceeding may be authorized and paid by the Company in advance of the final disposition of that action, suit or proceeding upon a determination made in accordance with the procedure established in Section 7.4 that, based solely on the facts then known to those making the determination and without further investigation, the person seeking indemnification satisfied the standard of conduct prescribed by Section 7.1, and upon receipt by the Company of:
(i) a written undertaking by or on behalf of the person to repay the amount if that person is finally adjudicated:
(a) not to have acted honestly or in the reasonable belief that such person’s action was not in or not opposed to the best interests of the Company or its stockholders or, in the case of a person serving as a fiduciary of an employee benefit plan or trust, in or not opposed to the best interests of such plan or trust or its participants or beneficiaries;
(b) with respect to any criminal action or proceeding, to have had reasonable cause to believe that the person’s conduct was lawful; or
(c) with respect to any claim, issue or matter asserted in any action, suit or proceeding brought by or in the right of the Company, to be liable to the Company, unless the court in which that action, suit or proceeding was brought permits indemnification in accordance with Subsection 2 ; and
(ii) a written affirmation by the person that he or she has met the standard of conduct necessary for indemnification by the Company as authorized in this Section.
The undertaking required by Paragraph (i) shall be an unlimited general obligation of the person seeking the advance, but need not be secured and may be accepted without reference to financial ability to make the repayment.
Sec. 7.6 Rights Not Exclusive; Enforceable by Separate Action.
The indemnification and entitlement to advances of expenses provided by this Article shall not be deemed exclusive of any rights to which those indemnified may be entitled under any agreement, vote of stockholders or disinterested Directors or otherwise, both as to action in that person’s official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee, agent, trustee partner or fiduciary and shall inure to the benefit of the heirs and personal representatives of such a person. A right to indemnification required by this Article may be enforced by a separate action against the Company, if an order for indemnification has not been entered by a court in any action, suit or proceeding in respect to which indemnification is sought.
Sec. 7.7 Insurance.
The Company shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, trustee, partner, fiduciary, employee or agent of another corporation, partnership, joint venture, trust, pension or other employee benefit plan or other enterprise against any liability asserted against that person and incurred by that person in any such capacity, or arising out of that person’s status as such, whether or not the Company would have the power to indemnify that person against such liability under this Section.
Sec. 7.8 Miscellaneous.
For purposes of this Article, references to the "Company" shall include, in addition to the surviving corporation or new corporation, any participating corporation in a consolidation or merger. For purposes of this Article, the Company shall be deemed to have requested a person to serve an employee benefit plan whenever the performance by him or her of his or her duties to the Company also imposes duties on, or otherwise involves services by, him to the plan or participants or beneficiaries of the plan; excise taxes assessed on a person seeking indemnification with respect to an employee benefit plan pursuant to applicable law shall be deemed "fines"; and action taken or omitted by him or her with respect to an employee benefit plan in the performance of his or her duties for a purpose reasonably believed by him or her to be in the interests of the participants or beneficiaries of the plan shall be deemed to be for a purpose which is in the best interests of the Company.
Sec. 7.9 Amendment.
Any amendment, modification or repeal of this Article VII shall not deny, diminish or otherwise limit the rights of any person to indemnification or advance hereunder with respect to any action, suit or proceeding arising out of any conduct, act or omission occurring or allegedly occurring at any time prior to the date of such amendment, modification or repeal.
Article VIIIAmendment of Bylaws
These Bylaws may be altered or amended by the Board of Directors at any meeting, the notice for which shall include such proposed amendment in respect of all matters, except where by its nature the matter requires an amendment to the Articles of Incorporation of the Company.
Article IXUse of Pronouns
Use of the masculine gender in these Bylaws shall be considered to represent either masculine or feminine gender wherever appropriate.
Article XDate of Adoption
These Bylaws were adopteddefined by the Board of Directors of the Company and becamesummarized in the job description attached as Exhibit A. The President shall faithfully perform the duties of his position as described herein, devote substantially all of his business time and energies to the business and affairs of the Company and shall use his best efforts, skills and abilities to promote the Company’s interests. The President may not engage in any business activities or render any services of a business, commercial, or professional nature (whether or not for compensation) that would affect adversely the President’s performance of his responsibilities and duties hereunder or conflict with the business of the Company for the benefit of any person or entity, unless the President receives the prior written consent of the Company.
4. COMPENSATION. The Company shall pay the President a base salary of not less than Eighteen Thousand three hundred thirty three Dollars and thirty-three cents ($18,333.33) per month (an annualized rate of not less than Two Hundred Twenty Thousand Dollars ($220,000.00) per annum) payable in accordance with the Company’s standard payroll practices. This base salary shall be reviewed annually beginning as of the first week of January, 2004 and thereafter annually by the Compensation Committee of the Company’s Board of Directors and adjusted at the Company’s sole discretion. The President shall also participate in a performance compensation plan, to be developed during 2003 by mutual agreement between the President and the Company, which shall be effective September 12, 2001.in calendar year 2003. Other such plans may be agreed upon by the parties in subsequent calendar years in concert with the Company’s evolving goals and objectives.
5. BENEFITS.
(a) The President shall be eligible to participate in such medical, dental, disability, retirement, life insurance and other employee benefits on the same basis as may be provided to other similarly situated employees of the Company. The President shall be entitled to participate in a Supplemental Executive Retirement Plan (SERP), the terms of which shall be negotiated and finalized by March 31, 2003. This benefit shall be the subject of a separate contract that shall be incorporated by reference into this Agreement and shall not be changed, altered or terminated except by mutual agreement of the contracting parties. As to all other benefits to which the President may be entitled in parity with all other employees,such benefits may be created, changed, or terminated from time to time in the Company’s sole discretion. In addition, the President shall be entitled to reasonable paid vacations consistent with the Company’s vacation policy.
(b) The Company shall reimburse the President for all reasonable, ordinary, and necessary expenses incurred by the President in the performance of his duties hereunder in accordance with the Company’s policies.
6. TERMINATION.
(a) Termination by the Company. The Company may elect to terminate this Agreement and the President from his employment at any time for any reason by giving the President thirty (30) days’ prior written notice of termination, subject to payment by the Company of the base salary described below.
In the event of termination pursuant to this Section 6(a) the President shall be entitled to receive any earned but unpaid base salary through the notice period plus severance pay equal to two year’s base compensation, (which the parties agree shall be deemed to include any unused vacation time) payable either in monthly installments or a lump sum at the discretion of the Company.
The rights and benefits the President may have under employee benefit plans and programs of the Company in existence as of the effective date of such termination, if any, shall be determined in accordance with the terms of such plans and programs. Except as provided in this Section 6 and in Sections 7, 8, and 9, all obligations of the parties hereunder shall cease upon termination.
(b) Resignation. The President may voluntarily resign his employment at any time for any reason by giving the Company not less thanthirty (30) days’ prior written notice of termination. In such event, the President shall be entitled only to his earned but unpaid base salary accrued up to his last day of work together with any unused but accrued vacation time subject to Company policy limitations. The rights and benefits the President may have under employee benefit plans and programs of the Company in existence as of the effective date of such termination, if any, shall be determined in accordance with the terms of such plans and programs. The Company may then establish at its discretion a last day of work but the President shall still be entitled to full pay and benefits through the 30 day notice period notwithstanding that he may actually work less than 30 days at the election of the Company. Except in this Section 6 and in Sections 7, 8 and 9, all obligations of the parties under this Agreement shall cease immediately upon the President’s last day of work.
(c) Good Reason. In the case of "Good Reason" as defined herein, the President may consider that his employment has been constructively terminated by the Company. For purposes of this Agreement, "Good Reason" shall mean:
(i) The assignment to the President of duties inconsistent with the President’s position (including status, offices, titles, and reporting requirements) authority, duties, or responsibilities as described in Section 3 of this Agreement, or any other action by the Company which results in a substantial and material diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice there of given by the President.
(ii) Any failure by the Company to comply with any of the provisions of Section 4 of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the President.
(iii) Any purported termination by the Company of the President’s employment otherwise than as expressly permitted by the Agreement; or
(iv) Any failure by the Company (or successor Company) to comply with the Change of Control provisions of Section 10 of this Agreement.
(d) Termination Due to Death. In the event of the death of the President during this Agreement, the estate or other legal representatives of the President shall be entitled to any amount of earned but unpaid base salary accrued through the pay period in which death occurs plus any accrued but untaken vacation benefits, such payment to be paid promptly following death. The estate or other legal representatives of the President also shall be entitled to receive incentive compensation payments, if any, that the President would have earned if his employment had continued through the then current fiscal year of the Company, which amount shall be reduced to account for the percentage of the fiscal year not worked by the President because of such death. Rights and benefits that the President, or the President’s estate or other legal representatives, may have under employee benefit plans and programs of the Company upon the President’s death, if any, shall be determined in accordance with the terms and provisions of such plans and programs.
(e) Termination Due to Disability.
(i) The President’s employment hereunder may be terminated by the Company in the event the President is totally or partially disabled as determined by a Board Certified Medical Doctor for a cumulative period of ninety (90) days during any twelve (12) month period. During such ninety-day period, the President shall be paid his compensation in accordance with the terms of the short-term sick leave program then provided by the Company and/or through the standard group Long-Term Disability program offered to officers and employees of the Company and its subsidiaries. For purposes of this Agreement, "disability" shall be defined and benefits shall be paid in accordance with the terms of the long-term disability policy then available to all employees and executives of the Company.
(ii) Upon termination of the President’s employment due to disability pursuant to Section 6(e)(i) hereof, the President shall be entitled to continued benefits in accordance with the normal policies and practices, if any, in effect as of the date of such termination for officers and employees of the Company; provided further, that the President shall be entitled to receive incentive payments, if any, the President would have earned if his employment had continued through the then current fiscal year of the Company, which amount shall be reduced to account for the percentage of the fiscal year not worked by the President because of such disability. Any continued rights and benefits the President, or the President’s legal representatives, may have under employee benefit plans and programs of the Company upon the President’s termination due to disability, if any, shall be determined in accordance with the terms and provisions of such plans and programs. Except as provided in Section 6 and in Sections 7, 8, and 9, all obligations of the parties under this Agreement shall cease immediately upon termination.
a. Cause
The Company may terminate the employment of the President and immediately remove the President from his employment for "cause". For purposes of this Section, "cause" shall include, but not be limited to, the following:
(i) Any admission of, or a plea of guilty or no contest to, any charge of embezzlement, theft or fraudulent act or any crime which by three quarters vote of the Board of Directors would reasonably be expected to be materially detrimental to the business, operations, reputation or financial condition of the Company;
(ii) Willful misconduct of President in connection with the performance of any of his duties, including, without limitation, misappropriation of funds or property of the Company or any of its subsidiaries and/or affiliates or securing or attempting to secure personally any profit in connection with any transaction entered into on behalf of the Company or any of its subsidiaries and/or affiliates as determined by a three quarters vote of the Board of Directors;
(iii) Conduct by the President that would result in material injury to the reputation of the Company or its affiliates if the President were retained in his position with the Company such as, but not limited to substance abuse, sexual harassment behaviors or violent or abusive behaviors exhibited in the workplace, as determined by a three quarters vote of the Board of Directors;
(iv) The entry of any legal or regulatory order, which has the effect of precluding the President from performing his duties hereunder for more than 30 consecutive days;
(v) Active disloyalty, such as aiding a competitor as determined by a three quarters vote of the Board of Directors;
(vi) Any other breach by or default of the President of the terms of this Employment Agreement as determined by a three quarters vote of the Board of Directors;
(vii) The inability of the Company to obtain at reasonable cost a bond covering the activities of the President; or
(viii) The willful and continued failure of the President to perform substantially the President’s duties with the Company or one of its affiliates (other than such failure resulting from incapacity due to physical or mental illness) after a written demand for substantial performance improvement is delivered the President by the Board of Directors which specifically identifies the manner in which the Board believes that the President has not substantially performed the President’s duties as determined by a three quarters vote of the Board of Directors.
For purposes of this provision, no act or failure to act, on the part of the President shall be considered "willful" unless it is done, or omitted to be done, by the President in bad faith or without reasonable belief that the President’s action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the President in good faith and in the best interests of the Company. The cessation of employment of the President shall not be deemed to be for Cause unless and until there shall have been delivered to the President a copy of a resolution duly adopted by the affirmative vote of not less than three quarters of the entire membership of the Board at a meeting the Board called and held for such purpose (after reasonable notice is provided to the President and the President is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the President is guilty of the conduct described in subparagraphs f (i) through f (viii) above, and specifying the particulars thereof in detail.
(ix) In the event of termination for cause pursuant to Section 6(f)(i) through Section 6(f)(viii) hereof, the President shall be entitled to receive any earned but unpaid base salary through the Termination Date. The rights and benefits the President may have under employee benefit plans and programs of the Company existing as of the date of such termination, if any, shall be determined in accordance with the terms of such plans and programs. Except as provided in Section 6(f)(ii) and otherwise by applicable law, upon termination pursuant to Section 6 f (i), all obligations of the Company to the President hereunder shall cease immediately.
(x) In the event that the Company terminates the employment of the President for cause the non-competition covenant set forth in Section 8 of this Agreement will be modified to allow the President to seek employment, including employment with a competitor company, but he shall not, for a period of one year after termination of his employment, directly or indirectly, in any capacity, solicit from or perform work related to financial, investment, lending, depository, or other financial services on behalf of any individual, trust, or estate, partnership, corporation or other business entity who is or has been in the twelve (12) months prior to the effective date of termination a customer or client of Bar Harbor Bankshares or any of its subsidiaries.
(xi) To the extent that the Company terminates the President for cause, and any breach may be cured by the President, he will be provided a 30 day period within which he may cure any default.
7. CONFIDENTIAL INFORMATION.
(a) Non-Disclosure. Except as specifically authorized by the Company in writing, from the date hereof and continuing forever, the President agrees not to:
(i) Disclose any Confidential Information to any individual or entity, or otherwise permit any person or entity to obtain or disclose any Confidential Information, or
(ii) Use any Confidential Information for the President’s own financial gain, whether individually or on behalf of another individual or entity (whether or not such other individual or entity is in any way employed by or affiliated with the Company). While not in any way limiting the generality of the foregoing, the prohibitions contained herein shall extend to any and all speeches and articles, and other similar forms of information dissemination, engaged or participated in by the President, whether individually or on behalf of, or in concert with, another individual or entity (whether or not such other individual or entity is in any way employed by or affiliated with the Company). The President, however, may disclose Confidential Information if and only to the extent required by a valid order or subpoena issued by a court or administrative agency of competent jurisdiction, provided that in such event the President shall promptly notify the Company and any subsidiary or affiliate of the Company to which the Confidential Information relates, at a time and in a manner calculated to afford the Company or its subsidiary or affiliate a reasonable opportunity to protect its interests in such Confidential Information. Nothing contained in this Section 7 (a) shall be construed as prohibiting the President from disclosing Confidential Information that is or has become known to the public generally or is otherwise in the public domain other than as a result of improper disclosure.
(b) Confidential Information. For purposes hereof, the term "Confidential Information" means any and all information and compilations of information, in whatever form or medium (including any copies thereof), relating to any part of the business of the Company, the business of any subsidiary or affiliate of the Company or of their customers, provided to the President, or which the President obtained or compiled or had obtained or compiled on his behalf, which information or compilations of information are not a matter of public record or generally known to the public, including without limitation,
(i) Financial information regarding the Company or any subsidiary or affiliate of the Company;
(ii) Personnel data, including compensation arrangements relating to the President or any other employee of the Company or any subsidiary or affiliate of the Company;
(iii) Internal plans, practices, and procedures of the Company or any subsidiary or affiliate of the Company;
(iv) The names, portfolio information, investment strategies, requirements, lending or deposit information, or any similar information of any customers, clients, or prospects of the Company or any subsidiary or affiliate of the Company;
(v) Business methods and marketing strategies of the Company or any subsidiary or affiliate of the Company;
(vi) Any other information expressly deemed confidential by the officers and directors of the Company; and
(vii) The terms and conditions of this Employment Agreement and any documents or instruments executed in connection therewith.
(c) The President shall not, without the prior written consent of the Company, use or disclose, or negligently permit any unauthorized person to use, disclose, or gain access to any Confidential Information.
(d) Upon termination of employment, the President hereby agrees to deliver promptly to the Company and its affiliates and subsidiaries all memoranda, notes, records, manuals or other documents, including all copies of such materials, containing Confidential Information, whether made or compiled by the President or furnished to him from any source by virtue of the President’s relationship with the Company or its subsidiaries or affiliates.
(e) Regardless of the reason for his cessation of employment, the President will furnish such information as may be in the President’s possession and cooperate with the Company or its affiliates or subsidiaries as may reasonably be requested in connection with any claims or legal actions in which the Company is or may become a party. The Company will reimburse the President for any reasonable out-of-pocket expenses the President incurs in order to satisfy his obligations under this clause.
EXHIBIT 10.3BAR HARBOR BANKSHARESand its SubsidiariesINCENTIVE STOCK OPTION PLAN OF 2000
8. 1. PurposeNON-COMPETITION OBLIGATIONS. In consideration of the Plancovenants of the Company contained herein, the President covenants and agrees with the Company that, during the "Non-Compete Period" (as hereinafter defined) and within a one hundred (150) "air" mile radius from Bar Harbor, Maine, the President shall not without specific written approval , directly or indirectly:
(a) Engage in any insurance, brokerage, trust, banking or other financial services as an owner, employee, consultant, representative, or in any other capacity;
(b) Directly or indirectly request or advise any past, present, or future customers of the Company to withdraw, curtail, or cancel his, her, or its business with the Company or any of its affiliated entities;
(c) Directly or indirectly cause, suggest, or induce others to call on any past, present, or future customers of the Company or any of its affiliated entities;
(d) Canvas, solicit, or accept any business on behalf of any other bank, insurance agency, trust, or other financial services business, other than the Company or any of its affiliated entities, from any past or present customer of the Company or any of its affiliated entities.
The purpose"Non-Compete Period" shall commence on the date hereof and terminate one (1) year after the cessation of the President’s employment with the Company, regardless of reason, whether or not pursuant to this Agreement.
9. NO SOLICITATION OF EMPLOYEES. While employed by the Company, and for a period of twelve (12) months following cessation of his employment for any reason and by any party, the President shall not, directly or indirectly, by any means or device whatsoever, for himself or on behalf of, or in conjunction with, any other person, partnership, or corporation, solicit, entice, hire, or attempt to hire or employ any employee of the Company or any of its affiliated entities.
During this Agreement, the President shall not interview or negotiate employment with, or accept employment from, a competitor in the market area described in Section 8(a) above except with the written consent of the Company.
10. CHANGE OF CONTROL.
(a) If during the term of this Stock Option Plan ("Plan")Agreement there is a change in control of the Company, the President shall be entitled to aid Bar Harbor Bankshares, ("'Corporation")receive a severance payment or services previously rendered to the Company in a lump sum as provided for herein (subject to Section 10 (b) below in the event that his employment is terminated by the Company, voluntarily or involuntarily, within one year after a change in control of the Company, unless such termination occurs by virtue of normal retirement, permanent and Bar Harbor Banking & Trusttotal disability, or death of the President. Subject to Section 10(b) below, the amount of this payment to the President shall equal two (2) times the President’s full base annual salary at the rate in effect at the time notice of termination is given, plus any incentive compensation payments that the President would have earned if his employment had continued through the then current fiscal year of the Company (the "Bank") and any accrued but unused vacation time subject to the then existing Company policies and limitations.
(b) Notwithstanding any other Subsidiaryprovisions of this Agreement or of any other agreement, contract, or understanding previously or subsequently entered into by the President of the Corporation ("Other Subsidiary"Company, except an agreement, contract, or understanding subsequently entered into that expressly modifies or excludes application of this Section 10(b) (the "Other Agreements"), and notwithstanding any formal or informal plan or other arrangement previously or subsequently adopted by the Company for the direct or indirect provision of compensation to the President (including groups or classes of participants or beneficiaries of which the President is a member), whether or not such compensation is deferred, is in securing and retaining employees of outstanding ability by making it possible to offer them an increased incentive,cash, or is in the form of a proprietary interest inbenefit to or for the Corporation,President (a "Benefit Plan"), the President shall not have any right to joinreceive any payment or continue inother benefit under this Section 10, any Other Agreement, or any Benefit Plan if such payment or benefit, taking into account all other payments or benefits to or for the servicePresident under this Agreement, all Other Agreements, and all Benefit Plans, would cause any payment to the President under this
Agreement to be considered a "parachute payment" within the meaning of the Corporation, Bank, and/or Other Subsidiary and to increase their efforts for its welfare and success.
2. Definitions
As used in this Plan, the following words shall have the following meanings:
(a) "Bank" means Bar Harbor Banking & Trust Company, a Maine banking corporation, which is a wholly-owned subsidiarySection 280G(B)(2) of Bar Harbor Bankshares, Inc.;
(b) "Board" means the Board of Directors of the Corporation;
(c) "Code" means the Internal Revenue Code of 1986 as amended;amended (a "Parachute Payment"). In the event that the receipt of any such payment or benefit under this Agreement, any Other Agreement, or any Benefit Plan would cause the President to be considered to have received a Parachute Payment under this Agreement, then the President shall have the right, in his sole discretion, to designate those payments or benefits under this Agreement, any Other Agreement, or any Benefit Plans, which should be reduced or eliminated so as to avoid having the payment to the President under this Agreement be deemed to be a Parachute Payment.
(d) "Common Stock" means (c) For purposes of this Agreement, a "Change in Control" of the $2.00 par value common stockCompany shall be deemed to have occurred if:
(i) Any "Person" including a "group" (as such term is used in Section 13(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), as amended, becomes the "beneficial owner" (as determined pursuant to Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Bar Harbor Bankshares Inc.;
(e) "Compensation Committee" shall be the committee appointed by the Board whose duties shall include the administration of this Plan.
(f) "Corporation" means Bar Harbor Bankshares, a Maine corporation with its principal office located in Bar Harbor, Maine;
(g) "Disability" means the Participant's inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not lessrepresenting more than twelve (12) months;
(h) "Employee" means any person in the regular year-round, full-time and year-round, part-time common law employment of the Corporation or any Subsidiary, as an executive or non- executive officer or employee thereof;
(i) "Incentive Stock Option" means a stock option to purchase shares of Common Stock, which is intended to qualify as an incentive stock option defined in Code Section 422;
(j) "Options" means an Incentive Stock Option;
(k) "Parent" means any corporation in an unbroken chain of corporations if each of the corporations owns stock possessing fifty percent (50%) or more of the total combined voting power of the Company’s then outstanding securities, other than as a result of an issuance of securities initiated by the Company in the ordinary course of its business, or
(ii) The Company is party to a Business Combination (as hereinafter defined), unless, following consummation of the Business Combination, more than 50% of the outstanding voting securities of the resulting entity are beneficially owned, directly or indirectly, by the holders of the Company’s outstanding voting securities immediately prior to the Business Combination in substantially the same proportions as those existing immediately prior to the Business Combinations; or
(iii) The stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all classesor substantially all of the Company’s assets to another person or entity which is not a wholly owned subsidiary of the Company.
(iv) For purposes of this Section (c), a "Business Combination" means any cash tender or exchange offer, merger, or other business combination, sale of stock, in oneor sale of all or substantially all of the assets, or any combination of the foregoing transactions.
11. BINDING OBLIGATION of COMPANY and ANY SUCCESSOR IN INTEREST. The Company expressly agrees that it shall not merge or consolidate into or with another Financial Service Holding Company, Bank, firm or person until such Financial Services Holding Company, Bank, firm, or person expressly agrees, in writing, to assume and discharge the duties and obligations of Bar Harbor Bankshares, under this Agreement. The Company agrees to provide written notice of the existence of this Agreement and its contents to any potential successor as part of negotiations leading to a successor in interest. This Agreement shall be binding upon the parties hereto, their successors, beneficiaries, heirs, and personal representatives.
12. ENFORCEMENT. The President acknowledges that his breach or threatened or attempted breach of any provisions of Sections 7, 8, or 9 of this Agreement would cause irreparable harm to the Company not compensable in monetary damages and that the Company shall be entitled upon proof of a breach, in addition to all other corporationsapplicable remedies, to a temporary and permanent injunction and a decree for specific performance of the terms of Sections 7, 8, or 9 without being required to prove damages or furnish any bond or other security. Nothing herein contained shall be construed as prohibiting the Company from pursuing any other remedy available to it for such breach or threatened or attempted breach. The President shall pay all enforcement costs, including reasonable attorneys’ fees, incurred by the Company in successful enforcement by temporary and permanent injunction of Section 7, 8, or 9.
13. REFORMATION. All the parties hereto acknowledge that the parties have carefully considered the nature and scope of such chain;
(l) "Participant" means a person to whom an Option is granted that has not expiredprotection. The activities, period, and ceasedarea covered are expressly acknowledged and agreed to be exercisablefair, reasonable, and necessary. To the extent that any covenant contained in Sections 7, 8, or 9 is held to be invalid, illegal, or unenforceable because of the extent of activities, duration of such covenant, the geographic area covered thereby or otherwise, the parties agree that the court making such determination shall reform such covenant to include as much of its nature and scope as will render it enforceable and, in its reduced form, said covenant shall be valid, legal and enforceable to the fullest extent of the law.
14. ASSIGNMENTS, SUCCESSORS AND ASSIGNS. The rights and obligations of the President hereunder are not assignable or delegable and any prohibited assignment or delegation will be null and void. The Company may assign its rights and delegate its obligations under this Agreement. The provisions hereof shall inure to the Plan;benefit of and be binding upon the permitted successors and assigns of the parties hereto.
(m) "Subsidiary" means 15. GOVERNING LAW. This Agreement shall be interpreted under, subject to and governed by the substantive laws of the State of Maine, without giving effect to provisions thereof regarding conflict of laws.
16. COUNTERPARTS. This Agreement may be executed simultaneously in any corporation other than the Corporation in an unbroken chainnumber of corporations beginning with the Corporation ifcounterparts, each of which will be deemed an original but all of which will together constitute one and the corporationssame instrument.
17. INVALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect any other thanprovision hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision was omitted. Furthermore, in lieu of such illegal, invalid, or unenforceable provision here shall be added automatically as a part of this Agreement a provision as similar in terms to such illegal, invalid, or unenforceable provision as may be possible and be legal, valid, and enforceable.
18. EXCLUSIVENESS. This Agreement constitutes the last corporation inentire understanding and agreement between the unbroken chain owns fifty percent (50%) or moreparties with respect to the employment by the Company of the total combined voting powerPresident and supercedes and revokes any and all other agreements, oral or written, between the parties.
19. MODIFICATION WAIVER. This Agreement may not be modified or amended except in writing signed by the parties. No term or condition of all classesthis Agreement will be deemed to have been waived unless waived in writing by the party charged with waiver. A waiver shall operate only as to the specific term or condition waived and will not constitute a waiver of stock in oneany other term or condition of this Agreement or as to any subsequent occurrence of the other corporations in such chain.term or condition.
3.20. AdministrationMEDIATION ANDARBITRATION. Except as otherwise expressly provided hereunder, the parties agree that any and all disputes arising out of Plan
The Planthe President’s employment, or cessation of employment, including but not limited to any dispute, controversy, or claim arising under any federal, state, or locale statue, law, ordinance or regulation or under this Agreement, shall be administeredresolved exclusively by Alternative Dispute Resolution described in this Agreement ("ADR"). The initiation of ADR shall first require mediation and the parties agree to first try to settle any dispute through mediation. Mediation shall be initiated by either party by the Compensation Committee.serving of a written notice of intent to mediate (a "Mediation Notice") by one party upon the other. If no resolution has been mutually agreed through mediation within ninety (90) days of service of a Mediation Notice, then and only then may the dispute be submitted to arbitration. Arbitration shall be initiated by the serving of a written notice of intent to arbitrate (an "Arbitration Notice") by one party upon the other. Notwithstanding the foregoing, nothing in this Agreement shall be deemed to preclude the Company from seeking temporary or permanent injunctive relief and/or damages from a court of competent jurisdiction with respect to any breach of Sections 7, 8, and 9 of this Agreement.
(a). In the event that a director of the Board is eligibleparty wishes to initiate ADR, a Mediation Notice must be selected for the grant of an Option, during such membership as a director, such director shall recuse himself or herself and not participate in the discussion nor voteserved on the award of the Option to him or her. The Compensation Committee shall have the power and authority to administer, construe and interpret the Plan, to make rules for carrying it out and to make changes in such rules.
4. Granting of Options and $100,000 Limitation
The Board may from time to time grant Options under the Plan to such Employees and subject to the limitations of paragraph (a) of Section 7, for such number of shares as the Board may determine after receiving recommendations from the Compensation Committee or the executive officer of the Corporation, Bank, and/or Other Subsidiary that employs the Participant. Subject to the provisions of the Plan, the Board may impose such terms and conditions as it deems advisable on the grant of an Option. Any of the foregoing to the contrary notwithstanding, the following limitations shall apply to the grant of any Incentive Stock Option:
(a) The aggregate fair market value, determined at the time of the Incentive Stock Option is granted, of the stock exercised by a Participant for the first time during any calendar year shall not exceed $100,000.
(b) Any Option granted to a Participant, who immediately before such grant owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock either of the Corporation or any Subsidiary shall not be a Incentive Stock Option, unless (i) at the time such Option is granted the Option price per share is not less than once hundred ten percent (110%) of the optioned stock’s then fair market value; and (ii) the Option shall not be exercisable after the expiration of five (5) years from the date of the grant of the Option.
5. Terms of Options
The terms of each Option granted under the Plan shall be as determined from time to time by the Board and shall be set forth in an Incentive Stock Option Agreement in a form attached hereto as Exhibit "A" for Participants who are Bank employees and Exhibit B for Participants who are employees of Other Subsidiaries and approved by the Board; provided, however, the terms of such agreement shall not exceed the following limitations:
(a) Subject to Paragraph (b) of Section 4 with regard to 10% owners, the Option price per share shall not be less than one hundred percent (100%) of the fair market value of the optioned stock at the time the Option is granted.
(b) Subject to paragraph (e) of this Section, the Option shall be exercisable in whole or in part from time to time during the period beginning on date of grant of the Option, and ending no later than the expiration of ten (10) years from the date of grant to the Option, unless an earlier expiration date shall be stated in the Option or the Option shall cease to be exercisable pursuant to paragraph (d) of this Section 5.
(c) Payment in full of the Option price for shares purchased pursuant to an Option shall be made upon exercise of the Option (in whole or in part) and shall be made in cash, except as otherwise provided in Section 6.
(d) If a Participant’s employment with the Corporation, the Bank, and/or Other Subsidiary terminates, the following rules shall apply:
(i) If a Participant’s employment with the Corporation, the Bank, and/or Other Subsidiary terminates other than by reason of the Participant’s death, disability or retirement after reaching age 65, the Participant’s Option shall thereupon expire and cease to be exercisable upon the expiration of the earlier of ten (10) years from the date of grant of the Option, or three (3)party within 6 months from the date of such termination.
(ii)on which the claim arose. If the Participant’s employmentparties cannot mutually agree on a mediator, then a mediator shall be selected in accordance with the Corporation,Employment Mediation Rules of the Bank, and/or Other Subsidiary terminates by reasonAmerican Arbitration Association.
(b) In the event that mediation is unsuccessful and arbitration is initiated, it shall be conducted under the National Rules for the Resolution of his death,Employment Disputes of the Participant’s OptionAmerican Arbitration Association. There shall terminate and ceasebe a single arbitrator to be exercisableagreed upon by the parties, provided that, if the parties are unable to agree upon a single arbitrator, each party shall name an arbitrator and the two so named shall name a third arbitrator. The arbitration proceedings shall be heard by the arbitrator(s) and the decision of the arbitrator, or of a majority of the panel if one has been selected, shall be final and binding on the parties. Judgment upon the expirationarbitration award may be entered in any court of competent jurisdiction. An Arbitration Notice must be served on the earlier of ten (10) years from the date of grant of the Option, orother party within one (1) year from the date on which the claim arose, and failure to bring such a claim within such one-year period shall constitute a waiver of death. Such Option maysuch claim and an absolute bar to any further proceedings in any forum with respect to it. All mediation and arbitration proceedings shall be exercisedconducted in Bangor, Maine, unless the parties otherwise agree in writing.
( c ) The costs of the mediator shall be paid for entirely by the duly appointed personal representativeCompany. The cost of the deceased Participant’s estate.arbitrator(s) shall be borne equally by the parties. Each party shall be responsible for its own cost of representation and counsel.
(iii) If a Participant’s employment with the Corporation, the Bank,
21. Notices. All notices, requests, demands, waivers, and other communications required or Other Subsidiary terminates by reason of Disability, the Participant’s Option shall terminate and ceasepermitted to be exercisable upongiven under this Agreement will be in writing and will be deemed to have been duly given: (a) if delivered personally or sent by facsimile or electronic mail, on the expirationdate received, (b) if delivered by overnight courier, on the day after mailing, and (c) if mailed, five days after mailing with postage prepaid. Any such notice will be sent as follows:
To the President:
Joseph M. Murphy
At current home address of record
To the Company:
Bar Harbor Bankshares Fax Number: (207) 288-2811
Attn: Human Resources Department
82 Main Street
PO Box 400
Bar Harbor, ME 04609 E-mail: msawyer@bhbt.com
With copies to:
Daniel G. McKay, Esq. Fax Number: (207) 942-3040
Eaton Peabody
80 Exchange Street
PO Box 1210
Bangor, ME 04402-1210 E-mail: dmckay@eatonpeabody.com
22. SURVIVAL. The provisions of Sections 7, 8, 9, and 20, and all payment and other obligations of the earlier of ten (10) years from the date of grant of the Option, or one (1) year from the date of such termination in the case of disability.
(iv) If a Participant’s employment with the Corporation, the Bank, or Other Subsidiary terminatesparties, which by reason of retirement after reaching age 65 (other than for Disability), the Participant’s Option shall expire and ceasetheir terms are to be exercisable uponperformed subsequent to termination, shall survive the expiration of the earlier of ten (10) years from the date of grant of the Option, or three (3) months from the date of such termination.
(v) Notwithstanding anything contained herein to the contrary, if a Participant’s employment with the Corporation, the Bank, and/or Other Subsidiary is terminated for case (fraud, embezzlement, failure to perform job responsibilities, etc.) as determined by the Board, in the Board’s sole discretion, or if a Participant completes with the Corporation, the Bank, or Other Subsidiary, any Option granted to that Participant shall be immediately revoked and terminated and the Participant shall have no further rights under this Plan. For purposestermination of this Plan, competition with the Corporation, the Bank, or Other SubsidiaryAgreement and shall include direct or indirect ownership of or employment with a financial services business within a 100 mile radius of any office operated by the Corporation or any of its Subsidiaries.
(e) Notwithstanding any other provision herein, the options granted hereunder shall vest as set forth in a vesting schedule to be determined by the Board at the time the Options are granted and such vesting schedule shall be set forth in the Incentive Stock Option Agreement executed at the time the Option is granted.
In the event that the Corporation has a change of control in which
(i) 51% or more of the stock of the Corporation is acquired or
(ii) the Corporation is merged or consolidated with another corporation in an acquisition transaction or
(iii) the Corporation sells substantially all of the assets of the Corporation, or
(iv) the Bank or Other Subsidiary which employs the Participant is merged or consolidated with another entity not owned at least 50% by the Corporation or
(v) such Bank or Other Subsidiary which employs the Participant has a change of control in which 51% or more of the stock of the Bank is acquired or
(vi) such Bank sells substantially all of its assets,
then immediately prior to any such transaction, the vesting schedule shall not be applicable and the holder of any options granted hereunder shall be 100% vested in such options, subject to the other terms and conditions herein.remain fully enforceable.
6. Exercise of Options
The holder of an Option who decides to exerciseIN WITNESS WHEREOF, the Option in whole or in part shall give notice to the Secretary of the Corporation of such exercise in writing on a form approved by the Board. Any exercise shall be effectiveparties have executed this Agreement as of the date specified in the notice of exercise, but not earlier than the date the notice of exercise and payment in fullfirst above written.
COMPANY
BAR HARBOR BANKSHARES
/s/ John P. Reeves
John P. Reeves, Chairman of the Option price in cash is actually received and in the hands of the Secretary of the Corporation. However, in lieu of making a cash payment, the holder of an Option (a) may deliver or cause to be withheld from the Option shares, shares of Common Stock (valued at their fair market value on the date of exercise, determined by the Board of Directors) in satisfaction of all or any part of the exercise price or (b ) if approved by the Board of Directors, delivery of an interest bearing promissory note, payable to the Corporation or the Bank with interest, collateral, and under terms prescribed by the Corporation or the Bank, in payment of all or part of the exercise price at the time of exercise.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
/s/ Joseph M. Murphy
Joseph M. Murphy
7. Limitations and ConditionsEXHIBIT 99(a)
(a) CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350)
The total number of shares of Common Stock that may be optioned as Incentive Stock Options under the Plan is Four Hundred Fifty Thousand (450,000) sharesundersigned executive officer of Bar Harbor Bankshares -- $2.00 par value common stock. Such total number(the "Registrant") hereby certifies that the Registrant’s Form 10-K for the period ended December 31, 2002, fully complies with the requirements of shares may consist, in whole or in part, of unissued shares or reacquired shares. The foregoing numbers of shares may be increased or decreased by the events set forth in Section 9.
(b) There shall be no limitations on the amount of shares of Common Stock that may be optioned as Incentive Stock Options under the Plan as set forth in Section 7(a) above, on an annual basis. The amount of shares to be optioned, within the total limitation set forth in Section 7(a) above, shall be determined solely at the discretion13(a) of the Board as set forth herein. If there is a proposed acquisition, merger, changeSecurities Exchange Act of control or other takeover1934 and that the information contained therein fairly presents, in all material respects, the financial condition and results of operations of the Corporation or the Bank that employs the Participant as provided for in Section 5(e) of this Plan, the Board, at its sole discretion, may issue any options authorized under this Plan but unissued prior to such time.
(c) Any shares that have been optioned that cease to be subject to an Option (other than by reason of exercise of the Option) shall again be available for option and shall not be considered as having been theretofore optioned.
(d) No Option shall be granted under the Plan after October 3, 2010, (10 years after the effective date, which effective date is the date this Plan is approved by the Corporation's shareholders), and the Plan shall terminate on such date, but Options theretofore granted may extend beyond that date in accordance with the Plan. At the time an Option is granted or amended or the terms or conditions of an Option are changed, the Board may provide for limitations or conditions on the exercisability of the Option.
(e) An Option shall not be transferable by the Participant otherwise than by Will or by the laws of descent and distribution. During the lifetime of the Participant, an Option shall only be exercisable by the Participant.
(f) No person shall have any rights of a stockholder as to shares under option until, after proper exercise of the Option, such shares shall have been recorded on the Corporation's official stockholder records as having been issued or transferred.
(g) The Corporation shall not be obligated to deliver any shares until there has been compliance with such laws or regulations as the Corporation may deem applicable. The Corporation shall use its best efforts to effect such compliance. In addition to the foregoing and not by way of limitation, the Corporation may require that the person exercising the Option represent and warrant at the time of such exercise that any shares acquired by exercise are being acquired only for investment and without any present intention to sell or distribute such shares, if, in the opinion of counsel for the Corporation, such a representation is required under the Securities Act of 1933 or any other applicable law, regulation or rule of any governmental agency.Registrant.
8. Transfers and Leaves of Absence
For the purposes of the Plan: (a) a transfer of a Participant's employment without an intervening period from the Corporation to a Subsidiary or vice versa, or from one Subsidiary to another or from Parent to Subsidiary or vice versa, shall not be deemed a tennination of employment, and (b ) an Employee who is granted in writing a leave of absence of no more than ninety (90) days, or if more than ninety (90) days, which guarantees his employment with the Corporation, the Bank, or Other Subsidiary at the end of such leave, shall be deemed to have remained in the employ of the Corporation, the Bank, or Other Subsidiary during such leave of absence./s/ Joseph M. MurphyName: Joseph M. Murphy
Title: Chief Executive Officer
9. Stock AdjustmentsDate: March 27, 2003
In the event of any merger, consolidation, stock dividend, split-up, combination or exchange of shares or recapitalization or change in capitalization, the total number of shares set forth in paragraph (a) of Section 7 shall be proportionately and appropriately adjusted. In any such case, the number and kind of shares that are subject to any Option (including any Option outstanding after termination of employment) and the Option price per share shall be proportionately and appropriately adjusted without any change in the aggregate Option price to be paid therefor upon the exercise of the Option. The determination by the Board as to the terms of any of the foregoing adjustments shall be conclusive and binding.
10. Amendments and Termination
(a) The Board shall have the power to amend the Plan, including the power to change the amount of the aggregate fair market value of the shares for which any Employee may be granted Incentive Stock Options under Section 4 to the extent provided in Code Section 422. It shall not, however, except as otherwise provided in the Plan, increase the maximum number of shares authorized for the Plan, nor change the class of eligible employees to other than Employees as defined herein, nor reduce the basis upon which the minimum Option price is determined, nor extend the period within which Options under the Plan may be granted, nor provide for an Option that is exercisable during a period of more than ten (10) years from the date it is granted. It shall have no power (without the consent of the person or persons at the time entitled to exercise the Option) to change the terms and conditions of any Option after the Option is granted in a manner that would adversely affect the rights of such persons except to the extent, if any, provided in the Option.
(b) The Board may suspend or terminate the Plan at any time. No such suspension or termination shall affect Options then in effect.
11. No Employment Right
The grant of an Option hereunder shall not constitute an agreement or understanding, expressed or implied, on the part of the Corporation, any Parent or any Subsidiary, to employ the Participant for any specified period and shall not confer upon any employee the right to continue in the employment of the Corporation, any Parent or any Subsidiary, nor affect any right which the Corporation, a Parent or Subsidiary may have to terminate the employment of such employee.
12. Effective Date
The Plan is adopted on and shall be effective as of October 3, 2000.
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EXHIBIT 21SUBSIDIARIES99(b)
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE REGISTRANTSARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350)
The undersigned executive officer of Bar Harbor Bankshares has two wholly-owned operating subsidiaries. Namely:
BTI
/s/ Gerald Shencavitz
Name: Gerald Shencavitz
Title: Chief FinancialGroup was incorporated on August 16, 1999, as the holding company for three operating subsidiaries. Namely:Officer
Bar Harbor Trust ServicesBlock Capital ManagementDirigo Investments, Inc.
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Date: March 27, 2003