UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549FORM 10-Q
Quarterly Report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934
Forfor the quarter endedSeptember 30, 2001March 31, 2002. Commission File No. 841105-DBAR HARBOR BANKSHARES
Maine 01-0393663
(State
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
PO Box 400
82 Main Street, Bar Harbor, ME 04609-0400(Address
(Address of principal executive offices) (Zip Code)Registrant'sRegistrant’s telephone number, including area code: (207)
288- 3314288-3314Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES: XX NO:
Indicate the number of shares outstanding of each of the
issuer'sissuer’s classes of common stock as ofSeptember 30, 2001:March 31, 2002:Common Stock:
3,270,1943,245,770TABLE OF CONTENTS
Page No. | ||
PART 1 | FINANCIAL INFORMATION | |
Item 1. | FINANCIAL STATEMENTS (unaudited) | |
Independent | 3 | |
Financial | ||
Consolidated Balance Sheets at | 4 | |
Consolidated Statements of Income for the Three | 5 | |
Consolidated Statements of Changes in | 6 | |
Consolidated Statements of Cash Flow for the | 7 | |
Notes to Consolidated Financial Statements | 8 | |
Item 2. | Management’s Discussion and Analysis of Financial | 10 |
Item 3. | Quantitative and Qualitative Disclosure About Market Risk | 22 |
PART II | OTHER INFORMATION | |
Item 1. | Legal Proceedings | 25 |
Item 2. | Changes in Securities and Use of Proceeds | 25 |
Item 3. | Defaults Upon Senior Securities | 25 |
Item 4. | Submission of Matters to a Vote of Security Holders | 26 |
Item 5 | Other Information | 26 |
Item 6 | Exhibits and Reports on Form 8-K | 27 |
Signature Page | 28 |
INDEPENDENT ACCOUNTANTS'ACCOUNTANTS’ REVIEW REPORT
The Board of Directors
Bar Harbor Bankshares
We have reviewed the accompanying interim consolidated financial information of Bar Harbor Bankshares and Subsidiaries as of September 30, 2001,March 31, 2002, and for the three- and nine-monththree-month periods ended September 30, 2001March 31, 2002 and 2000.2001. These financial statements are the responsibility of the Company'sCompany’s management.
We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with U.S. generally accepted auditing standards, the objective of which is to express an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with U.S. generally accepted accounting principles.
/s/
/s/ BERRY, DUNN, McNEIL & PARKER
Portland, Maine
November 9, 2001
3
May 10, 2002
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2002 AND DECEMBER 31, 2001
(Dollar in thousands)
March 31, 2002 | December 31, | |
Assets | ||
Cash and due from banks | $ 12,753 | $ 17,355 |
Securities: | ||
Available for sale, at market | 116,761 | 106,743 |
Held to maturity (market value $27,863 and $24,943 at | 29,414 | 26,866 |
Other securities | 457 | 8,464 |
Total securities | 146,632 | 142,073 |
Loans | 310,959 | 297,970 |
Allowance for possible loan losses | (4,376) | (4,169) |
Loans, net of allowance | 306,583 | 293,801 |
Premises and equipment | 12,727 | 12,954 |
Other assets | 19,989 | 21,020 |
TOTAL ASSETS | $498,684 | $487,203 |
Liabilities | ||
Deposits | ||
Demand deposits | $ 37,399 | $ 46,112 |
NOW accounts | 46,312 | 45,685 |
Savings deposits | 88,573 | 91,140 |
Time deposits | 115,646 | 108,896 |
Total deposits | 287,930 | 291,833 |
Securities sold under repurchase agreements | 12,379 | 15,159 |
Borrowings from Federal Home Loan Bank | 140,478 | 120,900 |
Other liabilities | 5,358 | 6,773 |
TOTAL LIABILITIES | 446,145 | 434,665 |
Commitments and contingent liabilities (Notes 4 and 5) | ||
Shareholders’ Equity: | 7,287 | 7,287 |
Surplus | 4,002 | 4,002 |
Retained earnings | 44,467 | 43,875 |
Accumulated other comprehensive income |
|
|
Less: cost of 397,844 shares and 386,124 shares | | |
TOTAL SHAREHOLDERS’ EQUITY | 52,539 | 52,538 |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $498,684 | $487,203 |
See independent accountants' report.Independent Accountant’s Review Report. The accompanying notes are an integral part of these consolidated financial statements.
4
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(Dollars in thousands, except per share data)
(unaudited)
2002 | 2001 | |
Interest and dividend income: | ||
Interest and fees on loans | $5,689 | $6,007 |
Interest and dividends on securities and federal funds | 2,275 | 2,755 |
Total interest and dividend income | 7,964 | 8,762 |
Interest expense | 3,148 | 4,477 |
Net interest income | 4,816 | 4,285 |
Provision for possible loan losses | 300 | 200 |
Net interest income after provision for possible loan losses | 4,516 | 4,085 |
Noninterest income: | ||
Trust and other financial services | 651 | 965 |
Service charges on deposit accounts | 349 | 558 |
Other service charges, commissions, and fees | 58 | 53 |
Credit card service charges and fees | 158 | 109 |
Other operating income | 85 | 101 |
Net securities gains | 39 | -- |
Total noninterest income | 1,340 | 1,786 |
Noninterest expenses: | ||
Salaries and employee benefits | 2,243 | 2,019 |
Occupancy expense | 283 | 268 |
Furniture and equipment expense | 372 | 360 |
Credit card expenses | 120 | 97 |
Other operating expense | 1,179 | 1,479 |
Total noninterest expenses | 4,197 | 4,223 |
Income before income taxes | 1,659 | 1,648 |
Income taxes | 449 | 558 |
NET INCOME | $1,210 | $1,090 |
Computation of Net Income Per Share: | ||
Weighted average number of capital stock | ||
Basic | 3,251,551 | 3,300,447 |
Effect of dilutive employee stock options | 38,435 | -- |
Diluted | 3,289,987 | 3,300,447 |
NET INCOME PER SHARE | ||
Basic | $0.37 | $0.33 |
Diluted | $0.37 | $0.33 |
Dividends per share | $0.19 | $0.19 |
See independent accountants' report.Independent Accountant’s Review Report. The accompanying notes are an integral part of these consolidated financial statements.
5
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(Dollars in thousands, except per share data)
(unaudited)
| SURPLUS | RETAINED | NET UNREALIZED APPRECIATION (DEPRECIATION) ON SECURITIES AVAILABLE FOR SALE | TREASURY STOCK |
TOTAL SHAREHOLDERS’ | |
Balance, December 31, 2000 | $7,287 | $4,002 | $42,854 | $ (76) | $(3,560) | $50,507 |
Net income | -- | -- | 1,090 | -- | -- | 1,090 |
Cumulative effect to record |
-- |
-- |
-- |
(28) |
-- |
(28) |
Net unrealized appreciation on |
-- |
-- |
-- |
1,075 |
-- |
1,075 |
Total comprehensive income | -- | -- | 1,090 | 1,047 | -- | 2,137 |
Cash dividends declared | -- | -- | (631) | -- | -- | (631) |
Purchase of treasury stock | -- | -- | -- | -- | (449) | (449) |
Balance March 31, 2001 | $7,287 | $4,002 | $43,313 | $ 971 | $(4,009) | $51,564 |
Balance, December 31, 2001 | $7,287 | $4,002 | $43,875 | $1,707 | $(4,333) | $52,538 |
Net income | -- | -- | 1,210 | -- | -- | 1,210 |
Net unrealized depreciation on |
-- |
-- |
-- |
(382) |
-- |
(382) |
Total comprehensive income | -- | -- | 1,210 | (382) | -- | 828 |
Cash dividends declared | -- | -- | (618) | -- | -- | (618) |
Purchase of treasury stock | -- | -- | -- | -- | (209) | (209) |
Balance March 31, 2002 | $7,287 | $4,002 | $44,467 | $1,325 | $(4,542) | $52,539 |
See independent accountants' report.Independent Accountant’s Review Report. The accompanying notes are an integral part of these consolidated financial statements.
6
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(Dollars in thousands)
(unaudited)
2002 | 2001 | |
Cash flows from operating activities: | ||
Net income | $ 1,210 | $ 1,090 |
Adjustments to reconcile net income to net cash provided by operating activities: | ||
Depreciation | 364 | 280 |
Provision for loan losses | 300 | 200 |
Net amortization (accretion) of bond premium (discount) | (94) | 4 |
Net change in other assets | 1,228 | 589 |
Net change in other liabilities | (1,415) | (340) |
Net cash provided by operating activities | 1,593 | 1,823 |
Cash flows from investing activities: | ||
Net change in Federal Funds sold | -- | (18,000) |
Purchases of securities held to maturity | (2,416) | -- |
Purchases of securities available for sale | (23,408) | -- |
Proceeds from maturity and principal paydowns of | 7,788 | 2,784 |
Proceeds from call of securities available for sale | 4,985 | 14,109 |
Net decrease(increase) in other securities | 8,007 | (37) |
Net loans made to customers | (13,082) | (1,589) |
Capital expenditures | (137) | (1,118) |
Net cash used in investing activities | (18,263) | (3,851) |
Cash flows from financing activities: | ||
Net decrease in deposits | (3,903) | (8,013) |
Net change in securities sold under repurchase agreements | (2,780) | 1,608 |
Proceeds from Federal Home Loan Bank advances | 23,800 | 20,000 |
Repayment of Federal Home Loan Bank advances | (7,122) | (26,804) |
Net change in short term borrowed funds | 2,900 | 16,152 |
Purchase of treasury stock | (209) | (449) |
Payments of dividends | (618) | (631) |
Net cash provided by financing activities | 12,068 | 1,863 |
Net decrease in cash and cash equivalents | (4,602) | (165) |
Cash and cash equivalents at beginning of period | 17,355 | 10,580 |
Cash and cash equivalents at end of period | $12,753 | $ 10,415 |
Non-cash transactions | ||
Transfer from loans to other real estate owned | $ -- | $ 25 |
Transfer of securities from held to maturity to | -- | 113,856 |
See independent accountants' report.Independent Accountant’s Review Report. The accompanying notes are an integral part of these consolidated financial statements.
BAR HARBOR BANKSHARES AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(unaudited)
1. Basis of Presentation.
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles and with the instructions to Form 10-Q, and therefore,
they do not include all of the information and footnotes required
by generally accepted accounting principles for complete
presentation of financial statements.are unaudited. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All significant intercompany transactions and balances
are eliminated in consolidation. The income reported for the 2001
periodthree months ended March 31, 2002 is not necessarily indicative of the results that may be expected for the year ending December 31, 2001.2002.
Certain financial information which is normally included in financial statements in accordance with U. S. generally accepted accounting principles, but which is not required for interim reporting purposes, has been omitted. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company'sCompany’s annual report on Form 10-K for the year ended December 31, 2000.
2001.
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.
The allowance for possible loan losses is maintained at a level
adequate to absorb possible 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 credit losses and recoveries on
loans previously charged off are added to the allowance.
Diluted net income per share reflects the effect of stock options outstanding at the end of the period.
Certain 20002001 and prior year balances have been reclassified to conform with the 20012002 financial presentation.
2. Effect of Recent Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 133,Position (SOP) 01-6, "Accounting for Derivative Instruments and Hedgingby Certain Entities (Including Entities with Trade Receivables) That Lend to or Finance the Activities of Others," as
amended by SFAS No. 137 and SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities",was issued in December 2001. The SOP is effective for financial statements issued for the fiscal years beginning after JuneDecember 15, 2000. These
statements set2001. The SOP reconciles and conforms the accounting and financial reporting standards for derivative
instrumentsprovisions established by various Audit and hedging activities. They require an entity
recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. These
statements have had no impact on 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 June 30, 2001. SFAS No. 140 replaces
SFAS No. 125.Accounting Industry Guides. This statement is expected to have no material
impact todoes not affect the Company'sCompany’s consolidated financial condition and results of operations.
See independent accountants' report. The accompanying notes are
an integral part of these consolidated financial statements.
8
During 2001, the Financial Accounting Standards Board issued SFAS
No. 141, "Business Combinations," and SFAS 142, "Goodwill and
Other Intangible Assets."
SFAS No. 141 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.
SFAS No. 142 requires that goodwill no longer be amortized to
earnings, but instead be reviewed for impairment. The
amortization of goodwill ceases upon adoption of the Statement,
which will be January 1, 2002. The Company has not determined the
impact of adopting SFAS No. 142.
SFAS No. 143, Accounting for Asset Retirement Obligations, and
SFAS No. 144, Accounting for the Impairment or Disposal of Long-
Lived Assets, provide guidance concerning the recognition and
measurement 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
affect the Company's consolidated financial condition and results
of operations.
3. Line of Business Reporting
The Company manages and operates two major lines of business: Community Banking and Financial Services. Community Banking, through the wholly owned subsidiary Bar Harbor Banking and Trust Company, includes lending and deposit-gathering activities and related services to businesses and consumers. Financial Services through BTI Financial Group and its three operating subsidiaries includes Dirigo Investments, Inc., a NASD registered broker-
dealer;broker-dealer; Block Capital Management, an SEC registered investment advisor; and Bar Harbor Trust Services, a Maine chartered trust company. 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. The Community
Banking line of business in the first nine months of 2000 includes
the pretax gain in non-interest income of $1,960,000 representing
the sale of the Bank's trust operations to BTI. On an after tax
basis, this gain is $1,313,000 as reflected in net income for the
Bank. The effect of this internal transaction is eliminated in
the Consolidated Totals. Other is comprised of inter-company eliminations and parent company only items. Selected segment information is included in the following table.
THREE MONTHS ENDED MARCH 31, 2002
(Dollars in thousands)
(unaudited)
Community Banking | Financial Services | Other | Consolidated | |
Net interest income | $4,806 | $ 10 | $ -- | $4,816 |
Provision for loan losses | 300 | -- | -- | 300 |
Net interest income after provision for loan losses | 4,506 | 10 | -- | 4,516 |
Non-interest income | 724 | 672 | (56) | 1,340 |
Non-interest expense | 3,199 | 937 | 61 | 4,197 |
Income (loss) before income tax | 2,031 | (255) | (117) | 1,659 |
Income tax (benefit) | 576 | (87) | (40) | 449 |
Net income (loss) | $1,455 | $(168) | $ (77) | $1,210 |
THREE MONTHS ENDED MARCH 31, 2001
(unaudited)
Community Banking | Financial Services | Other | Consolidated Totals | |
Net interest income | $4,279 | $ 6 | $ -- | $4,285 |
Provision for loan losses | 200 | -- | -- | 200 |
Net interest income after provision for loan losses | 4,079 | 6 | -- | 4,085 |
Non-interest income | 846 | 965 | (25) | 1,786 |
Non-interest expense | 3,099 | 1,117 | 7 | 4,223 |
Income (loss) before income tax | 1,826 | (146) | (32) | 1,648 |
Income tax (benefit) | 618 | (49) | (11) | 558 |
Net income (loss) | $1,208 | $ (97) | $ (21) | $1,090 |
4. Intangible Assets
The accompanying notes are
an integral partCompany has goodwill with a carrying amount of these$750,000 and $804,707 as of March 31, 2002, and 2001 respectively and $750,000 as of December 31, 2001. Upon adoption of Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," on January 1, 2002, amortization of goodwill was discontinued and the goodwill will be evaluated for impairment. Prior to the adoption of SFAS No. 142, goodwill was amortized on a straight-line basis over 10 to 15 years. Prior to June 30, 2002 management will determine whether there has been impairment of the goodwill as of January 1, 2002.
Following is the effect on net income and earnings per share had amortization of goodwill not been recorded in each period presented.
For three months ended: | ||
March 31, 2002 | March 31, 2001 | |
Reported net income | $1,210 | $1,090 |
Add: Goodwill amortization (net of tax) | -- | 12 |
Adjusted net income | $1,210 | $1,102 |
Basic earnings per share: | ||
Reported | $ 0.37 | $ 0.33 |
Add: Goodwill amortization | -- | -- |
Adjusted | $ 0.37 | $ 0.33 |
Diluted earnings per share: | ||
Reported | $ 0.37 | $ 0.33 |
Add: Goodwill amortization | -- | -- |
Adjusted | $ 0.37 | $ 0.33 |
5. 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.
9
Item 2. MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain matters discussed
The following discussion, as well as certain other statement contained in this Report on Form 10-Q, or incorporated herein by reference, contain statements which may be considered to be forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as Amended and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends
such forward looking statements to be covered by the safe harbor
provisions for forward looking statements contained in 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 is including this
statement for purposesother 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 provisions. The
forwardfor forward-looking statements provided by the PSLRA. Forward looking statements discussedinclude, but are not limited to, those made in this Report on Form 10Qconnection with estimates with respect to the future results of operation, financial condition, and business of the Company and its subsidiaries which are subject to risks and uncertaintieschange based on the impact of various factors that could cause actual results to differ materially from those projected. Such risks and
uncertaintiesestimated. Those factors include but are not limited to, those describedto: changes in Management's Discussiongeneral, economic and Analysismarket conditions; the development of Financial Conditionan interest rate environment that adversely affects the interest rate spread or other income anticipated from the operation and Resultsinvestments of Operations. Changes to such risks and uncertainties,
which could impact futurethe financial performance, include, among
other things, (1) competitive pressures inservices group and/or the banking industry;
(2)Bank; significant changes in the interest rate environment; (3) general economic conditions, either nationallyscenario from that anticipated which could materially change credit quality trends and the ability to generate loans; significant delay in or regionally; (4)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 regulatory environment; (5) changesforegoing discussion, or elsewhere in business conditionsthis Form 10-Q. Certain amounts in the 2001 financial statements have been reclassified to conform to the presentation used in 2002 and inflation; and (6) changesprior years.
Unless otherwise noted, all dollars are expressed in security markets. Accordingly, the
information set forth therein should be carefully considered when
evaluating the business prospectsthousands except per share data.
SUMMARY
The Company reported consolidated net income of the Company.
The following is the review of Bar Harbor Bankshares (the Company)
and its subsidiaries, Bar Harbor Banking and Trust Company and BTI
Financial Group,$1,210, or $0.37 per fully diluted share, for the ninethree months ended September 30, 2001.
SUMMARY
Total assets for the CompanyMarch 31, 2002. This compares with net income of $466.3 million at September 30,
2001, are essentially the same as at December 31, 2000. Earnings
were $2,682,000$1,090 or $0.33 per fully diluted share for the first nine monthsquarter of 2001, representing increases of 11.0% and $706,000
below12.1% respectively. The return on average total assets was 0.97% for the earningsfirst quarter of 2002, compared with 0.93% for the same period in 2000.the prior year. The principal
reasonreturn on average shareholders’ equity for the decrease in earningsmost recent quarter amounted to 9.21%, compared with 8.42% for the quarter ended March 31, 2001.
NET INTEREST INCOME
Net interest income, which represents the difference between interest earned on interest earning assets and interest incurred on interest bearing liabilities, is the additional provisionprimary source of $1 million, or $660,000 after taxes, thatearnings. Net interest income is affected by the Bank added to its
allowancelevel and composition of assets, liabilities and equity, as well as changes in market interest rates.
The Company’s net interest income, on a fully tax equivalent basis, for possible loan losses. This additional provision
establishes the allowance for possible loan losses at a level that
management feels is adequate to absorb possible future losses.
Net income of $1,215,000 in the third quarter of 2001 representedthree months ended March 31, 2002 was $4,966, representing an increase of $70,000$660 or 15.3%, compared with $4,306 recorded for the same period in 2001. The increase in net interest income was principally attributed to $30,531 in average earning asset growth between periods, and a 31 basis point improvement in the Company’s net interest margin, from 4.01% to 4.32%.
Interest income - Interest income, on a fully tax equivalent basis, amounted to $8,114 for the quarter ended March 31, 2002, representing a decrease of $669, or 7.6%, when compared with $8,783 for the same period in 2001. Declining interest rates contributed $1,688 to the decreased interest income, offset by $1,019 in additional interest income generated by increased earning asset volume. In light of eight interest rate decreases and a 325 basis point drop in the federal funds targeted rate between reporting periods, the Company’s yield on average earning assets showed moderate declines. The yield on average earning assets declined 112 basis points to 7.06 % for the quarter ended March 31, 2002, when compared with 8.18% for the same period in 2001.
Loans - Average loans for the quarter ended March 31, 2002 totaled $305,187, representing an increase of $32,594, or 12.0%, when compared with the same period in 2001. The growth in average loans was entirely attributed to consumer real estate loans including home equity loans, which increased $34,533 compared with the same period in 2001. The tax equivalent yield on average loans between periods declined 138 basis points to 7.57% in the quarter ended March 31, 2002.
Investment securities - Average investment securities, including federal funds sold, money market funds and time deposits with other banks, totaled $160,946 for the quarter ended March 31, 2002, representing a decrease of $2,063, or 1.3% compared with the same period in 2001. The tax equivalent yield on investment securities declined 79 basis points to 6.09%, when compared with the same period in 2001.
Interest expense - Interest expense for the three months ended March 31, 2002 amounted to $3,148, representing a decrease of $1,329, or 29.7%, compared with the same period in 2001. The decrease in interest expense was principally attributed to a 166 basis point decline in the cost of interest bearing liabilities, from 4.88% to 3.22%, and was reflective of the significant declines in the federal funds targeted rate during the comparable period.
Deposits - Average deposit balances for the three months ended March 31, 2002 totaled $284,863 representing an increase of $14,761, or 5.5%, over the same period last year. Althoughin 2001. Interest bearing deposits, which represent 86.5% of total assets are atdeposits, increased $13,819, or 5.9%, over the same overall level as at December 31,
2000, the mix has changed over the past nine months. Investment
securities of $137 million at September 30, 2001, including $15
million of short termperiod in 2001. The growth in deposits was led by money market funds, decreased almost $25
million from December 31, 2000, due to called securities and
prepaymentsaccounts, which are classified with savings, posting an increase of mortgage backed securities that were not replaced.
Excluding these$18,948 or 27.2%, followed by NOW accounts, posting an increase $4,809 or 11.6%. The growth in money market account balances was partially offset by a decline in time accounts, presumably because of depositors’ unwillingness to commit to longer-term fixed rate investments investment securities
decreased almost $40 million since yearend 2000. These reductions
occurredduring a period of historically low interest rates. Brokered certificates of deposit amounted to $2,485 during the quarter ended March 31, 2002, whereas none were outstanding for the same period in large measure because2001. For the lowerquarter ended March 31, 2002, the average cost of interest rate
environment made early pay-offs
10
and refinancings attractivebearing deposits amounted to borrowers. At September 30,2.46% compared with 4.05% for the same period in 2001, loans were approximately $20 million more than at Decemberrepresenting a decrease of 159 basis points.
Borrowed funds - Average borrowings for the quarter ended March 31, 2000, principally due2002 amounted to seasonal borrowings by the bank's
commercial customers and$150,327, representing an increase in consumer real estate
lending.
BTI Financial Group (BTI)of $10,613, or 7.6%, a wholly owned financial services
subsidiary of Bar Harbor Bankshares, was
formed in the fall of 1999. BTI Financial Group's subsidiaries,
Dirigo Investments, Inc., Bar Harbor
Trust Services and Block Capital Management began operations in
January of 2000. As a result of the formation of BTI, the Company
has implemented segment reporting as required by Statement of
Financial Accounting Standard (SFAS) No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The formation
of these three companies is expected to position BTI to more fully
participate in various segments of the financial services industrycompared with the potential for significant growth. In mid-2000, a branch
office of Dirigo Investments, Inc. was established in the Bangor,
Maine, area including an office manager and a broker, expanding
the potential market area. This office was further expanded with
additional brokers in late 2000. At the end of the first quarter 2001, BTI moved into its newly renovated centralized facilitiesof 2001. The increase in Ellsworth, Maine.
REVIEW OF FINANCIAL CONDITION AT SEPTEMBER 30, 2001 AND
DECEMBER 31, 2000
Total assets remained essentially levelborrowings between December 31, 2000,
and September 30, 2001, although the mix of these assets changed.
Investment securities decreased a net $24.7 million from 2000 year
end due to maturities, called issues, and paydowns of mortgage
backed securities. Lower interest rates, precipitated by the
Federal Reserve reducing the targeted federal funds rate by 350
basis points during the first nine months of 2001, have
contributed to an acceleration of called securities, refinancings,
and payoffs of securitized mortgages. Included in the balance of
investment securities is $15 million of money market investments
that were purchased principally from funding generated from the
investment portfolio. The net incoming cash flow from the
investment portfolio has been used to reduce borrowings from the
Federal Home Loan Bank, which have decreased $19.5 million since
December 31, 2000, andperiods was exclusively utilized to fund seasonal increases in cash and due
from banks which was $6.3 million greater at September 30, 2001
than at yearend 2000.
Loans increased $19.7 million during the first nine months of 2001
including a $5.2 million increase in commercial loans and a $14.5
million increase in consumer loans, primarily in real estate
mortgages. At the end of the third quarter 2001, consumer loans
represented 58% of the portfolio, which is consistent with year
end 2000. The ratio of commercial loans tends to increase
modestly in the second and third calendar quarters that are more
seasonally active for commercial lending. Deposits at September
30, 2001 are $16.4 million greater than December 31, 2000, and
include some seasonal increases that accumulate during the more
active summer and autumn period in the Bank's market area.
The Bank's reserve for possible loan losses as of September 30,
2001, is 1.37% of total loans compared to 1.56% at December 31,
2000. Management reviews the allocation to the reserve on a
quarterly basis and funds the reserve as deemed necessary. This
review includes a provision for specific accounts and impaired
loans, provisions due to historic loan loss experience by loan
type and reserves reflecting industry and credit concentrations,
current local and national economic conditions, underwriting
standards, and regulatory guidelines.growth. During the first ninequarter of 2002, the average cost of borrowings amounted to 4.46%, representing a decrease of 180 basis points compared with the same period in 2001.
The following table sets forth an analysis of net interest income by each major category of interest earning assets on a fully tax equivalent basis, and interest bearing liabilities for the three months ended March 31, 2002, and 2001 respectively.
ANALYSIS OF NET INTEREST INCOME
THREE MONTHS ENDED
MARCH 31, 2002, AND 2001
2002 | 2001 | |||||
Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | |
Interest Earning Assets: | ||||||
Loans(1) | $ 305,187 | $5,696 | 7.57% | $272,593 | $6,017 | 8.95% |
Investment securities | 151,927 | 2,374 | 6.34% | 156,465 | 2,674 | 6.93% |
Fed Funds sold, money market funds, and time deposits with other banks | 9,019 | 44 | 1.98% | 6,544 | 92 | 5.70% |
Total Investments | 160,946 | 2,418 | 6.09% | 163,009 | 2,766 | 6.88% |
Total Earning Assets | 466,133 | 8,114 | 7.06% | 435,602 | $8,783 | 8.18% |
Non Interest Earning Assets: | ||||||
Cash and due from banks | 7,148 | 9,230 | ||||
Other assets (2) | 24,844 | 24,251 | ||||
Total Assets | $ 498,125 | $469,083 | ||||
Interest Bearing Liabilities: | ||||||
Deposits | $246,367 | $ 1,493 | 2.46% | $232,548 | $2,321 | 4.05% |
Securities sold under repurchase agreements | 14,353 | 82 | 2.32% | 13,054 | 149 | 4.63% |
Other borrowings | 135,974 | 1,573 | 4.69% | 126,660 | 2,007 | 6.43% |
Total Borrowings | 150,327 | 1,655 | 4.46% | 139,714 | 2,156 | 6.26% |
Total Interest Bearing Liabilities | 396,694 | 3,148 | 3.22% | 372,262 | 4,477 | 4.88% |
Rate Spread | 3.84% | 3.30% | ||||
Non Interest Bearing Liabilities: | ||||||
Demand deposits | 38,496 | 37,554 | ||||
Other liabilities | 10,366 | 7,470 | ||||
Total Liabilities | 445,556 | 417,286 | ||||
Shareholders' Equity | 52,569 | 51,780 | ||||
Total liabilities and | $498,125 | $469,066 | ||||
Net Interest Income and Net Interest | 4,966 | 4.32% | 4,306 | 4.01% | ||
Less: Tax Equivalent Adjustment | (150) | (21) | ||||
Net Interest Income | $ 4,816 | $ 4,285 | ||||
- For the purpose of
2001,these computations, non-accrual loans are included in average loans.- For the purpose of these computations, unrealized gains (losses) on available-for-sale securities are recorded in other assets
- For the purpose of these computations, reported on a tax equivalent basis.
The following table sets forth a summary analysis of the relative impact on net charge offs totaled $2,101,000 compared to
$782,000 during the first nine monthsinterest income of 2000. Includedchanges in the 2001 net charge-off total is an amountaverage volume of $1,063,000 related to
one credit engaged in the fishing industry. During the
11
second quarter 2001, an additional provision to the allowance was
recognized to establish the reserve at a
level management feels is adequate to absorb possible future loan
losses. The amounts below represent the total loan dollars past
due as of September 30, 2001, and December 31, 2000.
VOLUME | RATE | NET | |
Loans (1) | $ 960 | $(1,281) | $(321) |
Taxable investment securities | (466) | (310) | (776) |
Non-taxable investment securities (1) | 477 | (1) | 476 |
Federal funds sold, money market funds, and time | 48 | (96) | (48) |
TOTAL EARNING ASSETS | 1,019 | (1,688) | (669) |
Deposits | 147 | (975) | (828) |
Securities sold under repurchase agreements and | 16 | (83) | (67) |
Other borrowings | 160 | (594) | (434) |
TOTAL INTEREST BEARING LIABILITIES | 323 | (1,652) | (1,329) |
NET CHANGE IN NET INTEREST INCOME (1) | $ 696 | $ (36) | $ 660 |
(1) Reported on 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 Bankshares and an important factor in the Company’s results of operations. Likewise, non-interest expense represents a significant category of expense for the Company.
For the three months ended March 31, 2002 non-interest income amounted to $1,340 compared with $1,786 for the same period in 2001, representing a decrease of $446, or 25.0%. Total non-interest expense amounted to $4,197 compared with $4,223 in the first quarter of 2001, representing a decrease of $26.
As more fully disclosed in Note 3 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
Three Months Ended March 31, 2002 and 2001
2002 | 2001 | Change | Change | |
Non-interest income | $ 724 | $ 846 | $122 | 14.4% |
Non-interest expense | $3,199 | $3,099 | $100 | 3.2% |
Non-interest income: Non-interest income from Community Banking represented 54.0% of the Company’s total first quarter non-interest income. For the three months ended March 31, 2002, the Banks non-interest income amounted to $724, compared with $846 during the same period in 2001, representing a decrease of $122, or 14.4%.
The decrease in non-interest income was entirely attributed to a decline in service charges on deposit accounts. In December of 2000 the Bank implemented various product and service fee enhancements and improved its management over fee waivers. As was anticipated, the initial impact on fee income was not fully sustained in the months following implementation, as small accounts were consolidated and certain customer habits, including overdraft activity, showed a substantial change.
Non-interest expense: Non-interest expense from Community Banking represented 76.2% of the Company’s total non-interest income for the nineperiod ended March 31, 2002. For the three months ended September 30,March 31, 2002 the Banks non-interest expense amounted to $3,199, compared with $3,099 during the same period in 2001, totaled $5,665,000,representing an increase of $100, or 3.2%.
The increase in non-interest expense is principally attributed to increases in salaries and employee benefits. Throughout 2001 staff additions were made in customer service, credit administration and operational areas of the Bank, the full impact of which is $936,000currently reflected.
Financial Services
Three Months Ended March 31, 2002 and 2001
2002 | 2001 | Change | Change | |
Non-interest income | $672 | $ 965 | $293 | 30.4% |
Non-interest expense | $937 | $1,117 | $180 | 16.1% |
Non-interest income: Non-interest income from Financial Services (BTI Financial Group) represented 50.1% of the Company’s total non-interest income for the period ended March 31, 2002. For the three months ended March 31, 2002 non-interest income at BTI Financial Group amounted to $672, compared with $965 during the same period in 2001, representing a decrease of $293, or 30.4%.
Included in BTI’s first quarter 2002 non-interest income is an adjustment of $162, representing a more thanaccurate accrual of fee income. Excluding this adjustment, fee income actually declined $131, or 13.6%. The decline in fee income is principally attributed to a significant decline in the market value of assets under management at Block Capital Management and Bar Harbor Trust Services. Fees charged to clients are derived principally from the market values of assets managed. At March 31, 2002, assets under management totaled $234,002, compared with $258,982 for the same period in 2001, representing a decrease of $24,980, or 9.6%. First quarter fee income at Dirigo Investments also declined, and was principally due to recent changes in management and staff.
Non-interest expense: Non-interest expense from Financial Services represented 22.3% of the Company’s non-interest expense for the three months ended March 31, 2002. For the three months ended March 31, 2002 BTI’s non-interest expense amounted to $937, compared with $1,117 during the same period in 2001, representing a decrease of $180, or 16.1%.
Included in the first nine
monthsquarter 2001 non-interest expense are marketing campaign expenses totaling $172, as compared with $6 in 2000. This 20% increase is due principally to fee
enhancements implemented by the Bank in late 2000, improved
management of customer charges, and a 7% increase in BTI revenues
from its three financial services subsidiaries.
NON-INTEREST EXPENSE
Non-interestquarter ended March 31, 2002. Occupancy expenses for the nineperiod ended March 31, 2002 are $77 greater than the same period in 2001, and are a result of BTI’s purchase and renovation of a new headquarters complex located in Ellsworth Maine, and occupied in May 2001. Salary and benefits expense for the three-month period ended March 31, 2002 declined $45, or 9.4%, compared with the same period in 2001, and are the result of recent management changes and restructuring efforts.
INCOME TAXES
The effective tax rate for the three months ended September 30,March 31, 2002 was 27.1%, as compared with 33.9% for the same period of 2001. This decrease was principally attributed to the addition of $25,067 in tax-exempt investment securities to the Banks investment securities portfolio.
LOAN PORTFOLIO
The following table represents the components of the Bank’s loan portfolio as of March 31, 2002 and December 31, 2001:
Summary of Loan Portfolio
March 31, 2002, and December 31, 2001 totaled $13,152,000,
March 31, 2002 | December 31, 2001 | |||
Real estate loans | ||||
Construction and development | $ 16,828 | 5.41% | $ 20,348 | 6.83% |
Mortgage | 240,596 | 77.37% | 229,634 | 77.07% |
Loans to finance agricultural | ||||
production and other loans to farmers | 6,681 | 2.15% | 7,149 | 2.40% |
Commercial and industrial loans | 30,838 | 9.92% | 22,158 | 7.43% |
Loans to individuals for household, | ||||
family and other personal expenditures | 13,870 | 4.46% | 13,918 | 4.67% |
All other loans | 2,146 | 0.69% | 3,699 | 1.24% |
Real estate under foreclosure | -- | 0.00% | 1,064 | 0.36% |
TOTAL LOANS | 310,959 | 100.00% | 297,970 | 100.00% |
Less: Allowance for possible loan losses | 4,376 | 4,169 | ||
NET LOANS | $ 306,583 | $ 293,801 |
Total loans – Total loans at March 31, 2002 amounted to $310,959 as compared with $297,970 at December 31, 2001, representing an increase of $619,000,$12,989, or 4.9%4.4%. The growth in the loan portfolio was the principal factor underlying the $12,782 increase in the Company’s total assets compared with December 31 2001.
Loan growth during the quarter ended March 31, 2002 was principally attributed to consumer real estate and home equity loans, posting an increase over 2001 year-end of $13.2 million, or 7.7%. Much of this activity carried over from commitments made in late 2001 and, to a lesser extent, construction loans migrating to permanent financing. Commercial and industrial loans also showed strong growth during the quarter, increasing $8,680 or 39.2%. Growth in this category was attributed to new relationships as well as existing ones using their credit lines to build seasonal inventory levels. The decrease in all other loans was principally due to a decline in tax-exempt municipal loans, because of aggressive pricing in the Bank’s marketplace.
Credit Risk – Credit risk is managed through loan officer authorities, loan policies, the Bank’s Senior Loan Committee, oversight from the first nine monthsBank’s Senior Credit Officer, and the Bank’s Board of 2000. OverDirectors. Management follows a policy of continually identifying, analyzing and grading credit risk inherent in the loan portfolio. An ongoing independent review, subsequent to management’s review, of individual credits is performed by an independent loan review function, which reports to the Audit Committee of the Board of Directors.
Non-performing loans -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 for the periods indicated:
TOTAL NONPERFORMING LOANS
MARCH 31, 2002, DECEMBER 31, 2001, AND MARCH 31, 2001
March 31, 2002 | December 31, 2001 | March 31, 2001 | |
Loans accounted for on a non-accrual basis | $2,073 | $2,191 | $1,010 |
Accruing loans contractually past due 90 days or more | 227 | 151 | 6,758 |
$2,300 | $2,342 | $7,768 | |
Allowance for loan losses to non-performing loans | 190% | 178% | 54% |
Non-performing loans to total loans | 0.74% | 0.79% | 2.85% |
Allowance for loan losses to total loans | 1.41% | 1.40% | 1.54% |
At March 31, 2002, total non-performing loans amounted to $2,300, or 0.74% of total loans, and stood at its lowest level over the past several months,five years.
Allowance for loan losses and 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 allowance is maintained at a level that is, in management’s judgment, 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. 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.
During the quarter ended March 31, 2002, the Company has
made additionsprovided $300 to staffthe allowance for loan losses compared with $200 for the same period in critical customer related and
operational areas, has implemented technological improvements
throughout the Company, has increased staffing2001. Net loans charged off in the credit
administration area, and has expandedthree months ended March 31, 2002 amounted to $93 compared with $242 for the BTI network,
particularlysame period in 2001.
The following table details changes in the Bangor market.
Throughoutallowance and summarizes loan loss experience for the second quarterperiods shown.
Summary of 2000,Loan Loss Experience
Three Months Ended
March 31, 2002, December 31, 2001 and March 31, 2001
| March 31 2002, | December 31, 2001 | March 31, 2001 |
Balance at beginning of period | $ 4,169 | $ 3,986 | $ 4,236 |
Charge offs: | |||
Commercial,financial, agricultural, others | 38 | �� 142 | 98 |
Real estate loans | |||
Real estate-construction | -- | -- | -- |
Real estate-mortgage | 67 | 89 | 39 |
Installments and other loans to individuals | 34 | 87 | 138 |
Total charge offs | 139 | 318 | 275 |
Recoveries: | |||
Commercial, financial, agricultural, others | 20 | 75 | 9 |
Real estate loans | |||
Real estate-construction | -- | -- | -- |
Real estate-mortgage | 7 | 62 | 14 |
Installments and other loans to individuals | 19 | 14 | 10 |
Total recoveries | 46 | 151 | 33 |
Net charge offs | 93 | 167 | 242 |
Provision charged to operations | 300 | 350 | 200 |
Balance at end of period | $ 4,376 | $ 4,169 | $ 4,194 |
Average loans outstanding during period | $305,187 | $294,230 | $272,593 |
Net charge offs to average loans outstanding | 0.03% | 0.06% | 0.09% |
The following table presents the banking software
conversionbreakdown of the allowance by loan type at March 31, 2002 and December 31, 2001.
ALLOCATION OF ALLOWANCE FOR POSSIBLE LOAN LOSSES
at March 31, 2002, and December 31, 2001
March 2002 | December 2001 | |||
Amount | Percent of Loans in Each Category to Total loans |
Amount | Percent of Loans in Each Category to Total loans | |
Commercial, financial, and agricultural | $1,988 | 12.07% | $1,387 | 9.84% |
Real estate loans: | ||||
Real estate-construction | 112 | 5.41% | 135 | 6.83% |
Real estate-mortgage | 1,598 | 77.37% | 1,525 | 77.42% |
Installments and other loans | ||||
to individuals | 516 | 4.46% | 855 | 4.67% |
Other | -- | 0.69% | -- | 1.24% |
Unallocated | 162 | 0.00% | 267 | 0.00% |
TOTAL | $4,376 | 100.00% | $4,169 | 100.00% |
At March 31, 2002, the adequacy analysis resulted in a need for specific reserves of $2,990, general reserves of $755, impaired reserves of $469, and other reserves of $162.
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’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 concentrations within the portfolio. Impaired reserves consider all consumer loans over 90 days past due and impaired commercial loans which are fully reserved within the specific reserves via individual review and specific allocation of probable loss for loan relationships over $250, and pool reserves for smaller impaired loans. The Bank had no troubled debt restructurings during the period ended March 31, 2002, and all of its impaired loans were considered collateral dependent and were adequately reserved.
Loan delinquency levels have remained at low levels for several consecutive months. However, existing loan documentation and/or structural weaknesses for certain loans written in prior years continue to Information Technology, Inc. (ITI) was completed.
At that time,impede collection efforts in certain cases and have impacted the Company began expense recognitionlevel of capitalized
costs related to this system. This increaseprobable losses. These weaknesses are historical in technology
expenses is includednature and do not necessarily reflect current loan underwriting and documentation standards. The extent of these problems in the first nine months of 2001, but had
been only partially incurredentire loan portfolio is not entirely known; however, it is known that such problems exist and, accordingly, the allowance incorporates this knowledge.
Based upon the process employed and giving recognition to all attendant factors associated with the loan portfolio, management considers the allowance for loan losses at March 31, 2002 to be appropriate for the risks inherent in the first nine months of 2000.
During the second quarter of 2001, the Company began depreciation
of the new BTI headquarters buildingloan portfolio and the related furniture,
fixtures, and equipment.
CAPITAL
At September 30, 2001, the Company's capital to asset ratio is
11.4%, while the Bank has a leverage ratio of 9.44%, a risk-
weighted Tier 1 ratio of 14.6% and a Total Capital ratio of 15.9%,
allresident in the well capitalized categories. These ratios compare to
December 31, 2000, when the capital to asset ratio was 10.5% for
thelocal and national economy as of that date.
CAPITAL RESOURCES
The Company and the Bank hadare subject to the risk based capital guidelines administered by the Bank regulatory agencies. The risk based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Under these guidelines, assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of risk weighted assets and off-balance sheet items. The guidelines require all banks and bank holding companies to maintain a minimum ratio of total risk based capital to risk weighted assets of 8%, including a minimum ratio of Tier I capital to total risk weighted assets of 4% and a Tier I capital to average assets of 4% ("Leverage Ratio"). Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements.
As of March 31, 2002, the Company and its banking subsidiary are considered well capitalized under the regulatory framework for prompt corrective action. Under the capital adequacy guidelines, a well capitalized institution must maintain a minimum total risk based capital to total risk weighted assets ratio of at least 10%, a minimum Tier I capital to total risk weighted assets ratio of at least 6%, and a minimum leverage ratio risk-based Tier 1
ratio,of at least 5%.
The following table sets forth the Company’s regulatory capital at March 31, 2002 and Total Capital ratioDecember 31, 2001, under the rules applicable at that date.
March 31, 2002 | December 31, 2001 | |||
Amount | Ratio | Amount | Ratio | |
Total Capital to Risk Weighted Assets | $53,508 | 16.6% | $52,950 | 16.8% |
Regulatory Requirement | 25,797 | 8.0% | 25,154 | 8.0% |
Excess | $27,711 | 8.6% | $27,796 | 8.8% |
Tier I Capital to Risk Weighted Assets | 49,473 | 15.3% | 49,017 | 15.6% |
Regulatory Requirement | 12,898 | 4.0% | 12,577 | 4.0% |
Excess | $36,575 | 11.3% | $36,440 | 11.6% |
Tier I Capital to Average Assets | 49,473 | 10.0% | 49,017 | 10.3% |
Regulatory Requirement | 19,746 | 4.0% | 18,997 | 4.0% |
Excess | $29,727 | 6.0% | $30,020 | 6.3% |
The Company’s principal source of 9.4%, 15.1%,funds to pay cash dividends and 16.4%
respectively. Regulatory minimums for these risk based measures
are 4% for leverage, 4% for Tier 1,support its commitments is derived from its banking subsidiary, Bar Harbor Banking and 8% for Total Capital.Trust Company. The Company is primarily dependent upondeclared dividends in the paymentaggregate amount of cash
dividends from its subsidiary Bank to service its commitments$618 and pay dividends to its shareholders.$631 in the first three months of 2002 and 2001, respectively, at a rate of $0.19 per share. The Bank'sBank’s principal regulatory agency, the Federal Deposit Insurance Corporation,FDIC, currently limits Bank dividends to current earnings excluding securities gains while maintaining a specified Tier 1I leverage capital ratio with which theof 8%, without prior approval. The Bank is in full compliance.
compliance with these requirements and does not anticipate any impact on its ability to pay dividends at historical levels.
In November 1999, the Company announced a stock buyback plan. The Board of Directors of the Company has authorized the open market purchase of up to 10% of the Company’s outstanding shares of common stock, or 344,000 shares, with the program continuing through December 31, 2002. As of March 31, 2002, the Company had repurchased 197,844 shares of stock under the plan, at a total cost of $3,202 and an average price of $16.18. The Company holds the repurchased shares as treasury stock.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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. The Bank, 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’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.
Interest Rate Risk – Interest rate risk can be defined as an exposure to movement in interest rates that could have an adverse impact on the Bank’s net interest income. Interest rate risk arises naturally from the imbalance in the re-pricing, maturity and/or cash flow characteristics of assets and liabilities. Management’s objectives are to measure, monitor and develop strategies in response to the interest rate risk profile inherent in the Bank’s balance sheet.
The Bank’s interest rate risk measurement and management techniques incorporate the re-pricing and cash flow attributes of balance sheet and off balance sheet instruments as they relate to current and potential changes in interest rates. The level of interest rate risk, measured in terms of the potential future effect on net interest income, is determined through the use of modeling and other techniques under multiple interest rate scenarios. Interest rate risk is evaluated in depth on a quarterly basis and reviewed by the Asset/Liability Committee ("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.
The Bank utilizes an interest rate risk model widely recognized in the financial industry to monitor and measure interest rate risk. The model simulates the behavior of interest income and expense of all 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.
The 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. 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 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’s net interest income sensitivity analysis as of March 31, 2002, over one and two year horizons.
INTEREST RATE RISK
CHANGE IN NET INTEREST INCOME FROM THE FLAT RATE SCENERIO
MARCH 31, 2002
-100 basis | +200 basis points | +300 basis points | |
Year 1 | |||
Net interest income change ($) | ($297) | $438 | $627 |
Net interest income change (%) | -1.55% | 2.29% | 3.27% |
Year 2 | |||
Net interest income change ($) | ($1,516) | $1,339 | $1,764 |
Net interest income change (%) | -7.19% | 6.99% | 9.21% |
The Bank’s net interest income sensitivity position at March 31, 2002, did not significantly change as compared with December 31, 2001. While the Bank continued to extend fixed rate loans, the matched duration of funding sources mitigated the potential future impact on the net interest margin. The Company continues to be positively positioned in an upward rate environment over twelve and twenty-four month horizons, while moderately exposed in a sustained declining rate environment in year two of that horizon; a scenario management believes is not likely.
The preceding sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including: the nature and timing of interest rate levels and yield curve shape, prepayment speeds on loans and securities, deposit rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and others. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences might change.
As market conditions vary from those assumed in the sensitivity analysis, actual results may also differ due to: prepayment/refinancing levels deviating from those assumed, 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 does not reflect actions that ALCO might take in responding to or anticipating changes in interest rates.
When appropriate, ALCO may use off-balance sheet instruments such as interest rate floors, caps and swaps to hedge its interest rate risk position. A policy statement, approved by the board of directors of the Bank, governs use of these instruments. There were no off-balance sheet instruments in place during 2001, or in the first quarter of 2002.
Liquidity Risk - Liquidity is measured by the Bank'sCompany’s ability to meet short-term cash needs at a reasonable cost or minimum lossminimal 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 Bank.
Liquidity management involves theCompany’s ability to meet cash flow
requirementsliquidity needs, including variations in the markets served by its network of offices, its customers, which may come from depositors
withdrawing funds or borrowers requiring fundsmix 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 its asset/liability management policy. Continual monitoring of these ratios, both historical and through forecasts under multiple rate scenarios, allows the Company to meet credit
needs. Withoutemploy strategies necessary to maintain adequate liquidity management, the Bank would not
be able to meet the needs of the individuals and communities it
serves. liquidity.
The BankCompany uses a Basic Surplus/Deficitbasic surplus/deficit model to measure its liquidity over a 30-day30- and 90-day time horizon.horizons. The relationship between liquid assets and short-term liabilities that are vulnerable to non-replacement within a 30-day period is
examined.are routinely monitored. The Bank'sCompany’s policy
14 is to maintain its liquidity position at a minimum of 5% of total assets. LiquidityAt March 31, 2002, liquidity, as measured by the Basic Surplus/Deficitbasic surplus/deficit model, was 12.0% as of September 30, 2001,5.4% for the 30-day horizonhorizon. Including the Company’s unused line of credit at the Federal Home Loan Bank, which amounted to $46,900 basic surplus stood at 14.9%.
REGULATORY MATTERS
In the third quarter of 2001, the Bank entered into an agreement ("Agreement") with its principal regulators, the Federal Deposit Insurance Corporation ("FDIC") and 10.3%the Maine Bureau of Financial Institutions ("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 90-day horizon.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 term strategic planning process which is currently underway. The Bank's position with regardBank has also implemented a policy of paying dividends to interest rate sensitivity
consistsits 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 matchingforegoing 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.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Paul G. Ahern and Bonnie R. McFee, both former executive officers and employees of BTI, resigned their positions in January 2002 and have since made monetary demands for severance benefits under their employment agreements. Mr. Ahern was also a director of the Company until his resignation in January 2002. BTI disputes that either employee is entitled to the benefits that they have demanded, and arbitration proceedings have commenced under the terms of each employment agreement in order to determine the rights of the parties.
Both Mr. Ahern and Ms. McFee also have threatened other legal action against the Company and BTI, including the possible initiation of shareholder derivative actions. In response to this threatened legal action, and as provided for under Maine law, the Company has appointed an independent committee of directors to investigate the allegations and demands made by Mr. Ahern and Ms. McFee. That investigation is ongoing as of the date of this report.
In April 2002 the Company filed in Maine Superior Court, County of Hancock, complaints for declaratory relief against both Mr. Ahern and Ms. McFee seeking, among other things, declarations that: the demands made by Mr. Ahern and Ms. McFee are not the proper subjects of a shareholder derivative action in that they seek remedies not appropriate to such an action; neither Mr. Ahern nor Ms. McFee can fairly and adequately represent the interests of the Company or of its assetsshareholders in connection with the shareholder derivative actions which they have threatened; and liabilities for
repricing within a year. The gap analysisneither Mr. Ahern nor Ms. McFee have standing, or the right, to initiate the threatened shareholder derivative actions against the Company. This litigation is pending at the time of this report.
Various legal claims arise from time to time in the current interest
rate environment shows the Bank with approximately $43.4 million
more assets than liabilities that would be repriced within twelve
months. If rates were to rise by 200 basis points, net interest
income could increase by $365,000normal course of business which, in the first year, and increase
by $992,000 duringopinion of management, will have no material effect on the second year. If rates were to drop by 200
basis points and using a parallel yield curve shift in rates,
simulations based on a static balance sheet indicate that the
Bank's net interest income could decrease by approximately
$575,000 during the first year of the drop, and decrease its
income in the second year by $2.4 million. Although targeted
federal funds rates have decreased 100 basis points since
September 30, 2001, a continued drop totalling 200 basis points
may be unlikely, thereby moderating any reduction in net interest
income from falling rates.
15
PART II OTHER INFORMATION
Item 1 Legal Proceedings
None
Company’s consolidated financial statements.
Item 2 Changes in Securities and Use of Proceeds None
Item 3 Defaults Upon Senior Securities None
Item 4 Submission of Matters to a Vote of Security Holders
a)
The vote for Directors was as follows:
Nominee elected as Director | Term Expires | For | Against | Abstain | ||||
Thomas A. Colwell | 2005 | 2,160,961 | 18,229 | 0 | ||||
Dwight L. Eaton | 2005 | 2,144,334 | 34,556 | 0 | ||||
Cooper F. Friend | 2005 | 2,151,230 | 27,659 | 0 |
Continuing members of the Board of Directors:
Name | Position |
Joseph M. Murphy | Director |
Dean S. Read | Director |
Ruth S. Foster | Director |
John P. Reeves | Chairman |
Bernard K. Cough | Director |
The vote to set the number of Directors for the ensuing year at nine was as follows:
For | Against | Abstain | ||||
2,148,334 | 15,951 | 14,905 |
The vote to ratify the Board of Directors’ selection of Berry, Dunn, McNeil & Parker as independent auditors of the Company and its Subsidiaries for the ensuing year was as follows:
For | Against | Abstain | ||||
2,110,943 | 8,305 | 59,943 |
Item 5 Other Information None
Item 6 Exhibits and Reports on Form 8-K
Form 8-K filed September 5, 2001, reporting Item 5, "Other
Events". Company reported
(a) 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). |
3.1 and 3.2 | Articles of Incorporation and Bylaws | (i) Articles as amended July 11, 1995 are incorporated by reference to Form S-14 filed with the Commission March 26, 1984 (Commission File Number 2-90171). (ii) Bylaws as amended to date are incorporated by reference to Form 10-K, Item 14 (a)(3) filed with the Commission March 28, 2002. |
10 | Material Contracts | |
10.1 Deferred Compensation Plans | Incorporated by reference to Form 10-K filed with the Commission March 31, 1987 (Commission File Number 0-13666). | |
10.2 Paul Ahern Employment Contract | Incorporated by reference to Form 10-K filed with the Commission March 30, 2001. | |
10.3 | Incentive Stock Option Plan of 2000 | Incorporated by reference to Form 10-K, Item 14(a)(3) filed with the Commission on March 28, 2002. |
(b) Reports on Form 8-K that "the Board of
Directors of Bar Harbor Bankshares (the "Corporation") has voted
to approve the hiring of a new Chief Executive Officer of the
Corporation to replace Dean S. Read. Mr. Read will continue
Current Reports on Form 8-K have been filed as the President and Chief Executive Officer of Bar Harbor Banking
and Trust Company, a wholly-owned subsidiary of the Corporation,
and will continue to serve as Chief Executive Officer of the
Corporation until such time as his successor has been selected and
approved by the Corporation's Board of Directors."
16
follows:
Date Current Report Filed | Item | Description |
February 6, 2002 | 5 – Other Events | Concerning the resignations of two Company executive employees, Mr. Paul Ahern and Ms. Bonnie McFee and resignation of Warren Cook as a Company Director. |
February 8, 2002 | 5 – Other Events | Concerning an interview given by then Company President and CEO Dean S. Read, on February 6, 2002, and published in a financial industry newsletter on February 7, 2002. |
February 28, 2002 | 5 – Other Events | Concerning the following: (a) Hiring of Joseph M. Murphy as Company President and CEO effective February 25, 2002, and his election to Company Board of Directors. (b) Election of Cooper F. Friend to Company Board of Directors effective February 25, 2002. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BAR HARBOR BANKSHARES
/S/ Dean S. Read
/S/ Joseph Murphy
Date: November 9, 2001 Dean S. Read
May 14, 2002 Joseph Murphy
Chief Executive Officer
/S/
/S/ Gerald Shencavitz
Date: November 9, 2001May 14, 2002 Gerald Shencavitz
Chief Financial Officer
17
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
BAR HARBOR BANKSHARES
Date: November 9, 2001 Dean S. Read
Chief Executive
Officer
Date: November 9, 2001 Gerald Shencavitz
Chief Financial
Officer
17