UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 for the quarter ended March 31,June 30, 2002. Commission File No. 841105-D
BAR HARBOR BANKSHARES
Maine 01-0393663
(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 of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (207) 288-3314
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: XX NO:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of MarchJuly 31, 2002:
Common Stock: 3,245,7703,206,766
TABLE OF CONTENTS
Page No. | ||
PART 1 | FINANCIAL INFORMATION | |
Item 1. | FINANCIAL STATEMENTS (unaudited) | |
Independent Accountants’ Review Report | 3 | |
Financial Statements: | ||
Consolidated Balance Sheets at | 4 | |
Consolidated Statements of Income for the Three and Six | 5 | |
Consolidated Statements of Changes in Shareholders’ | 6 | |
Consolidated Statements of Cash Flow for the | 7 | |
Notes to Consolidated Financial Statements |
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Item 2. | Management’s Discussion and Analysis of Financial |
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Item 3. | Quantitative and Qualitative Disclosure About Market Risk |
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PART II | OTHER INFORMATION | |
Item 1. | Legal Proceedings |
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Item 2. | Changes in Securities and Use of Proceeds |
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Item 3. | Defaults Upon Senior Securities |
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Item 4. | Submission of Matters to a Vote of Security Holders |
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Item 5 | Other Information |
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Item 6 | Exhibits and Reports on Form 8-K |
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Signature Page |
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INDEPENDENT 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 March 31,June 30, 2002, and for the three-monththree and six month periods ended March 31,June 30, 2002 and 2001. These financial statements are the responsibility of the Company’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.United States 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.United States generally accepted accounting principles.
/s/ BERRY, DUNN, McNEIL & PARKER
Portland, MaineMay 10,August 06, 2002
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETSMARCH 31,JUNE 30, 2002 AND DECEMBER 31, 2001
(DollarDollars in thousands)
March 31, 2002 | December 31, | June 30, 2002 | December 31, 2001 | |
Assets | ||||
Cash and due from banks | $ 12,753 | $ 17,355 | $ 10,003 | $ 17,355 |
Securities: | ||||
Available for sale, at market | 116,761 | 106,743 | 116,988 | 106,743 |
Held to maturity (market value $27,863 and $24,943 at | 29,414 | 26,866 | ||
Held to maturity (market value $30,933 and | 31,541 | 26,866 | ||
Other securities | 457 | 8,464 | 1,139 | 8,464 |
Total securities | 146,632 | 142,073 | 149,668 | 142,073 |
Loans | 310,959 | 297,970 | 325,831 | 297,970 |
Allowance for possible loan losses | (4,376) | (4,169) | ||
Allowance for loan losses | (4,537) | (4,169) | ||
Loans, net of allowance | 306,583 | 293,801 | 321,294 | 293,801 |
Premises and equipment | 12,727 | 12,954 | ||
Premises and equipment, net | 11,837 | 12,118 | ||
Goodwill | 375 | 750 | ||
Other assets | 19,989 | 21,020 | 20,942 | 21,106 |
TOTAL ASSETS | $498,684 | $487,203 | $514,119 | $487,203 |
Liabilities | ||||
Deposits | ||||
Demand deposits | $ 37,399 | $ 46,112 | $ 40,958 | $ 46,112 |
NOW accounts | 46,312 | 45,685 | 45,214 | 45,685 |
Savings deposits | 88,573 | 91,140 | 89,867 | 91,140 |
Time deposits | 115,646 | 108,896 | 115,538 | 108,896 |
Total deposits | 287,930 | 291,833 | 291,577 | 291,833 |
Securities sold under repurchase agreements | 12,379 | 15,159 | 11,581 | 15,159 |
Borrowings from Federal Home Loan Bank | 140,478 | 120,900 | 151,315 | 120,900 |
Other liabilities | 5,358 | 6,773 | 6,595 | 6,773 |
TOTAL LIABILITIES | 446,145 | 434,665 | 461,068 | 434,665 |
Commitments and contingent liabilities (Notes 4 and 5) | ||||
Shareholders’ Equity: | 7,287 | |||
Commitments and contingent liabilities (Note 5) | ||||
Shareholders' equity | ||||
Capital stock, par value $2.00; authorized | 7,287 | 7,287 | ||
Surplus | 4,002 | 4,002 | 4,002 | |
Retained earnings | 44,467 | 43,875 | 44,736 | 43,875 |
Accumulated other comprehensive income |
|
| ||
Less: cost of 397,844 shares and 386,124 shares | | | ||
Accumulated other comprehensive income | ||||
Unrealized appreciation on securities available for sale, net of taxes of $1,064 and $880 at June 30, 2002 and December 31, 2001, respectively | 2,051 | 1,707 | ||
Unrealized appreciation on derivative instruments | 102 | - | ||
Less: cost of 436,595 shares and 386,314 shares | (5,127) | (4,333) | ||
TOTAL SHAREHOLDERS’ EQUITY | 52,539 | 52,538 | ||
TOTAL SHAREHOLDERS' EQUITY | 53,051 | 52,538 | ||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $498,684 | $487,203 | ||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $514,119 | $487,203 |
See Independent Accountant’sAccountants’ Review Report. The accompanying notes are an integral part of these consolidated financial statements.
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(Dollars in thousands, except per share data)
(unaudited)
Three Months Ended | Six Months Ended | |||
2002 | 2001 | 2002 | 2001 | |
Interest and dividend income: | ||||
Interest and fees on loans | $ 5,923 | $ 5,938 | $ 11,612 | $ 11,945 |
Interest and dividends on securities and | 2,069 | 2,437 | 4,344 | 5,192 |
Total interest and dividend income | 7,992 | 8,375 | 15,956 | 17,137 |
Interest expense | 3,208 | 4,279 | 6,356 | 8,756 |
Net interest income | 4,784 | 4,096 | 9,600 | 8,381 |
Provision for loan losses | 300 | 1,200 | 600 | 1,400 |
Net interest income after provision for | 4,484 | 2,896 | 9,000 | 6,981 |
Noninterest income: | ||||
Trust and other financial services | 588 | 787 | 1,239 | 1,752 |
Service charges on deposit accounts | 390 | 507 | 739 | 1,065 |
Other service charges, commissions and | 14 | 89 | 72 | 142 |
Credit card service charges and fees | 311 | 216 | 469 | 325 |
Other operating income | 114 | 155 | 199 | 256 |
Net securities gains | 66 | - | 105 | - |
Total noninterest income | 1,483 | 1,754 | 2,823 | 3,540 |
Noninterest expenses: | ||||
Salaries and employee benefits | 2,332 | 2,124 | 4,575 | 4,143 |
Occupancy expense | 282 | 228 | 565 | 496 |
Furniture and equipment expense | 367 | 369 | 739 | 729 |
Credit card expenses | 215 | 196 | 335 | 293 |
Other operating expense | 1,284 | 1,199 | 2,463 | 2,678 |
Total noninterest expenses | 4,480 | 4,116 | 8,677 | 8,339 |
Income before income taxes and cumulative | 1,487 | 534 | 3,146 | 2,182 |
Income taxes | 360 | 157 | 809 | 715 |
Income before cumulative effect of accounting change | 1,127 | 377 | 2,337 | 1,467 |
Less: Cumulative effect of change in | - | - | 247 | - |
Net income | $ 1,127 | $ 377 | $ 2,090 | $ 1,467 |
Computation of Net Income Per Share: | ||||
Weighted average number of capital stock | ||||
Outstanding | ||||
Basic | 3,233,470 | 3,276,114 | 3,242,460 | 3,288,213 |
Effect of dilutive employee stock | 58,442 | 3,402 | 58,442 | 3,402 |
Diluted | 3,291,912 | 3,279,516 | 3,300,902 | 3,291,615 |
NET INCOME PER SHARE: | ||||
Basic before cumulative effect of | $ 0.35 | $ 0.12 | $ 0.72 | $ 0.45 |
Cumulative effect of change in | $ - | $ - | $ 0.08 | $ - |
Basic | $ 0.35 | $ 0.12 | $ 0.64 | $ 0.45 |
Diluted before cumulative effect of | $ 0.34 | $ 0.12 | $ 0.71 | $ 0.45 |
Cumulative effect of change in | $ - | $ - | $ 0.08 | $ - |
Diluted | $ 0.34 | $ 0.12 | $ 0.63 | $ 0.45 |
Dividends per share | $ 0.19 | $ 0.19 | $ 0.38 | $ 0.38 |
See Independent Accountants’ Review Report. The accompanying notes are an integral part of these consolidated financial statements
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(Dollars in thousands, except per share data)
(unaudited)
Capital | Surplus | Retained | Other | Treasury | Total | |
Balance December 31, 2000 | $7,287 | $4,002 | $42,854 | $ (76) | $(3,560) | $50,507 |
Net income | - | - | 1,467 | - | - | 1,467 |
Cumulative effect to record | - | - | - | (28) | - | (28) |
Net unrealized appreciation | - | - | - | 808 | - | 808 |
Total comprehensive income | - | - | 1,467 | 780 | - | 2,247 |
Cash dividends declared ($0.38 | - | - | (1,254) | - | - | (1,254) |
Purchase of treasury stock | - | - | - | - | (449) | (449) |
Balance June 30, 2001 | $7,287 | $4,002 | $43,067 | $ 704 | $(4,009) | $51,051 |
Balance December 31, 2001 | $7,287 | $4,002 | $43,875 | $1,707 | $(4,333) | $52,538 |
Net income | - | - | 2,090 | - | - | 2,090 |
Net unrealized appreciation on | ||||||
available for sale, net of tax | - | - | - | 379 | - | 379 |
Net unrealized appreciation on | - | - | - | 67 | - | 67 |
Total comprehensive income | - | - | 2,090 | 446 | - | 2,536 |
Cash dividends declared ($0.38 | - | - | (1,228) | - | - | (1,228) |
Purchase of treasury stock | - | - | - | - | (880) | (880) |
Stock options exercised (4,341 | - | - | (1) | - | 86 | 85 |
Balance June 30, 2002 | $7,287 | $4,002 | $44,736 | $2,153 | $(5,127) | $ 53,051 |
See Independent Accountants’ Review Report. The accompanying notes are an integral part of these consolidated financial statements.
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(Dollars in thousands)
(unaudited)
2002 | 2001 | |||
Cash flows from operating activities: | ||||
Net income | $ 2,090 | $ 1,467 | ||
Adjustments to reconcile net income to net cash provided by | ||||
operating activities: | ||||
Depreciation | 568 | 604 | ||
Provision for loan losses | 600 | 1,400 | ||
Gain on sale of other real estate owned | (9) | - | ||
Net amortization (accretion) of bond premium (discount) | (61) | 8 | ||
Cumulative effect of change in accounting for goodwill | 375 | - | ||
Net change in other assets | (57) | 565 | ||
Net change in other liabilities | (178) | (939) | ||
Net cash provided by operating activities | 3,328 | 3,105 | ||
Cash flows from investing activities: | ||||
Net change in federal funds sold | - | (2,000) | ||
Purchases of securities held to maturity | (4,526) | - | ||
Proceeds from maturity and principal paydowns of securities held to maturity | 8 | 270 | ||
Purchases of securities available for sale | (36,146) | - | ||
Proceeds from maturity and principal paydowns of securities available for sale | 12,487 | 7,524 | ||
Proceeds from sale and call of securities | 13,994 | 23,879 | ||
Net decrease (increase) in other securities | 7,325 | (100) | ||
Net loans made to customers | (28,093) | (13,775) | ||
Capital expenditures | (287) | (2,048) | ||
Net cash provided (used) by investing | (35,238) | 13,750 | ||
Cash flows from financing activities: | ||||
Net decrease in deposits | (256) | (2,177) | ||
Net change in securities sold under repurchase agreements | (3,578) | (1,279) | ||
Proceeds from Federal Home Loan Bank borrowings | 39,740 | 20,000 | ||
Repayment of Federal Home Loan Bank borrowings | (21,825) | (47,304) | ||
Net change in short term borrowed funds | 12,500 | 16,152 | ||
Proceeds from stock issuance | 85 | - | ||
Purchase of treasury stock | (880) | (449) | ||
Payments of dividends | (1,228) | (1,253) | ||
Net cash provided (used) by financing | 24,558 | (16,310) | ||
Net increase (decrease) in cash and cash | (7,352) | 545 | ||
Cash and cash equivalents at beginning of period | 17,355 | 10,580 | ||
Cash and cash equivalents at end of period | $10,003 | $11,125 | ||
Non-cash transactions | ||||
Transfers from loans to other real | $ - | $ 25 | ||
Transfers of securities from held to | - | 113,856 |
See Independent Accountants’ Review Report. The accompanying notes are an integral part of these consolidated financial statements.
BAR HARBOR BANKSHARES AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOMEFOR 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 Accountant’s Review Report. The accompanying notes are an integral part of these consolidated financial statements.
BAR HARBOR BANKSHARES AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITYFOR 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 Accountant’s Review Report. The accompanying notes are an integral part of these consolidated financial statements.
BAR HARBOR BANKSHARES AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSFOR 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 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)
1. Basis of Presentation.
The accompanying consolidated 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. The income reported for the threesix months ended March 31,June 30, 2002 is not necessarily indicative of the results that may be expected for the year ending December 31, 2002.
Certain financial information, which is normally included in financial statements in accordance with U. S.United States 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’s annual report on Form 10-K for the year ended December 31, 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.
Diluted net income per share reflects the effect of stock options outstanding at the end of the period.
Certain 2001 and prior year balances have been reclassified to conform with the 2002 financial presentation.
2. Effect of Recent Accounting Pronouncements
Statement of Position (SOP) 01-6, "Accounting by Certain Entities (Including Entities with Trade Receivables) That Lend to or Finance the Activities of Others," was issued in December 2001. The SOP is effective for financial statements issued for the 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. This statement does not 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 the wholly owned subsidiary BTI Financial Group (BTI) and its three operating subsidiaries, includes Dirigo Investments, Inc., a NASD registered 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. Other is comprised of inter-company eliminations and parent company only items. Selected segment information is included in the following table.tables.
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 JUNE 30, 2002 | ||||
Community | Financial | Consolidated | ||
Banking | Services | Other | Totals | |
Net interest income | $4,774 | $ 10 | $ - | $4,784 |
Provision for loan losses | 300 | - | - | 300 |
Net interest income after provision | 4,474 | 10 | - | 4,484 |
Noninterest income | 851 | 567 | 65 | 1,483 |
Noninterest expense | 3,294 | 850 | 336 | 4,480 |
Income/(loss) before income taxes | 2,031 | (273) | (271) | 1,487 |
Income taxes (benefit) | 573 | (137) | (76) | 360 |
Net income/(loss) | $1,458 | $(136) | $(195) | $1,127 |
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 |
THREE MONTHS ENDED JUNE 30, 2001 | ||||
Community | Financial | Consolidated | ||
Banking | Services | Other | Totals | |
Net interest income | $4,091 | $ 5 | $ - | $4,096 |
Provision for loan losses | 1,200 | - | - | 1,200 |
Net interest income after | 2,891 | 5 | - | 2,896 |
Noninterest income | 929 | 792 | 33 | 1,754 |
Noninterest expense | 3,040 | 1,000 | 76 | 4,116 |
Income/(loss) before income taxes | 780 | (203) | (43) | 534 |
Income taxes (benefit) | 250 | (79) | (14) | 157 |
Net income/(loss) | $ 530 | $ (124) | $(29) | $ 377 |
4. Intangible Assets
SIX MONTHS ENDED JUNE 30, 2002 | ||||
Community | Financial | Other | Consolidated | |
Net interest income | $9,580 | $ 20 | $ - | $9,600 |
Provision for loan losses | 600 | - | - | 600 |
Net interest income after provision | 8,980 | 20 | - | 9,000 |
Noninterest income | 1,575 | 1,239 | 9 | 2,823 |
Noninterest expense | 6,493 | 1,787 | 397 | 8,677 |
Income/(loss) before income taxes | 4,062 | (528) | (388) | 3,146 |
Income taxes (benefit) | 1,149 | (224) | (116) | 809 |
Net income/(loss) before | 2,913 | (304) | (272) | 2,337 |
Cumulative effect of change in | - | (247) | - | (247) |
Net income/(loss) | $2,913 | $ (551) | $(272) | $2,090 |
SIX MONTHS ENDED JUNE 30, 2001 | ||||
Community | Financial | Consolidated | ||
Banking | Services | Other | Totals | |
Net interest income | $8,370 | $ 11 | $ - | $8,381 |
Provision for loan losses | 1,400 | - | - | 1,400 |
Net interest income after | 6,970 | 11 | - | 6,981 |
Noninterest income | 1,775 | 1,757 | 8 | 3,540 |
Noninterest expense | 6,139 | 2,117 | 83 | 8,339 |
Income/(loss) before income | 2,606 | (349) | (75) | 2,182 |
Income taxes (benefit) | 868 | (128) | (25) | 715 |
Net income/(loss) | $1,738 | $ (221) | $(50) | $1,467 |
3. Goodwill
The Company has goodwill with a carrying amount of $750,000 and $804,707$375 thousand as of March 31,June 30, 2002, and 2001 respectively and $750,000$750 thousand 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 beis now 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
During the first half of 2002, the Company completed implementation of SFAS No. 142, "Goodwill and Other Intangible Assets" which requires most goodwill to June 30, 2002 management will determine whether there has beenbe tested for impairment at least annually, rather than amortized over a period of time. The Company estimated the value of goodwill utilizing several standard valuation techniques, including discounted cash flow analysis, as well as an estimation of the impact of current business conditions on the long-term value of the goodwill ascarried on the balance sheet. Management and the Board of Directors determined the impact of the overall deterioration of the stock and bond markets on investor activities within its target market area had negatively impacted the value of the Company’s goodwill balance related to the acquisition of Dirigo Investments, Inc., its broker dealer subsidiary of BTI. This resulted in an estimation of impairment of $247 thousand, net of tax. As permitted by SFAS No. 142, the Company conducted its valuation during the second quarter, for an estimate of value on January 1, 2002. Under generally accepted accounting principles, this had the result of impacting year-to-date performance without affecting second quarter results.
FollowingThe following is the effect on net income and earnings per share hadif amortization of goodwill had not been recorded in each period presented.
For three months ended: | For six months ended: | |||
March 31, 2002 | March 31, 2001 | 6/30/02 | 6/30/01 | |
Reported net income | $1,210 | $1,090 | $2,090 | $1,467 |
Add: Goodwill amortization (net of tax) | -- | 12 | - | 24 |
Adjusted net income | $1,210 | $1,102 | $2,090 | $1,491 |
Basic earnings per share: | ||||
Reported | $ 0.37 | $ 0.33 | $ 0.64 | $ 0.45 |
Add: Goodwill amortization | -- | -- | ||
Adjusted | $ 0.37 | $ 0.33 | ||
Add: Goodwill amortization (net of tax) | - | - | ||
Adjusted net income | $ 0.64 | $ 0.45 | ||
Diluted earnings per share: | ||||
Reported | $ 0.37 | $ 0.33 | ||
Add: Goodwill amortization | -- | -- | ||
Adjusted | $ 0.37 | $ 0.33 | ||
Reported net income | $ 0.63 | $ 0.45 | ||
Add: Goodwill amortization (net of tax) | - | - | ||
Adjusted net income | $ 0.63 | $ 0.45 |
4. Derivative Financial Instruments
The Company has an interest rate swap agreement with a notional amount of $10 million at June 30, 2002 to hedge floating rate loans. The swap agreement is designated as a cash flow hedge since it converts a portion of the loan portfolio from a variable rate, based upon the prime rate, to a fixed rate. The hedge relationship is estimated to be 100% effective; therefore, there is no impact on the statement of income. The fair value of the swap agreement is recorded in the statement of condition with the offset recorded in the statement of other comprehensive income.
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.
6. Income Taxes
The income tax provision for all periods presented differs from the expense that would result from applying the federal statutory rate of 34% to income before income taxes principally because of tax exempt interest income.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion, as well as certain other statementstatements contained in this Form 10-Q, 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-Q.
Certain amounts in the 2001 financial statements have been reclassified to conform to the presentation used in 2002 and prior years.
2002. Unless otherwise noted, all dollars are expressed in thousands except per share data.
SUMMARY
The Company reported consolidated net income of $1,210,$1,127 or $0.37$0.34 per fully diluted share, for the three months ended March 31,June 30, 2002. This compares with net income of $1,090$377 or $0.33$0.12 per fully diluted share for the firstsecond quarter of 2001, representing increasesan increase of 11.0% and 12.1% respectively.$750, or 199%. The return on average total assets was 0.97%0.89% for the firstsecond quarter of 2002, compared with 0.93%0.33% for the same period in the prior year. The return on average shareholders’ equity for the most recent quarter amounted to 9.21%8.60%, compared with 8.42%2.92% for the quarter ended March 31,June 30, 2001.
Net income for the six months ended June 30, 2002 was $2,090, or fully diluted earnings per share of $0.63. This compares with net income of $1,467, or $0.45 per fully diluted share for the same period in 2001, representing an increase of $623, or 42.5%.
As more fully described in footnote 3 of the financial statements, during the first half of 2002 the company completed implementation of SFAS No. 142, "Goodwill and Other Intangible Assets", resulting in a one time after tax adjustment of $247. As provided for under SFAS No. 142, the Company conducted its valuation during the second quarter, for an estimate of value on January 1, 2002. Under generally accepted accounting principles, this had the result of impacting year-to-date performance without affecting second quarter results. For the six months ended June 30, 2002, net income before the cumulative effect of the change in accounting for goodwill was $2,337, or $0.71 per fully diluted share, representing an increase of $870, or 59.3%, compared with the same period in 2001.
The increase in net income is principally attributed to an additional provision for loan losses of $660, net tax, recorded in the second quarter of 2001. Without this additional provision in 2001 and the cumulative effect of the change in accounting for goodwill in 2002, net income for the six months ended June 30, 2002 would have increased $210, or 9.9%, compared with the same period in 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 primary source of earnings. Net interest income is affected by the level 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 the three months ended March 31,June 30, 2002 was $4,966,$4,913, representing an increase of $660$785, or 15.3%19.0%, compared with $4,306 recorded forthe same period in 2001. For the six month period ended June 30, 2002, net interest income on a fully tax equivalent basis amounted to $9,881, representing an increase of $1,447, or 17.2%, compared with the same period in 2001. The increase in net interest income was principally attributed to $30,531$37,034 in average earning asset growth between periods, and a 31 basis point improvement in the Company’s net interest margin, from 4.01%3.93% to 4.32%4.24%.
Interest income - Interest income, on a fully tax equivalent basis, amounted to $8,114$8,121 for the quarter ended March 31,June 30, 2002, representing a decrease of $669,$286, or 7.6%3.4%, when compared with $8,783$8,407 for the same period in 2001. Declining interest rates contributed $1,688Contributing 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 andthis change was a 325100 basis point dropdecrease 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 %between periods, from 7.83% for the quarter ended March 31,June 30, 2001 to 6.83% in the current quarter. The decrease in interest income resulting from declining yields was largely offset by a 10.8% increase in average earning assets, from $430,551 for the quarter ended June 30, 2001 to $476,904 in the current quarter. Average earning assets, as a percent of average total assets, were 94.0% for the three months ended June 30, 2002, when compared with 8.18%93.0% for the same period inthree months ended June 30, 2001.
Loans - Average loans for the quarter ended March 31,June 30, 2002 totaled $305,187,$319,036, representing an increase of $32,594,$41,345, or 12.0%14.9%, when compared with the same period in 2001. The growthincrease in average loans was entirely attributedis due to growth in consumer real estate loans including home equity loans, which increased $34,533 compared with the same period in 2001.loans. The tax equivalent yield on average loans between periods declined 138113 basis points to 7.57% in7.47% for the quarter ended March 31,June 30, 2002.
Investment securities - Average investment securities, including federal funds sold, money market funds and time deposits with other banks, totaled $160,946$157,868 for the quarter ended March 31,June 30, 2002, representing a decreasean increase of $2,063,$5,008, or 1.3%3.3% compared with the same period in 2001. The tax equivalent yield on investment securities declined 7990 basis points to 6.09%5.54%, when compared with the same period in 2001. The yield on the investment securities portfolio has been and may continue to be impacted by accelerated principal cash flows and lower market interest rates.
Interest expense - Interest expense for the three months ended March 31,June 30, 2002 amounted to $3,148,$3,208, representing a decrease of $1,329,$1,071, or 29.7%25.0%, compared with the same period in 2001. The decrease in interest expense was principally attributed to a 166152 basis point decline in the cost of interest bearing liabilities, from 4.88%4.68% to 3.22%3.16%, and was reflective of the significant declines in the federal funds targeted rate during the comparable period. The decrease in interest expense resulting from declining rates was partially offset by an 11.1% increase in average interest bearing liabilities, from $366,935 for the quarter ended June 30, 2001, to $407,685 in the current quarter.
Deposits - Average deposit balances for the three months ended March 31,June 30, 2002 totaled $284,863$287,258 representing an increase of $14,761,$17,656, or 5.5%6.5%, overcompared with the same period in 2001. Interest bearing deposits, which represent 86.5%86.8% of total deposits, increased $13,819,$17,186, or 5.9%7.4%, overcompared with the same period in 2001. The growth in deposits was led by money market accounts, which are classified with savings, posting an increase of $18,948 or 27.2%,$18,455, followed by NOW accounts, posting an increase $4,809$3,197 or 11.6%9.5%. The growth in money market and NOW account balances was partially offset by a decline in time accounts, presumably because of depositors’ unwillingness to commit to longer-term fixed rate investments during a period of historically low interest rates. Brokered certificates of deposit amounted to $2,485$4,548 during the quarter ended March 31,June 30, 2002, whereas none were outstanding for the same period in 2001. For the quarter ended March 31,June 30, 2002, the average cost of interest bearing deposits amounted to 2.46%2.42% compared with 4.05%3.94% for the same period in 2001, representing a decrease of 159152 basis points.
Borrowed funds - Average borrowings for the quarter ended March 31,June 30, 2002 amounted to $150,327,$158,309, representing an increase of $10,613,$23,564, or 7.6%17.5%, compared with the firstsecond quarter of 2001. The increase in borrowings between periods was exclusivelyprincipally utilized to fund loan growth.growth and, to a lesser extent, growth in the investment securities portfolio. During the firstsecond quarter of 2002, the average cost of borrowings amounted to 4.46%4.31%, representing a decrease of 180165 basis points compared with the same period in 2001. Further reductions in borrowing costs will be more moderate, as management has extended the maturities on a portion of its borrowings to provide protection against rising rates and an eventual reversal of recent interest rate trends.
The following table setstables set 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 and six months ended March 31,June 30, 2002, and 2001 respectively.
ANALYSIS OF NET INTEREST INCOME
THREE MONTHS ENDEDMARCH 31,JUNE 30, 2002, AND 2001
2002 | 2001 | |||||||||||
Average Balance | Interest | Average Rate | Average Balance | Interest | Average Rate | 2002 | 2002 | 2002 | 2001 | 2001 | 2001 | |
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% | ||||||
Loans (1, 3) | $319,036 | $5,942 | 7.47% | $277,691 | $5,953 | 8.60% | ||||||
Investment securities(3) | 154,395 | 2,163 | 5.62% | 140,231 | 2,314 | 6.62% | ||||||
Fed funds sold, money market | 3,473 | 16 | 1.85% | 12,629 | 140 | 4.45% | ||||||
Total Investments | 160,946 | 2,418 | 6.09% | 163,009 | 2,766 | 6.88% | 157,868 | 2,179 | 5.54% | 152,860 | 2,454 | 6.44% |
Total Earning Assets | 466,133 | 8,114 | 7.06% | 435,602 | $8,783 | 8.18% | 476,904 | 8,121 | 6.83% | $430,551 | $8,407 | 7.83% |
Non Interest Earning Assets: | ||||||||||||
Cash and due from banks | 7,148 | 9,230 | 8,805 | 9,274 | ||||||||
Other assets (2) | 24,844 | 24,251 | 21,345 | 23,002 | ||||||||
Total Assets | $ 498,125 | $469,083 | $507,054 | $462,827 | ||||||||
Interest Bearing Liabilities: | ||||||||||||
Deposits | $246,367 | $ 1,493 | 2.46% | $232,548 | $2,321 | 4.05% | $249,376 | $1,506 | 2.42% | $232,190 | $2,278 | 3.94% |
Securities sold under repurchase agreements | 14,353 | 82 | 2.32% | 13,054 | 149 | 4.63% | 11,645 | 66 | 2.27% | 12,623 | 134 | 4.26% |
Other borrowings | 135,974 | 1,573 | 4.69% | 126,660 | 2,007 | 6.43% | 146,664 | 1,636 | 4.47% | 122,122 | 1,867 | 6.13% |
Total Borrowings | 150,327 | 1,655 | 4.46% | 139,714 | 2,156 | 6.26% | 158,309 | 1,702 | 4.31% | 134,745 | 2,001 | 5.96% |
Total Interest Bearing Liabilities | 396,694 | 3,148 | 3.22% | 372,262 | 4,477 | 4.88% | 407,685 | 3,208 | 3.16% | 366,935 | 4,279 | 4.68% |
Rate Spread | 3.84% | 3.30% | 3.67% | 3.15% | ||||||||
Non Interest Bearing Liabilities: | ||||||||||||
Demand deposits | 38,496 | 37,554 | 37,882 | 37,412 | ||||||||
Other liabilities | 10,366 | 7,470 | 9,054 | 6,770 | ||||||||
Total Liabilities | 445,556 | 417,286 | 454,746 | 411,117 | ||||||||
Shareholders' Equity | 52,569 | 51,780 | 52,433 | 51,710 | ||||||||
Total liabilities and | $498,125 | $469,066 | ||||||||||
Total Liabilities and Shareholders' Equity | $507,054 | $462,827 | ||||||||||
Net Interest Income and Net Interest | 4,966 | 4.32% | 4,306 | 4.01% | 4,913 | 4.13% | 4,128 | 3.85% | ||||
Less: Tax Equivalent Adjustment | (150) | (21) | (129) | (32) | ||||||||
Net Interest Income | $ 4,816 | $ 4,285 | $4,784 | $4,096 |
(1) For purposes of these computations, non-accrual loans are included in average loans.
(2) For purposes of these computations, unrealized gains (losses) on available-for-sale securities are recorded in other assets.
(3) For purposes of these computations, reported on a tax equivalent basis.ANALYSIS OF NET INTEREST INCOME
SIX MONTHS ENDED
JUNE 30, 2002, AND 2001
2002
Average
Balance2002
Interest2002
Average
Rate2001
Average
Balance2001
Interest2001
Average
RateInterest Earning Assets:
Loans (1, 3)
$312,134
$11,628
7.51%
$275,160
$11,970
8.77%
Investment securities(3)
150,160
4,548
6.11%
148,308
4,988
6.78%
Fed funds sold, money market funds, and time
deposits with other banks
7,783
60
1.55%
9,575
232
4.89%
Total Investments
157,943
4,608
5.88%
157,883
5,220
6.67%
Total Earning Assets
470,077
16,236
6.97%
$433,043
$17,190
8.00%
Non Interest Earning Assets:
Cash and due from banks
8,814
8,974
Other assets (2)
20,794
22,613
Total Assets
$499,685
$464,630
Interest Bearing Liabilities:
Deposits
$247,778
$ 2,999
2.44%
$232,343
$ 4,599
3.99%
Securities sold under repurchase agreements
12,991
148
2.30%
12,836
283
4.45%
Other borrowings
141,341
3,208
4.58%
124,386
3,874
6.28%
Total Borrowings
154,332
3,356
4.39%
137,222
4,157
6.11%
Total Interest Bearing Liabilities
402,110
6,355
3.19%
369,565
8,756
4.78%
Rate Spread
3.78%
3.22%
Non Interest Bearing Liabilities:
Demand deposits
38,591
37,129
Other liabilities
6,813
6,191
Total Liabilities
447,514
412,885
Shareholders' Equity
52,171
51,745
Total Liabilities and Shareholders' Equity
$499,685
$464,630
Net Interest Income and Net Interest Margin
9,881
4.24%
8,434
3.93%
Less: Tax Equivalent Adjustment
(281)
(53)
Net Interest Income
$ 9,600
$ 8,381
(1) For the purpose of these computations, non-accrual loans are included in average loans.
(2) For the purpose of these computations, unrealized gains (losses) on available-for-sale securities are recorded in otherassets- assets.
(3) For the purpose of these computations, reported on a tax equivalent basis.
The following table setstables set forth a summary analysis of the relative impact on net interest income of changes in the average volume of interest earning assets and interest bearing liabilities, and changes in average rates on such assets and liabilities. The income from tax-exempt assets has been adjusted to a fully tax equivalent basis, thereby allowing a uniform comparisons to be made. Because of the numerous simultaneous volume and rate changes during the periods analyzed, it is not possible to precisely allocate changes to volume or rate. For presentation purposes, changes which are not solely due to volume changes or rate changes have been allocated to these categories in proportion to the relationships of the absolute dollar amounts of the change in each.
ANALYSIS OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME
THREE MONTHS ENDED MARCH 31,JUNE 30, 2002 ANDVERSUS JUNE 30, 2001Increases(Decreases) Due to
INCREASES (DECREASES) DUE TO:
VOLUME | RATE | NET | Average | Average | Net | |
Loans (1) | $ 960 | $(1,281) | $(321) | $9,605 | $(9,616) | $ (11) |
Taxable investment securities | (466) | (310) | (776) | (190) | (305) | (495) |
Non-taxable investment securities (1) | 477 | (1) | 476 | 348 | (4) | 344 |
Federal funds sold, money market funds, and time | 48 | (96) | (48) | |||
Fed funds sold, money market funds, and | (69) | (55) | (124) | |||
TOTAL EARNING ASSETS | 1,019 | (1,688) | (669) | 9,694 | (9,980) | (286) |
Deposits | 147 | (975) | (828) | 182 | (954) | (772) |
Securities sold under repurchase agreements and | 16 | (83) | (67) | |||
Securities sold under repurchase agreements | (10) | (58) | (68) | |||
Other borrowings | 160 | (594) | (434) | 521 | (752) | (231) |
TOTAL INTEREST BEARING LIABILITIES | 323 | (1,652) | (1,329) | 693 | (1,764) | (1,071) |
NET CHANGE IN NET INTEREST INCOME (1) | $ 696 | $ (36) | $ 660 | $9,001 | $(8,216) | $ 785 |
(1) Reported on tax equivalent
basisbasis.
ANALYSIS OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME
SIX MONTHS ENDED JUNE 30, 2002 VERSUS JUNE 30, 2001
INCREASES (DECREASES) DUE TO:
Average | Average | Net | |
Loans (1) | $2,613 | $(2,955) | $ (342) |
Taxable investment securities | (746) | (516) | (1,262) |
Non-taxable investment securities (1) | 835 | (13) | 822 |
Fed funds sold, money market funds, and | (39) | (133) | (172) |
TOTAL EARNING ASSETS | 2,663 | (3,617) | (954) |
Deposits | 327 | (1,927) | (1,600) |
Securities sold under repurchase agreements | 4 | (139) | (135) |
Other borrowings | 628 | (1,294) | (666) |
TOTAL INTEREST BEARING LIABILITIES | 959 | (3,360) | (2,401) |
NET CHANGE IN NET INTEREST INCOME (1) | $1,704 | $ (257) | $ 1,447 |
(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,June 30, 2002 non-interest income amounted to $1,340$1,483 compared with $1,786$1,754 for the same period in 2001, representing a decrease of $446,$271, or 25.0%15.5%. Total non-interest expense amounted to $4,197$4,480 compared with $4,223$4,116 in the firstsecond quarter of 2001, representing a decreasean increase of $26.$364, or 8.8%.
As more fully disclosed in Note 32 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,June 30, 2002 and 2001
2002 | 2001 | Change | Change | |||||
2002 | 2001 | Change | Change | |||||
Non-interest income | $ 724 | $ 846 | $122 | 14.4% | $ 851 | $ 929 | $ 78 | 8.4% |
Non-interest expense | $3,199 | $3,099 | $100 | 3.2% | $3,294 | $3,040 | $254 | 8.4% |
Non-interest income: Non-interest income from Community Banking represented 54.0%57.4% of the Company’s total firstsecond quarter non-interest income. For the three months ended March 31,June 30, 2002, the Banks non-interest income amounted to $724,$851, compared with $846$929 during the same period in 2001, representing a decrease of $122,$78, or 14.4%8.4%.
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. AsThese actions substantially improved non-interest income during the first half of 2001. However, 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%73.5% of the Company’s total second quarter non-interest income for the period ended March 31, 2002.expense. For the three months ended March 31,June 30, 2002 the BanksBank’s non-interest expense amounted to $3,199,$3,294, compared with $3,099$3,040 during the same period in 2001, representing an increase of $100,$254, or 3.2%8.4%.
The increase in non-interest expense iswas principally attributed to increases in salaries and employee benefits. Throughout 2001 staff additions were made in customer service, lending, credit administration and operational areas of the Bank, the full impact of which is currently reflected.reflected in the financial statements.
Financial Services
Three Months Ended March 31,June 30, 2002 and 2001
2002 | 2001 | Change | ||||||
2002 | 2001 | Change | ||||||
Non-interest income | $672 | $ 965 | $293 | 30.4% | $567 | $ 792 | $225 | 28.4% |
Non-interest expense | $937 | $1,117 | $180 | 16.1% | $850 | $1,000 | $150 | 15.0% |
Non-interest income: Non-interest income from Financial Services (BTI Financial Group) represented 50.1%38.2% of the Company’s total second quarter non-interest income for the period ended March 31, 2002.income. For the three months ended March 31,June 30, 2002, non-interest income at BTI Financial Group amounted to $672,$567, compared with $965$792 during the same period in 2001, representing a decrease of $293,$225, or 30.4%28.4%.
Included in BTI’s first quarter 2002 non-interest income is an adjustment of $162, representing a more accurate accrual of fee income. Excluding this adjustment, fee income actually declined $131, or 13.6%. The decline in fee income iswas principally attributed to a significant declinedecrease in the market value of assets under management at Block Capital Management and Bar Harbor Trust Services.Services and was reflective of the overall decline in the stock market. Fees charged to clients are derived principally from the market values of assets managed. At March 31,June 30, 2002, assets under management totaled $234,002,$210,791, compared with $258,982 for the same period in$255,191 at June 30, 2001, representing a decrease of $24,980,$44,400, or 9.6%17.4%. FirstSecond quarter fee income at Dirigo Investments also declined, and was principally dueattributed to recent changesthe overall deterioration in the stock and bond markets and its impact on investor activities within the Company’s target market. Changes in management and staff.staff at Dirigo also contributed to a portion of the revenue decline.
Non-interest expense: Non-interest expense from Financial Services represented 22.3%19.0% of the Company’s second quarter non-interest expense for the three months ended March 31, 2002.expense. For the three months ended March 31,June 30, 2002, BTI’s non-interest expense amounted to $937,$850, compared with $1,117$1,000 during the same period in 2001, representing a decrease of $180,$150, or 16.1%15%.
IncludedSalaries and employee benefit expenses declined $71 between periods and were the result of management and staffing changes. With the Company’s adoption of SFAS 142, "Goodwill and Other Intangible Assets", the amortization of goodwill ceased. For the three months ended June 30, 2001, the amortization of intangible assets amounted to $51, compared with none recorded in the first quarter 2001 non-interest expense are marketing campaigncurrent quarter. Marketing and other miscellaneous operating expenses totaling $172, as compared with $6 in the quarter ended March 31, 2002.also declined between periods. Occupancy expenses for the three month period ended March 31,June 30, 2002 are $77were $58 greater than the same period in 2001, and are awere the 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 and six months month periods ended March 31, 2002 was 27.1%, asJune 30 were 24.2% and 25.7% respectively, compared with 33.9%29.4% and 32.8% for the same period ofperiods in 2001. This decrease wasThe decreases were principally attributed to the addition of $25,067 $27,848in tax-exempt investmenttax exempt securities to the BanksBank’s investment securities portfolio.portfolio between periods.
LOAN PORTFOLIO
The following table represents the components of the Bank’s loan portfolio as of March 31,June 30, 2002 and December 31, 2001:
Summary of Loan PortfolioMarch 31, 2002, and December 31, 2001SUMMARY OF LOAN PORTFOLIO
June 30, | December 31, | |||||
March 31, 2002 | December 31, 2001 | 2002 | 2001 | |||
Real estate loans | ||||||
Construction and development | $ 16,828 | 5.41% | $ 20,348 | 6.83% | $ 17,836 | $ 20,348 |
Mortgage | 240,596 | 77.37% | 229,634 | 77.07% | 252,022 | 229,634 |
Loans to finance agricultural | ||||||
production and other loans to farmers | 6,681 | 2.15% | 7,149 | 2.40% | ||
Loans to finance agricultural | 7,005 | 7,149 | ||||
Commercial and industrial loans | 30,838 | 9.92% | 22,158 | 7.43% | 33,521 | 22,158 |
Loans to individuals for household, | ||||||
family and other personal expenditures | 13,870 | 4.46% | 13,918 | 4.67% | 13,422 | 13,918 |
All other loans | 2,146 | 0.69% | 3,699 | 1.24% | 2,025 | 3,699 |
Real estate under foreclosure | -- | 0.00% | 1,064 | 0.36% | - | 1,064 |
TOTAL LOANS | 310,959 | 100.00% | 297,970 | 100.00% | 325,831 | 297,970 |
Less: Allowance for possible loan losses | 4,376 | 4,169 | ||||
Less: Allowance for loan losses | 4,537 | 4,169 | ||||
NET LOANS | $ 306,583 | $ 293,801 | $321,294 | $293,801 |
Total loans – Total loans at March 31,June 30, 2002 amounted to $310,959$325,831 as compared with $297,970 at December 31, 2001, representing an increase of $12,989,$27,861, or 4.4%9.4%. The growth in the loan portfolio was the principal factor underlying the $12,782$26,916 increase in the Company’s total assets compared with December 31, 2001.
Loan growth during the quartersix months ended March 31,June 30, 2002 was principally attributed to consumer real estate and home equity loans, particularly consumer, posting an increase over 2001 year-end of $13.2 million,$19,876, or 7.7%7.9%. MuchMortgage origination volume remained strong, due to in part to the impact of this activity carried over from commitments made in late 2001current market interest rates and to a lesser extent, construction loans migrating to permanent financing.healthy local economy. Commercial and industrial loans also showed strong growth during six-month period ending June 30, 2002, increasing $11,363 or 51.3%. While the quarter, increasing $8,680 or 39.2%. Growthbank continued to establish new commercial business relationships, growth in this category was principally attributed to new relationshipsseasonal activity, as well as existing ones using theirbusinesses utilized established lines of 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 Bank’s Senior Credit Officer, and the Bank’s Board of Directors. Management follows a policy of continually identifying, analyzing and grading credit risk inherent in the loan portfolio. An ongoing independent review, subsequent to management’s review, of individual credits is performed by an independent loan review function, which reports to the Audit Committee of the Board of Directors.
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 forat the periodsdates indicated:
TOTAL NONPERFORMING LOANSMARCH 31,JUNE 30, 2002, DECEMBER 31, 2001, AND MARCH 31,JUNE 30, 2001
(dollars in thousands)
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% |
June 30, | December 31, | June 30, | |
Loans accounted for on a | $1,444 | $2,191 | $5,493 |
Accruing loans contractually | 113 | 151 | 320 |
Total non-performing loans | $1,557 | $2,342 | $5,813 |
Allowance for loan losses to total loans | 1.39% | 1.40% | 1.43% |
Non-Performing loans to total loans | 0.48% | 0.79% | 2.05% |
Allowance for loan losses to non-performing loans | 291% | 178% | 70% |
Non-performing loans continued to decline during the six-month period ended June 30, 2002. At March 31,June 30, 2002, total non-performing loans amounted to $2,300,$1,557, or 0.74%0.48% of total loans, and stood at its lowest level over the past five years. The improvement in the level of non-performing loans over the past year is principally the result of the effectiveness of the Bank’s credit administration and workout procedures, aided by a strong local economy.
Other real estate owned – When a real estate loan goes to foreclosure and the bank purchases the property, the property is transferred from the loan portfolio to Other Real Estate Owned (OREO) at its fair value. If the loan balance is higher than the fair value of the property, the difference is charged to the allowance for loan losses at the time of the transfer. Along with using conservative fair market valuations of OREO properties, reserves are established to allow for selling expenses that can be reasonably estimated. At June 30, 2002, the Bank did not have any Other Real Estate Owned. This compares with $63 and $115 at December 31, 2001 and June 30, 2001, respectively.
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 quartersix month period ended March 31,June 30, 2002, the Company provided $300$600 to the allowance for loan losses compared with $200$1,400 for the same period in 2001. The decrease in the provision for loan losses was primarily attributed to one large credit exceeding $1,000 that was charged off in the second quarter of 2001. Net loans charged off induring the threesix months ended March 31,June 30, 2002 amounted to $93$232 compared with $242$1,568 for the same period in 2001.
The following table details changes in the allowance and summarizes loan loss experience for thesix-month periods shown.ended June 30, 2002 and 2001.
Summary of Loan Loss ExperienceSUMMARY OF LOAN LOSS EXPERIENCEThreeSix Months EndedMarch 31,June 30, 2002 December 31, 2001 and March 31, 2001
| March 31 2002, | December 31, 2001 | March 31, 2001 | June 30, | June 30, |
Balance at beginning of period | $ 4,169 | $ 3,986 | $ 4,236 | $ 4,169 | $ 4,236 |
Charge offs: | |||||
Commercial,financial, agricultural, others | 38 | �� 142 | 98 | ||
Real estate loans | |||||
Commercial, financial | 77 | 1,261 | |||
Real estate mortgages | |||||
Real estate-construction | -- | -- | -- | - | - |
Real estate-mortgage | 67 | 89 | 39 | 110 | 48 |
Installments and other loans to individuals | 34 | 87 | 138 | 106 | 300 |
Total charge offs | 139 | 318 | 275 | 293 | 1,609 |
Recoveries: | |||||
Commercial, financial, agricultural, others | 20 | 75 | 9 | ||
Real estate loans | |||||
Commercial, financial | 24 | 10 | |||
Real estate mortgages: | |||||
Real estate-construction | -- | -- | -- | - | - |
Real estate-mortgage | 7 | 62 | 14 | 7 | 8 |
Installments and other loans to individuals | 19 | 14 | 10 | 30 | 23 |
Total recoveries | 46 | 151 | 33 | 61 | 41 |
Net charge offs | 93 | 167 | 242 | 232 | 1,568 |
Provision charged to operations | 300 | 350 | 200 | 600 | 1,400 |
Balance at end of period | $ 4,376 | $ 4,169 | $ 4,194 | $ 4,537 | $ 4,068 |
Average loans outstanding during period | $305,187 | $294,230 | $272,593 | $312,134 | $275,160 |
Net charge offs to average loans outstanding | 0.03% | 0.06% | 0.09% | 0.07% | 0.57% |
The following table presents the breakdown of the allowance by loan type at March 31,June 30, 2002 and December 31, 2001.
ALLOCATION OF ALLOWANCE FOR POSSIBLE LOAN LOSSES
(at March 31,June 30, 2002 and December 31, 20012001)
March 2002 | December 2001 | June 2002 | December 2001 | |||||
Amount | Percent of Loans in Each Category to Total loans |
Amount | Percent of Loans in Each Category to Total loans | Amount | Percent of Loans in Each Category to Total loans | Amount | Percent of Loans in Each Category to Total loans | |
Commercial, financial, and agricultural | $1,988 | 12.07% | $1,387 | 9.84% | $1,874 | 12.44% | $1,387 | 9.84% |
Real estate loans: | ||||||||
Real estate mortgages: | ||||||||
Real estate-construction | 112 | 5.41% | 135 | 6.83% | 128 | 5.47% | 135 | 6.83% |
Real estate-mortgage | 1,598 | 77.37% | 1,525 | 77.42% | 1,805 | 77.35% | 1,525 | 77.42% |
Installments and other loans | ||||||||
to individuals | 516 | 4.46% | 855 | 4.67% | ||||
Installments and other loans | 536 | 4.12% | 855 | 4.67% | ||||
Other | -- | 0.69% | -- | 1.24% | 31 | 0.62% | - | 1.24% |
Unallocated | 162 | 0.00% | 267 | 0.00% | 163 | 0.00% | 267 | 0.00% |
TOTAL | $4,376 | 100.00% | $4,169 | 100.00% | $4,537 | 100.00% | $4,169 | 100.00% |
At March 31,June 30, 2002, the adequacy analysis resulted in a need for specific reserves of $2,990,$3,222, general reserves of $755,$813, impaired reserves of $469,$151, and other reserves of $162.$351.
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,June 30, 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 impede collection efforts in certain cases and have impacted the level of 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 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,June 30, 2002 to be appropriate for the risks inherent in the loan portfolio and resident in the local and national economy as of that date.
CAPITAL RESOURCES
The Company and the Bank are 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,June 30, 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 of at least 5%.
The following table sets forth the Company’s regulatory capital at March 31,June 30, 2002 and December 31, 2001, under the rules applicable at that date.
June 30, 2002 | December 31, 2001 | |||
Amount | Ratio | Amount | Ratio | |
Total Capital to Risk Weighted Assets | $52,974 | 15.3% | $52,950 | 16.8% |
Regulatory Requirement | 27,770 | 8.0% | 25,154 | 8.0% |
Excess | $25,204 | 7.3% | $27,796 | 8.8% |
Tier I Capital to Risk Weighted Assets | 48,632 | 14.0% | 49,017 | 15.6% |
Regulatory Requirement | 13,885 | 4.0% | 12,577 | 4.0% |
Excess | $34,747 | 10.0% | $36,440 | 11.6% |
Tier I Capital to Average Assets | 48,632 | 9.6% | 49,017 | 10.3% |
Regulatory Requirement | 20,192 | 4.0% | 18,997 | 4.0% |
Excess | $28,440 | 5.6% | $30,020 | 6.3% |
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 funds to pay cash dividends and support its commitments is derived from its banking subsidiary, Bar Harbor Banking and Trust Company. The Company declared dividends in the aggregate amount of $618$1,228 and $631$1,254 in the first threesix months of 2002 and 2001, respectively, at a rate of $0.19$0.38 per share. The Bank’s principal regulatory agency, the FDIC, currently limits Bank dividends to current earnings excluding securities gains while maintaining a Tier I leverage capital ratio of 8%, without prior approval. The Bank is in full compliance with these requirements and does not anticipate any impact on itsthe Company’s 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,June 30, 2002, the Company had repurchased 197,844232,254 shares of stock under the plan, at a total cost of $3,202$3,877 and an average price of $16.18.$16.69. 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,June 30, 2002, over one and two year horizons. Given the current Federal Funds rate of 1.75%, the analysis incorporates a declining interest rate scenario of 100 basis points, versus 200 basis points as shown in prior periods.
INTEREST RATE RISK
CHANGE IN NET INTEREST INCOME FROM THE FLAT RATE SCENERIOMARCH 31,JUNE 30, 2002
-100 basis | +200 basis points | +300 basis points | -100 basis points | +200 basis points | |
Year 1 | |||||
Net interest income change ($) | ($297) | $438 | $627 | ($243) | $362 |
Net interest income change (%) | -1.55% | 2.29% | 3.27% | -1.26% | 1.88% |
Year 2 | |||||
Net interest income change ($) | ($1,516) | $1,339 | $1,764 | ($1,636) | $636 |
Net interest income change (%) | -7.19% | 6.99% | 9.21% | -8.50% | 3.30% |
The Bank’s net interest income sensitivity position at March 31,June 30, 2002, did not significantly change as compared with December 31, 2001. the prior two quarters. Based upon the information and assumptions in effect at June 30, 2002, management believes that a 200 basis point increase in interest rates over the next twelve months would increase net interest income by $362, or 1.88%, while a 100 basis point decline would decrease net interest income by $243, or 1.26%.
While the Bank continued to extend fixed rate loans during the quarter, the relatively 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 asAs 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.
At June 30, 2002 the Bank had one derivative instrument, an interest rate swap, outstanding. The details are summarized as follows:
Description | Maturity | Notional Amount (in thousands) | Fixed Interest Rate | Variable Interest Rate | Hedge Pool |
Receive fixed rate, pay | 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 June 30, 2002 was 4.75%. The bank is required to pay a counter party monthly variable rate payments indexed to prime, while receiving monthly fixed rate payments based upon an interest rate of 6.425% over the term of the agreement.
The credit risk associated with the interest rate swap agreement is the risk of non-performance by the counter-party to the agreement. However, management does not anticipate non-performance by the counter-party, and monitors risk through its asset/liability management policies and procedures.
The interest rate swap agreement, which qualifies as a cash flow hedge, has an original maturity of two years and as of June 30, 2002 had an unrealized gain of $101 thousand. In accordance with the Statement of Financial Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 137, and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", the unrealized gain is recorded in the statement of condition with the offset recorded in the statement of other comprehensive income. The use of the interest rate swap agreement increased interest income during the most recent quarter by $28 thousand. There were no off-balance sheetderivative instruments in placeoutstanding during 2001, or in the first quarter of 2002.2002 or during the year ended December 31, 2001.
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 its 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 March 31,June 30, 2002, liquidity, as measured by the basic surplus/deficit model, was 5.4%8.2% for the 90-day horizon and 5.0% for the 30-day horizon.horizon, reflecting the seasonality of the Bank’s loan and deposit base. Including the Company’s unused linelines of credit at the Federal Home Loan Bank and other correspondents, which amounted to $46,900$16,397, basic surplus stood at 14.9%.
11.5% for the 90-day horizon and 8.3% for the 30-day horizon. The Company also has the ability to borrow additional funds on a serviced basis utilizing unpledged securities and mortgage related loan portfolios.
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 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 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 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.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company previously reported on Form 10-Q (Part II, Item 1 Legal Proceedings) for the period ended March 31, 2002 and filed with the Commission on May 15, 2002 (the "First Quarter 10-Q"), that, in response to threatened legal actions by Mr. Paul G. Ahern and Ms. 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,Financial Group, 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. ThatMcFee (the "Independent Committee"). The Independent Committee’s investigation is ongoing as of the date of this report.
In April 2002The Company previously reported on the First Quarter 10-Q (Part II, Item 1 Legal Proceedings), that the Company filed complaints in the Maine Superior Court, County of Hancock complaints(the "Court") for declaratory relief against both Mr. Ahern and Ms. McFee seeking, among other things, declarations that:(the "Complaints"). In July, 2002 the demands made by Mr. Ahern and Ms. McFee are notCourt dismissed the proper subjects of a shareholder derivative action inComplaints stating that they seek remedies not appropriate to such an action;there is no justiciable issue since neither Mr. Ahern nor Ms. McFee can fairlyhas as yet filed a shareholder derivative suit.
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, BTI Financial Group, Bar Harbor Trust Services, Block Capital Management, Dirigo Investments, Inc., Paul G. Ahern, Bonnie R. McFee, Brett S. Miller and adequately representFrank Jansen as defendants. The causes of action asserted in the interestsNeely Complaint are securities fraud, rescission of investment contract, breach of contract, interference with contract, conversion, common law fraud and deceit, breach of fiduciary duty, aiding and abetting breach of fiduciary duty and negligent supervision. The complaint alleges in part that Bar Harbor Trust Services engaged in the aggressive investment of trust assets and a high turn over of the assets in order to generate non-interest income for the Company or of its shareholdersfrom trustee fees and advisory fees. Neely has sought money damages and punitive damages plus interest and costs. The Company has denied the allegations set forth in connection with the shareholder derivative actions which they have threatened;Neely Complaint and neither Mr. Ahern nor Ms. McFee have standing, oris actively defending the right, to initiate the threatened shareholder derivative actions against the Company. This litigation is pending at the time of this report.lawsuit.
Various other 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.
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
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
(a)Exhibits.
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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 | ||
10.2 Paul Ahern Employment Contract |
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| 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
Current ReportsNo current reports on Form 8-K have been filed as follows:
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for the period covered by this report:
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/ /S/ Joseph M. Murphy
Date: May 14,August 13, 2002 Joseph M. Murphy
Chief Executive Officer
/S/
/S/ Gerald Shencavitz
Date: May 14,August 13, 2002 Gerald Shencavitz
Chief Financial Officer