UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x
|
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
|
|
|
___
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________.
|
Commission File Number
: 001-13349
BAR HARBOR BANKSHARES
(Exact name of registrant as specified in its charter)
Maine
(
State or other jurisdiction of
incorporation or organization
)
|
|
01-0393663
(
I.R.S. Employer
Identification No.
)
|
|
|
|
P.O. Box 400, 82 Main Street
Bar Harbor, Maine
(
Address of principal executive offices
)
|
04609-0400
(Zip Code)
|
(207) 288-3314
(Registrants telephone number,
including area code)
|
Securities registered pursuant to Section 12(b) of the Act:
Title of class
|
Name of
exchange on which registered
|
Common Stock,
$2.00 par value per share
|
NYSE Amex
|
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act: YES ___ NO
x
Indicate by check mark
if the registrant is not required to file reports pursuant to Section 13 or Section 15(d)
of the Exchange Act: YES ___ NO
x
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 registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days: YES
x
NO ___
Indicate by checkmark
whether the registrant has submitted electronically and posted on its corporate Website,
if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files).
YES ___
NO
___
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section
229.405 of this chapter) is not contained herein, and will not be contained, to the
registrants knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. ___
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of "large
accelerated filer," "accelerated filer" and "smaller reporting
company" in Rule 12b-2 of the Exchange Act: Large accelerated filer ___ Accelerated
filer
x
Non-accelerated filer (do not check if a
smaller reporting company) ___ Smaller reporting company ___
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
YES ___ NO
x
The aggregate market
value of the common stock held by non-affiliates of Bar Harbor Bankshares was $92,241,527
based on the closing sale price of the common stock on the NYSE Amex on June 30, 2010, the
last trading day of the registrants most recently completed second quarter.
Number of shares of
Common Stock par value $2.00 outstanding as of March 1, 2011:
3,830,038
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders
to be held on May 17, 2011 are incorporated by reference into Part III, Items 10-14 of
this Annual Report on Form 10-K.
FORWARD-LOOKING STATEMENTS DISCLAIMER
Certain statements, as well as certain other discussions contained in
this Annual Report on Form 10-K, or incorporated herein by reference, contain statements
which may be considered to be forward-looking within the meaning of Section 27A of the
Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934,
as amended. You can identify these forward-looking statements by the use of words like
"strategy," "expects," "plans," "believes,"
"will," "estimates," "intends," "projects,"
"goals," "targets," and other words of similar meaning. You can also
identify them by the fact that they do not relate strictly to historical or current facts.
Investors are cautioned that forward-looking statements are inherently
uncertain. Forward-looking statements include, but are not limited to, those made in
connection with estimates with respect to the future results of operations, financial
condition, and the business of Bar Harbor Bankshares (the "Company") which are
subject to change based on the impact of various factors that could cause actual results
to differ materially from those projected or suggested due to certain risks and
uncertainties. Those factors include but are not limited to:
(i)
|
The
Company's success is dependent to a significant extent upon general economic conditions in
Maine, and Maine's ability to attract new business, as well as factors that affect
tourism, a major source of economic activity in the Companys immediate market areas;
|
|
|
(ii)
|
The
Company's earnings depend to a great extent on the level of net interest income (the
difference between interest income earned on loans and securities and the interest expense
paid on deposits and borrowings) generated by the Companys wholly-owned banking
subsidiary, Bar Harbor Bank & Trust, (the "Bank"), and thus the
Companys results of operations may be adversely affected by increases or decreases
in interest rates;
|
|
|
(iii)
|
The
banking business is highly competitive and the profitability of the Company depends on the
Bank's ability to attract loans and deposits in Maine, where the Bank competes with a
variety of traditional banking and nontraditional institutions, such as credit unions and
finance companies;
|
|
|
(iv)
|
A
significant portion of the Bank's loan portfolio is comprised of commercial loans and
loans secured by real estate, exposing the Company to the risks inherent in financing
based upon analysis of credit risk, the value of underlying collateral, and other
intangible factors which are considered in making commercial loans and, accordingly, the
Company's profitability may be negatively impacted by judgment errors in risk analysis, by
loan defaults, and the ability of certain borrowers to repay such loans during a downturn
in general economic conditions;
|
|
|
(v)
|
A
significant delay in or inability to execute strategic initiatives designed to increase
revenues and or control expenses;
|
|
|
(vi)
|
The
potential need to adapt to changes in information technology systems, on which the Company
is highly dependent, could present operational issues or require significant capital
spending;
|
|
|
(vii)
|
Significant
changes in the Companys internal controls, or internal control failures;
|
|
|
(viii)
|
Acts
or threats of terrorism and actions taken by the United States or other governments as a
result of such threats, including military action, could adversely affect business and
economic conditions in the United States generally and in the Companys markets,
which could have an adverse effect on the Companys financial performance and that of
borrowers and on the financial markets and the price of the Companys common stock;
|
|
|
(ix)
|
Significant
changes in the extensive laws, regulations, and policies governing bank holding companies
and their subsidiaries, which could alter the Company's business environment or affect its
operations;
|
|
|
(x)
|
Changes in
general, national, international, regional or local economic conditions and credit markets
which are less favorable than those anticipated by Company management that could impact
the Company's investment securities portfolio, quality of credits, or the overall demand
for the Company's products or services; and
|
|
|
(xi)
|
The Companys
success in managing the risks involved in all of the foregoing matters.
|
You should carefully review all of these factors as well as the risk
factors set forth in Item 1A. Risk Factors contained in this Annual Report of Form 10-K.
There may be other risk factors that could cause differences from those anticipated by
management.
The forward-looking statements contained herein represent the Company's
judgment as of the date of this Annual Report on Form 10-K, and the Company cautions
readers not to place undue reliance on such statements. The Company disclaims any
obligation to publicly update or revise any forward-looking statement contained in the
succeeding discussion, or elsewhere in this Annual Report on Form 10-K, except to the
extent required by federal securities laws.
TABLE OF CONTENTS
PART I
|
|
|
|
|
|
ITEM 1
|
BUSINESS
|
6
|
|
|
|
|
Organization
|
6
|
|
Bar
Harbor Bank & Trust
|
6
|
|
Bar
Harbor Trust Services
|
8
|
|
Competition
|
8
|
|
Management
and Employees
|
9
|
|
Supervision
and Regulation
|
9
|
|
Financial
Information About Industry Segments
|
21
|
|
Availability
of Information Company Website
|
21
|
|
|
|
|
|
|
ITEM 1A
|
RISK
FACTORS
|
21
|
|
|
|
|
|
|
ITEM 1B
|
UNRESOLVED
STAFF COMMENTS
|
29
|
|
|
|
|
|
|
ITEM 2
|
PROPERTIES
|
29
|
|
|
|
|
|
|
ITEM 3
|
LEGAL
PROCEEDINGS
|
30
|
|
|
|
|
|
|
ITEM 4
|
RESERVED
|
30
|
|
|
|
|
|
|
PART II
|
|
|
|
|
|
ITEM 5
|
MARKET
FOR REGISTRANTS COMMON STOCK, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
|
30
|
|
|
|
|
Market
Information
|
30
|
|
Dividends
|
31
|
|
Recent
Sale of Unregistered Securities; Use of Proceeds from Registered Securities
|
32
|
|
Purchase
of Equity Securities by the Issuer and Affiliated Purchasers
|
32
|
|
Stock
Based Compensation Plans
|
32
|
|
Transfer
Agent Services
|
33
|
|
|
|
|
|
|
ITEM 6
|
SELECTED
CONSOLIDATED FINANCIAL DATA
|
33
|
|
|
|
|
|
|
ITEM 7
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
34
|
|
|
|
|
Executive
Overview
|
35
|
|
Application
of Critical Accounting Policies
|
38
|
|
Financial
Condition
|
40
|
|
Results
of Operations
|
65
|
|
|
|
|
|
|
ITEM
7A
|
QUALITATIVE AND
QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
|
82
|
|
|
|
|
|
|
ITEM
8
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
87
|
|
|
|
|
|
|
ITEM
9
|
CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
|
132
|
|
|
|
|
|
|
ITEM
9A
|
CONTROLS AND
PROCEDURES
|
132
|
|
|
|
|
|
|
ITEM
9B
|
OTHER
INFORMATION
|
135
|
|
|
|
|
|
|
PART
III
|
|
|
|
|
|
ITEM
10
|
DIRECTORS,
EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE OF THE REGISTRANT
|
135
|
|
|
|
|
|
|
ITEM
11
|
EXECUTIVE
COMPENSATION
|
135
|
|
|
|
|
|
|
ITEM
12
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|
136
|
|
|
|
|
|
|
ITEM
13
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
|
136
|
|
|
|
|
|
|
ITEM
14
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
136
|
|
|
|
|
|
|
PART
IV
|
|
|
|
|
|
ITEM
15
|
EXHIBITS,
FINANCIAL STATEMENTS SCHEDULES
|
136
|
|
|
|
|
SIGNATURES
|
138
|
PART I
ITEM 1. BUSINESS
Organization
Bar Harbor Bankshares (the "Company") ("BHB") was
incorporated under the laws of the state of Maine on January 19, 1984. At December 31,
2010, the Company had total consolidated assets of $1.12 billion and total shareholders
equity of $103.6 million.
The Company has one, wholly-owned first tier operating subsidiary, Bar
Harbor Bank & Trust (the "Bank"), a community bank, which offers a wide
range of deposit, loan, and related banking products, as well as brokerage services
provided through a third-party brokerage arrangement. In addition, the Company offers
trust and investment management services through its second tier subsidiary, Bar Harbor
Trust Services ("Trust Services"), a Maine chartered non-depository trust
company. These products and services are offered to individuals, businesses,
not-for-profit organizations and municipalities.
The Company is a bank holding company ("BHC") registered
under the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and is
subject to supervision, regulation and examination by the Board of Governors of the
Federal Reserve System (the "FRB"). The Company is also a Maine Financial
Institution Holding Company for the purposes of the laws of the state of Maine, and as
such is subject to the jurisdiction of the Superintendent (the "Superintendent")
of the Maine Bureau of Financial Institutions ("BFI").
Bar Harbor Bank & Trust
The Bank, originally founded in 1887, is a Maine financial institution,
and its deposits are insured by the Federal Deposit Insurance Corporation (the
"FDIC") up to the maximum extent permitted by law. The Bank is subject to the
supervision, regulation, and examination of the FDIC and the BFI. It is not a member of
the Federal Reserve Bank.
The Bank has twelve (12) branch offices located throughout downeast and
midcoast Maine, including its principal office located at 82 Main Street, Bar Harbor. The
Banks offices are located in Hancock, Washington, and Knox Counties, representing
the Banks principal market areas. The Hancock County offices, in addition to Bar
Harbor, are located in Blue Hill, Deer Isle, Ellsworth, Northeast Harbor, Somesville,
Southwest Harbor, and Winter Harbor. The Washington County offices are located in
Milbridge, Machias, and Lubec. The Knox County office is located in Rockland. The Bank
delivers its operations and technology support services from its operations center located
in Ellsworth, Maine.
The Bank is a retail bank serving individual and business customers,
retail establishments and restaurants, seasonal lodging, biological research laboratories,
and a large contingent of retirees. As a coastal bank, it serves the tourism, hospitality,
lobstering, fishing, boat building and marine services industries. It also serves
Maines wild blueberry industry through its Hancock and Washington County offices.
The Bank operates in a competitive market that includes other community banks, savings
institutions, credit unions, and branch offices of statewide and interstate bank holding
companies located in the Banks market area.
The Bank has a broad deposit base and loss of any one depositor or
closely aligned group of depositors would not have a material adverse effect on its
business. Historically, the banking business in the Banks market area has been
seasonal, with lower deposits in the winter and spring, and higher deposits in the summer
and autumn. These seasonal swings have been fairly predictable and have historically not
had a material adverse impact on the Bank or its liquidity position. Approximately 91.5%
of the Banks deposits are in interest bearing accounts. The Bank has paid, and
anticipates that it will continue to pay, competitive interest rates on all of the deposit
account products it offers and does not anticipate any material loss of these deposits.
The Bank emphasizes personal service to the community, with a
concentration on retail banking. Customers are primarily individuals and small businesses
to which the Bank offers a wide variety of products and services.
Retail Products and Services
:
The Bank offers a variety of
consumer financial products and services designed to satisfy the deposit and borrowing
needs of its retail customers. The Banks retail deposit products and services
include checking accounts, interest bearing NOW accounts, money market accounts, savings
accounts, club accounts, short-term and long-term certificates of deposit, Health Savings
Accounts, and Individual Retirement Accounts. Credit products and services include home
mortgages, residential construction loans, home equity loans and lines of credit, credit
cards, installment loans, and overdraft protection services. The Bank provides secured and
unsecured installment loans for new or used automobiles, boats, recreational vehicles,
mobile homes and other personal needs. The Bank also offers other customary products and
services such as safe deposit box rentals, wire transfers, check collection services,
foreign currency exchange, money orders, and U.S. Savings Bonds.
The Bank staffs a customer service center, providing customers with
telephone and e-mail responses to their questions and needs. The Bank also offers free
banking-by-mail services.
Retail Brokerage Services:
The Bank retains Infinex
Investments, Inc., ("Infinex") as a full service third-party broker-dealer,
conducting business under the assumed business name "Bar Harbor Financial
Services." Bar Harbor Financial Services is a branch office of Infinex, an
independent registered broker-dealer offering securities and insurance products that is
not affiliated with the Company or its subsidiaries. These products are not deposits, are
not insured by the FDIC or any other government agency, are not guaranteed by the Bank or
any affiliate, and may be subject to investment risk, including possible loss of value.
Bar Harbor Financial Services principally serves the brokerage needs of
individuals, from first-time purchasers, to sophisticated investors. It also offers a line
of life insurance, annuity, and retirement products, as well as financial planning
services. Infinex was formed by a group of member banks, and is reportedly one of the
largest providers of third party investment and insurance services to banks and their
customers in New England. Through Infinex, the Bank is able to take advantage of the
expertise, capabilities, and experience of a well-established third-party broker-dealer in
a cost effective manner.
Electronic Banking Services:
The Bank continues to offer free
Internet banking services, including free check images and electronic bill payment,
through its dedicated website at
www.BHBT.com
. Additionally, the Bank offers
TeleDirect, an interactive voice response system through which customers can check account
balances and activity, as well as initiate money transfers between their accounts.
Automated Teller Machines (ATMs) are located at each of the Banks twelve (12) branch
locations. These ATMs access major networks throughout the United States, including Plus,
NYCE, and other major ATM and credit card companies. The Bank is also a member of Maine
Cash Access, providing customers with surcharge-free access to 205 ATMs throughout the
state of Maine. Visa debit cards are also offered, providing customers with free access to
their deposit account balances at point of sale locations throughout most of the world.
Commercial Products and Services
:
The Bank serves the small
business market throughout downeast and midcoast Maine. It offers business loans to
individuals, partnerships, corporations, and other business entities for capital
construction, real estate and equipment financing, working capital, real estate
development, and a broad range of other business purposes. Business loans are provided
primarily to organizations and sole proprietors in the tourism, hospitality, healthcare,
blueberry, boatbuilding, biological research, and fishing industries, as well as to other
small and mid-size businesses associated with coastal communities. Certain larger loans,
which exceed the Banks lending limits, are written on a participation basis with
other financial institutions, whereby the Bank retains only such portions of those loans
that are within its lending limits and credit risk tolerances.
The Bank offers a variety of commercial deposit accounts, most notably
business checking and tiered money market accounts. These accounts are typically used as
operating accounts or short-term savings vehicles. The Banks cash management
services provide business customers with short-term investment opportunities through a
cash management sweep program, whereby excess operating funds over established thresholds
are swept into overnight securities sold under agreements to repurchase. The Bank also
offers
Business On Line Direct
("
BOLD"
) an Internet banking
service for businesses. This service allows business clients to view their account
histories, print statements, view check images, order stop payments, transfer funds
between accounts, transmit Automated Clearing House (ACH) files, and order both domestic
and foreign wire transfers. The Bank also offers remote deposit capture, enabling its
business customers to deposit checks remotely. Other commercial banking services include
merchant credit card processing provided through a third party vendor, night depository,
and coin and currency handling.
Bar Harbor Trust Services
Trust Services is a Maine chartered non-depository trust company and a
wholly-owned subsidiary of the Bank. Trust Services provides a comprehensive array of
trust and investment management services to individuals, businesses, not-for-profit
organizations, and municipalities of varying asset size.
Trust Services serves as trustee of both living trusts and trusts under
wills, including revocable and irrevocable, charitable remainder and testamentary trusts,
and in this capacity holds, accounts for and manages financial assets, real estate and
special assets. Trust Services offers custody, estate settlement, and fiduciary tax
services. Additionally, Trust Services offers employee benefit trust services for which it
acts as trustee, custodian, administrator and/or investment advisor, for employee benefit
plans and for corporate, self employed, municipal and not-for-profit employers located
throughout the Companys market areas.
The staff includes credentialed investment and trust professionals with
extensive experience. At December 31, 2010, Trust Services served 740 client accounts,
with assets under management and assets held in custody amounting to $314.2 million and
$22.6 million, respectively.
Competition
The Company competes principally in downeast and midcoast Maine, which
can generally be characterized as rural areas. The Company considers its primary market
areas to be in Hancock, Knox, and Washington counties, each in the state of Maine.
According to the 2009 Census Bureau Report estimate, the population of these three
counties was 53,447, 40,801 and 32,107 respectively, representing a combined population of
approximately 126,355. The economies in these three counties are based primarily on
tourism, healthcare, fishing, aquaculture, agriculture, and small local businesses, but
are also supported by a large contingent of retirees. Major competitors in these market
areas include local independent banks, local branches of large regional bank affiliates,
thrift institutions, savings and loan institutions, mortgage companies, and credit unions.
Other competitors in the Companys primary market area include financing affiliates
of consumer durable goods manufacturers, insurance companies, brokerage firms, investment
advisors, and other non-bank financial service providers.
Like most financial institutions in the United States, the Company
competes with an ever-increasing array of financial service providers. As the national
economy moves further towards a concentration of service companies, competitive pressures
will mount.
The Company has generally been able to compete effectively with other
financial institutions by emphasizing quality customer service, making decisions at the
local level, maintaining long-term customer relationships, building customer loyalty, and
providing products and services designed to address the specific needs of customers;
however, no assurance can be given that the Company will continue to be able to compete
effectively with other financial institutions in the future.
No material part of the Companys business is dependent upon one,
or a few customers, or upon a particular industry segment, the loss of which would have a
material adverse impact on the operations of the Company.
Management and Employees
The Company has two principal officers: Joseph M. Murphy, President and
Chief Executive Officer, and Gerald Shencavitz, Executive Vice President, Chief Financial
Officer and Treasurer.
Joseph M. Murphy also serves as President and Chief Executive Officer
of the Bank. Gerald Shencavitz also serves as Executive Vice President, Chief Financial
Officer, Chief Operating Officer and Treasurer of the Bank, and Chief Financial Officer of
Trust Services. Other senior operating positions in the Company include a President of
Trust Services, and Senior Vice Presidents in charge of retail banking, business banking,
credit administration, operations, human resources and marketing.
As of December 31, 2010, the Bank employed 153 full-time equivalent
employees, Trust Services employed 13 full-time equivalent employees, and the holding
company employed 3 full-time employees, representing a full-time equivalent complement of
169
employees of the Company.
The Company maintains comprehensive employee benefit programs, which
provide health, dental, long-term and short-term disability, and life insurance. All
Company employees are eligible for participation in the Bar Harbor Bankshares 401(k) Plan
provided they meet minimum age and service requirements. Certain officers and employees of
the Company and its subsidiaries also participate in the Companys 2000 and 2009
Stock Option Plans and/or have incentive bonus compensation plans, supplemental executive
retirement agreements and change in control, confidentiality and non-compete agreements.
The Companys management believes that employee relations are good
and there are no known disputes between management and employees.
Supervision and Regulation
The business in which the Company and its subsidiaries are engaged is
subject to extensive supervision, regulation, and examination by various federal and state
bank regulatory agencies, including the Federal Reserve Bank (the "FRB"),
Federal Deposit Insurance Corporation (the "FDIC"), and the Superintendent of
the Maine Bureau of Financial Institutions (the "Superintendent"), as well as
other governmental agencies in the states in which the Company and its subsidiaries
operate. The supervision, regulation, and examination to which the Company and its
subsidiaries are subject are intended primarily to protect depositors and other customers,
or are aimed at carrying out broad public policy goals, and are not necessarily for the
protection of the shareholders.
Some of the more significant statutory and regulatory provisions
applicable to banks and BHCs, to which the Company and its subsidiaries are subject, are
described more fully below, together with certain statutory and regulatory matters
concerning the Company and its subsidiaries. The description of these statutory and
regulatory provisions does not purport to be complete and is qualified in its entirety by
reference to the particular statutory or regulatory provision.
Passage of the Dodd-Frank Act:
In July 2010, Congress enacted
regulatory reform legislation known as the DoddFrank Wall Street Reform and Consumer
Protection Act (the "DoddFrank Act"), which the President signed into law
on July 21, 2010. Many aspects of the DoddFrank Act are subject to further
rulemaking and will take effect over several years, making it difficult to anticipate the
overall financial impact to the Company, the Bank or across the industry. This new law
broadly affects the financial services industry by implementing changes to the financial
regulatory landscape aimed at strengthening the sound operation of the financial services
sector, including provisions that, among other things, will:
Repeal the federal prohibitions on the payment of interest on demand
deposits, thereby permitting depository institutions to pay interest on business
transaction and other accounts.
The Companys management is actively reviewing the provisions of
the DoddFrank Act and assessing its probable impact on the business, financial
condition, and results of operations of the Company and the Bank. Provisions in the
legislation that affect deposit insurance assessments, interchange fees, and payment of
interest on demand deposits could increase the costs associated with deposits as well as
place limitations on certain revenues those deposits may generate.
Bank Holding Company Act
:
As a registered BHC and a Maine
financial institution holding company, the Company is subject to regulation under the BHC
Act and Maine law and to examination and supervision by the Board of Governors of the FRB
and the Superintendent, and is required to file reports with, and provide additional
information requested by, the FRB and the Superintendent. The FRB has the authority to
issue orders to BHCs to cease and desist from unsound banking practices and violations of
conditions imposed by, or violations of agreements with, the FRB. The FRB is also
empowered to assess civil money penalties against companies or individuals that violate
the BHC Act or orders or regulations thereunder, to order termination of non-banking
activities of non-banking subsidiaries of BHCs, and to order termination of ownership and
control of a non-banking subsidiary of a BHC.
Under the BHC Act, the Company may not generally engage in activities
or acquire more than 5% of any class of voting securities of any company engaged in
activities other than banking or activities that are closely related to banking. However,
a bank holding company that has elected to be treated as a "financial holding
company" may engage in activities that are financial in nature or incidental or
complementary to such financial activities, as determined by the FRB alone, or together
with the Secretary of the Department of the Treasury. The Company has not elected
financial holding company status. Under certain circumstances, the Company may be required
to give notice to or seek approval of the FRB before engaging in activities other than
banking. In addition, Maine law requires approval by the Superintendent prior to
acquisition of more than 5% of the voting shares of a Maine financial institution or any
financial institution holding company that controls a Maine financial institution. The
Superintendent also must approve acquisition by a Maine financial institution holding
company of more than 5% of a financial institution or financial institution holding
company domiciled outside of the state of Maine.
Bank Holding Company Support of Subsidiary Banks:
Under the
Dodd-Frank Act, the Company is required to serve as a source of financial strength for the
Bank in the event of the financial distress of the Bank. This provision codifies the
longstanding policy of the FRB. This support may be required at times when the bank
holding company may not have the resources to provide it. Similarly, under the
cross-guarantee provisions of Federal Deposit Insurance Act, as amended, the FDIC can hold
any FDIC-insured depository institution liable for any loss suffered or anticipated by the
FDIC in connection with (1) the "default" of a commonly controlled FDIC-insured
depository institution; or (2) any assistance provided by the FDIC to a commonly
controlled FDIC-insured depository institution "in danger of default." The
Companys bank subsidiary, Bar Harbor Bank & Trust, is an FDIC insured depository
institution.
Regulatory Capital Requirements
: The FRB and the FDIC have
issued substantially similar risk-based and leverage capital guidelines applicable to
United States banking organizations. In addition, these regulatory agencies may from time
to time require that a banking organization maintain capital above the minimum levels,
whether because of its financial condition or actual or anticipated growth.
As a bank holding company, the Company is subject to consolidated
regulatory capital requirements administered by the FRB. The Bank is subject to similar
capital requirements administered by the FDIC. The federal regulatory authorities
risk-based capital guidelines are based upon the 1988 capital accord
("Basel I") of the Basel Committee on Banking Supervision (the "Basel
Committee"). The Basel Committee is a committee of central banks and bank
supervisors/regulators from the major industrialized countries that develops broad policy
guidelines for use by each countrys supervisors in determining the supervisory
policies they apply. The requirements are intended to ensure that banking organizations
have adequate capital given the risk levels of assets and off-balance sheet financial
instruments. Under the requirements, banking organizations are required to maintain
minimum ratios for Tier 1 capital and total capital to risk-weighted assets (including
certain off-balance sheet items, such as letters of credit). For purposes of calculating
the ratios, a banking organizations assets and some of its specified off-balance
sheet commitments and obligations are assigned to various risk categories. A depository
institutions or holding companys capital, in turn, is classified in one of
three tiers, depending on type:
-
Core Capital (Tier 1):
Tier 1 capital includes common
equity, retained earnings, qualifying non-cumulative perpetual preferred stock, a limited
amount of qualifying cumulative perpetual stock at the holding company level, minority
interests in equity accounts of consolidated subsidiaries, and qualifying trust preferred
securities, less goodwill, most intangible assets and certain other assets.
-
Supplementary Capital (Tier 2):
Tier 2 capital
includes, among other things, perpetual preferred stock and trust preferred securities not
meeting the Tier 1 definition, qualifying mandatory convertible debt securities,
qualifying subordinated debt, and allowances for possible loan and lease losses, subject
to limitations.
-
Market Risk Capital (Tier 3):
Tier 3 capital includes
qualifying unsecured subordinated debt.
The Company, like other bank holding companies, currently is required
to maintain Tier 1 capital and "Total capital" (the sum of Tier 1 and Tier 2
capital) equal to at least 4.0% and 8.0%, respectively, of its total risk-weighted assets
(including various off-balance-sheet items, such as letters of credit). The Bank, like
other depository institutions, is required to maintain similar capital levels under
capital adequacy guidelines. In addition, for a depository institution to be considered
"well-capitalized" under the regulatory framework for prompt corrective action,
its Tier 1 and total capital ratios must be at least 6.0% and 10.0% on a risk-adjusted
basis, respectively. At December 31, 2010, the Companys Tier I Risk-based and Total
Risk-based capital ratios were 13.57% and 15.41%, respectively.
Pursuant to Section 171 of the Dodd-Frank Act (more commonly know as
the "Collins Amendment"), the capital requirements generally applicable to
insured depository institutions will serve as a floor for any capital requirements the FRB
may establish for the Company as a BHC. As a result, hybrid securities, including trust
preferred securities, issued on or after May 19, 2010, are not eligible to be included in
Tier 1 capital and instead may be included only in Tier 2 capital. The Collins Amendment
also specifies that the Federal Reserve may not establish risk-based capital requirements
for bank holding companies that are quantitatively lower than the risk-based capital
requirements in effect for insured depository institutions as of July 21, 2010.
Bank holding companies and banks are also required to comply with
minimum leverage ratio requirements. The leverage ratio is the ratio of a banking
organizations Tier 1 capital to its total adjusted quarterly average assets (as
defined for regulatory purposes). The requirements necessitate a minimum leverage ratio of
3.0% for bank holding companies and national banks that either have the highest
supervisory rating or have implemented the appropriate federal regulatory authoritys
risk-adjusted measure for market risk. All other bank holding companies and national banks
are required to maintain a minimum leverage ratio of 4.0%, unless a different minimum is
specified by an appropriate regulatory authority. In addition, for a depository
institution to be considered "well-capitalized" under the regulatory framework
for prompt corrective action, its leverage ratio must be at least 5.0%. The Federal
Reserve Board has not advised the Company, and the FDIC has not advised the Bank, of any
specific minimum leverage
ratio applicable to it.
At December 31, 2010, the Companys Tier I Leverage ratio was 9.01%.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), among other things, identifies five capital categories for insured
depository institutions (well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized) and requires the federal
bank regulatory agencies to implement systems for "prompt corrective action" for
insured depository institutions that do not meet minimum capital requirements within such
categories. FDICIA imposes progressively more restrictive constraints on operations,
management and capital distributions, depending on the category in which an institution is
classified. Failure to meet the capital guidelines could also subject a banking
institution to capital raising requirements. An "undercapitalized" bank must
develop a capital restoration plan and its parent holding company must guarantee that
banks compliance with the plan. The liability of the parent holding company under
any such guarantee is limited to the lesser of 5% of the banks assets at the time it
became "undercapitalized" or the amount needed to comply with the plan.
Furthermore, in the event of the bankruptcy of the parent holding company, such guarantee
would take priority over the parents general unsecured creditors. In addition,
FDICIA requires the various regulatory agencies to prescribe certain non-capital standards
for safety and soundness relating generally to operations and management, asset quality
and executive compensation, and permits regulatory action against a financial institution
that does not meet such standards.
The various regulatory agencies have adopted substantially similar
regulations that define the five capital categories identified by FDICIA, using the total
risk-based capital, Tier 1 risk-based capital and leverage capital ratios as the relevant
capital measures. Such regulations establish various degrees of corrective action to be
taken when an institution is considered undercapitalized. Under the regulations, a bank
generally shall be deemed to be:
-
"well-capitalized" if it has a total risk based capital
ratio of 10.0% or greater, has a Tier I risk based capital ratio of 6.0% or more, has a
leverage ratio of 5.0% or greater and is not subject to any written agreement, order or
capital directive or prompt corrective action directive;
-
"adequately capitalized" if it has a total risk based capital ratio of 8.0% or
greater, a Tier I risk based capital ratio of 4.0% or more, and a leverage ratio of 4.0%
or greater (3.0% under certain circumstances) and does not meet the definition of a
"well-capitalized bank;"
-
"undercapitalized" if it has a total risk based capital ratio that is less
than 8.0%, a Tier I risk based capital ratio that is less than 4.0% or a leverage ratio
that is less than 4.0% (3.0% under certain circumstances);
-
"significantly undercapitalized" if it has a total risk
based capital ratio that is less than 6.0%, a Tier I risk based capital ratio that is less
than 3.0% or a leverage ratio that is less than 3.0%; and
-
"critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%.
Regulators also must take into consideration (1) concentrations of
credit risk; (2) interest rate risk (when the interest rate sensitivity of an
institutions assets does not match the sensitivity of its liabilities or its
off-balance-sheet position); and (3) risks from non-traditional activities, as well as an
institutions ability to manage those risks, when determining the adequacy of an
institutions capital. This evaluation will be made as a part of the
institutions regular safety and soundness examination. In addition, the Company, and
any bank with significant trading activity, must incorporate a measure for market risk
into their regulatory capital calculations. At December 31, 2010, and at the time of this
report, the Companys risk-based capital ratio and leverage ratio were well in excess
of regulatory requirements, and its management expects these ratios to remain in excess of
regulatory requirements. In addition, at December 31, 2010, and at the time of this report
the Bank was well in excess of applicable FDIC requirements.
An institution generally must file a written capital restoration plan
which meets specified requirements with an appropriate FDIC regional director within 45
days of the date that the institution receives notice or is deemed to have notice that it
is undercapitalized, significantly undercapitalized or critically undercapitalized. An
institution, which is required to submit a capital restoration plan, must concurrently
submit a performance guaranty by each company that controls the institution. A critically
undercapitalized institution generally is to be placed in conservatorship or receivership
within 90 days unless the FDIC formally determines that forbearance from such action would
better protect the deposit insurance fund. Immediately upon becoming undercapitalized, an
institution becomes subject to the provisions of Section 38 of the Federal Deposit
Insurance Act ("FDIA"), including for example, (i) restricting payment of
capital distributions and management fees, (ii) requiring that the FDIC monitor the
condition of the institution and its efforts to restore its capital, (iii) requiring
submission of a capital restoration plan, (iv) restricting the growth of the
institutions assets and (v) requiring prior approval of certain expansion proposals.
The Company has not elected, and does not expect to elect, to calculate
its risk-based capital requirements under the Internal-Ratings Based and Advanced
measurement Approaches (commonly referred to as the "advanced approaches" or
"Basel II") proposed by the Basel Committee on Banking Supervisioni (the
"Basel Committee"), as implemented in the U. S. by the federal banking agencies.
In connection with Basel II, the federal banking agencies also issued, in 2008, a joint
notice of proposed rulemaking that sought comment on implementation in the United States
of certain aspects of the "standardized approach" of the international Basel II
Accord (the "Standardized Approach Proposal"). However, the federal banking
agencies have delayed finalizing the Standardized Approach Proposal until they can
determine how best to eliminate its reliance on credit ratings, as required by Section
939A of the Dodd-Frank Act. Regardless, the Company and the Bank do not currently expect
to calculate their capital requirements and ratios in accordance with the Standardized
Approach Proposal.
In response to the recent financial crisis, the Basel Committee
released additional recommended revisions to existing capital rules throughout the world.
These proposed revisions are intended to protect financial stability and promote
sustainable economic growth by setting out higher and better capital requirements, better
risk coverage, the introduction of a global leverage ratio, measures to promote the
buildup of capital that can be drawn down in periods of stress, and the introduction of
two global liquidity standards (collectively, "Basel III"). The FRB has not yet
adopted Basel III, and there remains considerable uncertainty regarding the timing for
adoption and implementation of Basel III in the United States. If and when the FRB does
implement Basel III, it may be with some modifications or adjustments. Accordingly, the
Company is not yet in a position to determine the effect of Basel III on its capital
requirements.
The Companys principal regulators may raise capital requirements
applicable to banking organizations beyond current levels. The Company is unable to
predict whether higher capital requirements will be imposed and, if so, at what levels and
on what schedules. Therefore, the Company cannot predict what effect such higher
requirements may have on it.
Information concerning the Company and its subsidiaries with respect to
capital requirements is incorporated by reference from Part II, Item 7, section entitled
"Capital Resources" and from Part II, Item 8, Notes to Consolidated Financial
Statements, Note 11 "Shareholders Equity," each in this Annual Report on
Form 10-K for the year ended December 31, 2010.
Transactions with Affiliates:
Under Sections 23A and 23B of the
FRA and Regulation W thereunder, there are various legal restrictions on the extent to
which a bank holding company and its non-bank subsidiaries may borrow, obtain credit from
or otherwise engage in "covered transactions" with its FDIC-insured depository
institution subsidiaries. Such borrowings and other covered transactions by an insured
depository institution subsidiary (and its subsidiaries) with its non-depository
institution affiliates are limited to the following amounts:
-
in the case of one such affiliate, the aggregate amount of covered
transactions of the insured depository institution and its subsidiaries cannot exceed 10%
of the capital stock and surplus of the insured depository institution; and
-
in the case of all affiliates, the aggregate amount of covered
transactions of the insured depository institution and its subsidiaries cannot exceed 20%
of the capital stock and surplus of the insured depository institution.
The Dodd-Frank Act amended the definition of affiliate to include an
investment fund for which the depository institution or one of its affiliate is an
investment adviser. "Covered transactions" are defined by statute for these
purposes to include a loan or extension of credit to an affiliate, a purchase of or
investment in securities issued by an affiliate, a purchase of assets from an affiliate
unless exempted by the FRB, the acceptance of securities issued by an affiliate as
collateral for a loan or extension of credit to any person or company, or the issuance of
a guarantee, acceptance, or letter of credit on behalf of an affiliate. Covered
transactions are also subject to certain collateral security requirements. Further, a bank
holding company and its subsidiaries are prohibited from engaging in certain tying
arrangements in connection with any extension of credit, lease or sale of property of any
kind, or furnishing of any service.
Change in Bank Control Act
: The Change in Bank Control Act
prohibits a person or group of persons from acquiring "control" of a BHC, unless
the FRB has been notified and has not objected to the transaction. Under a rebuttable
presumption established by the FRB, the acquisition of 10% or more of a class of voting
securities of a BHC with a class of securities registered under section 12 of the
Securities Exchange Act of 1934 as amended (the "Exchange Act"), would, under
the circumstances set forth in the presumption, constitute acquisition of control of the
BHC. In addition, a company is required to obtain the approval of FRB under the BHC Act
before acquiring 25% (5% in the case of an acquirer that is a BHC) or more of any class of
outstanding voting securities of a BHC, or otherwise obtaining control or a
"controlling influence" over that BHC. In September 2008 the FRB released
guidance on minority investment in banks which relaxed the presumption of control for
investments of greater than 10% of a class of outstanding voting securities of a bank
holding company in certain instances discussed in the guidance.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
:
Riegle-Neal permits adequately or well-capitalized and adequately or well managed bank
holding companies, as determined by the FRB, to acquire banks in any state subject to
certain concentration limits and other conditions. Riegle-Neal also generally authorizes
the interstate merger of banks. In addition, among other things, Riegle-Neal permits banks
to establish new branches on an interstate basis provided that the law of the host state
specifically authorizes such action. However, as a bank holding company, The Company is
required to obtain prior FRB approval before acquiring more than 5% of a class of voting
securities, or substantially all of the assets, of a bank holding company, bank or savings
association.
Declaration of Dividends
:
According to its Policy Statement on
Cash Dividends Not Fully Covered by Earnings (the "FRB Dividend Policy"), the
FRB considers adequate capital to be critical to the health of individual banking
organizations and to the safety and stability of the banking system. Of course, one of the
major components of the capital adequacy of a bank or a BHC is the strength of its
earnings, and the extent to which its earnings are retained and added to capital or paid
to shareholders in the form of cash dividends. Accordingly, the FRB Dividend Policy
suggests that banks and BHCs generally should not maintain their existing rate of cash
dividends on common stock unless the organizations net income available to common
shareholders over the past year has been sufficient to fully fund the dividends, and the
prospective rate of earnings retention appears consistent with the organizations
capital needs, asset quality and overall financial condition. The FRB Dividend Policy
reiterates the FRBs belief that a BHC should not maintain a level of cash dividends
to its shareholders that places undue pressure on the capital of bank subsidiaries, or
that can be funded only through additional borrowings or other arrangements that may
undermine the BHCs ability to serve as a source of strength.
Under current Maine corporation law, the directors of a corporation may
make distributions (including declaration of a dividend) to its shareholders (subject to
restriction by the articles of incorporation) unless, after giving effect to the
distribution: (1) the corporations total assets would be less than its total
liabilities, with liquidation preferences of any senior preferred shares treated as
liabilities (the "balance sheet test"); or (2) the corporation would not be able
to pay its debts as they become due in the usual course of business (the "equity
solvency test"). In order for a distribution to be lawful under Maine corporate law,
it must satisfy both the balance sheet test and equity solvency test. These limitations
generally apply to investor owned Maine financial institutions and financial institution
holding companies.
The FDIC has the authority to use its enforcement powers to prohibit a
bank from paying dividends if, in its opinion, the payment of dividends would constitute
an unsafe or unsound practice. Federal law also prohibits the payment of dividends by a
bank that will result in the bank failing to meet its applicable capital requirements on a
pro forma basis.
Deposit Insurance
. The Bank pays deposit insurance
premiums to the FDIC based on an assessment rate established by the FDIC. For most banks
and savings associations, including the Bank, FDIC rates depend upon a combination of
CAMELS component ratings and financial ratios. CAMELS ratings reflect the applicable bank
regulatory agencys evaluation of the financial institutions capital, asset
quality, management, earnings, liquidity and sensitivity to risk. For large banks and
savings associations that have long-term debt issuer ratings, assessment rates depend upon
such ratings, and CAMELS component ratings. Pursuant to the Dodd-Frank Act, the FDIC has
amended the deposit insurance assessment by changing the calculation of deposit
assessments. Under the new calculation, deposit premiums will be based on assets rather
than insurable deposits. To determine its actual deposit insurance premiums, the Bank will
compute the base amount on its average consolidated assets less its average tangible
equity (which the FDIC proposes to be defined as the amount of Tier 1 capital) and its
applicable assessment rate. The new assessment formula will become effective on April 1,
2011, and will be used to calculate the June 30, 2011 assessment. Future expenses will be
based on asset levels, Tier 1 capital levels, assessment rates, CAMELS ratings, and
whether there are any future special assessments by the FDIC. The Bank is unable to
predict the effect of the changes to the calculation of its deposit insurance assessment,
but expects that its aggregate FDIC-deposit insurance premium payable June 30, 2011 will
be lower than its December 31, 2010, payment.
In November 2009 the FDIC adopted a rule that required insured
depository institutions to prepay their quarterly risk-based assessments for all of 2010,
2011, and 2012, on December 30, 2009, along with each institutions risk-based
deposit insurance assessment for the third quarter of 2009. For purposes of calculating
the amount to prepay, the FDIC required that institutions use their total base assessment
rate in effect on September 30, 2009, and increase that assessment base quarterly at
a 5 percent annual growth rate through the end of 2012. On September 29, 2009,
the FDIC also increased annual assessment rates uniformly by 3 basis points beginning
in 2011 such that an institutions assessment for 2011 and 2012 would be increased by
an annualized 3 basis points. The Banks prepayment for 2010, 2011 and 2012
amounted to $3,550,596.
In 2008, the level of FDIC deposit insurance was temporarily increased
from $100,000 to $250,000 per depositor and this level of insurance was made permanent
under the Dodd-Frank Act. Additionally, the Dodd-Frank Act provides temporary unlimited
deposit insurance coverage for noninterest-bearing transactions accounts beginning
December 31, 2010, and ending December 31, 2012. This replaced the FDICs Transaction
Account Guarantee Program, which expired on December 31, 2010.
The FDIC has the power to adjust deposit insurance assessment rates at
any time. We cannot predict whether, as a result of the adverse change in U.S. economic
conditions and, in particular, declines in the value of real estate in certain markets
served by the Bank, the FDIC will in the future increase deposit insurance assessment
levels.
Activities and Investments of Insured State-Chartered Banks:
FDIC
insured, state-chartered banks, such as the Bank, are also subject to similar restrictions
on their business and activities. Section 24 of the Federal Deposit Insurance Act
("FDIA"), generally limits the activities as principal and equity investments of
FDIC insured, state-chartered banks to those activities that are permissible to national
banks. In 1999, the FDIC substantially revised its regulations implementing Section 24 of
the FDIA to ease the ability of state-chartered banks to engage in certain activities not
permissible for national banks, and to expedite FDIC review of bank applications and
notices to engage in such activities.
Safety and Soundness Standards:
FDICIA, as amended, directs
each federal banking agency to prescribe safety and soundness standards for depository
institutions relating to internal controls, information systems, internal audit systems,
loan documentation, credit underwriting, interest rate risk, asset growth, compensation,
asset quality, earnings, and stock valuation. The Community Development and Regulatory
Improvement Act of 1994 amended FDICIA by allowing federal banking agencies to publish
guidelines rather than regulations covering safety and soundness.
FDICIA also contains a variety of other provisions that may affect the
Companys and the Banks operations, including reporting requirements,
regulatory guidelines for real estate lending, "truth in savings" provisions,
and the requirement that a depository institution give 90 days prior written notice to
customers and regulatory authorities before closing any branch.
Consumer Protection Regulation
Consumer Protection Laws General
:
The
Company and the Bank are subject to a number of federal and state laws designed to protect
consumers and prohibit unfair or deceptive business practices. These laws include the
Equal Credit Opportunity Act, Fair Housing Act, Home Ownership Protection Act, Fair Credit
Reporting Act, as amended by the Fair and Accurate Credit Transactions Act of 2003 (the
"FACT Act"), the Gramm-Leach-Bliley Act of 1999 (the "GLBA"), Truth in
Lending Act, the Community Reinvestment Act (the "CRA"), the Home Mortgage
Disclosure Act, Real Estate Settlement Procedures Act, National Flood Insurance Act and
various state law counterparts. These laws and regulations mandate certain disclosure
requirements and regulate the manner in which financial institutions must interact with
customers when taking deposits, making loans, collecting loans and providing other
services. Further, the Dodd-Frank Act established the CFPB, which has the responsibility
for making rules and regulations under the federal consumer protection laws relating to
financial products and services. The CFPB also has a broad mandate to prohibit unfair or
deceptive acts and practices and is specifically empowered to require certain disclosures
to consumers and draft model disclosure forms. Failure to comply with consumer protection
laws and regulations can subject financial institutions to enforcement actions, fines and
other penalties.
Interchange Fees
:
Pursuant to the Dodd-Frank Act,
the FRB has issued a proposed rule governing the interchange fees charged on debit cards.
The proposed rule would cap the fee a bank could charge on a debit card transaction and
shifts such interchange fees from a percentage of the transaction amount to a per
transaction fee. Although the proposed rule does not directly apply to institutions with
less than $10 billion in assets, market forces may result in debit card issuers of all
sizes adopting fees that comply with this rule. If adopted, the proposed rule would likely
result in a decrease in the fee income the Bank earns from debit cards.
Mortgage Reform
:
The Dodd-Frank Act prescribes certain
standards that mortgage lenders must consider before making a residential mortgage loan,
including verifying a borrowers ability to repay such mortgage loan. The Dodd-Frank
Act also allows borrowers to assert violations of certain provisions of the
Truth-in-Lending Act as a defense to foreclosure proceedings. Under the Dodd-Frank Act,
prepayment penalties are prohibited for certain mortgage transactions and creditors are
prohibited from financing insurance policies in connection with a residential mortgage
loan or home equity line of credit. The Dodd-Frank Act requires mortgage lenders to make
additional disclosures prior to the extension of credit, in each billing statement and for
negative amortization loans and hybrid adjustable rate mortgages.
Customer Information Security:
The FDIC and other bank
regulatory agencies have adopted final guidelines for establishing standards for
safeguarding nonpublic personal information about customers. These guidelines implement
provisions of the Gramm-Leach-Bliley Act of 1999 ("GLBA"), which establishes a
comprehensive framework to permit affiliations among commercial banks, insurance
companies, securities firms, and other financial service providers by revising and
expanding the BHCA framework. Specifically, the Information Security Guidelines
established by the GLBA require each financial institution, under the supervision and
ongoing oversight of its Board of Directors or an appropriate committee thereof, to
develop, implement and maintain a comprehensive written information security program
designed to ensure the security and confidentiality of customer information, to protect
against anticipated threats or hazards to the security or integrity of such information
and to protect against unauthorized access to or use of such information that could result
in substantial harm or inconvenience to any customer. The federal banking regulators have
issued guidance for banks on response programs for unauthorized access to customer
information. This guidance, among other things, requires notice to be sent to customers
whose "sensitive information" has been compromised if unauthorized use of this
information is "reasonably possible." A majority of states have enacted
legislation concerning breaches of data security and Congress is considering federal
legislation that would require consumer notice of data security breaches.
Privacy
:
The GLBA requires financial institutions to
implement policies and procedures regarding the disclosure of nonpublic personal
information about consumers to nonaffiliated third parties. In general, the statute
requires financial institutions to explain to consumers their policies and procedures
regarding the disclosure of such nonpublic personal information, and, unless otherwise
required or permitted by law, financial institutions are prohibited from disclosing such
information except as provided in their policies and procedures.
Identity Theft Red Flags
: The federal banking
agencies jointly issued final rules and guidelines in November 2007, implementing Section
114 of the Fair and Accurate Credit Transactions Act of 2003 ("FACT Act") and
final rules implementing Section 315 of the FACT Act. The rules implementing Section 114
require each financial institution or creditor to develop and implement a written Identity
Theft Prevention Program (the "Program") to detect, prevent, and mitigate
identity theft in connection with the opening of certain accounts or certain existing
accounts. In addition, the Agencies issued guidelines to assist financial institutions and
creditors in the formulation and maintenance of a Program that satisfies the requirements
of the rules. The rules implementing Section 114 also require credit and debit card
issuers to assess the validity of notifications of changes of address under certain
circumstances. Additionally, the Agencies are issuing joint rules under Section 315 that
provide guidance regarding reasonable policies and procedures that a user of consumer
reports must employ when a consumer reporting agency sends the user a notice of address
discrepancy. The joint final rules and guidelines were effective January 1, 2008. The
mandatory compliance date for this rule was November 1, 2008. Management believes the
Company is in compliance with all of the requirements prescribed by the FACT Act and all
applicable final implementing rules.
Fair Credit Reporting Affiliate Marketing Regulations
: The federal banking
agencies jointly issued rules effective on January 1, 2008, to implement the affiliate
marketing provisions in Section 214 of the FACT Act, which amends the Fair Credit
Reporting Act. The final rules generally prohibit a person from using information received
from an affiliate to make a solicitation for marketing purposes to a consumer, unless the
consumer is given notice and a reasonable opportunity and a reasonable and simple method
to opt out of the making of such solicitations.
Other Regulatory Requirements
Community Reinvestment:
The Community Reinvestment Act
("CRA") requires lenders to identify the communities served by the
institutions offices and other deposit taking facilities and to make loans and
investments and provide services that meet the credit needs of these communities.
Regulatory agencies examine each of the banks and rate such institutions compliance
with CRA as "Outstanding," "Satisfactory," "Needs to
Improve" or "Substantial Noncompliance." Failure of an institution to
receive at least a "Satisfactory" rating could inhibit such institution or its
holding company from undertaking certain activities, including engaging in activities
newly permitted as a financial holding company under the
G
LBA and
acquisitions of other financial institutions. The FRB must take into account the record of
performance of banks in meeting the credit needs of the entire community served, including
low-and moderate-income neighborhoods. The Bank a achieved a rating of
"Satisfactory" on its most recent examination. Maine also has enacted
substantially similar community reinvestment requirements.
USA Patriot Act:
The USA Patriot Act of 2001 (the "Patriot
Act"), designed to deny terrorists and others the ability to obtain anonymous access
to the U.S. financial system, has significant implications for depository institutions,
broker-dealers and other businesses involved in the transfer of money. The Patriot Act,
together with the implementing regulations of various federal regulatory agencies, has
caused financial institutions, including the Bank and Trust Services, to adopt and
implement additional or amend existing policies and procedures with respect to, among
other things, anti-money laundering compliance, suspicious activity and currency
transaction reporting, customer identity verification and customer risk analysis. The
statute and its underlying regulations also permit information sharing for
counter-terrorist purposes between federal law enforcement agencies and financial
institutions, as well as among financial institutions, subject to certain conditions. It
also requires the Federal Reserve Board (and other federal banking agencies) to evaluate
the effectiveness of an applicant in combating money-laundering activities when
considering applications filed under Section 3 of the BHC Act, or under the Bank Merger
Act. In 2006, final regulations under the USA Patriot Act were issued requiring financial
institutions, including the Bank, to take additional steps to monitor their correspondent
banking and private banking relationships as well as their relationships with "shell
banks."
Regulatory Enforcement Authority:
The enforcement powers
available to federal banking regulators include, among other things, the ability to assess
civil money penalties, to issue cease and desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated parties, as
defined. In general, these enforcement actions may be initiated for violations of law and
regulations and unsafe or unsound practices. Other actions or inactions may provide the
basis for enforcement action, including misleading or untimely reports filed with
regulatory authorities. Under certain circumstances, federal and state law requires public
disclosure and reports of certain criminal offenses and also final enforcement actions by
the federal banking agencies.
Securities Regulation:
The common stock of the Company is
registered with the U. S. Securities and Exchange Commission ("SEC") under
Section 12(g) of the Securities Exchange Act of 1934, as amended. Accordingly, the Company
is subject to the information, proxy solicitation, insider trading restrictions and other
requirements of the Act.
The Emergency Economic Stabilization Act of 2008; American Recovery and
Reinvestment Act of 2009:
In the third quarter of 2008, the Federal Reserve, the
U.S. Treasury and the FDIC initiated measures to stabilize the financial markets and
to provide liquidity for financial institutions. The Emergency Economic Stabilization Act
of 2008 ("EESA") was signed into law on October 3, 2008 and authorized the
U.S. Treasury to provide funds to be used to restore liquidity and stability to the
U.S. financial system pursuant to the Troubled Asset Relief Program
("TARP"). Under the authority of EESA, the U.S. Treasury instituted a
voluntary capital purchase program ("CPP") under TARP to encourage healthy
U.S. financial institutions to build capital to increase the flow of financing to
U.S. businesses and consumers and to support the U.S. economy. Under the CPP
program, the U.S. Treasury purchased senior preferred shares of financial
institutions which pay cumulative dividends at a rate of 5% per year for five years and
thereafter at a rate of 9% per year. The minimum subscription amount available to a
participating institution was one percent of total risk-weighted assets. In general, the
maximum subscription amount was three percent of risk-weighted assets.
The terms of the senior preferred shares, as amended by the American
Recovery and Reinvestment Act of 2009 ("ARRA"), provide that the shares may be
redeemed, in whole or in part, at par value plus accrued and unpaid dividends upon
approval of the U.S. Treasury and the participating institutions primary
banking regulators. The senior preferred shares are non-voting and qualify as Tier 1
capital for regulatory reporting purposes.
On January 16, 2009, as part of the CPP established by the Treasury
under the EESA, the Company sold to Treasury (i) 18,751 shares of the Companys Fixed
Rate Cumulative Perpetual Preferred Stock, Series A, no par value, having a liquidation
preference of one thousand dollars per share; and (ii) a ten-year warrant to purchase up
to 104,910 shares of the Companys common stock, par value two dollars per share at
an initial exercise price of $26.81 per share (the "Warrant"), for an aggregate
purchase price of $18,751,000 in cash. All of the proceeds from the sale were treated as
Tier 1 capital for regulatory purposes. The investment in the Company by Treasury through
the CPP increased the Companys and the Banks already strong Tier 1 Leverage,
Tier 1 Risk-based and Total Risk-based capital ratios by approximately 200, 300, and 300
basis points, respectively.
On December 21, 2009, the Company completed its offering of 800,000
shares of common stock to the public at $27.50 per share. The net proceeds from this
offering, after deducting underwriting discounts and expenses amounted to $20,412,000. As
a result of the successful completion of this common stock offering, the number of shares
of the Companys common stock subject to the Warrant sold to the Treasury was
subsequently reduced by one half to 52,455 shares.
On January 20, 2010, the Company completed the closing of the
underwriters exercise of its over-allotment option to purchase an additional 82,021
shares of the Companys common stock at a purchase price to the public of $27.50 per
share. The Company received total net proceeds from the offering, including the exercise
of the over-allotment option, after deducting underwriting discounts and expenses,
amounting to $22,442,000.
On February 24, 2010, the Company redeemed all 18,751 shares of its
Fixed Rate Cumulative Perpetual Preferred Stock, Series A, it sold to the Treasury as part
of the CPP. The Company paid $18,774,439 to the Treasury to redeem the Preferred Stock,
consisting of $18,751,000 of principal and $23,439 of accrued and unpaid dividends. The
Company and the Bank received approvals from their respective regulators to redeem the
Preferred Stock. The Companys redemption of the Preferred Stock is not subject to
any additional conditions or stipulations from the Treasury or the Companys and the
Banks principal regulators. Upon the companys redemption of the Preferred
Stock, it was no longer subject to certain restrictions on dividends, stock re-purchases,
or executive compensation.
On July 28, 2010, the Company repurchased the Warrant sold to the
Treasury in its entirety for $250,000. The repurchase of the Warrant did not have any
effect on the Companys earnings or earnings per share. As a result of the Warrant
repurchase, the Company has repurchased all securities issued to the Treasury under CPP.
Taxation:
The Company is subject to those rules of federal
income taxation generally applicable to corporations under the Internal Revenue Code. The
Company is also subject to state taxation under the laws of the state of Maine.
Governmental Policies:
The earnings of the Company are significantly affected by the monetary and fiscal
policies of governmental authorities, including the FRB. Among the instruments of monetary
policy used by the FRB to implement these objectives are open-market operations in
U.S. Government securities and federal funds, changes in the discount rate on member
bank borrowings and changes in reserve requirements against member bank deposits. These
instruments of monetary policy are used in varying combinations to influence the overall
level of bank loans, investments and deposits, and the interest rates charged on loans and
paid for deposits. The FRB frequently uses these instruments of monetary policy,
especially its open-market operations and the discount rate, to influence the level of
interest rates and to affect the strength of the economy, the level of inflation or the
price of the dollar in foreign exchange markets. The monetary policies of the FRB have had
a significant effect on the operating results of banking institutions in the past and are
expected to continue to do so in the future. It is not possible to predict the nature of
future changes in monetary and fiscal policies, or the effect which they may have on the
Companys business and earnings.
Other Legislative Initiatives:
Proposals
may be introduced in the United States Congress and in the Maine State Legislature and
before various bank regulatory authorities which would alter the powers of, and
restrictions on, different types of banking organizations and which would restructure part
or all of the existing regulatory framework for banks, bank holding companies and other
providers of financial services. Moreover, other bills may be introduced in Congress which
would further regulate, deregulate or restructure the financial services industry,
including proposals to substantially reform the regulatory framework. It cannot be
predicted what additional legislative and/or regulatory proposals, if any, will be
considered in the future, whether any such proposals will be adopted or, if adopted, how
any such proposals would affect the Company or the Bank.
Financial Information about Industry Segments
The information required under this item is included in the
Companys financial statements, which appear in Part II, Item 8 of this Annual Report
on Form 10-K, and is incorporated herein by cross reference thereto.
Availability of Information Company Website
The Company maintains a website on the Internet at
www.BHBT.com.
The Company makes available, free of charge, on its website its annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K (proxy materials), and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such
reports are electronically filed with, or furnished to, the Securities and Exchange
Commission the ("SEC"). The Companys reports filed with, or furnished to,
the SEC are also available at the SECs website at www.sec.gov. Information contained
on the Companys website does not constitute a part of this report.
ITEM 1A. RISK FACTORS
An investment in the Companys common stock is subject to risks
inherent to the Companys business. The material risks and uncertainties that
management believes affect the Company are described below. Before making an investment
decision, you should carefully consider the risks and uncertainties described below
together with all of the other information included or incorporated by reference in this
report.
The risks and uncertainties described below are not all inclusive.
Additional risks and uncertainties that management is not aware of or focused on or that
management currently deems immaterial may also impair the Companys business
operations. This report is qualified in its entirety by these risk factors.
Risks Related to the Companys Business
In its normal course of business, the Company is subject to many risks
and uncertainties inherent with providing banking and financial services. Although the
Company continually seeks ways to manage these risks, and has established programs and
procedures to ensure controls are in place and operating effectively, the Company
ultimately cannot predict the future. Actual results may differ materially from the
Companys expectations due to certain risks and uncertainties. The following
discussion sets forth the most significant risk factors that the Company believes could
cause its actual future results to differ materially from expected results.
The Companys business may be adversely affected by conditions in the financial
markets and economic conditions generally
From December 2007 through June 2009, the U.S. economy was in
recession. Business activity across a wide range of industries and regions in the U. S.
was greatly reduced. Although economic conditions have begun to improve, certain sectors,
such as real estate, remain weak and unemployment remains high. Local governments and many
businesses are still in serious difficulty due to lower consumer spending and the lack of
liquidity in the credit markets.
Market conditions also led to the failure or merger of several
prominent financial institutions and numerous regional and community-based financial
institutions. These failures, as well as projected future failures, have had a significant
negative impact on the capitalization level of the deposit insurance fund of the FDIC,
which, in turn, has led to a significant increase in deposit insurance premiums paid by
financial institutions.
The Companys financial performance generally, and in particular
the ability of borrowers to pay interest on and repay principal of outstanding loans and
the value of collateral securing those loans, as well as demand for loans and other
products and services the Company offers, is highly dependent upon on the business
environment in the markets where the Company operates, in the State of Maine and in the
United States as a whole. A favorable business environment is generally characterized by,
among other factors, economic growth, efficient capital markets, low inflation, low
unemployment, high business and investor confidence, and strong business earnings.
Unfavorable or uncertain economic and market conditions can be caused by declines in
economic growth, business activity or investor or business confidence; limitations on the
availability or increases in the cost of credit and capital; increases in inflation or
interest rates; high unemployment, natural disasters; or a combination of these or other
factors.
Overall, during 2010, the business environment has been adverse for many households and
businesses in the United States and worldwide. While economic conditions in the State of
Maine, the United States and worldwide have begun to improve, there can be no assurance
that this improvement will continue. Such conditions could adversely affect the credit
quality of the Companys loans, results of operations and financial condition.
Dramatic declines in the national housing market since 2008, with
falling home prices and increasing foreclosures, unemployment and under-employment, have
negatively impacted the credit performance of mortgage loans and resulted in significant
write-downs of asset values by financial institutions, including government-sponsored
enterprises as well as major commercial and investment banks. These write-downs, initially
of mortgage-backed securities but spreading to credit default swaps and other derivative
and cash securities, in turn, have caused many financial institutions to seek additional
capital, to merge with larger and stronger institutions and, in some cases, to fail.
Reflecting concern about the stability of the financial markets generally and the strength
of counterparties, many lenders and institutional investors have reduced or ceased
providing funding to borrowers, including to other financial institutions. This market
turmoil and tightening of credit have led to an increased level of commercial and consumer
delinquencies, diminished consumer confidence, increased market volatility and widespread
reduction of business activity generally. The resulting economic pressure on consumers and
lack of confidence in the financial markets could adversely affect the Companys
business, financial condition and results of operations. In particular, the Company may
face the following risks in connection with these events:
-
The Company expects to face increased regulation of the banking and
financial services industry. Compliance with such regulation may increase the
Companys costs and limit its ability to pursue business opportunities.
-
Market developments may affect customer confidence levels and may
cause increases in loan delinquencies and default rates, which the Company expects could
impact the Banks charge-offs and provision for loan losses.
-
Market developments may affect the Banks securities portfolio
by causing other-than-temporary impairments, prompting write-downs and securities losses.
-
The Companys and the Banks ability to borrow from other
financial institutions or to access the debt or equity capital markets on favorable terms
or at all could be adversely affected by further disruptions in the capital markets or
other events, including actions by rating agencies and deteriorating investor
expectations.
-
Competition in banking and financial services industry could
intensify as a result of the increasing consolidation of financial services companies in
connection with current market conditions.
-
The Bank may be required to pay significantly higher premiums to the
FDIC because market developments have significantly depleted the insurance fund of the
FDIC and reduced the ratio of reserves to insured deposits.
The Banks allowance for loan losses may not be adequate to cover
loan losses.
A significant source of risk for the Company arises from the
possibility that losses will be sustained because borrowers, guarantors and related
parties may fail to perform in accordance with the terms of their loan agreements. Most
loans originated by the Bank are secured, but some loans are unsecured based upon
managements evaluation of the creditworthiness of the borrowers. With respect to
secured loans, the collateral securing the repayment of these loans principally includes a
wide variety of real estate, and to a lesser extent personal property, either of which may
be insufficient to cover the obligations owed under such loans.
Collateral values and the financial performance of borrowers may be
adversely affected by changes in prevailing economic, environmental and other conditions,
including declines in the value of real estate, changes in interest rates and debt service
levels, changes in oil and gas prices, changes in monetary and fiscal policies of the
federal government, widespread disease, terrorist activity, environmental contamination
and other external events, which are beyond the control of the Bank. In addition,
collateral appraisals that are out of date or that do not meet industry recognized
standards might create the impression that a loan is adequately collateralized when in
fact it is not. Although the Bank may acquire any real estate or other assets that secure
defaulted loans through foreclosures or other similar remedies, the amounts owed under the
defaulted loans may exceed the value of the assets acquired.
The Bank has adopted underwriting and credit monitoring policies and
procedures, including the establishment and ongoing review of the allowance for loan
losses and review of borrower financial statements and collateral appraisals, which
management believes are appropriate to mitigate the risk of loss by assessing the
likelihood of borrower non-performance and the value of available collateral. The Bank
also manages credit risk by diversifying its loan portfolio. An ongoing independent
review, subsequent to managements review, of individual credits is performed by an
independent loan review function, which reports to the Audit Committee of the Board of
Directors. However, such policies and procedures have limitations, including judgment
errors in managements risk analysis, and may not prevent unexpected losses that
could have a material adverse effect on the Companys business, financial condition
and results of operations.
The Banks loans are principally concentrated in certain areas of
Maine and adverse economic conditions in those markets could adversely affect the
Companys operations.
The Company's success is dependent to a significant extent upon general
economic conditions in the United States and, in particular, the local economies of
downeast and midcoast Maine, the primary markets served by the Bank. The Bank is
particularly exposed to real estate and economic factors in the downeast and midcoast
areas of Maine, as most of its loan portfolio is concentrated among borrowers in these
markets. Furthermore, because a substantial portion of the Banks loan portfolio is
secured by real estate in these areas, the value of the associated collateral is also
subject to regional real estate market conditions.
The slow pace of the current economic recovery or a return to an
economic recession in the markets served by the Bank, and the nation as a whole, could
negatively impact household and corporate incomes. This impact could lead to decreased
loan demand and increase the number of borrowers who fail to pay the Bank interest or
principal on their loans, and accordingly, could have a material adverse effect on the
Companys business, financial condition, results of operations, or liquidity.
Federal and state governments could pass legislation responsive to
current credit conditions, which could cause the Bank to experience higher credit losses.
The Company could experience higher credit losses because of federal or
state legislation or regulatory action that reduces the amount the Banks borrowers
are otherwise contractually required to pay under existing loan contracts. Also, the
Company could experience higher credit losses because of federal or state legislation or
regulatory action that limits the Banks ability to foreclose on property or other
collateral or makes foreclosure less economically feasible.
Interest rate volatility could significantly reduce the Companys
profitability.
The Companys earnings largely depend on the relationship between
the yield on its earning assets, primarily loans and investment securities, and the cost
of funds, primarily deposits and borrowings. This relationship, commonly known as the net
interest margin, is susceptible to significant fluctuation and is affected by economic and
competitive factors that influence the yields and rates, and the volume and mix of the
Banks interest earning assets and interest bearing liabilities.
Interest rate risk can be defined as an exposure to movement in
interest rates that could have an adverse impact on the Bank's net interest income.
Interest rate risk arises from the imbalance in the re-pricing, maturity and/or cash flow
characteristics of assets and liabilities. The Company is subject to interest rate risk to
the degree that its interest bearing liabilities re-price or mature more slowly or more
rapidly or on a different basis than its interest earning assets. Significant fluctuations
in interest rates could have a material adverse impact on the Companys business,
financial condition, results of operations, or liquidity.
The Bank's interest rate risk measurement and management techniques
incorporate the re-pricing and cash flow attributes of its 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. 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, in order to preserve the sensitivity of net interest income to actual or
potential changes in interest rates.
The Company is exposed to a variety of operational risks that could
result in significant financial losses.
The Company is exposed to many types of operational risk, including
reputation risk, legal and compliance risk, the risk of fraud or theft by employees or
outsiders, unauthorized transactions by employees or operational errors, including
clerical or record-keeping errors or those resulting from faulty or disabled computer or
telecommunications systems.
Negative public opinion can result from the Companys actual or
alleged conduct in any number of activities, including lending practices, corporate
governance and acquisitions, and from actions taken by government regulators and community
organizations in response to those activities. Negative public opinion can adversely
affect the Companys ability to attract and keep customers and can expose it to
litigation and regulatory action.
Given the volume of transactions at the Company, certain errors may be
repeated or compounded before they are discovered and successfully rectified. The
Companys necessary dependence upon automated systems to record and process its
transaction volumes may further increase the risk that technical system flaws or employee
tampering or manipulation of those systems will result in losses that are difficult to
detect. The Company may also be subject to disruptions of its operating systems arising
from events that are wholly or partially beyond its control (for example, computer viruses
or electrical telecommunication outages), which may give rise to disruption of service to
customers and to financial loss or liability. The Company is further exposed to the risk
that its external vendors may be unable to fulfill their contractual obligations (or will
be subject to the same risk of fraud or operational errors by their respective employees
as is the Company) and to the risk that the Companys (or its vendors) business
continuity and data security systems prove to be inadequate.
The Company regularly assesses the level of operational risk throughout
the organization and has established systems of internal controls that provide for timely
and accurate information. Testing of the operating effectiveness of these control systems
is performed regularly. While not providing absolute assurance, these systems of internal
controls have been designed to manage operational risks at appropriate, cost-effective
levels. Procedures exist that are designed to ensure policies relating to conduct, ethics,
and business practices are followed. From time to time losses from operational risk may
occur, including the effects of operational errors. Such losses are recorded as
non-interest expense.
While the Company continually monitors and improves its system of
internal controls, data processing systems, and corporate-wide risk management processes
and procedures, there can be no assurances that future losses arising from operational
risk will not occur and have a material impact on the Companys business, financial
condition, results of operations, or liquidity.
The Company may not be able to meet its cash flow needs on a timely
basis at a reasonable cost, and its cost of funds for banking operations may significantly
increase as a result of general economic conditions, interest rates and competitive
pressures.
Liquidity is the ability to meet cash flow needs on a timely basis and
at a reasonable cost. The liquidity of the Bank is used to make loans and to repay deposit
and borrowing liabilities as they become due, or are demanded by customers and creditors.
Many factors affect the Banks ability to meet liquidity needs, including variations
in the markets served by its network of offices, its mix of assets and liabilities,
reputation and standing in the marketplace, and general economic conditions.
The Banks primary source of funding is retail deposits, gathered
throughout its network of twelve banking offices. Wholesale funding sources principally
consist of secured borrowing lines from the Federal Home Loan Bank of Boston of which it
is a member, secured borrowing lines from the Federal Reserve Bank of Boston, and brokered
certificates of deposit obtained from the national market. The Banks securities and
loan portfolios provide a source of contingent liquidity that could be accessed in a
reasonable time period through sales.
Significant changes in general economic conditions, market interest
rates, competitive pressures or otherwise, could cause the Banks deposits to
decrease relative to overall banking operations, and it would have to rely more heavily on
brokered funds and borrowings in the future, which are typically more expensive than
deposits.
Changes in economic conditions, including consumer savings habits and
availability or access to the brokered deposit market could potentially have a significant
impact on the Companys liquidity position, which in turn could materially impact its
financial condition, results of operations and cash flows. For further information about
the Companys liquidity position, refer below in this Report to Part II, Item 7,
"Liquidity Risk."
Declines in value may adversely impact the investment securities portfolio.
The Bank may be required to record other-than-temporary impairment
charges on its investment securities if they suffer a decline in value that is considered
other-than-temporary. Numerous factors, including collateral deterioration underlying
certain private-label mortgage-backed securities, municipal bond defaults, lack of
liquidity for re-sales of certain investment securities, or adverse actions by regulators,
could have a negative effect on Banks securities portfolio in future periods. An
other-than-temporary impairment charge could have a material adverse effect on the
Companys results of operations and financial condition
.
The Companys information technology systems may be vulnerable to
attack or other technological failures, exposing the Company to significant loss.
The Company relies heavily on data processing software, communication
and information exchange on a variety of computing platforms and networks including the
Internet. Despite instituted safeguards, the Company cannot be certain that all of its
systems are entirely free from vulnerability to electronic attack or other technological
difficulties or failures. The Company also relies on the services of a variety of third
party vendors to meet its data processing and communication needs. If information security
is breached or other technology difficulties or failures occur, information may be
misappropriated, services and operations may be interrupted and the Company could be
exposed to claims from customers, suffer loss of business and suffer loss of reputation in
its marketplace. Any of these results could have a material adverse effect on the
Companys business, financial condition, results of operations or liquidity.
Strong competition within the Companys markets may significantly
impact its profitability.
The Company competes with an ever-increasing array of financial service
providers. As a bank holding company and state-chartered financial institution,
respectively, the Company and the Bank are subject to extensive regulation and
supervision, including, in many cases, regulations that limit the type and scope of their
activities. The non-bank financial service providers that compete with the Company and the
Bank may not be subject to such extensive regulation, supervision, and tax burden.
Competition from nationwide banks, as well as local institutions, continues to mount in
the Companys markets.
Regional, national and international competitors have far greater
assets and capitalization than the Company and have greater access to capital markets and
can offer a broader array of financial services than the Company. For example, consumers
can maintain funds that would have historically been held as bank deposits in brokerage
accounts or mutual funds. Consumers can also complete transactions such as paying bills
and/or transferring funds directly without the assistance of banks. The process of
eliminating banks as intermediaries, known as "disintermediation," could result
in the loss of fee income, as well as the loss of customer deposits and the related income
generated from those deposits. Further, many of the Companys competitors have fewer
regulatory constraints and may have lower cost structures. Additionally, due to their
size, many competitors may be able to achieve economies of scale and, as a result, may
offer a broader range of products and services as well as better pricing for those
products and services than the Corporation can.
The Companys ability to compete successfully depends on a number
of factors, including, among other things:
-
The ability to develop, maintain and build long-term customer
relationships based on top quality service, high ethical standards and safe, sound assets.
-
The ability to expand the Companys market position.
-
The scope, relevance and pricing of products and services offered to
meet customer needs and demands.
-
The rate at which the Company introduces new products and services
relative to its competitors
-
Customer satisfaction with the Companys level of service.
-
Industry and general economic trends.
Failure to perform in any of these areas could significantly weaken the
Companys competitive position, which could adversely affect the Companys
growth and profitability.
No assurance can be given that the Company will continue to be able to
compete effectively with other financial institutions in the future. Furthermore,
developments increasing the nature or level of competition could have a material adverse
affect on the Companys business, financial condition, results of operations, or
liquidity.
The Company continually encounters technological change
The financial services industry is continually undergoing rapid
technological change with frequent introductions of new technology-driven products and
services. The effective use of technology increases efficiency and enables financial
institutions to better serve customers and to reduce costs. The Companys future
success depends, in part, upon its ability to address the needs of its customers by using
technology to provide products and services that will satisfy customer demands, as well as
to create additional efficiencies in the Companys operations. Many of the
Companys competitors have substantially greater resources to invest in technological
improvements. The Company may not be able to effectively implement new technology-driven
products and services or be successful in marketing these products and services to its
customers. Failure to successfully keep pace with technological change affecting the
financial services industry could have a material adverse impact on the Companys
business and, in turn, the Companys financial condition and results of operations.
The business of the Company and the Bank is highly regulated and impacted by
federal monetary policy, limiting the manner in which the Company and the Bank may conduct
its business and obtain financing.
The Company and the Bank are subject to extensive regulation and
supervision under federal and state laws and regulations. The restrictions imposed by such
laws and regulations limit the manner in which the Company and the Bank conducts its
business, undertakes new investments and activities, and obtains financing. These laws and
regulations are designed primarily for the protection of the deposit insurance funds and
consumers and not to benefit the Companys shareholders. These laws and regulations
may sometimes impose significant limitations on the Companys operations. The more
significant federal and state banking regulations that affect the Company and the Bank are
described in this report at Part I, Item 1, "Supervision and Regulation." These
regulations, along with the existing tax, accounting, securities, insurance, and monetary
laws, regulations, rules, standards, policies and interpretations control the methods by
which financial institutions conduct business, implement strategic initiatives and tax
compliance, and govern financial reporting and disclosures. These laws, regulations,
rules, standards, policies and interpretations are constantly evolving and may change
significantly over time.
The nature, extent, and timing of the adoption of significant new laws
and regulations, or changes in or repeal of existing laws and regulations, or specific
actions of regulators, could have a material adverse effect on the Companys
business, financial condition, results of operations or liquidity. Furthermore, federal
monetary policy, particularly as implemented through the Federal Reserve System,
significantly affects credit risk and interest rate risk conditions for the Company, and
any unfavorable change in these conditions could have a material adverse effect on the
Companys business, financial condition, results of operations or liquidity.
The Companys controls and procedures may fail or be circumvented
Management regularly reviews and updates the Companys internal
controls, disclosure controls and procedures, and corporate governance policies and
procedures. Any system of controls, however well designed and operated, is based in part
on certain assumptions and can provide only reasonable, not absolute, assurance that the
objectives of the system are met. Any failure or circumvention of the Companys
controls and procedures or failure to comply with regulations related to controls and
procedures could have a material adverse effect on the Companys business, results of
operations and financial condition.
The preparation of the Companys financial statements requires the
use of estimates that could significantly vary from actual results.
The preparation of the consolidated financial statements in conformity
with U. S. generally accepted accounting principles requires management to make
significant estimates that affect the financial statements. The most critical estimate is
the allowance for loan losses. Due to the inherent nature of estimates, the Company cannot
provide absolute assurance that it will not significantly increase the allowance for loan
losses and/or sustain credit losses that are significantly higher than the provided
allowance, which could have a material adverse effect on the Companys business,
financial condition, results of operations, or liquidity. For further information on the
use of estimates, refer to this report at Part II, Item 7, "Application of Critical
Accounting Policies."
The Companys access to funds from subsidiaries may be restricted.
The Company is a separate and distinct legal entity from our banking
and nonbanking subsidiaries. The Company depends on dividends, distributions and other
payments from is banking and nonbanking subsidiaries to fund dividend payments on the
Companys common stock and to fund all payments on our other obligations. Our
subsidiaries are subject to laws that authorize regulatory bodies to block or reduce the
flow of funds from those subsidiaries to the Company, which could impede access to funds
we need to make payments on our obligations or dividend payments.
Prepayments of loans may negatively impact the Banks business.
Generally, customers may prepay the principal amount of their
outstanding loans at any time. The speed at which such prepayments occur, as well as the
size of such prepayments, are within Bank customers discretion. If customers prepay
the principal amount of their loans, and the Bank is unable to lend those funds to other
borrowers or invest the funds at the same or higher interest rates, the Banks
interest income will be reduced. A significant reduction in interest income could have a
negative impact on the Companys results of operations and financial condition.
The Company may be unable to attract and retain key personnel.
The Companys success depends, in large part, on its ability to
attract and retain key personnel, particularly at its executive level. Competition for
qualified personnel in the financial services industry can be intense and the Company and
its subsidiaries may not be able to hire or retain the key personnel that it depends upon
for success. The unexpected loss of services of one or more of the Companys key
personnel could have a material adverse impact on its business because of their skills,
knowledge of the markets in which the Company operates, years of industry experience and
the difficulty of promptly finding qualified replacement personnel.
To the extent that the Company acquires other companies, its business
may be negatively impacted by certain risks inherent with such acquisitions.
To the extent that the Company may acquire other financial services
companies or assets in the future, its business may be negatively impacted by certain
risks inherent with such acquisitions. These risks include, but are not limited to, the
following:
-
the risk that the acquired business or assets will not perform in
accordance with managements expectations;
-
the risk that difficulties will arise in connection with the
integration of the operations of the acquired business with the operations of the
Companys businesses;
-
the risk that management will divert its attention from other aspects
of the Companys business;
-
the risk that the Company may lose key employees of the combined
business; and
-
the risks associated with entering into geographic and product
markets in which the Company has limited or no direct prior experience.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
The Companys headquarters are located at 82 Main Street, Bar
Harbor, Maine, which also serves as the main office for the Bank.
As of December 31, 2010, the Bank operated 12 full-service banking
offices throughout downeast and midcoast Maine; namely: Bar Harbor, Northeast Harbor,
Southwest Harbor, Somesville, Deer Isle, Blue Hill, Ellsworth, Rockland, Winter Harbor,
Milbridge, Machias, and Lubec. The Bank owns ten of these banking offices and leases two
at prevailing market rates.
The Banks Ellsworth office consists of a building constructed in
1982 and two additional parcels contiguous to this branch. The City of Ellsworth is
considered the hub of downeast Maine and the Banks Ellsworth office is by far its
busiest location. The Bank is currently in the process of a substantial reconfiguration of
the Ellsworth banking office and its surrounding campus to better meet the Banks
needs at that location.
An Operations Center is located in Ellsworth, Maine, that houses the
Companys operations and data processing centers. The Bank also owns a
22,000-square-foot office building at 135 High Street, Ellsworth, Maine, which is occupied
by the Bank and Trust Services. The Bank also leases space at One Cumberland Place in
Bangor, Maine.
In the opinion of management, the physical properties of the Company
and the Bank are considered adequate to meet the needs of customers in the communities
served. Additional information relating to the Companys properties is provided in
Item 8, Note 6 of the Consolidated Financial Statements contained in this Annual Report on
Form 10-K and incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to certain ordinary
routine litigation incidental to the normal conduct of their respective businesses, which
in the opinion of management based upon currently available information will have no
material effect on the Company's consolidated financial statements.
ITEM 4. [RESERVED]
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON STOCK, RELATED SHAREHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The common stock of the Company is traded on the NYSE Amex under the
trading symbol BHB.
The following table sets forth the high and low market prices per share
of BHB Common Stock as reported by NYSE Amex by calendar quarter for each of the last two
years:
|
1st Quarter
|
2nd Quarter
|
3rd Quarter
|
4th Quarter
|
|
High
|
Low
|
High
|
Low
|
High
|
Low
|
High
|
Low
|
2010
|
$30.50
|
$26.50
|
$30.90
|
$24.66
|
$28.95
|
$24.75
|
$29.80
|
$26.50
|
2009
|
$26.65
|
$17.28
|
$31.76
|
$22.30
|
$37.20
|
$30.53
|
$35.00
|
$26.27
|
As of March 1, 2011, there were 3,830,038 shares of Company common
stock, par value $2.00 per share, outstanding and approximately 943 Registered
Shareholders of record, as obtained through the Company's transfer agent.
Performance Graph
The following graph illustrates the estimated yearly percentage change
in the Company's cumulative total stockholder return on its common stock for each of the
last five years. Total stockholder return is computed by taking the difference between the
ending price of the common stock at the end of the previous year and the current year,
plus any dividends paid divided by the ending price of the common stock at the end of the
previous year. For purposes of comparison, the graph also illustrates the comparable
stockholder return of NYSE Amex listed banks as a group as measured by the NYSE Amex
Composite Index and the NYSE ARCA Banks & Financial Services index. The graph assumes
a $100 investment on December 31, 2005 in the common stock of each of the Company, the
NYSE Amex Composite index and the NYSE ARCA Bank & Financial Services index as a group
and measures the amount by which the market value of each, assuming reinvestment of
dividends, has increased as of December 31 of each calendar year since the base
measurement point of December 31, 2005.
[PERFORMANCE GRAPH]
Market values are based on information obtained from the NYSE Amex.
|
12/05
|
12/06
|
12/07
|
12/08
|
12/09
|
12/10
|
|
|
|
|
|
|
|
Bar Harbor
Bankshares
|
100.00
|
124.48
|
126.95
|
107.77
|
119.19
|
130.92
|
NYSE Amex
Composite
|
100.00
|
119.54
|
144.62
|
87.02
|
118.50
|
152.13
|
NYSE ARCA.
Banks & Financial Services
|
100.00
|
117.48
|
99.85
|
75.51
|
81.41
|
94.72
|
Dividends
Common stock dividends paid by the Company in 2010 and 2009 are
summarized below:
|
1
st
Quarter
|
2
nd
Quarter
|
3
rd
Quarter
|
4
th
Quarter
|
Total
|
2010
|
$0.260
|
$0.260
|
$0.260
|
$0.265
|
$1.045
|
2009
|
$0.260
|
$0.260
|
$0.260
|
$0.260
|
$1.040
|
During 2010, the Company declared and distributed regular cash
dividends on its common stock in the aggregate amount of $3,955 compared with $2,994 in
2009. The Companys 2010 dividend payout ratio amounted to 39.4% compared with 32.6%
in 2009. The total regular cash dividends paid in 2010 amounted to $1.045 per share of
common stock, compared with $1.040 in 2009, representing an increase of $0.005, or 0.5%.
In the first quarter of 2011, the Companys Board of Directors
declared a regular cash dividend of $0.27 per share of common stock, representing an
increase of $0.01 or 3.8% compared with the first quarter of 2010. The dividend will be
paid March 15, 2011 to shareholders of record as of the close of business on February 16,
2011.
The Company has a history of paying quarterly dividends on its common
stock. However, the Companys ability to pay such dividends depends on a number of
factors, including the Companys financial condition, earnings, its need for funds
and restrictions on the Companys ability to pay dividends under federal laws and
regulations. Therefore, there can be no assurance that dividends on the Companys
common stock will be paid in the future.
In January 2009 the Company became subject to certain material
restrictions and limitations on its ability to declare or pay dividends on its shares of
common stock that arose from the Companys participation in the Treasurys
Capital Purchase Program ("CPP"). Generally, the consent of the U.S. Treasury
("the Treasury") was required for the Company to increase its quarterly cash
dividend in excess of $0.26 per share of common stock. In February 2010, the Company
redeemed all of its Preferred Stock it sold to the Treasury as part of the CPP. The
Companys redemption of the Preferred Stock is not subject to any additional
conditions or stipulations from the Treasury or the Companys and the Banks
principal regulators, including limitations on the Companys ability to increase
quarterly cash dividends.
For further information, refer to Item 6, Selected Consolidated
Financial Data for dividend related ratios and Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations, (specifically the "Capital
Resources" section).
Sale of Unregistered Securities; Use of Proceeds from Registered
Securities
No unregistered securities were sold by the Company during the year
ended December 31, 2010.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides information with respect to any purchase
of shares of the Companys common stock made by or on behalf of the Company or any
"affiliated purchaser" for the quarter ended December 31, 2010.
Period
|
Total
Number of Shares Purchased
|
Average
Price Paid
per Share
|
Total Number of Shares Purchased
as Part of Publicly Announced Plans
or Programs
|
Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs (1)
|
|
|
|
|
|
October 1-31,
2010
|
---
|
$ ---
|
---
|
---
|
November 1-30,
2010
|
---
|
$ ---
|
---
|
---
|
December 1-31,
2010
|
10,000
|
$27.50
|
10,000
|
233,218
|
(1) In August 2008, the Companys Board of Directors approved a
program to repurchase up to 300,000 shares of the Companys common stock, or
approximately 10.2% of the shares then currently outstanding. The stock repurchase program
became effective as of August 21, 2008 and was authorized to continue for a period of up
to twenty-four consecutive months. The Company previously suspended repurchases under the
program during the period the Company was a participant in the Treasurys CPP. In
August 2010, and following the Companys exit from CPP, the Companys Board of
Directors authorized the continuance of this repurchase program through August 19, 2012.
Depending on market conditions and other factors, these purchases may be commenced or
suspended at any time, or from time to time, without prior notice and may be made in the
open market or through privately negotiated transactions. The program will remain in
effect until fully utilized or until modified, superseded or terminated.
Stock Based Compensation Plans
Information regarding stock-based compensation awards both outstanding
and available for future grants as of December 31, 2010, represents stock-based
compensation plans approved by shareholders and is presented in the table below. There are
no compensation plans under which equity securities of the Company may be issued that have
not been approved by shareholders. Additional information is presented in Note 13,
Stock-Based
Compensation Plans,
in the Notes to the Consolidated Financial Statements included in
Item 8,
Financial Statements and Supplementary Data,
within this Annual Report on
Form 10-K.
Plan Category
|
Number of securities to be issued upon exercise of
outstanding options, warrants, and rights, net of forfeits and exercised shares
(a)
|
Weighted average exercise price of outstanding options, warrants, and
rights
(b)
|
Number of securities remaining available for issuance under
equity compensation (excluding securities referenced in column (a))
(c)
|
|
|
|
|
Equity
compensation plans approved
by security holders
|
238,370
|
$24.73
|
154,900
|
Equity
compensation plans not
approved by security holders
|
---
|
N/A
|
---
|
|
|
|
|
Total
|
238,370
|
$24.73
|
154,900
|
Transfer Agent Services
American Stock Transfer & Trust Company provides transfer agent
services for the Company. Inquiries may be directed to: American Stock Transfer &
Trust Company, 6201 15
th
Avenue, 3
rd
Floor, Brooklyn, NY, 11219,
telephone: 1-800-937-5449, Internet address:
www.amstock.com.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The supplementary financial data presented in the following table
contains information highlighting certain significant trends in the Companys
financial condition and results of operations over an extended period of time.
The following information should be analyzed in conjunction with Item 7
- Managements Discussion and Analysis of Financial Condition and Results of
Operations, and with the audited consolidated financial statements included in this Annual
Report on Form 10-K.
Unless otherwise noted, all dollars are expressed in thousands except
share and per share data.
FIVE-YEAR SUMMARY OF FINANCIAL DATA
As of and For the Years Ended December 31,
|
2010
|
2009
|
2008
|
2007
|
2006
|
Balance
Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
$1,117,933
|
$1,072,381
|
$972,288
|
$889,472
|
$824,877
|
Total
securities
|
357,882
|
347,026
|
290,502
|
264,617
|
213,252
|
Total loans
|
700,670
|
669,492
|
633,603
|
579,711
|
555,099
|
Allowance for
loan losses
|
(8,500)
|
(7,814)
|
(5,446)
|
(4,743)
|
(4,525)
|
Total deposits
|
708,328
|
641,173
|
578,193
|
539,116
|
496,319
|
Total
borrowings
|
300,014
|
311,629
|
323,903
|
278,853
|
260,712
|
Total
shareholders' equity
|
103,608
|
113,514
|
65,445
|
65,974
|
61,051
|
Average assets
|
1,087,327
|
1,052,496
|
926,357
|
841,206
|
788,557
|
Average
shareholders' equity
|
105,911
|
88,846
|
65,139
|
62,788
|
57,579
|
|
|
|
|
|
|
Results Of
Operations
|
|
|
|
|
|
|
|
|
|
|
|
Interest and
dividend income
|
$ 51,141
|
$ 54,367
|
$ 53,594
|
$ 51,809
|
$ 46,145
|
Interest
expense
|
19,432
|
21,086
|
26,403
|
28,906
|
24,449
|
Net interest
income
|
31,709
|
33,281
|
27,191
|
22,903
|
21,696
|
Provision for
loan losses
|
2,327
|
3,207
|
1,995
|
456
|
131
|
Net interest
income after provision for loan losses
|
29,382
|
30,074
|
25,196
|
22,447
|
21,565
|
|
|
|
|
|
|
Non-interest
income
|
7,458
|
6,022
|
6,432
|
5,929
|
6,876
|
Non-interest
expense
|
22,046
|
21,754
|
20,513
|
18,201
|
18,677
|
|
|
|
|
|
|
Income before
income taxes
|
14,794
|
14,342
|
11,115
|
10,175
|
9,764
|
Income taxes
|
4,132
|
3,992
|
3,384
|
3,020
|
2,885
|
|
|
|
|
|
|
Net income
|
$ 10,662
|
$ 10,350
|
$ 7,731
|
$ 7,155
|
$ 6,879
|
Preferred stock
dividends and accretion of discount
|
653
|
1,034
|
---
|
---
|
---
|
Net income
available to common shareholders
|
$ 10,009
|
$ 9,316
|
$ 7,731
|
$ 7,155
|
$ 6,879
|
|
|
|
|
|
|
Per Common
Share Data:
|
|
|
|
|
|
Basic earnings
per share
|
$ 2.65
|
$ 3.19
|
$ 2.63
|
$ 2.36
|
$ 2.26
|
Diluted
earnings per share
|
$ 2.61
|
$ 3.12
|
$ 2.57
|
$ 2.30
|
$ 2.20
|
Cash dividends
per share
|
$ 1.045
|
$ 1.040
|
$ 1.020
|
$ 0.955
|
$ 0.905
|
Dividend payout
ratio
|
39.43%
|
32.60%
|
38.78%
|
40.47%
|
40.04%
|
|
|
|
|
|
|
Selected
Financial Ratios:
|
|
|
|
|
|
Return on total
average assets
|
0.98%
|
0.98%
|
0.83%
|
0.85%
|
0.87%
|
Return on total
average equity
|
10.07%
|
11.65%
|
11.87%
|
11.40%
|
11.95%
|
Tax-equivalent
net interest margin
|
3.18%
|
3.40%
|
3.13%
|
2.91%
|
2.98%
|
|
|
|
|
|
|
Capital
Ratios:
|
|
|
|
|
|
Tier 1 leverage
capital ratio
|
9.01%
|
10.35%
|
6.61%
|
7.10%
|
7.34%
|
Tier 1
risk-based capital ratio
|
13.57%
|
15.34%
|
9.95%
|
10.76%
|
10.82%
|
Total
risk-based capital ratio
|
15.41%
|
17.14%
|
11.60%
|
11.59%
|
11.65%
|
|
|
|
|
|
|
Asset
Quality Ratios:
|
|
|
|
|
|
Net charge-offs
to average loans
|
0.24%
|
0.13%
|
0.21%
|
0.04%
|
0.05%
|
Allowance for
loan losses to total loans
|
1.21%
|
1.17%
|
0.86%
|
0.82%
|
0.82%
|
Allowance for
loan losses to non-performing loans
|
62%
|
85%
|
124%
|
230%
|
721%
|
Non-performing
loans to total loans
|
1.95%
|
1.37%
|
0.70%
|
0.36%
|
0.11%
|
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Managements discussion and analysis, which follows, focuses on
the factors affecting the Companys consolidated results of operations for the years
ended December 31, 2010, 2009, and 2008, and financial condition at December 31, 2010, and
2009, and where appropriate, factors that may affect future financial performance. The
following discussion and analysis of financial condition and results of operations of the
Company and its subsidiaries should be read in conjunction with the consolidated financial
statements and notes thereto, and selected financial and statistical information appearing
elsewhere in this Annual Report on Form 10-K.
Amounts in the prior period financial statements are reclassified
whenever necessary to conform to current period presentation.
Unless otherwise noted, all dollars are expressed in thousands except
share data.
Use of Non-GAAP Financial Measures:
Certain information
discussed below is presented on a fully tax-equivalent basis. Specifically, included in
2010, 2009 and 2008 interest income was $3,419,
$3,195, and $1,992, respectively, of tax-exempt interest income from certain
investment securities and loans. An amount equal to the tax benefit derived from this tax
exempt income has been added back to the interest income totals discussed in certain
sections of this Managements Discussion and Analysis, representing tax-equivalent
adjustments of $1,623, $1,505 and $899 in 2010, 2009 and 2008, respectively, which
increased net interest income accordingly. The analysis of net interest income tables
included in this Annual Report on Form 10-K provide a reconciliation of tax-equivalent
financial information to the Company's consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles.
Management believes the disclosure of tax-equivalent net interest
income information improves the clarity of financial analysis, and is particularly useful
to investors in understanding and evaluating the changes and trends in the Company's
results of operations. Other financial institutions commonly present net interest income
on a tax-equivalent basis. This adjustment is considered helpful in the comparison of one
financial institution's net interest income to that of another institution, as each will
have a different proportion of tax-exempt interest from their earning asset portfolios.
Moreover, net interest income is a component of a second financial measure commonly used
by financial institutions, net interest margin, which is the ratio of net interest income
to average earning assets. For purposes of this measure as well, other financial
institutions generally use tax-equivalent net interest income to provide a better basis of
comparison from institution to institution. The Company follows these practices.
EXECUTIVE OVERVIEW
General Information
Bar Harbor Bankshares is a Maine corporation and a registered bank
holding company under the Bank Holding Company Act of 1956, as amended. At December 31,
2010, the Company had consolidated assets of $1.12 billion and was one of the larger
independent community banking institutions in the state of Maine.
The Companys principal asset is all of the capital stock of Bar
Harbor Bank & Trust (the "Bank"), a community bank incorporated in March,
1887. With twelve (12) branch office locations, the Company is a diversified financial
services provider, offering a full range of banking services and products to individuals,
businesses, governments, and not-for-profit organizations throughout downeast and midcoast
Maine.
The Company attracts deposits from the general public in the markets it
serves and uses such deposits and other sources of funds to originate commercial business
loans, commercial real estate loans, residential mortgage and home equity loans, and a
variety of consumer loans. The Company also invests in mortgage-backed securities issued
by U.S. government agencies and government-sponsored enterprises, obligations of state and
political subdivisions, as well as other debt securities. In addition to community
banking, the Company provides a comprehensive array of trust and investment management
services through its second tier subsidiary, Bar Harbor Trust Services ("Trust
Services"), a Maine chartered non-depository trust company.
Major Sources of Revenue
The principal source of the Companys revenue is net interest
income, representing the difference or spread between interest income from its loan and
securities portfolios, and the interest expense paid on deposits and borrowed funds. In
addition to net interest income, non-interest income is a significant source of revenue
for the Company and an important factor in its results of operations. The Companys
non-interest income is derived from financial services including trust, investment
management and third-party brokerage services, as well as service charges on deposit
accounts, merchant credit card processing referral and transaction fees, realized gains or
losses on the sale of securities, and a variety of other miscellaneous product and service
fees.
Business Strategy
The Company, as a diversified financial services provider, pursues a
strategy of achieving long-term sustainable growth, profitability, and shareholder value,
without sacrificing its soundness. The Company works toward achieving this goal by
focusing on increasing its loan and deposit market share in the coastal communities of
Maine, either organically or by way of strategic acquisitions. The Company believes one of
its more unique strengths is an understanding of the financial needs of coastal
communities and the businesses vital to Maines coastal economy, namely: tourism,
hospitality, retail establishments and restaurants, seasonal lodging and campgrounds,
biological research laboratories, fishing, lobstering, boat building, and marine services.
Operating under a community banking philosophy, the Companys key
strategic focus is vigorous financial stewardship, deploying investor capital safely yet
efficiently for the best possible returns. The Company strives to provide unmatched
service to its customers, while maintaining strong asset quality and a focus toward
improving operating efficiencies. In managing its earning asset portfolios, the Company
seeks to utilize funding and capital resources within well-defined credit, investment,
interest-rate and liquidity guidelines. In managing its balance sheet the Company seeks to
preserve the sensitivity of net interest income to changes in interest rates, and to
enhance profitability through strategies that promise sufficient reward for understood and
controlled risk. The Company is deliberate in its efforts to maintain adequate liquidity
under prevailing and expected conditions, and strives to maintain a balanced and
appropriate mix of loans, securities, core deposits, brokered deposits and borrowed funds.
Material Risks and Challenges
In its normal course of business, the Company faces many risks inherent
with providing banking and financial services. Among the more significant risks managed by
the Company are losses arising from loans not being repaid, commonly referred to as
"credit risk," and losses of income arising from movements in interest rates,
commonly referred to as "interest rate and market risk." The Company is also
exposed to national and local economic conditions, downturns in the economy, or adverse
changes in real estate markets, which could negatively impact its business, financial
condition, results of operations or liquidity.
Management has numerous policies and control processes in place that
provide for the monitoring and mitigation of risks based upon and driven by a variety of
assumptions and actions which, if changed or altered, could impact the Companys
business, financial condition, results of operations or liquidity. The foregoing matters
are more fully discussed in Part I, Item 1A, "Risk Factors," and throughout this
Annual Report on Form 10-K.
Summary Financial Results
For the year ended December 31, 2010, the Company reported net income
available to common shareholders of $10,009 compared with $9,316 for the year ended
December 31, 2009, representing an increase of $693, or 7.4%. This increase was
principally attributed to a $1,436 increase in non-interest income, principally securities
gains, and an $880 decline in the provision for loan losses compared with 2009. Largely
offsetting these year-over-year positive results were a $1,454 or 4.2% decline in
tax-equivalent net interest income and a $292 or 1.3% increase in non interest expenses.
The Companys 2010 diluted earnings per share, after preferred
stock dividends and accretion of preferred stock discount, amounted to $2.61 compared with
$3.12 in 2009, representing a decline of $0.51, or 16.3%.
The decline in 2010 diluted earnings per share largely reflected the
Companys previously reported issuance of 882,021 shares of its common stock in the
fourth quarter of 2009 and the first quarter of 2010, the proceeds from which were
primarily used to repurchase all of the shares of Preferred Stock sold to the U.S.
Department of the Treasury (the "Treasury") in the first quarter of 2009 as part
of the Capital Purchase Program established by the Treasury under the Emergency Economic
Stabilization Act of 2008. As a result of the repurchase, in the first quarter of 2010 the
Company accelerated the accretion of $496 in preferred stock discount, reducing 2010 net
income available to common shareholders and diluted earnings per common shareholders by
$496 and $0.13, respectively. Total preferred stock dividends and accretion of discount
amounted to $653 in 2010, compared with $1,034 in 2009, representing a decline of $381, or
36.8%.
The Companys 2010 return on average shareholders equity
amounted to 10.07% compared with 11.65% in 2009, largely reflecting a $17,065 or 19.2%
increase in 2010 average shareholders equity. The Companys 2010 return on
average assets amounted to 0.98%, unchanged compared with 2009.
The Companys total assets ended the year at $1,117,933,
representing an increase of $45,552, or 4.2%, compared with December 31, 2009. Asset
growth was principally attributed to increases in the Banks commercial and consumer
loan portfolios, which were up $28,343 and $4,836, or 7.7% and 1.7%, respectively.
The Banks total non-performing loans ended the year at $13,677,
up from $9,176 at year-end 2009. The increase in non-performing loans was entirely
attributed to a $5,194 commercial real estate development loan to a local, non-profit
housing authority in support of an affordable housing project. The Banks 2010 loan
loss experience exceeded its historical norms with net loan charge-offs amounting to
$1,641, or 0.24% of total average loans, compared with $839 and 0.13% in 2009,
respectively. At December 31, 2010, the allowance for loan losses stood at $8,500,
representing an increase of $686 or 8.8% compared with December 31, 2009. At December 31,
2010, the allowance expressed as a percentage of total loans stood at 1.21%, up from 1.17%
at December 31, 2009.
The Banks total deposits ended the year at $708,328, up $67,155,
or 10.5%, compared with December 31, 2009. All categories of deposits posted meaningful
increases in 2010. Deposit growth was principally attributed to savings and money market
accounts, and NOW accounts, which increased $39,957 and $8,118, or 23.3% and 10.9%,
respectively. Demand deposits were up $2,607 or 4.5%. The Banks total time deposits,
which include certificates of deposit obtained from the national market, were up $16,473,
or 4.9%, compared with December 31, 2009.
At December 31, 2010, the Company and the Bank continued to exceed
regulatory requirements for "well-capitalized" financial institutions. Under the
capital adequacy guidelines administered by the Banks principal regulators,
"well-capitalized" institutions are those with Tier I leverage, Tier I
Risk-based, and Total Risk-based ratios of at least 5%, 6% and 10%, respectively. At
December 31, 2010, the Companys Tier I Leverage, Tier I Risk-based, and Total
Risk-based capital ratios were 9.01%, 13.57% and 15.41%, respectively.
At December 31, 2010, the Companys tangible common equity ratio
stood at 9.01%, up from 8.60% at December 31, 2009.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Managements discussion and analysis of the Companys
financial condition and results of operations are based on the Consolidated Financial
Statements, which are prepared in accordance with U.S. generally accepted accounting
principles. The preparation of such financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosure of contingent assets and liabilities.
Management evaluates its estimates, including those related to the allowance for loan
losses, on an ongoing basis. Management bases its estimates on historical experience and
various other assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis in making judgments about the carrying values of assets
that are not readily apparent from other sources. Actual results could differ from the
amount derived from managements estimates and assumptions under different
assumptions or conditions.
The Companys significant accounting policies are more fully
enumerated in Note 1 to the Consolidated Financial Statements included in Item 8 of this
Annual Report on Form 10-K. The reader of the financial statements should review these
policies to gain a greater understanding of how the Companys financial performance
is reported. Management believes the following critical accounting policies represent the
more significant estimates and assumptions used in the preparation of the Consolidated
Financial Statements:
Allowance for Loan Losses:
The allowance for loan losses
("allowance") is a significant accounting estimate used in the preparation of
the Companys consolidated financial statements. The allowance, which is established
through a provision for loan loss expense, is based on managements evaluation of the
level of allowance required in relation to the estimated inherent risk of probable loss in
the loan portfolio. Management regularly evaluates the allowance for adequacy by taking
into consideration factors such as previous loss experience, the size and composition of
the portfolio, current economic and real estate market conditions and the performance of
individual loans in relation to contract terms and estimated fair values of collateral.
The use of different estimates or assumptions could produce different provisions for loan
losses. A smaller provision for loan losses results in higher net income, and when a
greater amount of provision for loan losses is necessary, the result is lower net income.
Refer to Part II, Item 7,
Allowance for Loan Losses and Provision,
and Part II,
Item 8, Note 3,
Loans and allowance for loan losses,
of the Consolidated Financial
Statements, in this Annual Report on Form 10-K, for further discussion and analysis
concerning the allowance.
Other-Than-Temporary Impairments on Securities
:
One of the
significant estimates related to investment securities is the evaluation of
other-than-temporary impairments. The evaluation of securities for other-than-temporary
impairments is a quantitative and qualitative process, which is subject to risks and
uncertainties and is intended to determine whether declines in the fair value of
investments should be recognized in current period earnings. The risks and uncertainties
include changes in general economic conditions, the issuers financial condition
and/or future prospects, the effects of changes in interest rates or credit spreads and
the expected recovery period of unrealized losses.
Securities that are in an unrealized loss position, are reviewed at
least quarterly to determine if an other-than-temporary impairment is present based on
certain quantitative and qualitative factors and measures. The primary factors considered
in evaluating whether a decline in value of securities is other-than-temporary include:
(a) the cause of the impairment; (b) the financial condition, credit rating and
future prospects of the issuer; (c) whether the debtor is current on contractually
obligated interest and principal payments; (d) the volatility of the securities fair
value; (e) performance indicators of the underlying assets in the security including
default rates, delinquency rates, percentage of non-performing assets, loan to collateral
value ratios, third party guarantees, current levels of subordination, vintage, and
geographic concentration and; (f) any other information and observable data considered
relevant in determining whether other-than-temporary impairment has occurred, including
the expectation of the receipt of all principal and interest due.
For securitized financial assets with contractual cash flows, such as
private-label mortgage-backed securities, the Company periodically updates its best
estimate of cash flows over the life of the security. The Companys best estimate of
cash flows is based upon assumptions consistent with an economic recession, similar to
those the Company believes market participants would use. If the fair value of a
securitized financial asset is less than its cost or amortized cost and there has been an
adverse change in timing or amount of anticipated future cash flows since the last revised
estimate to the extent that the Company does not expect to receive the entire amount of
future contractual principal and interest, an other-than-temporary impairment charge is
recognized in earnings representing the estimated credit loss if management does not
intend to sell the security and believes it is more-likely-than-not the Company will not
be required to sell the security prior to recovery of cost or amortized cost. Estimating
future cash flows is a quantitative and qualitative process that incorporates information
received from third party sources along with certain assumptions and judgments regarding
the future performance of the underlying collateral. In addition, projections of expected
future cash flows may change based upon new information regarding the performance of the
underlying collateral.
Refer to Part II, Item 7,
Impaired Securities,
and Part
II, Item 8, Note 1 of the Consolidated Financial Statements
in this Annual Report
on Form 10-K, for further discussion and analysis concerning other-than-temporary
impairments.
Income Taxes:
The Company estimates its income taxes for each
period for which a statement of income is presented. This involves estimating the
Companys actual current tax liability, as well as assessing temporary differences
resulting from differing timing of recognition of expenses, income and tax credits, for
tax and accounting purposes. These differences result in deferred tax assets and
liabilities, which are included in the Companys consolidated balance sheets. The
Company must also assess the likelihood that any deferred tax assets will be recovered
from historical taxes paid and future taxable income and, to the extent that the recovery
is not likely, a valuation allowance must be established. Significant management judgment
is required in determining income tax expense, and deferred tax assets and liabilities. As
of December 31, 2010 and 2009, there was no valuation allowance for deferred tax assets,
which are included in other assets on the consolidated balance sheet.
Goodwill:
The valuation techniques used by the Company to
determine the carrying value of intangible assets acquired in acquisitions involves
estimates for discount rates, projected future cash flows and time period calculations,
all of which are susceptible to change based upon changes in economic conditions and other
factors. Any changes in the estimates used by the Company to determine the carrying value
of its goodwill, or which otherwise adversely affect their value or estimated lives, may
have an adverse effect on the Company's results of operations.
Refer to Notes 1 and 6 of the consolidated financial statements in Item
8 of this Annual Report on Form 10-K for further details of the Companys accounting
policies and estimates covering goodwill.
FINANCIAL CONDITION
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 Banks primary earning assets
with additional capacity invested in money market instruments. Average earning assets
represented 96.4% and 97.1% of total average assets during 2010 and 2009, respectively.
The Company, through its management of liabilities, attempts to provide
stable and flexible sources of funding within established liquidity and interest rate risk
guidelines. This is accomplished through retail deposit products offered within the
markets served, as well as through the prudent use of borrowed and brokered funds.
The Companys objectives in managing its balance sheet are to
preserve the sensitivity of net interest income to actual or potential changes in interest
rates, and to enhance profitability through strategies that promise sufficient reward for
understood and controlled risk. The Company is deliberate in its efforts to maintain
adequate liquidity, under prevailing and forecasted economic conditions, and to maintain
an efficient and appropriate mix of core deposits, brokered deposits, and borrowed funds.
Earning Assets
For the year ended December 31, 2010, the Companys total average
earning assets amounted to $1,047,949, compared with $1,022,037 in 2009, representing an
increase of $25,912, or 2.5%. The 2010 increase in average earning assets was principally
attributed to a $26,787 or 4.1% increase in the Banks average loan portfolio,
partially offset by a $1,262 decline in average securities.
The tax-equivalent yield on total average earning assets amounted to
5.03% in 2010 compared with 5.47% in 2009, representing a decline of 44 basis points. The
weighted average yield on the Banks securities portfolio declined 90 basis points to
5.08% in 2010, largely reflecting the replacement of accelerated cash flows from the
portfolio during a period of historically low interest rates. The weighted average yield
on the Banks loan portfolio declined 19 basis points to 5.14% in 2010, largely
reflecting the ongoing competitive re-pricing of certain commercial loans and the
origination and refinancing of residential mortgage loans during a period of historically
low interest rates.
For the year ended December 31, 2010, total tax-equivalent interest
income amounted to $52,764 compared with $55,872 in 2009, representing a decline of
$3,108, or 5.6%. Interest income from the securities portfolio contributed $3,210 to the
decline in 2010 interest and income, partially offset by a $103 increase in interest
income from the loan portfolio.
Total Assets
The Companys assets principally consist of loans and securities,
which at December 31, 2010 represented 62.7% and 32.0% of total assets, compared with
62.4% and 32.4% at December 31, 2009, respectively.
At December 31, 2010 the Companys total assets stood at
$1,117,933 compared with $1,072,381 at December 31, 2009, representing an increase of
$45,552, or 4.2%. The increase in total assets was principally attributed to a $31,178 or
4.7% increase in total loans, followed by a $10,856 or 3.1% increase in securities.
Securities
The average securities portfolio represented 33.3% of the
Companys average earning assets in 2010 and generated 33.6% of its total
tax-equivalent interest and dividend income, compared with 34.3% and 37.5% in 2009,
respectively.
Bank management considers securities as a relatively attractive means
to effectively leverage the Banks strong capital position, as securities are
typically assigned a significantly lower risk weighting for the purpose of calculating the
Banks and the Companys risk-based capital ratios. The overall objectives of
the Banks strategy for the securities portfolio include maintaining appropriate
liquidity reserves, diversifying earning assets, managing interest rate risk, leveraging
the Banks strong capital position, and generating acceptable levels of net interest
income. The securities portfolio is managed under the policy guidelines established by the
Banks Board of Directors.
The securities portfolio is primarily comprised of mortgage-backed
("MBS") securities issued by U.S. government agencies, U.S. Government-sponsored
enterprises, and other non-agency, private-label issuers. The securities portfolio also
includes tax-exempt obligations of state and political subdivisions, and obligations of
other U.S. Government-sponsored enterprises. At December 31, 2010 and 2009, the securities
portfolio did not contain any pools of sub-prime mortgage-backed securities,
collateralized debt obligations, or commercial mortgage-backed securities. Additionally,
the Bank did not own any equity securities or have any corporate debt exposure in its
securities portfolio, nor did it own any perpetual preferred stock in Federal Home Loan
Mortgage Corporation ("FHLMC") or Federal National Mortgage Association
("FNMA"), or any interests in pooled trust preferred securities or auction rate
securities.
Total Securities
: At December 31, 2010, total securities stood
at $357,882 compared with $347,026 at December 31, 2009, representing an increase of
$10,856, or 3.1%. Securities purchased during 2010 principally consisted of
mortgage-backed securities issued and guaranteed by U.S. Government agencies and sponsored
enterprises.
Trading Securities:
Trading securities are securities bought
and held principally for the purpose of selling them in the near term with the objective
of generating profits on short-term differences in price. During the years ended December
31, 2010 and 2009, the Bank did not own any trading securities.
Securities Held to Maturity:
Securities held to maturity are
debt securities for which the Bank has the positive intent and ability to hold until
maturity. Held to maturity investments are reported at their aggregate cost, adjusted for
amortization of premiums and accretion of discounts. During the years ended December 31,
2010 and 2009, the Bank did not own any securities held to maturity.
Securities Available for Sale
:
Securities available for sale
represented 100% of total securities at December 31, 2010 and 2009.
The designation of securities available for sale is made at the time of
purchase, based upon managements intent to hold the securities for an indefinite
time; however, these securities would be available for sale in response to changes in
market interest rates, related changes in the securities prepayment risk, needs for
liquidity, or changes in the availability of and yield on alternative investments. The
securities available for sale portfolio is used for liquidity purposes while
simultaneously producing earnings.
Securities classified as available for sale are reported at their fair
value with unrealized gains or losses, net of taxes, excluded from earnings but shown
separately as a component of shareholders equity. Gains and losses on the sale of
securities available for sale are determined using the specific-identification method and
are shown separately in the consolidated statements of income.
The following table summarizes the securities available for sale
portfolio as of December 31, 2010 and 2009:
|
December 31, 2010
|
Available
for Sale:
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Estimated
Fair
Value
|
|
|
|
|
|
Obligations
of US Government-sponsored enterprises
|
$ 1,000
|
$ 34
|
$ ---
|
$ 1,034
|
Mortgage-backed
securities:
|
|
|
|
|
US Government-sponsored enterprises
|
217,319
|
7,812
|
578
|
224,553
|
US Government agency
|
56,083
|
1,216
|
356
|
56,943
|
Private-label
|
22,720
|
311
|
2,201
|
20,830
|
Obligations
of states and political subdivisions thereof
|
60,245
|
327
|
6,050
|
54,522
|
Total
|
$ 357,367
|
$9,700
|
$9,185
|
$357,882
|
|
December 31, 2009
|
Available
for Sale:
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Estimated
Fair
Value
|
|
|
|
|
|
Obligations of
US Government-sponsored enterprises
|
$ 2,770
|
$ 13
|
$ 227
|
$ 2,556
|
Mortgage-backed
securities:
|
|
|
|
|
US Government-sponsored enterprises
|
226,740
|
7,613
|
3
|
234,350
|
US Government agency
|
21,522
|
606
|
21
|
22,107
|
Private-label
|
31,754
|
27
|
5,428
|
26,353
|
Obligations of
states and political subdivisions thereof
|
63,821
|
1,674
|
3,835
|
61,660
|
Total
|
$346,607
|
$9,933
|
$9,514
|
$347,026
|
Obligations of U.S. Government-sponsored Enterprises:
This
category of securities represents promissory notes (debt instruments) issued by U.S.
Government-sponsored enterprises, such as FNMA, FHLMC, FHLB, etc. All of these securities
were credit rated AAA by all of the major credit rating agencies at December 31, 2010 and
2009.
At December 31, 2010, the amortized cost of obligations of U.S.
Government-sponsored enterprises totaled $1,000, compared with $2,770 at December 31,
2009, representing a decline of $1,770, or 63.9%. At December 31, 2010, the amortized cost
of obligations of U.S. Government enterprises comprised 0.3% of the securities portfolio,
at fair value, compared with 0.8% at December 31, 2009.
At December 31, 2010, the Banks weighted average yield on
obligations of U.S. Government-sponsored enterprises amounted to 2.50%, compared with
5.02% at December 31, 2009.
Mortgage-backed Securities Issued by U.S. Government-sponsored
Enterprises:
This category of securities represents mortgage backed securities
issued and guaranteed by U.S. Government-sponsored enterprises, specifically, FNMA and
FHLMC. These Government-sponsored enterprises were placed under the conservatorship of the
U.S. Government on September 7, 2008. All of these securities were credit rated AAA by the
major credit rating agencies at December 31, 2010 and 2009.
At December 31, 2010, the amortized cost of mortgage-backed securities
issued by U.S. Government-sponsored enterprises totaled $217,319, compared with $226,740
at December 31, 2009, representing a decline of $9,421, or 4.2%. At December 31, 2010, the
amortized cost of mortgage-backed securities issued by U.S. Government enterprises
comprised 60.8% of the securities portfolio, compared with 65.4% at December 31, 2009.
At December 31, 2010, the Banks weighted average yield on
mortgage-backed securities issued by U.S. Government-sponsored enterprises amounted to
4.39%, compared with 5.39% at December 31, 2009, representing a decline of 100 basis
points. The decline in the weighted average yield was principally attributed to
prevailing, historically low market yields during 2010, with accelerated securities cash
flows from the portfolio generally being replaced with securities having both shorter
duration and lower yields than the existing weighted average yield for this segment of the
portfolio.
Mortgage-backed Securities Issued by U.S. Government Agencies:
This
category of securities represents mortgage-backed securities backed by the full faith and
credit of the U.S. Government, such as the Government National Mortgage Association
("GNMA"). All of these securities were credit rated AAA at December 31, 2010 and
2009.
At December 31, 2010, the total amortized cost of the Banks
mortgage-backed securities issued by U.S. Government agencies totaled $56,083, compared
with $21,522 at December 31, 2009, representing an increase of $34,561, or 160.6%. At
December 31, 2010, the amortized cost of mortgage-backed securities issued by U.S.
Government agencies comprised 15.7% of the Banks securities portfolio, compared with
6.2% at December 31, 2009.
At December 31, 2010, the weighted average yield on mortgage-backed
securities issued by U.S. Government agencies amounted to 3.60%, compared with 5.42% at
December 31, 2009, representing a decline of 182 basis points. The decline in the weighted
average yield was principally attributed to the purchase of securities having both shorter
duration and lower yields compared with the existing weighted average yield for this
segment of the portfolio.
Mortgage-backed Securities Issued by Private-label Issuers:
This
category of securities represents mortgage-backed securities issued by banks, investment
banks, and thrift institutions. Typically, these securities are largely based on mortgages
which exceed the conforming loan sizes required by agency securities. While private-label
mortgage-backed securities are not guaranteed by any U.S. Government agency, they are
credit rated by the major rating agencies (Moodys, Standard & Poors and
FITCH).
All of the Banks mortgage-backed securities issued by
private-label issuers carry various amounts of credit enhancement, and none are classified
as sub-prime mortgage-backed security pools. These securities were purchased based on the
underlying loan characteristics such as loan to value ratios, borrower credit scores,
property type and location, and the level of credit enhancement.
At December 31, 2010, the total amortized cost of the Banks
private-label MBS amounted to $22,720, compared with $31,754 at December 31, 2009,
representing a decline of $9,034, or 28.4%. This decline was principally attributed to
principal pay downs on the underlying securities collateral throughout 2010. At December
31, 2010, the amortized cost of mortgage-backed securities issued by private-label issuers
comprised 6.4% of the Banks securities portfolio, compared with 9.2% at December 31,
2009.
At December 31, 2010, the weighted average yield on the Banks
private-label mortgage-backed securities portfolio amounted to 6.35%, compared with 6.10%
at December 31, 2009.
At December 31, 2010, $12,089 of the total amortized cost of the
Banks private-label mortgage-backed securities portfolio was rated below investment
grade by at least one of the major credit rating agencies. All of these below investment
grade securities had been rated "AAA" by the credit rating agencies at the date
of purchase and continued to be rated "AAA" through December 31, 2007. Beginning
in 2008 and continuing through 2010, unprecedented market stresses began affecting all
mortgage-backed securities (Government agency and private-label) as the economy in general
and the housing market in particular seriously deteriorated. As a result, the Bank revised
its assessments as to the full recoverability of its private-label MBS and during 2010 and
2009 and 2008 recorded $898, $2,461 and $1,435, respectively, in OTTI write-downs under
existing accounting standards at that time. Refer to Part II, item 8, Notes to
Consolidated Financial Statements, Notes 1 and 2 in this Annual Report on Form 10-K for
further information on OTTI.
Obligations of States and Political Subdivisions Thereof:
Obligations
of states and political subdivisions thereof ("municipal bonds") are issued by
city, county and state governments, as well as by enterprises with a public purpose, such
as certain electric utilities, universities and hospitals. Municipal obligations are
supported by the general taxing authority of the municipality and, in the cases of school
districts, are supported by state aid. The Banks municipal bond portfolio is
generally concentrated in school districts across the U.S.A., which have historically been
considered among the safer municipal bond investments. One of the primary attractions of
municipal bonds is that "Bank Qualified" issues are federally tax exempt.
At December 31, 2010, the amortized cost of the Banks municipal
bond portfolio, totaled $60,245, compared with $63,821 at December 31, 2009, representing
a decline of $3,576, or 5.6%. At December 31, 2010, the amortized cost of municipal bonds
comprised 16.9% of the Banks securities portfolio, compared with 18.4% at December
31, 2009.
At December 31, 2010, the fully tax-equivalent yield on the Banks
municipal bond portfolio amounted to 7.36%, compared with 7.53% at December 31, 2009.
Municipal bonds are frequently supported with insurance, which
guarantees that in the event the issuer experiences financial problems, the insurer will
step in and assume payment of both principal and interest. Historically, insurance support
has strengthened an issuers underlying credit rating to AAA or AA status. Starting
in 2008 and continuing through 2010, many of the insurance companies providing municipal
bond insurance experienced financial difficulties and, accordingly, were downgraded by at
least one of the major credit rating agencies. Consequently, since 2008 a portion of the
Banks municipal bond portfolio was downgraded by at least one of the major credit
rating agencies. Notwithstanding the credit rating downgrades, at December 31, 2010 and
2009, the Banks municipal bond portfolio did not contain any below investment grade
securities as reported by major credit rating agencies.
Securities Maturity Distribution and Weighted Average Yields:
The
following table summarizes the maturity distribution of the amortized cost of the
Banks securities portfolio and weighted average yields of such securities on a fully
tax-equivalent basis as of December 31, 2010. The Bank recognizes the amortization of
premiums and accretion of discounts in interest income using the interest method over the
estimated life of the security. The maturity distribution is based upon the final maturity
date of the securities. Expected maturities may differ from contractual maturities because
issuers may have the right to call or pre-pay certain securities. In the case of
mortgage-backed securities, actual maturities may also differ from expected maturities due
to the amortizing nature of the underlying mortgage collateral, and the fact that
borrowers have the right to prepay.
SECURITIES
MATURITY SCHEDULE AND WEIGHTED AVERAGE YIELDS
DECEMBER 31, 2010
(at fair value)
|
Greater than one year
to five years
|
|
Greater than five to
ten years
|
|
Greater than
ten years
|
|
TOTAL
|
|
Estimated
Fair
Value
|
Weighted average rate
|
|
Estimated
Fair
Value
|
Weighted average yield
|
|
Estimated
Fair
Value
|
Weighted average yield
|
|
Estimated
Fair
Value
|
Weighted average yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of
US
Government-sponsored
enterprises
|
$1,034
|
2.50%
|
|
$
---
|
---
|
|
$
---
|
---%
|
|
$
1,034
|
2.50%
|
Mortgage-backed
securities:
|
|
|
|
|
|
|
|
|
|
|
|
US Government-sponsored
enterprises
|
1,755
|
3.76%
|
|
8,192
|
3.87%
|
|
214,606
|
4.42%
|
|
224,553
|
4.39%
|
US Government agency
|
195
|
2.27%
|
|
1,284
|
5.97%
|
|
55,464
|
3.55%
|
|
56,943
|
3.60%
|
Private-label
|
---
|
---
|
|
1,496
|
5.50%
|
|
19,334
|
6.41%
|
|
20,830
|
6.35%
|
Obligations of
states and
political subdivisions
thereof
|
106
|
7.49%
|
|
4,973
|
7.15%
|
|
49,443
|
7.38%
|
|
54,522
|
7.36%
|
Total
|
$3,090
|
|
|
$15,945
|
|
|
$338,847
|
|
|
$357,882
|
|
Securities Concentrations:
At December 31, 2010 and 2009, the
Bank did not hold any securities for a single issuer, other than U. S. Government agencies
and sponsored enterprises, where the aggregate book value of the securities exceeded 5% of
the Companys shareholders equity.
Impaired Securities:
The securities portfolio contains certain
securities where amortized cost exceeds fair value, which at December 31, 2010, amounted
to an excess of $9,185, or 2.6% of the total amortized cost of the securities portfolio.
At December 31, 2009 this amount represented an excess of $9,514, or 2.7% of the total
amortized cost of the securities portfolio. As of December 31, 2010, unrealized losses on
securities in a continuous unrealized loss position more than twelve-months amounted to
$6,618, compared with $6,675 at December 31, 2009.
Further information regarding impaired securities,
other-than-temporarily impaired securities and evaluation of securities for impairment is
incorporated by reference to Part II, Item 8, Notes 1 and 2 of the Consolidated Financial
Statements in this Annual Report on Form 10-K.
Federal Home Loan
Bank Stock
The Bank is a member of the Federal Home Loan Bank ("FHLB")
of Boston. The FHLB of Boston is a cooperatively owned wholesale bank for housing
and finance in the six New England states. Its mission is to support the residential
mortgage and community-development lending activities of its members, which include over
450 financial institutions across New England. As a requirement of membership in the FHLB
of Boston, the Bank must own a minimum required amount of FHLB stock, calculated
periodically based primarily on its level of borrowings from the FHLB. The Bank uses
the FHLB of Boston for most of its wholesale funding needs.
At December 31, 2010 the Banks investment in FHLB stock totaled
$16,068, unchanged compared with December 31, 2009.
FHLB stock is a non-marketable equity security and therefore is
reported at cost, which equals par value. Shares held in excess of the minimum required
amount are generally redeemable at par value. However, in the first quarter of 2009 the
FHLB announced a moratorium on such redemptions in order to preserve its capital in
response to current market conditions and declining retained earnings. This moratorium
continued throughout 2010. The minimum required shares are redeemable, subject to certain
limitations, five years following termination of FHLB membership. The Bank has no
intention of terminating its FHLB membership.
In the first quarter of 2009, the FHLB of Boston also advised its
members that it was focusing on preserving capital in response to other-than-temporary
impairment losses it had sustained, declining capital ratios and ongoing market
volatility. Accordingly, dividend payments for all of 2009 were suspended and that
continued to be the case in 2010. Following five consecutive quarters of profitability, on
February 22, 2011 the FHLBs board of directors declared a cash dividend equal to an
annual yield of 0.30 percent, based on the average stock outstanding in the fourth quarter
of 2010, which will be paid on March 2, 2011. The FHLBs board of directors
anticipates it will continue to declare modest cash dividends through 2011, but cautioned
that adverse events such as a negative trend in credit losses on the FHLBs
private-label MBS or mortgage loan portfolio, a meaningful decline in income, or
regulatory disapproval could lead to reconsideration of this plan.
The Company periodically evaluates its investment in FHLB stock for
impairment based on, among other things, the capital adequacy of the FHLB of Boston and
its overall financial condition. For the year ended December 31, 2010, the FHLB reported
unaudited net income of $106.6 million, following a net loss of $186.8 million in 2009.
The FHLB also reported that it remained in compliance with all regulatory capital ratios
as of December 31, 2010 and, in the most recent information available, was classified
"adequately capitalized" by its regulator, the Federal Housing Finance Agency,
as of September 30, 2010. At December 31, 2010, the FHLBs total regulatory
capital-to-assets ratio was 6.8%, exceeding the 4.0% minimum regulatory requirement, and
its permanent capital was $4.0 billion, exceeding its $975.2 million minimum regulatory
risk-based capital requirement.
The FHLB has the capacity to issue additional debt if necessary to
raise cash. If needed, the FHLB also has the ability to secure funding available to
government-sponsored enterprises through the U.S. Treasury. Based on the capital adequacy,
the liquidity position and return to profitability of the FHLB, Company management
believes there is no impairment related to the carrying amount of the Banks FHLB
stock as of December 31, 2010. Future deterioration of the FHLBs capital levels may
require the Bank to deem its restricted investment in FHLB stock to be
other-than-temporarily impaired. If evidence of impairment exists in future periods, the
FHLB stock would reflect fair value using observable or unobservable inputs. The Bank will
continue to monitor its investment in FHLB of Boston stock.
Loans
Total Loans:
At December 31, 2010, total loans amounted to
$700,670, compared with $669,492 at December 31, 2009, representing an increase of
$31,178, or 4.7%. Commercial loans led the overall growth of the loan portfolio in 2010.
The loan portfolio is primarily secured by real estate in the counties
of Hancock, Washington and Knox, Maine. The following table summarizes the major
components of the Banks loan portfolio, net of deferred loan origination fees and
costs, as of December 31 over the past five years.
SUMMARY OF LOAN PORTFOLIO AT DECEMBER 31
|
2010
|
2009
|
2008
|
2007
|
2006
|
|
|
|
|
|
|
Commercial
real estate mortgages
|
$260,357
|
$242,875
|
$204,588
|
$167,966
|
$135,077
|
Commercial
and industrial loans
|
80,765
|
77,284
|
65,717
|
65,238
|
61,634
|
Commercial
construction and
land development
|
32,114
|
26,901
|
32,086
|
15,697
|
24,253
|
Agricultural
and other loans to farmers
|
24,359
|
22,192
|
19,390
|
15,989
|
17,706
|
Total commercial loans
|
397,595
|
369,252
|
321,781
|
264,890
|
238,670
|
|
|
|
|
|
|
Residential
real estate mortgages
|
231,434
|
225,750
|
249,543
|
251,625
|
253,114
|
Home
equity loans
|
54,289
|
54,889
|
51,095
|
45,783
|
45,062
|
Consumer
loans
|
4,417
|
4,665
|
4,773
|
10,267
|
10,889
|
Total consumer loans
|
290,140
|
285,304
|
305,411
|
307,675
|
309,065
|
|
|
|
|
|
|
Tax
exempt loans
|
12,126
|
14,138
|
5,358
|
6,001
|
6,213
|
|
|
|
|
|
|
Deferred
origination costs(fees), net
|
809
|
798
|
1,053
|
1,145
|
1,151
|
Total
loans
|
700,670
|
669,492
|
633,603
|
579,711
|
555,099
|
Allowance
for loan losses
|
(8,500)
|
(7,814)
|
(5,446)
|
(4,743)
|
(4,525)
|
Total
loans net of allowance for
loan losses
|
$692,170
|
$661,678
|
$628,157
|
$574,968
|
$550,574
|
At December 31, 2010, commercial loans comprised 56.7% of the total
loan portfolio, compared with 55.2% at December 31, 2009. Consumer loans, which
principally consisted of residential real estate mortgage loans, comprised 41.4% of total
loans compared with 42.6% at December 31, 2009.
Factors contributing to the changes in the loan portfolio are
enumerated in the following discussion and analysis.
Commercial Loans:
The
Bank offers a variety of commercial lending products including term loans and lines of
credit. The Bank offers a broad range of short to medium-term commercial loans, primarily
collateralized, to businesses for working capital (including inventory and receivables),
business expansion (including acquisitions of real estate and improvements) and the
purchase of equipment and machinery. The purpose of a particular loan generally determines
its structure. Commercial loans are provided primarily to organizations and sole
proprietors in the tourism, hospitality, healthcare, blueberry, boatbuilding, biological
research, and fishing industries, as well as to other small and mid-size businesses
associated with the coastal communities of Maine.
Commercial loans are approved using a combination of individual loan
authorities, and a Directors Loan Committee. For loan relationships below $500,
loans are approved using individual loan authorities. For loan relationships over $500 but
less than $1,000, loans are approved by two Senior Signors. The Bank has four Senior
Signors the President and CEO, the SVP of Business Banking, the SVP of Retail
Banking and the SVP of Credit Administration. Loans to customer relationships over $1,000
require (with some limited exceptions as permitted in the Banks lending policy)
approval by the Banks Directors Loan Committee, a formal Committee of the
Banks Board of Directors. Any loans approved under any of the limited exceptions
permitted by the Banks lending policy are ratified by the Directors Loan
Committee, which meets regularly.
At December 31, 2010, total commercial loans amounted to $397,595,
compared with $369,252 at December 31, 2009, representing an increase of $28,343, or 7.7%.
All categories of commercial loans posted meaningful increases.
Commercial loan growth has generally been challenged by a troubled
economy, declining loan demand, and strong competition for quality loans. Bank management
attributes the overall growth in commercial loans to an effective business banking team,
deep local market knowledge, sustained new business development efforts, and a local
economy that has fared better than the nation as a whole.
Commercial Real Estate Mortgages
: The 2010 growth in the commercial
loan portfolio was principally attributed to commercial real estate mortgage
("CRE") loans which ended the year at $260,357, representing an increase of
$17,482 or 7.2%, compared with December 31, 2009. This category of loans represented 37.2%
of the loan portfolio at December 31, 2010, compared with 36.3% at December 31, 2009.
The Banks commercial real estate mortgage loans are
collateralized by liens on real estate, typically have variable interest rates (fixed
rates for five years or less) and amortize over a 15 to 20 year period. Payments on loans
secured by such properties are largely dependent on the successful operation or management
of the properties. Accordingly, repayment of these loans may be subject to adverse
economic conditions to a greater extent than other types of loans. The Bank seeks to
minimize these risks in a variety of ways, including giving careful consideration to the
propertys operating history, future operating projections, current and projected
occupancy, location and physical condition in connection with underwriting these loans.
The underwriting analysis also includes credit verification, analysis of global cash
flows, appraisals and a review of the financial condition of the borrower. Reflecting the
Banks business region, approximately 33.1% of the CRE portfolio is represented by
loans to the lodging industry. The Bank underwrites hotel loans as operating businesses,
lending primarily to seasoned establishments with stabilized cash flows.
Commercial and Industrial Loans:
At December 31, 2010, commercial
and industrial loans totaled $80,765, compared with $77,284 at December 31, 2009,
representing an increase of $3,481, or 4.5%. This category of loans represented 11.5% of
the loan portfolio at December 31, 2010, unchanged compared with December 31, 2009. The
Banks market area demographics have historically limited the opportunity and growth
potential in this particular category of loans.
In nearly all cases, commercial and industrial loans are made in the
Banks market areas and are underwritten on the basis of the borrowers ability
to service the debt from income. As a general practice, the Bank takes as collateral a
lien on any available real estate, equipment or other assets owned by the borrower and
obtains a personal guaranty of the borrower or principal. Working capital loans are
primarily collateralized by short-term assets whereas term loans are primarily
collateralized by long-term assets. In general, commercial and industrial loans involve
more credit risk than residential mortgage loans and commercial mortgage loans and,
therefore, usually yield a higher return. The increased risk in commercial and industrial
loans is principally due to the type of collateral securing these loans. The increased
risk also derives from the expectation that commercial and industrial loans generally will
be serviced principally from the operations of the business, and those operations may not
be successful. As a result of these additional complexities, variables and risks,
commercial and industrial loans generally require more thorough underwriting and servicing
than other types of loans.
Commercial Construction and Land Development Loans
:
At
December 31, 2010, commercial construction and development loans totaled $32,114, compared
with $26,901 at December 31, 2009, representing an increase of $5,213, or 19.4%.
The Bank makes loans to finance the construction of residential and, to
a lesser extent, nonresidential properties. Construction loans generally are
collateralized by first liens on real estate and have floating interest rates. The Bank
conducts periodic inspections prior to approval of periodic draws on these loans.
Underwriting guidelines similar to those described above are also used in the Banks
construction lending activities. Construction loans involve additional risks attributable
to the fact that loan funds are advanced upon the security of a project under
construction, and the project is of uncertain value prior to its completion. Because of
uncertainties inherent in estimating construction costs, the market value of the completed
project and the effects of governmental regulation on real property, it can be difficult
to accurately evaluate the total funds required to complete a project and the related loan
to value ratio. As a result of these uncertainties, construction lending often involves
the disbursement of substantial funds with repayment dependent, in part, on the success of
the ultimate project rather than the ability of a borrower or guarantor to repay the loan.
If the Bank is forced to foreclose on a project prior to completion, there is no assurance
that the Bank will be able to recover the entire unpaid portion of the loan. In addition,
the Bank may be required to fund additional amounts to complete a project and may have to
hold the property for an indeterminate period of time. While the Bank has underwriting
procedures designed to identify what it believes to be acceptable levels of risks in
construction lending, no assurance can be given that these procedures will prevent losses
from the risks described above.
Agricultural and Other Loans to Farmers:
Loans to finance
agricultural production and other loans to farmers totaled $24,359 as of December 31,
2010, compared with $22,192 at December 31, 2009, representing an increase of $2,167, or
9.8%. This category of loans represented 3.5% of the total loan portfolio at December 31,
2010, compared with 3.3% at December 31, 2009. The communities served by the Bank
generally offer limited opportunities for lending in this industry sector. This category
of loans includes loans related to Maines wild blueberry industry.
Consumer Loans:
At December 31, 2010, total consumer loans,
which principally consisted of residential real estate mortgage loans, stood at $290,140
compared with $285,304 at December 31, 2009, representing an increase of $4,836, or 1.7%.
Residential real estate mortgage loans totaled at $231,434 as of
December 31, 2010, compared with $225,750 at December 31, 2009, representing an increase
of $5,684, or 2.5%. This category of loans represented 33.0% of the Banks total loan
portfolio at December 31, 2010, compared with 33.7% at December 31, 2009.
Residential mortgage loan origination activity slowed during 2010
largely reflecting current economic conditions and uncertainties with respect to further
real estate market declines in the communities served by the Bank, and to a lesser extent
the expiration of the first time home buyers tax credit. Residential mortgage loan
refinancing activity continued at a brisk pace in 2010, which was attributed to
historically low interest rates.
Home equity loans totaled $54,289 at December 31, 2010, compared with
$54,889 at December 31, 2009, representing a decline of $600, or 1.1%. Approximately 93%
of the Banks home equity loan portfolio is represented by variable rate loans
indexed to the Prime interest rate. Bank management believes the 2010 decline in home
equity loans was principally attributed to depressed real estate values and a weak
economy, including diminished consumer spending and confidence.
Loans to individuals for household, family and other personal
expenditures ("consumer loans")
totaled $4,417 at December 31, 2010
compared with $4,665 at December 31, 2009, representing a decline of $248, or 5.3%. Given
strong competition from the financing affiliates of consumer durable goods manufacturers,
among other considerations, the Bank has not campaigned aggressively for consumer
installment loans over the past five years.
Tax Exempt Loans:
Tax-exempt loans totaled $12,126 at December
31, 2010, compared with $14,138 at December 31, 2009, representing a decline of $2,012, or
14.2%. Tax-exempt loans represented 1.7% of the total loan portfolio at December 31, 2010,
compared with 2.1% at December 31, 2009.
Tax-exempt loans principally include loans to local government
municipalities and, to a lesser extent, not-for-profit organizations. Government
municipality loans typically have short maturities (e.g., tax anticipation notes, etc.).
Government municipality loans are normally originated through a bid process among local
financial institutions and are typically priced aggressively, thus generating relatively
narrow net interest margins.
Loan Concentrations:
Because of the Banks proximity to
Acadia National Park, a large part of the economic activity in the area is generated from
the hospitality business associated with tourism. At December 31, 2010, approximately
$86,142 or 12.3% of the Banks loan portfolio was represented by loans to the lodging
industry, compared with $70,846 or 10.6% at December 31, 2009. Loan concentrations
continued
to reflect principally the Banks business region.
Sub-prime Mortgage Lending:
Sub-prime mortgage lending, which
has been the riskiest sector of the residential housing market, is not a market that Bank
management has actively pursued. In general, the industry does not apply a uniform
definition of what actually constitutes "sub-prime" lending. In referencing
sub-prime lending activities, Bank management relies upon several sources, including
Maines predatory lending law enacted January 1, 2008, and the "statement of
Sub-prime Mortgage Lending" issued by the federal bank regulatory agencies (the
"agencies") on June 29, 2007, which further references the expanded guidance for
sub-prime lending programs (the "expanded guidance"), issued by the agencies by
press release dated January 31, 2001.
In the expanded guidance, the agencies indicated that sub-prime lending
does not refer to individual sub-prime loans originated and managed, in the ordinary
course of business, as exceptions to prime risk selection standards. The agencies
recognize that many prime loan portfolios will contain such accounts. The agencies also
excluded prime loans that develop credit problems after origination and community
development loans from the sub-prime arena. According to the expanded guidance, sub-prime
loans are other loans to borrowers that display one or more characteristics of reduced
payment capacity. Five specific criteria, which are not intended to be exhaustive and are
not meant to define specific parameters for all sub-prime borrowers and may not match all
markets or institutions specific sub-prime definitions, are set forth,
including having a FICO (credit) score of 660 or lower. Based on the definitions and
exclusions described above, Bank management considers the Bank as a prime lender. Within
the Banks residential mortgage loan portfolio there are loans that, at the time of
origination, had one or more borrowers with FICO scores of 660 or below. However, as a
portfolio lender, the Bank reviews all credit underwriting data including all data
included in borrower credit reports and does not base its underwriting decisions solely on
FICO scores. Bank management believes the aforementioned loans, when made, were adequately
collateralized and documented, and otherwise conformed to the Banks prime lending
standards.
Real Estate Loans Under Foreclosure:
At December 31, 2010, real
estate loans under foreclosure totaled $2,746 compared with $3,552 at December 31, 2009,
representing a decrease of $806, or 22.7%.
At December 31, 2010, real estate loans under foreclosure were
represented by fifteen residential mortgage loans totaling $1,706, three commercial
construction loans totaling $872, and one commercial real estate loan of $168.
Other Real Estate Owned:
Real estate acquired in satisfaction
of a loan is reported in other assets. Properties acquired by foreclosure or deed in lieu
of foreclosure are transferred to other real estate owned ("OREO") and recorded
at the lower of cost or fair market value less estimated costs to sell based on appraised
value at the date actually or constructively received. Loan losses arising from the
acquisition of such property are charged against the allowance for loan losses. Subsequent
reductions in fair value below the carrying value are charged to other operating expenses.
At December 31, 2010 total OREO amounted to $656, compared with $854 as
of December 31, 2009. Two residential and two commercial properties comprised the December
31, 2010 balance of OREO.
Mortgage Loan Servicing:
The Bank from time to time will sell
residential mortgage loans to other institutions and investors such as the FHLMC. The Bank
has generally sold fixed rate, long term, low-coupon mortgages as a means of managing
interest rate risk. The sale of loans also allows the Bank to make more funds available to
customers in its servicing area, while the retention of servicing rights provides an
additional source of income. At December 31, 2010, the unpaid balance of mortgage loans
serviced for others totaled $30,525 compared with $32,810 at December 31, 2009,
representing a decline of $2,285 or 7.0%. During 2010, virtually all of the residential
mortgage loans originated by the Bank were held in its loan portfolio.
Loan Portfolio Interest Rate Composition:
The following table
summarizes the commercial, tax-exempt and consumer components of the loan portfolio by
fixed and variable interest rate composition, as of December 31, 2010 and 2009:
|
2010
|
|
2009
|
|
|
|
|
Commercial:
|
|
|
|
Fixed
|
$ 57,316
|
|
$ 42,939
|
Variable
|
340,683
|
|
326,712
|
Total
|
$ 397,999
|
|
$ 369,651
|
|
|
|
|
Tax
exempt:
|
|
|
|
Fixed
|
$ 7,045
|
|
$ 9,138
|
Variable
|
5,081
|
|
5,000
|
Total
|
$ 12,126
|
|
$ 14,138
|
|
|
|
|
Consumer:
|
|
|
|
Fixed
|
$ 179,861
|
|
$ 172,506
|
Variable
|
110,684
|
|
113,197
|
Total
|
$ 290,545
|
|
$ 285,703
|
|
|
|
|
Total
loans:
|
|
|
|
Fixed
|
$ 244,222
|
|
$ 224,583
|
Variable
|
456,448
|
|
444,909
|
Total
|
$ 700,670
|
|
$ 669,492
|
At December 31, 2010, fixed and variable rate loans comprised 34.9% and
65.1% of the loan portfolio, respectively, compared with 33.5% and 66.5% at December 31,
2009. Over the past two years variable rate loans comprised a larger portion of the loan
portfolio compared with historical levels. Bank management believes this was principally
driven by the historically low Prime interest rate, which is the index used for most of
the Banks variable rate commercial loans. Most new borrowers elected Prime based
loan pricing, while some existing borrowers renegotiated their higher cost fixed rate
borrowings to lower cost Prime based borrowings.
Loan Maturities and Re-pricing Distribution:
The following
table summarizes fixed rate loans reported by remaining maturity, and floating rate loans
by next re-pricing date, as of December 31, 2010 and 2009. Actual maturity dates may
differ from contractual maturity dates due to prepayments, modifications and
re-financings.
Maturities
|
2010
|
|
2009
|
|
|
|
|
One year or
less
|
$260,676
|
|
$237,293
|
Over 1 - 5
years
|
121,949
|
|
144,108
|
Over 5 years
|
318,045
|
|
288,091
|
Total loans
|
$700,670
|
|
$669,492
|
Credit Risk:
Credit risk is managed through loan officer
authorities, loan policies, and oversight from the Bank's Senior Credit Officer, the
Banks Senior Loan Officers Committee, the Directors Loan Committee, and
the Bank's Board of Directors. Management follows a policy of continually identifying,
analyzing and grading credit risk inherent in the loan portfolio. An ongoing independent
review, subsequent to management's review, of individual credits is performed by an
independent loan review function, which reports to the Audit Committee of the Board of
Directors.
Management recognizes that early and accurate recognition of risk is
the best means to reduce credit losses and maximize earnings. The Bank employs a
comprehensive risk management structure to identify and manage the risk of loss. For
consumer loans, the Bank identifies loan delinquency beginning at 10-day delinquency and
provides appropriate follow-up by written correspondence or personal contact.
Non-residential mortgage loan losses are recognized no later than the point at which a
loan is 120 days past due. Residential mortgage loan losses are recognized during the
foreclosure process, or sooner, when that loss is quantifiable and reasonably assured. For
commercial loans the Bank applies a risk grading system, which stratifies the portfolio
and allows management to focus appropriate efforts on the highest risk components of the
portfolio. The risk grades include ratings that correlate with regulatory definitions of
"Pass," "Other Assets Especially Mentioned," "Substandard,"
"Doubtful," and "Loss."
As a result of managements ongoing review of the loan portfolio,
loans are placed on non-accrual status, either due to the delinquent status of principal
and/or interest, or a judgment by management that, although payments of principal and/or
interest are current, such action is prudent because collection in full of all outstanding
principal and interest is in doubt. Loans are generally placed on non-accrual status when
principal and or interest is 90 days overdue, or sooner if judged appropriate by
management. Consumer loans are generally charged-off when principal and or interest
payments are 120 days overdue, or sooner if judged appropriate by management.
Non-performing Loans:
Non-performing loans include loans on
non-accrual status, loans that have been treated as troubled debt restructurings, and
loans past due 90 days or more and still accruing interest. At December 31, 2010, total
non performing loans included one troubled debt restructuring (a residential real estate
mortgage), that is currently on non-accrual, with an outstanding principal balance of
$301.
The following table sets forth the details of non-performing loans over
the past five years.
TOTAL NON-PERFORMING LOANS
AT DECEMBER 31
|
2010
|
2009
|
2008
|
2007
|
2006
|
|
|
|
|
|
|
Commercial real
estate mortgages
|
$ 3,572
|
$3,096
|
$1,645
|
$1,519
|
$253
|
Commercial
construction and land development
|
5,899
|
392
|
---
|
---
|
---
|
Commercial and
industrial loans
|
778
|
237
|
294
|
---
|
162
|
Agricultural
and other loans to farmers
|
254
|
1,848
|
199
|
79
|
41
|
Total commercial loans
|
10,503
|
5,573
|
2,138
|
1,598
|
456
|
|
|
|
|
|
|
Residential
real estate mortgages
|
3,022
|
2,498
|
1,696
|
377
|
37
|
Home equity
loans
|
146
|
304
|
26
|
73
|
73
|
Residential
construction and development
|
---
|
24
|
25
|
---
|
---
|
Consumer loans
|
---
|
5
|
16
|
5
|
4
|
Total consumer loans
|
3,168
|
2,831
|
1,763
|
455
|
114
|
|
|
|
|
|
|
Total
non-accrual loans
|
13,671
|
8,404
|
3,901
|
2,053
|
570
|
Accruing loans
contractually past due
90 days or more
|
6
|
772
|
503
|
9
|
58
|
Total non-performing loans
|
$13,677
|
$9,176
|
$4,404
|
$2,062
|
$628
|
|
|
|
|
|
|
Allowance for
loan losses to non-performing loans
|
62%
|
85%
|
124%
|
230%
|
721%
|
Non-performing
loans to total loans
|
1.95%
|
1.37%
|
0.70%
|
0.36%
|
0.11%
|
Allowance to
total loans
|
1.21%
|
1.17%
|
0.86%
|
0.82%
|
0.82%
|
At December 31, 2010, total non-performing loans amounted to $13,677,
or 1.95% of total loans, compared with $9,176 or 1.37% of total loans as of December 31,
2009. One commercial real estate development loan to a local, non-profit housing authority
in support of an affordable housing project accounted for $5,194, or 38.0%, of the total
year-end 2010 non-performing loans and more than accounted for the year-over-year
increase.
Non-performing commercial real estate mortgages amounted to $3,572 at
December 31, 2010, representing an increase of $476 or 15.4% compared with December 31,
2009. At December 31, 2010, non-performing commercial real estate loans were represented
by eleven business relationships, with outstanding balances ranging from $78 to $954.
Non-performing residential real estate mortgages amounted to $3,022 at
December 31, 2010, representing an increase of $524 or 21.0% compared with December 31,
2009. At December 31, 2010, non-performing residential real estate loans were represented
by 32, conventional, 1-4 family mortgage loans, with outstanding balances ranging from $4
to $457.
While the level and mix of non-performing loans continued to reflect
favorably on the overall quality of the Banks loan portfolio at December 31, 2010,
Bank management is cognizant of the weakened real estate market, elevated unemployment
rates and depressed economic conditions overall. Bank management recognizes that the
current credit cycle has yet to reach a definitive turning point and it may be some time
before the overall level of credit quality in the Banks loan portfolio shows lasting
improvement. Future levels of non-performing loans may be influenced by economic
conditions, including the impact of those conditions on the Banks customers,
including debt service levels, declining collateral values, tourism activity, consumer
confidence and other factors existing at the time. Management believes the economic
activity and conditions in the local real estate markets will continue to be significant
determinants of the quality of the loan portfolio in future periods and, thus, the
Companys results of operations and financial condition.
Delinquencies and Potential Problem Loans:
In addition to the
non-performing loans discussed above, the Bank also has loans that are 30 to 89 days
delinquent. These loans amounted to $3,749 and $4,255 at December 31, 2010, and 2009, or
0.54% and 0.64% of total loans, respectively, net of any loans classified as
non-performing that are within these delinquency categories. These loans and delinquency
trends in general are considered in the evaluation of the allowance for loan losses and
the related determination of the provision for loan losses.
Periodically, the Bank reviews the commercial loan portfolio for
evidence of potential problem loans. Potential problem loans are loans that are currently
performing in accordance with contractual terms, but where known information about
possible credit problems of the borrower causes doubt about the ability of the borrower to
comply with the loan payment terms and may result in disclosure of such loans as
non-performing at some time in the future.
At December 31, 2010, the Bank identified eighteen commercial
relationships totaling $4,886 as potential problem loans, or 0.70% of total loans. At
December 31, 2009, the Bank identified fourteen commercial relationships totaling $2,572
as potential problem loans, or 0.38% of total loans.
Factors such as payment history, value of supporting collateral, and
personal or government guarantees led the Bank to conclude that the current risk exposure
on these potential problem loans did not warrant accounting for the loans as
non-performing. Although in a performing status as of year-end, these loans exhibited
certain risk factors, which have the potential to cause them to become non-performing at
some point in the future.
Allowance for Loan Losses:
At December 31, 2010, the allowance
for loan losses (the "allowance") stood at $8,500, compared with $7,814 at
December 31, 2009, representing an increase of $686, or 8.8%. At December 31, 2010, the
allowance expressed as a percentage of total loans stood at 121 basis points, up from 117
basis points at December 31, 2009. The increase in the allowance was principally
attributed to continued deterioration in the overall credit quality of the Banks
loan portfolio, including the increases in non-performing and potential problem loans.
Company management believes this is reflective of depressed economic conditions, including
elevated unemployment levels and declining real estate values in the markets served by the
Bank.
The allowance is available to absorb probable 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, in managements
judgment, is appropriate for the amount of risk inherent in the current loan portfolio,
and adequate to provide for estimated, probable losses. Allowances are established for
specific impaired loans, a pool of reserves based on historical net loan charge-offs by
loan types, and supplemental reserves that adjust historical loss experience to reflect
current economic conditions, industry specific risks, and other qualitative and
environmental considerations impacting the inherent risk of loss in the current loan
portfolio.
Specific allowances for impaired loans are determined based upon a
discounted cash flows analysis, or as expedient, a collateral shortfall analysis. The
amount of collateral dependant impaired loans totaled $7,151 as of December 31, 2010,
compared with $4,416 as of December 31, 2009.
The related allowances for loan losses on these impaired loans amounted to $1,090
and $702 as of December 31, 2010 and 2009, respectively.
Management reviews impaired loans to ensure such loans are transferred
to interest non-accrual status, and written down when necessary. The amount of interest
income not recorded on impaired loans amounted to $536 and $382 for the years ended
December 31, 2010 and 2009, respectively.
General allowances for loan losses account for the risk and estimated
loss inherent in certain pools of industry and geographic loan concentrations within the
loan portfolio. There were no material changes in loan concentrations during 2010 compared
with 2009.
Based upon the process employed and giving recognition to all attendant
factors associated with the loan portfolio, management believes the allowance for loan
losses at December 31, 2010, is appropriate for the risks inherent in the loan portfolio.
While management uses available information to recognize losses on
loans, changing economic conditions and the economic prospects of the borrowers may
necessitate future additions or reductions to the allowance. In addition, various
regulatory agencies, as an integral part of their examination process, periodically review
the Banks allowance, which also may necessitate future additions or reductions to
the allowance, based on information available to them at the time of their examination.
The following table details changes in the allowance for loan losses
and summarizes loan loss experience by loan type over the past five years.
ALLOWANCE FOR LOAN LOSSES
SUMMARY OF LOAN LOSS EXPERIENCE
|
2010
|
2009
|
2008
|
2007
|
2006
|
|
|
|
|
|
|
Balance at
beginning of period
|
$ 7,814
|
$
5,446
|
$
4,743
|
$
4,525
|
$
4,647
|
Charge offs:
|
|
|
|
|
|
Commercial real
estate mortgages
|
296
|
74
|
280
|
60
|
---
|
Commercial and
industrial loans
|
652
|
280
|
858
|
29
|
197
|
Commercial
construction and land development
|
167
|
---
|
---
|
---
|
---
|
Agricultural
and other loans to farmers
|
396
|
68
|
3
|
69
|
10
|
Residential
real estate mortgages
|
160
|
455
|
86
|
8
|
23
|
Consumer loans
|
103
|
78
|
106
|
104
|
119
|
Home equity
loans
|
100
|
40
|
3
|
33
|
---
|
Total charge-offs
|
1,874
|
995
|
1,336
|
303
|
349
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
Commercial real
estate mortgages
|
3
|
---
|
2
|
3
|
7
|
Commercial and
industrial loans
|
15
|
21
|
1
|
26
|
4
|
Residential
real estate mortgages
|
106
|
119
|
17
|
---
|
32
|
Consumer loans
|
69
|
16
|
24
|
36
|
53
|
Home equity
loans
|
40
|
---
|
---
|
---
|
---
|
Total recoveries
|
233
|
156
|
44
|
65
|
96
|
|
|
|
|
|
|
Net charge-offs
|
1,641
|
839
|
1,292
|
238
|
253
|
Provision
charged to operations
|
2,327
|
3,207
|
1,995
|
456
|
131
|
|
|
|
|
|
|
Balance at end
of period
|
$ 8,500
|
$ 7,814
|
$ 5,446
|
$ 4,743
|
$ 4,525
|
|
|
|
|
|
|
Average loans
outstanding during period
|
$681,988
|
$655,201
|
$611,373
|
$558,795
|
$538,212
|
|
|
|
|
|
|
Net charge-offs
to average loans outstanding
|
0.24%
|
0.13%
|
0.21%
|
0.04%
|
0.05%
|
The Banks 2010 loan loss experience exceeded its historical
norms. Total net loan charge-offs amounted to $1,641 in 2010 compared with $839 in 2009,
representing an increase of $802, or 95.6%. Total net loan charge-offs to average loans
outstanding amounted to 0.24% in 2010, compared with 0.13% in 2009.
The following table presents the five-year summary of the allowance by
loan type at each respective year-end.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(at December 31)
|
2010
|
2009
|
2008
|
2007
|
2006
|
|
Amount
|
Percent of
Loans in
Each
Category
to
Total
loans
|
Amount
|
Percent of
Loans in
Each
Category
to
Total
loans
|
Amount
|
Percent of
Loans in
Each
Category
to
Total
loans
|
Amount
|
Percent of
Loans in
Each
Category
to
Total
loans
|
Amount
|
Percent of
Loans in
Each
Category
to
Total
loans
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and
industrial,
and agricultural
|
$1,460
|
15.01%
|
$1,812
|
14.85%
|
$1,546
|
13.43%
|
$1,059
|
14.01%
|
$1,387
|
14.29%
|
Real estate
mortgages:
|
|
|
|
|
|
|
|
|
|
|
Real
estate-construction
and land devlopment
|
999
|
4.58%
|
349
|
4.02%
|
251
|
5.06%
|
168
|
2.71%
|
205
|
4.37%
|
Real
estate-mortgage
|
5,858
|
78.05%
|
5,377
|
78.32%
|
3,414
|
79.91%
|
3,247
|
80.47%
|
2,628
|
78.26%
|
Installments
and other
loans to individuals
|
73
|
0.63%
|
122
|
0.70%
|
169
|
0.75%
|
235
|
1.77%
|
257
|
1.96%
|
Tax exempt
|
110
|
1.73%
|
154
|
2.11%
|
66
|
0.85%
|
34
|
1.04%
|
48
|
1.12%
|
TOTAL
|
$8,500
|
100.00%
|
$7,814
|
100.00%
|
$5,446
|
100.00%
|
$4,743
|
100.00%
|
$4,525
|
100.00%
|
Bank Owned Life Insurance
Bank-owned life insurance ("BOLI") represents life insurance
on the lives of certain retired employees who had provided positive consent allowing the
Bank to be the beneficiary of such policies. Increases in the cash value of the policies,
as well as insurance proceeds received in excess of the cash value, are recorded in other
non-interest income, and are not subject to income taxes. The cash surrender value of the
BOLI is included on the Companys consolidated balance sheet.
At December 31, 2010, the cash surrender value of BOLI amounted to
$7,112, compared with $6,846 at December 31, 2009, representing an increase of $266, or
3.9%, compared with December 31, 2009.
Other Assets
The Companys other assets are principally comprised of accrued
interest receivable, prepaid FDIC insurance assessments, deferred income taxes and other
real estate owned.
At December 31, 2010 total other assets amounted to $15,223, compared
with $15,846 at December 31, 2009, representing a decline of $623, or 3.9%.
Funding Sources
The Bank utilizes various traditional sources of funding to support its
earning asset portfolios. Funding sources principally consist of retail deposits and, to a
lesser extent, borrowings from the Federal Home Loan Bank of Boston ("FHLB") of
which it is a member, the Federal Reserve Bank of Boston ("Federal Reserve"),
and certificates of deposit obtained from the national market.
According to a January 2011 report prepared by the Maine Bureau of
Financial Institutions, Maine banks rely on borrowings and other types of non-core funding
to a much greater degree than the national average, as Maine banks historical core
deposit growth has not kept pace with earning asset growth.
While the Bank has had a long and successful track record in managing
its liquidity and funding its earning asset portfolios. Management believes that the
Banks future success in growing core deposits will be a determinant factor in its
ability to meaningfully grow earning assets and leverage its strong capital position.
Deposits
Historically, the banking business in the Banks market area has
been seasonal, with lower deposits in the winter and spring and higher deposits in the
summer and autumn. These seasonal swings have been fairly predictable and have not had a
materially adverse impact on the Bank. Seasonal swings in deposits have been typically
absorbed by the Banks strong liquidity position, including borrowing capacity from
the FHLB and FRB, brokered certificates of deposit obtained from the national market and
cash flows from the securities portfolio.
Total Deposits:
At December 31, 2010 total deposits amounted to
$708,328 compared with $641,173 at December 31, 2009, representing an increase of $67,155,
or 10.5%.
Demand Deposits:
The Banks demand deposits are
principally business accounts, which account for approximately two-thirds of total demand
deposits. At December 31, 2010, total demand deposits amounted to $60,350, compared with
$57,743 at December 31, 2009, representing an increase of $2,607, or 4.5%. As discussed
above, the Banks deposits are seasonal in nature and the timing and extent of
seasonal swings vary from year to year. This is particularly the case with demand
deposits. For the year ended December 31, 2010, average demand deposits amounted to
$57,036, compared with $53,152 in 2009, representing an increase of $3,884, or 7.3%.
Management believes the increase in demand deposits was largely attributed to a strong
tourist season in the local communities served by the Bank, combined with new customer
relationships.
The Bank strives to attract demand deposits in connection with its
commercial lending activities, on a total relationship basis. The Banks business
checking account offerings include
Small BusinessPlus, BusinessPlus,
and
Free
Small Business
, each designed to help business owners manage the varying financial
aspects of their business. The Bank also offers
Remote Deposit Capture,
enabling
its business customers to deposit checks remotely. Business demand deposits are also
generated by way of the Banks
Merchant Credit Card Processing Program
.
NOW Accounts:
Bank offers
interest bearing NOW
accounts to individuals, not-for-profit organizations and sole proprietor businesses. At
December 31, 2010, total NOW accounts amounted to $82,656, compared with $74,538 at
December 31, 2009, representing an increase of $8,118, or 10.9%. For the year ended
December 31, 2009, average NOW accounts amounted to $77,843, compared with $70,656 in
2009, representing an increase of $7,187 or 10.2%.
During 2010, the Banks most successful NOW account product
continued to be
Gold Wave Checking
, a relationship product designed for its
customers age 50 and above.
Savings and Money Market Deposits:
At December 31, 2010, total
savings and money market accounts amounted to $211,748, compared with $171,791 at December
31, 2009, representing an increase of $39,957, or 23.3%. For the year ended December 31,
2010, average savings and money market accounts amounted to $184,744, compared with
$164,543 in 2009, representing an increase of $20,201 or 12.3%.
Money market deposits represented the most significant deposit growth
category in 2010. Bank management believes this largely reflected the historically low
interest rates on fixed income products such as time certificates of deposit.
Time Deposits:
At December 31, 2010, total time deposits
amounted to $353,574, compared with $337,101 at December 31, 2009, representing an
increase of $16,473, or 4.9%. A portion of the Banks time deposits include
certificates of deposit obtained from the national market. This source of funds is
generally utilized to help support the Banks earning asset growth, while maintaining
its strong on-balance-sheet liquidity position via secured borrowing lines of credit with
the FHLB of Boston and the Federal Reserve Bank of Boston.
Bank management believes it has exercised restraint with respect to
overly aggressive deposit pricing strategies, and has sought to achieve an appropriate
balance between retail deposit growth and wholesale funding levels, while considering the
associated impacts on the Banks net interest margin and liquidity position. In
offering time deposits, the Bank generally prices these deposits on a relationship basis.
At December 31, 2010, the weighted average cost of time deposits was 2.19% compared with
2.58% at December 31, 2009, representing a decline of 39 basis points. Given the current
interest rate environment and continuing time deposit maturities, Bank management
anticipates that the weighted average cost of time deposits will continue to show declines
in 2011.
The following table summarizes the changes in the average balances of
deposits during the periods indicated, including the weighted average interest rates paid
for each category of deposits:
AVERAGE DEPOSIT BALANCES BY CATEGORY OF DEPOSIT
|
2010
|
|
2009
|
|
Average
Balance
|
Average
Rate
|
|
Average
Balance
|
Average
Rate
|
|
|
|
|
|
|
Demand
deposits
|
$ 57,036
|
---
|
|
$ 53,152
|
---
|
NOW
accounts
|
77,843
|
0.41%
|
|
70,656
|
0.43%
|
Savings
and money market deposits
|
184,744
|
0.81%
|
|
164,543
|
1.05%
|
Time
deposits
|
369,408
|
2.19%
|
|
337,242
|
2.58%
|
Total deposits
|
$689,031
|
|
|
$625,593
|
|
The following table summarizes the maturity distribution of time
deposits of $100 or greater:
MATURITY SCHEDULE
TIME DEPOSITS $100 OR GREATER
DECEMBER 31, 2010
Three months or
less
|
$ 39,513
|
Over three to
six months
|
24,399
|
Over six to
twelve months
|
27,213
|
Over twelve
months
|
29,292
|
Total
|
$120,417
|
Time deposits in denominations of $100 or greater totaled $120,417 at
December 31, 2010, compared with $109,551 at December 31, 2009, representing an increase
of $10,866, or 9.9%.
In July 2010, Congress enacted regulatory reform legislation know as
the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank
Act"), which the president signed into law on July 21, 2010. The Dodd-Frank Act
included provisions that permanently raised the current standard maximum FDIC deposit
insurance amount to $250 per depositor.
Borrowed Funds
The Bank utilizes borrowed funds in leveraging its strong capital
position and supporting its earning asset portfolios. Borrowed funds are principally
utilized to support the Banks investment securities portfolio and, to a lesser
extent, fund loan growth. Borrowed funds also provide a means to help manage balance sheet
interest rate risk, given the Banks ability to select desired amounts, terms and
maturities on a daily basis.
Borrowed funds principally consist of advances from the FHLB of Boston
(the "FHLB") and, to a lesser extent, securities sold under agreements to
repurchase, Fed funds purchased and borrowings from the Federal Reserve Bank of Boston.
Advances from the FHLB are secured by stock in the FHLB, investment securities, certain
commercial real estate loans, and blanket liens on qualifying mortgage loans and home
equity loans.
Refer to Part II, Item 7,
Contractual Obligations
, and Notes 10
and 11,
Short Term Borrowings
and
Long Term Debt,
of the consolidated
financial statements in this annual report on form 10-K for further information on
borrowed funds.
Total Borrowings:
At December 31, 2010, total borrowings
amounted to $300,014, compared with $311,629 at December 31, 2009, representing a decline
of $11,615, or 3.7%. The 2010 decline in borrowings was principally attributed to strong
retail deposit growth in 2010.
Junior Subordinated Debentures:
In the second quarter of 2008,
the Bank issued $5,000 aggregate principal amount of subordinated debt securities. These
securities qualify as Tier 2 capital for the Bank and the Company and were issued to help
support future earning asset growth without jeopardizing the Banks historically
strong capital position. The subordinated debt securities are due in 2023, but are
callable by the Bank after five years without penalty. The rate of interest on these
securities is three month Libor plus 345 basis points. The subordinated debt securities
are classified as borrowings on the Companys consolidated balance sheet.
Borrowing Maturities:
Borrowing maturities are managed in
concert with the Banks asset and liability management strategy and are closely
aligned with the ongoing management of balance sheet interest rate risk.
During 2010 and 2009, the Bank extended the maturities on a portion of
its FHLB borrowings. These actions were taken during periods of favorable market interest
rates, and were consistent with the Banks asset and liability management strategy of
lessening its exposure to rising interest rates over a five year horizon. At December 31,
2010, long term borrowings with maturities in excess of one year represented 60.0% of
total borrowings.
Capital Resources
Consistent with its long-term goal of operating a sound and profitable
organization, at December 31, 2010 the Company maintained its strong capital position and
continued to be a "well-capitalized" financial institution according to
applicable regulatory standards. Management believes this to be vital in promoting
depositor and investor confidence and providing a solid foundation for future growth.
Capital Ratios:
The Company and the Bank are subject to the
risk-based capital guidelines administered by the Companys and the Bank's principal
regulators. The risk-based capital guidelines are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among banks and bank holding
companies, to account for off-balance sheet exposure and to minimize disincentives for
holding liquid assets. Under these guidelines, assets and off-balance sheet items are
assigned to broad risk categories, each with appropriate weights. The resulting capital
ratios represent capital as a percentage of risk-weighted assets and off-balance sheet
items. The guidelines require all banks and bank holding companies to maintain a minimum
ratio of total risk-based capital to risk-weighted assets of 8%, including a minimum ratio
of Tier I capital to total risk-weighted assets of 4% and a Tier I capital to average
assets of 4% ("Leverage Ratio"). Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary actions by
regulators that, if undertaken, could have a material adverse effect on the Company's
financial statements.
As of December 31, 2010 and 2009, the Company and the Bank were
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 10.0%, a minimum Tier I capital to total risk-weighted assets ratio of
at least 6.0%, and a minimum Tier I Leverage ratio of at least 5.0%. At December 31, 2010
the Companys Total Risk-based, Tier I Risk-based, and Tier I Leverage ratios were
15.41%, 13.57% and 9.01%, respectively.
The following table sets forth the Company's regulatory capital at
December 31, 2010 and 2009, under the rules applicable at that date.
|
December 31, 2010
|
|
December 31, 2009
|
|
Amount
|
Ratio
|
|
Amount
|
Ratio
|
|
|
|
|
|
|
Total Capital
to Risk Weighted Assets
|
$113,741
|
15.41%
|
|
$122,615
|
17.14%
|
Regulatory
Requirement
|
59,065
|
8.00%
|
|
57,241
|
8.00%
|
Excess over
"adequately capitalized"
|
$ 54,676
|
7.41%
|
|
$ 65,374
|
9.14%
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital
to Risk Weighted Assets
|
$100,166
|
13.57%
|
|
$109,755
|
15.34%
|
Regulatory
Requirement
|
29,532
|
4.00%
|
|
28,620
|
4.00%
|
Excess over
"adequately capitalized"
|
$ 70,634
|
9.57%
|
|
$ 81,135
|
11.34%
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital
to Average Assets
|
$100,166
|
9.01%
|
|
$109,755
|
10.35%
|
Regulatory
Requirement
|
44,493
|
4.00%
|
|
42,431
|
4.00%
|
Excess over
"adequately capitalized"
|
$ 55,673
|
5.01%
|
|
$ 67,324
|
6.35%
|
As more fully disclosed in Note 12 of the Consolidated Financial
Statements in this Annual Report on Form 10-K, the Bank also maintained its standing as a
well-capitalized
institution as defined by applicable regulatory standards. At
December 31, 2010 the Banks Total Risk-based, Tier I Risk-based, and Tier I Leverage
ratios were 15.56%, 13.72% and 9.10%, respectively.
Series A Fixed Rate Cumulative Perpetual Preferred Stock and Warrant:
As previously reported, on January 16, 2009, the Company sold to Treasury 18,751
shares of the Companys Series A Preferred Stock and a ten-year Warrant to purchase
up to 104,910 shares of the Companys common stock, par value two dollars per share
at an initial exercise price of $26.81 per share, for an aggregate purchase price of
$18,751 in cash. All of the proceeds from the sale were treated as Tier 1 capital for
regulatory purposes.
On February 24, 2010 the Company redeemed all 18,751 shares of its
Preferred Stock sold to Treasury. The Company paid $18,774 to the Treasury to redeem the
Preferred Stock, consisting of $18,751 of principal and $23 of accrued and unpaid
dividends. The Companys redemption of the Preferred Stock was not subject to
additional conditions or stipulations from the Treasury.
The Preferred Stock that the Company repurchased for $18,751 had a
current carrying value of $18,255 (net of $496 unaccreted discount) on the Companys
consolidated balance sheet. As a result of the repurchase, the Company accelerated the
accretion of the $496 discount and recorded a total reduction in shareholders equity
of $18,751 in the first quarter of 2010. Additionally, the accelerated accretion of the
discount was treated in a manner consistent with that for preferred dividends in reporting
net income available to common shareholders in the Companys results of operations
for 2010, reducing diluted earnings per share by $0.13.
In the fourth quarter of 2009, the Warrant received by the Treasury to
purchase up to 104,910 shares of the Companys common stock was reduced by one half
to 52,455 shares as a result of the Companys successful completion of a common stock
offering in December 2009. On July 28, 2010, the Company repurchased the Warrant in its
entirety for $250. The repurchase of the Warrant did not have any effect on the
Companys earnings or earnings per share. As a result of the Warrant repurchase, the
Company has repurchased all securities issued to Treasury under CPP.
Common Stock Offering:
In December 2009 the Company completed
its offering of 800,000 shares of common stock to the public at $27.50 per share. The net
proceeds from this offering, after deducting underwriting discounts and expenses amounted
to $20,412. In January 2010 the Company completed the closing of the underwriters
exercise of its over-allotment option to purchase an additional 82,021 shares of the
Companys common stock at a purchase price to the public of $27.50 per share. The
Company received total net proceeds from the offering, including the exercise of the over
allotment option, after deducting underwriting discounts and expenses, amounting to
$22,442. All of the net proceeds from this offering are treated as Tier 1 capital for
regulatory purposes. In February of 2010, the Company used $18,751 of the net proceeds
from this offering to repurchase all of its Preferred Stock sold to Treasury under the
CPP.
Trends, Events or Uncertainties:
There are no known trends,
events or uncertainties, nor any recommendations by any regulatory authority, that are
reasonably likely to have a material effect on the Companys capital resources,
liquidity, or financial condition.
Stock Repurchase Plan:
In August of 2008, the Companys
Board of Directors approved a program to repurchase up to 300,000 shares of the
Companys common stock, or approximately 10.2% of the shares then currently
outstanding. The new stock repurchase program became effective as of August 21, 2008, and
was authorized to continue for a period of up to twenty-four consecutive months. In August
of 2010, the Companys Board of Directors authorized the continuance of this program
through August 19, 2012. Depending on market conditions and other factors, these purchases
may be commenced or suspended at any time, or from time to time, without prior notice and
may be made in the open market or through privately negotiated transactions.
As of December 31, 2010, the Company had repurchased 76,782 shares of
stock under this plan, at a total cost of $2,108 and an average price of $27.45 per share.
The Company recorded the repurchased shares as treasury stock.
Cash Dividends:
The Company has historically paid regular
quarterly cash dividends on its common stock. Each quarter the Board of Directors declares
the payment of regular quarterly cash dividends, subject to adjustment from time to time,
based on the Companys earnings outlook, the strength of its balance sheet, its need
for funds, and other relevant factors. There can be no assurance that dividends on the
Companys common stock will be paid in the future.
The Companys principal source of funds to pay cash dividends and
support its commitments is derived from Bank operations. During 2010, the Company declared
and distributed regular cash dividends on its common stock in the aggregate amount of
$3,955, compared with $2,994 in 2009. The Companys 2010 dividend payout ratio
amounted to 39.4%, compared with 32.6% in 2009. The total regular cash dividends paid in
2010 amounted to $1.045 per common share of common stock, compared with $1.040 in 2009,
representing an increase of $0.005 per share, or 0.5%.
In
the first quarter of 2011, the Company
declared a regular cash dividend of $0.27 per share of common stock, representing an
increase of $0.01 or 3.8%, compared with the first quarter of 2010.
Contractual Obligations
The Company is a party to certain contractual obligations under which
it is obligated to make future payments. These principally include borrowings from the
FHLB, consisting of short and long-term fixed rate borrowings, and collateralized by all
stock in the FHLB, a blanket lien on qualified collateral consisting primarily of loans
with first and second mortgages secured by one-to-four family properties, and certain
pledged investment securities. The Company has an obligation to repay all borrowings from
the FHLB.
The Company is also obligated to make payments on operating leases for
its branch office in Somesville, Maine, its temporary office in Ellsworth, Maine, and its
office in Bangor, Maine.
The following table summarizes the Companys contractual
obligations at December 31, 2010. Borrowings are stated at their contractual maturity due
dates and do not reflect call features, or principal amortization features, on certain
borrowings.
CONTRACTUAL OBLIGATIONS
|
|
Payments Due By Period
|
Description
|
Total Amount of Obligations
|
< 1 Year
|
1-3 Years
|
4-5 Years
|
> 5
Years
|
|
|
|
|
|
|
Borrowings from
Federal Home Loan Bank
|
$264,707
|
$ 89,573
|
$83,144
|
$74,990
|
$17,000
|
Fed Funds
Purchased
|
9,450
|
9,450
|
---
|
---
|
---
|
Securities sold
under agreements
to repurchase
|
20,857
|
20,857
|
---
|
---
|
---
|
Junior
subordinated debentures
|
5,000
|
---
|
---
|
---
|
5,000
|
Operating
Leases
|
566
|
126
|
205
|
185
|
50
|
Total
|
$300,580
|
$120,006
|
$83,349
|
$75,175
|
$22,050
|
All FHLB advances are fixed-rate instruments. Advances are payable at
their call dates or final maturity dates. At December 31, 2010, the Bank had $82,000 in
callable advances.
In the normal course of its banking and financial services business,
and in connection with providing products and services to its customers, the Company has
entered into a variety of traditional third party contracts for support services. Examples
of such contractual agreements would include services providing ATM, Visa Debit Card
processing, trust services accounting support, check printing, and the leasing of T-1
telecommunication lines supporting the Companys wide area technology network.
The majority of the Companys core operating systems and software
applications are maintained "in-house" with traditional third party maintenance
agreements of one year or less.
Off-Balance Sheet Arrangements
The Company is, from time to time, a party to certain off-balance sheet
arrangements that have or are reasonably likely to have a current or future effect on the
Company's financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources, that may be
material to investors.
At December 31, 2010 and 2009, the Companys off-balance sheet
arrangements were limited to standby letters of credit.
Standby Letters of Credit:
The Bank guarantees the obligations
or performance of certain customers by issuing standby letters of credit to third parties.
These letters of credit are sometimes issued in support of third-party debt. The risk
involved in issuing standby letters of credit is essentially the same as the credit risk
involved in extending loan facilities to customers, and they are subject to the same
origination, portfolio maintenance and management procedures in effect to monitor other
credit products. The amount of collateral obtained, if deemed necessary by the Bank upon
issuance of a standby letter of credit, is based upon management's credit evaluation of
the customer.
At December 31, 2010, commitments under existing standby letters of
credit totaled $750, compared with $372 at December 31, 2009. The fair value of the
standby letters of credit was not significant as of the foregoing dates.
Off-Balance Sheet Risk
The Bank is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financial needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial instruments
include commitments to extend credit and, in the past, have included certain financial
derivative instruments; namely, interest rate swap agreements and interest rate floor
agreements.
Commitments to Extend Credit:
Commitments to extend credit
represent agreements by the Bank to lend to a customer provided there is no violation of
any condition established in the contract. These commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of these commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis
using the same credit policies as it does for its balance sheet instruments, such as
loans. The amount of collateral obtained, if deemed necessary by the Bank upon the
issuance of commitment, is based on management's credit evaluation of the customer.
The following table summarizes the Banks commitments to extend
credit as of December 31:
COMMITMENTS TO EXTEND CREDIT
|
2010
|
|
2009
|
|
|
|
|
Commitments to
originate loans
|
$ 24,112
|
|
$ 42,694
|
Unused lines of
credit
|
84,360
|
|
78,607
|
Un-advanced
portions of construction loans
|
11,215
|
|
12,565
|
Total
|
$119,687
|
|
$133,866
|
Financial Derivative Instruments:
As part of its overall asset
and liability management strategy, the Bank periodically uses derivative instruments to
minimize significant unplanned fluctuations in earnings and cash flows caused by interest
rate volatility. The Bank's interest rate risk management strategy involves modifying the
re-pricing characteristics of certain assets and liabilities so that change in interest
rates does not have a significant adverse effect on net interest income. Derivative
instruments that management periodically uses as part of its interest rate risk management
strategy include interest rate swap agreements and interest rate floor agreements.
During 2010, the Bank had two outstanding, off balance sheet,
derivative instruments, both of which matured during the year. These derivative
instruments were interest rate floor agreements, with notional principal amounts totaling
$30,000. The notional amounts of the financial derivative instruments do not represent
exposure to credit loss. The Bank is exposed to credit loss only to the extent the
counter-party defaults in its responsibility to pay interest under the terms of the
agreements. The details of these two derivative instruments are summarized below.
INTEREST RATE FLOOR AGREEMENTS
Notional
Amount
|
Expiration
Date
|
Prime
Strike Rate
|
Premium
Paid
|
Cumulative
Cash Flows
Received
|
|
|
|
|
|
$20,000
|
08/01/10
|
6.00%
|
$186
|
$1,072
|
$10,000
|
11/01/10
|
6.50%
|
$ 69
|
$ 751
|
In 2005, interest rate floor agreements were purchased by the Bank to
limit its exposure to falling interest rates on two pools of loans indexed to the Prime
interest rate. Under the terms of the agreements, the Bank paid premiums of $186 and $69
for the right to receive cash flow payments if the Prime interest rate fell below the
predetermined floor rates of 6.00% and 6.50%, thus effectively ensuring interest income on
the pools of prime-based loans at minimum rates of 6.00% and 6.50% on the $20,000 and
$10,000 notional amounts for the duration of the agreements, respectively. The interest
rate floor agreements were designated as cash flow hedges.
During 2010, total cash flows received from counterparties amounted to
$588, compared with $884 in 2009. The cash flows received from counterparties were
recorded in interest income.
Liquidity
Liquidity is measured by the Companys 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 Companys ability to meet liquidity needs, including variations in the
markets served by its network of offices, its mix of assets and liabilities, reputation
and credit standing in the marketplace, and general economic conditions.
The Bank actively manages its liquidity position through target ratios
established under its Asset Liability Management Policy. Continual monitoring of these
ratios, both historical and through forecasts under multiple rate and stress scenarios,
allows the Bank to employ strategies necessary to maintain adequate liquidity. A portion
of the Banks deposit base has been historically seasonal in nature, with balances
typically declining in the winter months through late spring, during which period the
Banks liquidity position tightens.
The Bank uses a basic surplus 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
Banks policy is to maintain a liquidity position of at least 4% of total assets. At
December 31, 2010, liquidity, as measured by the basic surplus model, was 7.0% over the
30-day horizon and 6.3% over the 90-day horizon.
At December 31, 2010, the Bank had unused lines of credit and net
unencumbered qualifying collateral availability to support its credit line with the FHLB
approximating $70,594. The Bank also had capacity to borrow funds on a secured basis
utilizing the Borrower in Custody ("BIC") program at the Federal Reserve Bank of
Boston. At December 31, 2010, the Banks available secured line of credit at the
Federal Reserve Bank of Boston stood at $162,135 or 14.5% of the Banks total assets.
The Bank also has access to the national brokered deposit market, and has used this
funding source to bolster its liquidity position.
The Bank maintains a liquidity contingency plan approved by the
Banks Board of Directors. This plan addresses the steps that would be taken in the
event of a liquidity crisis, and identifies other sources of liquidity available to the
Company. Company management believes that the level of liquidity is sufficient to meet
current and future funding requirements. However, changes in economic conditions,
including consumer savings habits and availability or access to the brokered deposit
market could potentially have a significant impact on the Companys liquidity
position.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is the principal component of the Companys
income stream and represents the difference or spread between interest generated from
earning assets and the interest expense paid on deposits and borrowed funds. Net interest
income is entirely generated by the Bank. Fluctuations in market interest rates as well as
volume and mix changes in earning assets and interest bearing liabilities can materially
impact net interest income.
Total Net Interest Income:
For the year ended December 31,
2010, net interest income on a tax- equivalent basis amounted to $33,332 compared with
$34,786 in 2009, representing a decline of $1,454, or 4.2%. As more fully discussed below,
the decline in 2010 tax-equivalent net interest income was principally attributed to a 22
basis point decline in the Banks net interest margin, offset in part by a $25,912,
or 2.5% increase in average earning assets.
For the year ended December 31, 2009, net interest income on a
tax-equivalent basis amounted to $34,786, compared with $28,090 in 2008, representing an
increase of $6,696, or 23.8%. As more fully discussed below, the 2009 increase in
tax-equivalent net interest income compared with 2008 was principally attributed to a 27
basis point improvement in the tax-equivalent net interest margin, combined with average
earning asset growth of $125,687, or 14.0%.
Factors contributing to the changes in net interest income and the net
interest margin are further enumerated in the following discussion and analysis.
Net Interest Income Analysis:
The following tables summarize
the Companys daily average balance sheets and the components of net interest income,
including a reconciliation of tax equivalent adjustments, for the years ended December 31,
2010, 2009 and 2008:
AVERAGE BALANCE SHEET AND
ANALYSIS OF NET INTEREST INCOME
For the year ended December 31, 2010
|
Average
Balance
|
Interest
|
Weighted
Average
Rate
|
Interest
Earning Assets:
|
|
|
|
Loans (1,3)
|
$ 681,988
|
$35,039
|
5.14%
|
Taxable
securities (2)
|
288,492
|
13,239
|
4.59%
|
Non-taxable
securities (2,3)
|
60,544
|
4,484
|
7.41%
|
Total securities
|
349,036
|
17,723
|
5.08%
|
Federal Home
Loan Bank stock
|
16,068
|
---
|
0.00%
|
Fed funds sold,
money market funds, and time
|
|
|
|
deposits with other banks
|
857
|
2
|
0.23%
|
|
|
|
|
Total Earning
Assets
|
1,047,949
|
52,764
|
5.03%
|
|
|
|
|
Non-Interest
Earning Assets:
|
|
|
|
Cash and due
from banks
|
8,746
|
|
|
Allowance for
loan losses
|
(8,428)
|
|
|
Other assets
(2)
|
39,060
|
|
|
Total Assets
|
$1,087,327
|
|
|
|
|
|
|
|
|
|
|
Interest
Bearing Liabilities:
|
|
|
|
Deposits
|
$ 631,995
|
$ 9,906
|
1.57%
|
Borrowings
|
287,216
|
9,526
|
3.32%
|
Total Interest Bearing Liabilities
|
919,211
|
19,432
|
2.11%
|
Rate Spread
|
|
|
2.92%
|
|
|
|
|
Non-Interest
Bearing Liabilities:
|
|
|
|
Demand and
other non-interest bearing deposits
|
57,036
|
|
|
Other
liabilities
|
5,169
|
|
|
Total Liabilities
|
981,416
|
|
|
Shareholders'
equity
|
105,911
|
|
|
Total Liabilities and Shareholders' Equity
|
$1,087,327
|
|
|
Net interest
income and net interest margin (3)
|
|
33,332
|
3.18%
|
Less: Tax
Equivalent adjustment
|
|
(1,623)
|
|
Net Interest Income
|
|
$31,709
|
3.03%
|
(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, interest income is reported on a tax-equivalent
basis.
AVERAGE BALANCE SHEET AND
ANALYSIS OF NET INTEREST INCOME
For the year ended December 31, 2009
|
Average
Balance
|
Interest
|
Weighted
Average
Rate
|
Interest
Earning Assets:
|
|
|
|
Loans (1,3)
|
$ 655,201
|
$34,936
|
5.33%
|
Taxable
securities (2)
|
293,027
|
16,686
|
5.69%
|
Non-taxable
securities (2,3)
|
57,271
|
4,247
|
7.42%
|
Total
securities
|
350,298
|
20,933
|
5.98%
|
Federal Home
Loan Bank stock
|
15,782
|
---
|
0.00%
|
Fed funds sold,
money market funds, and time
|
|
|
|
deposits with other banks
|
756
|
3
|
0.40%
|
|
|
|
|
Total Earning Assets
|
1,022,037
|
55,872
|
5.47%
|
|
|
|
|
Non-Interest
Earning Assets:
|
|
|
|
Cash and due
from banks
|
8,574
|
|
|
Allowance for
loan losses
|
(6,634)
|
|
|
Other assets
(2)
|
28,519
|
|
|
Total Assets
|
$1,052,496
|
|
|
|
|
|
|
|
|
|
|
Interest
Bearing Liabilities:
|
|
|
|
Deposits
|
$ 572,441
|
$10,724
|
1.87%
|
Borrowings
|
332,521
|
10,362
|
3.12%
|
Total Interest Bearing Liabilities
|
904,962
|
21,086
|
2.33%
|
Rate Spread
|
|
|
3.14%
|
|
|
|
|
Non-Interest
Bearing Liabilities:
|
|
|
|
Demand and
other non-interest bearing deposits
|
53,152
|
|
|
Other
liabilities
|
5,536
|
|
|
Total Liabilities
|
963,650
|
|
|
Shareholders'
equity
|
88,846
|
|
|
Total Liabilities and Shareholders' Equity
|
$1,052,496
|
|
|
Net interest
income and net interest margin (3)
|
|
34,786
|
3.40%
|
Less: Tax
Equivalent adjustment
|
|
(1,505)
|
|
Net Interest Income
|
|
$33,281
|
3.26%
|
(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, interest income is reported on a tax-equivalent
basis.
AVERAGE BALANCE SHEET AND
ANALYSIS OF NET INTEREST INCOME
For the year ended December 31, 2008
|
Average
Balance
|
Interest
|
Average
Rate
|
Interest
Earning Assets:
|
|
|
|
Loans (1,3)
|
$611,373
|
$37,761
|
6.18%
|
Taxable
securities (2)
|
231,721
|
13,588
|
5.86%
|
Non-taxable
securities (2,3)
|
36,972
|
2,537
|
6.86%
|
Total securities
|
268,693
|
16,125
|
6.00%
|
Federal Home
Loan Bank stock
|
13,940
|
526
|
3.77%
|
Fed
funds sold, money market funds, and time
deposits with other banks
|
2,344
|
81
|
3.46%
|
|
|
|
|
Total Earning Assets
|
896,350
|
54,493
|
6.08%
|
|
|
|
|
Non-Interest
Earning Assets:
|
|
|
|
Cash and due
from banks
|
9,752
|
|
|
Allowance for
loan losses
|
(5,171)
|
|
|
Other assets
(2)
|
25,426
|
|
|
Total Assets
|
$926,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Bearing Liabilities:
|
|
|
|
Deposits
|
$518,702
|
$14,976
|
2.89%
|
Borrowings
|
282,954
|
11,427
|
4.04%
|
Total Interest Bearing Liabilities
|
801,656
|
26,403
|
3.29%
|
Rate Spread
|
|
|
2.79%
|
|
|
|
|
Non-Interest
Bearing Liabilities:
|
|
|
|
Demand and
other non-interest bearing deposits
|
54,664
|
|
|
Other
liabilities
|
4,898
|
|
|
Total Liabilities
|
861,218
|
|
|
Shareholders'
equity
|
65,139
|
|
|
Total Liabilities and Shareholders' Equity
|
$926,357
|
|
|
Net interest
income and net interest margin (3)
|
|
28,090
|
3.13%
|
Less: Tax
Equivalent adjustment
|
|
(899)
|
|
Net Interest Income
|
|
$27,191
|
3.03%
|
(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, interest income is reported on a tax-equivalent
basis.
Net Interest Margin
:
The net interest margin, expressed on a
tax-equivalent basis, represents the difference between interest and dividends earned on
interest-earning assets and interest paid to depositors and other creditors, expressed as
a percentage of average earning assets.
The net interest margin is determined by dividing tax-equivalent net
interest income by average interest-earning assets. The interest rate spread represents
the difference between the average tax-equivalent yield earned on interest earning-assets
and the average rate paid on interest bearing liabilities. The net interest margin is
generally higher than the interest rate spread due to the additional income earned on
those assets funded by non-interest bearing liabilities, primarily demand deposits and
shareholders equity.
The Companys tax-equivalent net interest margin amounted to 3.18%
in 2010, representing a decline of 22 basis points compared with 2009. In 2009, the
Companys tax-equivalent net interest margin amounted to 3.40%, compared with 3.13%
in 2008, representing an improvement of 27 basis points.
The following table summarizes the net interest margin components, on a
quarterly basis, over the past two years. Factors contributing to the changes in the net
interest margin are enumerated in the following discussion and analysis.
NET INTEREST MARGIN ANALYSIS
WEIGHTED
AVERAGE RATES
|
2010
|
|
2009
|
Quarter:
|
4
|
3
|
2
|
1
|
|
4
|
3
|
2
|
1
|
Interest
Earning Assets:
|
|
|
|
|
|
|
|
|
|
Loans (1,3)
|
5.00%
|
5.14%
|
5.20%
|
5.22%
|
|
5.16%
|
5.27%
|
5.35%
|
5.56%
|
Taxable
securities (2)
|
4.22%
|
4.60%
|
4.35%
|
5.23%
|
|
5.31%
|
5.64%
|
5.86%
|
5.98%
|
Non-taxable
securities (2,3)
|
7.39%
|
7.19%
|
7.57%
|
7.48%
|
|
7.53%
|
7.13%
|
7.61%
|
7.39%
|
Total securities
|
4.73%
|
5.04%
|
4.93%
|
5.64%
|
|
5.70%
|
5.90%
|
6.14%
|
6.18%
|
Federal Home
Loan Bank stock
|
0.00%
|
0.00%
|
0.00%
|
0.00%
|
|
0.00%
|
0.00%
|
0.00%
|
0.00%
|
Fed Funds sold, money market funds,
and time deposits with other banks
|
0.00%
|
0.27%
|
0.00%
|
0.00%
|
|
0.00%
|
1.33%
|
0.00%
|
0.93%
|
Total Earning
Assets
|
4.83%
|
5.01%
|
5.03%
|
5.28%
|
|
5.26%
|
5.40%
|
5.55%
|
5.68%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
Demand and
other non-interest bearing deposits
|
1.50%
|
1.56%
|
1.57%
|
1.64%
|
|
1.73%
|
1.79%
|
1.84%
|
2.17%
|
Borrowings
|
3.22%
|
3.39%
|
3.24%
|
3.42%
|
|
3.34%
|
3.19%
|
2.90%
|
3.07%
|
Total Interest
Bearing Liabilities
|
2.03%
|
2.13%
|
2.10%
|
2.21%
|
|
2.27%
|
2.29%
|
2.24%
|
2.53%
|
|
|
|
|
|
|
|
|
|
|
Rate Spread
|
2.80%
|
2.88%
|
2.93%
|
3.07%
|
|
2.99%
|
3.11%
|
3.31%
|
3.15%
|
|
|
|
|
|
|
|
|
|
|
Net Interest
Margin (3)
|
3.06%
|
3.15%
|
3.17%
|
3.34%
|
|
3.27%
|
3.38%
|
3.54%
|
3.42%
|
|
|
|
|
|
|
|
|
|
|
Net Interest
Margin without Tax Equivalent
Adjustments
|
2.92%
|
3.00%
|
3.01%
|
3.18%
|
|
3.10%
|
3.23%
|
3.39%
|
3.30%
|
(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, interest income is reported on a tax equivalent
basis.
Recent data suggests that the U.S. economy is slowly emerging from a
deep recession which began in December 2007, driven by sharp downturns in the nationwide
housing and credit markets, followed by multi-decade high unemployment rates and
diminished consumer spending. The Board of Governors of the Federal Reserve System
addressed the economic decline with changes in its monetary policy, by reducing the
Federal Funds rate to historic levels. During 2008 the targeted fed funds rate fell from
4.25% to a range of 0% to 0.25% where it stayed for all of 2009 and 2010. These actions
favorably impacted the Banks 2008 and 2009 net interest margins, as the total
weighted average cost of funds declined faster and to a greater extent than the decline in
the weighted average yield on its earning asset portfolios. As more fully discussed below,
this trend reversed itself in 2010, with earning asset yields declining to a greater
extent than the cost of interest bearing liabilities.
For the year ended December 31, 2010, the weighted average yield on
average earning assets amounted to 5.03%, compared with 5.47% in 2009, representing a
decline of 44 basis points. However, the weighted average cost of interest bearing
liabilities amounted to 2.11% in 2010, compared with 2.33% in 2009, representing a decline
of only 22 basis points. To summarize, comparing 2010 with 2009, the decline in the
Banks weighted average yield on its earning asset portfolios exceeded the decline in
the weighted average cost of interest bearing liabilities by 22 basis points.
A variety of factors contributed to the earning asset yield and net
interest margin declines during 2010, including the replacement of accelerated cash flows
from the Banks mortgage-backed securities ("MBS") portfolio during a
period of historically low interest rates. The year-to-date yield on the securities
portfolio was also negatively impacted by the accelerated MBS premium amortization related
to the Fannie Mae and Freddie Mac cumulative repurchases of seriously delinquent
securitized loans earlier in the year. As previously reported, in early 2010 these
Government-sponsored enterprises announced they would buy back an approximate $200 billion
backlog of seriously delinquent mortgages contained in certain residential MBS previously
sold to investors, including the Bank. These cumulative repurchases were completed during
the second quarter. The Banks year-to-date net interest margin and net interest
income were negatively impacted by the accelerated MBS premium amortization related to the
aforementioned repurchases, which reduced the net interest margin by approximately 4 basis
points and net interest income by approximately $420.
The Banks 2010 asset yield and net interest margin declines were
also attributed to the ongoing origination and competitive re-pricing of certain
commercial loans during a period of historically low interest rates. Likewise, the
replacement of accelerated cash flows from the Banks residential mortgage loan
portfolio, which was principally driven by heavy re-financing activity, also contributed
to the earning asset and net interest margin declines. In addition, 2010 earning asset
yields were negatively impacted by the maturity of two interest rate floor agreements
totaling $30,000 (off balance sheet derivative instruments) in the third and fourth
quarters, which had been guaranteeing a minimum of 6.00% and 6.50% on a Prime based
portfolio of loans.
The Banks 2010 net interest margin decline was also attributed to
a moderate shift from short-term funding to higher cost, long-term funding on the
Banks balance sheet. Considering the current near zero percent short-term funding
rates and the shape of the U.S. Treasury yield curve, the Banks interest rate risk
management strategy has been focused on protecting net interest income over a long-term
horizon, particularly in a rising interest rate environment. While this strategy pressures
earnings in the near-term, Company management believes the long term-risks associated with
funding the balance sheet short outweigh the short-term rewards. At December 31, 2010,
Company management believes the Banks balance sheet has been positioned such that
future levels of net interest income are largely insulated from rising interest rates.
For the year ended December 31, 2009, the weighted average yield on
average earning assets amounted to 5.47%, compared with 6.08% in 2008, representing a
decline of 61 basis points. However, the weighted average cost of interest bearing
liabilities amounted to 2.33% in 2009, compared with 3.29% in 2008, representing a decline
of 96 basis points. In summary, comparing 2009 with 2008, the decline in the Banks
weighted average cost of interest bearing liabilities exceeded the decline in the weighted
average yield on its earning asset portfolios by 35 basis points, which in turn lifted the
Banks 2009 net interest margin by 27 basis points
Should interest rates continue at current levels, Company management
anticipates the declining net interest margin trend experienced in 2010 will stabilize in
2011, as assets and liabilities are generally expected to re-price or be replaced more
proportionally into the current low interest rate environment.
The Banks interest rate sensitivity position is more fully
described in Part II, Item 7A of this Annual Report on Form 10-K,
Quantitative and
Qualitative Disclosures About Market Risk.
Interest and Dividend Income:
For the year ended December 31,
2010, total interest and dividend income on a tax-equivalent basis amounted to $52,764,
compared with $55,872 in 2009, representing a decline of $3,108, or 5.6%. The decline in
interest and dividend income was principally attributed to a 44 basis point decline in the
weighted average earning asset yield, offset in part by earning asset growth of $25,912 or
2.5%. The decline in interest and dividend income was entirely attributed to securities
income, which declined $3,210 or 15.3%, compared with 2009. The decline in securities
income was largely attributed to the ongoing replacement of accelerated mortgage-backed
security cash flows in a historically low interest rate environment, and to a lesser
extent the premium amortization impact of the previously discussed Fannie Mae and Freddie
Mac securitized loan buyouts. Accelerated cash flows were principally attributed to
significantly higher levels of securitized loan refinancing activity, as mortgage rates
declined to historical lows, combined with historically high securitized loan defaults.
For the year ended December 31, 2010, interest income from the loan
portfolio amounted to $35,039, compared with $34,936 in 2009, representing a slight
increase of $103, or 0.3%, compared with 2009. While the weighted average yield on the
loan portfolio declined 19 basis points to 5.14% in 2010, the impact of this decline was
essentially offset by average loan portfolio growth of $26,787 or 4.1%.
The Bank did not record any FHLB stock dividends in 2010, unchanged
compared with 2009. In the first quarter of 2009, the FHLB of Boston advised its members
that it was focusing on preserving capital in response to other-than-temporary impairment
losses it had sustained, and declining capital ratios. Accordingly, dividend payments were
suspended, and this continued to be the case through December 31, 2010.
As depicted on the rate/volume analysis table below, comparing 2010
with the 2009, the impact of the lower weighted average earning asset yield contributed
$4,156 to the decline in total tax-equivalent interest income, offset in part by $1,408
attributed to the increased volume of total average earning assets.
For the year ended December 31, 2009, total tax-equivalent interest
income amounted to $55,872, compared with $54,493 in 2008, representing an increase of
$1,379, or 2.5%.
The increase in 2009 interest income was principally attributed to
average earning asset growth of $125,687, or 14.0%, largely offset by a 61 basis point
decline in the weighted average earning asset yield. The decline in the weighted average
earning asset yield was principally attributed to the reduction of short-term interest
rates by the Federal Reserve, the impact of which reduced the weighted average yield on
the Banks variable rate loan portfolios. To a lesser extent, the weighted average
loan yields were also impacted by the renegotiation of certain fixed rate commercial loans
to variable rate loans with lower prevailing interest rates.
For the year ended December 31, 2009, interest income from the loan
portfolio amounted to $34,936, representing a decline of $2,825, or 7.5%, compared with
2008. The 2009 decline in loan interest income was attributed to an 85 basis point decline
in the weighted average loan portfolio yield to 5.33%, largely offset by average loan
portfolio growth of $43,828, or 7.2%.
For the year ended December 31, 2009, interest income from the
securities portfolio amounted to $20,933, representing an increase of $4,808, or 29.8%,
compared with 2008. The increase in interest income from securities was principally
attributed to average securities portfolio growth of $81,605 or 30.4%, offset in part by a
2 basis point decline in the weighted average securities portfolio yield, which in 2009
amounted to 5.98%. Because the majority of the securities portfolio is comprised of fixed
rate, non-callable securities, the decline in short-term interest rates did not have a
significant impact on the portfolios weighted average yield.
The Bank did not record any FHLB stock dividends in 2009, compared with
$526 in 2008.
As depicted on the rate/volume analysis table below, the increased
volume of average earning assets on the balance sheet during 2009 contributed $7,644 to
the increase in interest income compared with 2008, but this increase was largely offset
by a decline of $6,265 attributed to the impact of the lower weighted average earning
asset yield.
Interest Expense:
For the year ended December 31, 2010, total
interest expense amounted to $19,432, compared with $21,086 in 2009, representing a
decline of $1,654, or 7.8%. The 2010 decline in total interest expense compared with 2009
was principally attributed to a 22 basis point decline in the weighted average interest
rate paid on interest bearing liabilities, offset in part by a $14,249 or 1.6% increase in
average interest bearing liabilities.
The 2010 decline in the average cost of interest bearing liabilities
was principally attributed to prevailing, historically low short-term and long-term market
interest rates, with maturing time deposits and borrowings being added or replaced at a
lower cost and other interest bearing deposits re-pricing into the lower interest rate
environment. The weighted average cost of interest bearing deposits declined 30 basis
points in 2010 to 1.57%, while the weighted average cost of borrowings increased 20 basis
points to 3.32%, principally reflecting the addition of long-term borrowings to the
Banks balance sheet combined with the 2010 average balance pay-down of $45,305 in
low cost borrowings resulting from strong retail deposit growth.
As depicted on the rate/volume analysis table below, the impact of the
lower weighted average rate paid on interest bearing liabilities contributed $1,359 to the
2010 decline in interest expense, while the impact of the volume of average interest
bearing liabilities contributed $295.
For the year ended December 31, 2009, total interest expense amounted
to $21,086, compared with $26,403 in 2008, representing a decline of $5,317, or 20.1%. The
2009 decline in total interest expense compared with 2008 was principally attributed to a
96 basis point decline in the weighted average interest rate paid on interest bearing
liabilities, largely offset by a $103,306 or 12.9% increase in average interest bearing
liabilities
For the year ended December 31, 2009, the weighted average cost of
borrowed funds declined 92 basis points to 3.12%, while the weighted average cost of
interest bearing deposits declined 102 basis points to 1.87%, compared with 2008. The
foregoing declines principally resulted from lower market interest rates in 2009 compared
with 2008, combined with maturing time deposits and borrowings being replaced at lower
prevailing interest rates.
As depicted on the rate/volume analysis table below, the impact of the
lower weighted average rate paid on interest bearing liabilities contributed $8,888 to the
2009 decline in interest expense, but this was largely offset by an increase of $3,571
attributed to the impact of the increased volume of average interest bearing liabilities
compared with 2008.
Rate/Volume Analysis:
The following tables set forth a summary
analysis of the relative impact on net interest income of changes in the average volume of
interest earning assets and interest bearing liabilities, and changes in average rates on
such assets and liabilities. The income from tax-exempt assets has been adjusted to a
fully tax equivalent basis, thereby allowing uniform comparisons to be made. Because of
the numerous simultaneous volume and rate changes during the periods analyzed, it is not
possible to precisely allocate changes to volume or rate. For presentation purposes,
changes which are not solely due to volume changes or rate changes have been allocated to
these categories in proportion to the relationships of the absolute dollar amounts of the
change in each.
ANALYSIS OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME
FOR THE YEAR ENDED DECEMBER 31, 2010 VERSUS 2009
INCREASES (DECREASES) DUE TO:
|
Average
Volume
|
Average
Rate
|
Total
Change
|
|
|
|
|
Loans (1,3)
|
$ 1,423
|
$(1,320)
|
$ 103
|
Taxable
securities (2)
|
(258)
|
(3,189)
|
(3,447)
|
Non-taxable
securities (2,3)
|
243
|
(6)
|
237
|
Fed
funds sold, money market funds, and time
deposits with other banks
|
---
|
(1)
|
(1)
|
|
|
|
|
TOTAL EARNING
ASSETS
|
$ 1,408
|
$(4,516)
|
$(3,108)
|
|
|
|
|
Interest
bearing deposits
|
1,119
|
(1,937)
|
(818)
|
Borrowings
|
(1,414)
|
578
|
(836)
|
TOTAL INTEREST
BEARING LIABILITIES
|
$ (295)
|
$(1,359)
|
$(1,654)
|
|
|
|
|
NET CHANGE IN
NET INTEREST INCOME
|
$ 1,703
|
$(3,157)
|
$(1,454)
|
(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, interest income is reported on a tax equivalent
basis.
ANALYSIS OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME
FOR THE YEAR ENDED DECEMBER 31, 2009 VERSUS 2008
INCREASES (DECREASES) DUE TO:
|
Average
Volume
|
Average
Rate
|
Total
Change
|
|
|
|
|
Loans (1,3)
|
$2,711
|
$(5,536)
|
$(2,825)
|
Taxable
securities (2)
|
3,594
|
(496)
|
3,098
|
Non-taxable
securities (2,3)
|
1,394
|
316
|
1,710
|
Investment in
Federal Home Loan Bank stock
|
---
|
(526)
|
(526)
|
Fed funds sold,
money market funds, and time
|
|
|
|
deposits with
other banks
|
(55)
|
(23)
|
(78)
|
|
|
|
|
TOTAL EARNING
ASSETS
|
$7,644
|
$(6,265)
|
$ 1,379
|
|
|
|
|
Interest
bearing deposits
|
1,554
|
(5,806)
|
(4,252)
|
Borrowings
|
2,017
|
(3,082)
|
(1,065)
|
TOTAL INTEREST
BEARING LIABILITIES
|
$3,571
|
$(8,888)
|
$(5,317)
|
|
|
|
|
NET CHANGE IN
NET INTEREST INCOME
|
$4,073
|
$ 2,623
|
$ 6,696
|
(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, interest income is reported on a tax equivalent
basis.
Provision for Loan Losses
The provision for loan losses reflects the amount necessary to maintain
the allowance for loan losses (the "allowance") at a level that, in
managements judgment, is appropriate for the amount of inherent risk of probable
loss in the Banks current loan portfolio.
For the year ended December 31, 2010, the Bank recorded a provision for
loan losses (the "provision") of $2,327, compared with $3,207 in 2009,
representing a decline of $880 or 27.4%. Despite the year-over-year decline in the
provision, the amounts recorded during 2010 were higher than historical experience,
largely reflecting a continuance in the overall level of credit deterioration including
potential problem loans, combined with elevated levels of net loan charge-offs and
non-performing loans. These factors were partially mitigated by stabilizing economic
conditions and real estate values, and slowing loan portfolio growth.
For the year ended December 31, 2009, the Bank recorded a provision of
$3,207, compared with $1,995 in 2008, representing an increase of $1,212, or 60.8%. The
increase in the provision was largely attributed to deterioration in overall credit
quality, elevated levels of non-performing and potential problem loans, growth in the loan
portfolio, and depressed economic conditions, including high unemployment levels and
declining real estate values in the markets served by the Bank.
Refer to Part II, Item 7,
Non-performing Loans, Potential Problem
Loans and the Allowance for Loan Losses,
in this Annual Report on Form 10-K
for
further discussion and analysis related to the provision for loan losses.
Non-Interest Income
In addition to net interest income, non-interest income is a
significant source of revenue for the Company and an important factor in its results of
operations. In 2010, non-interest income represented 19.0% of total net interest income
and non-interest income, compared with 15.3% in 2009.
For the year ended December 31, 2010, total non-interest income
amounted to $7,458, compared with $6,022 in 2009, representing an increase of $1,436, or
23.8%.
For the year ended December 31, 2009, total non-interest income
amounted to $6,022, compared with $6,432 in 2008, representing a decline of $410 or 6.4%.
Factors contributing to the 2010 and 2009 changes in non-interest
income are enumerated in the following discussion and analysis:
Trust and Financial Services Income:
Income from trust and
financial services represented 40.0% of the Companys total non-interest income in
2010, compared with 40.6% and 39.1% in 2009 and 2008, respectively. Income from trust and
financial services is principally derived from fee income based on a percentage of the
fair market value of client assets under management and held in custody and, to a lesser
extent, revenue from brokerage services conducted through Bar Harbor Financial Services,
an independent third-party broker.
For the year ended December 31, 2010, income from trust and other
financial services amounted to $2,984, compared with $2,444 in 2009, representing an
increase of $540, or 22.1%. The increase in fee income from trust and financial services
was largely attributed to increases in the fair value of assets under management, new
client relationships, as well as increased brokerage activity during 2010.
Reflecting additional new business and further recovery in the equity
markets, at December 31, 2010, assets under management stood at $314,198, representing an
increase of $44,083 or 16.3% compared with December 31, 2009.
For the year ended December 31, 2009, income generated from trust and
financial services amounted to $2,444, compared with $2,513 in 2008, representing a
decline of $69, or 2.7%.
The decline in trust
and other financial services fees was principally attributed to declining revenue from
trust and investment management activities, largely reflecting lower average fair values
of assets under management during 2009 compared with 2008. The decline in revenue from
trust and investment management activities was partially offset by a moderate increase in
revenue generated from third party brokerage activities, which was principally attributed
to increased staff capacity and new client relationships.
Following a recovery in the equity markets, the fair value of assets
under management at December 31, 2009 rose to $270,115, representing an increase of
$39,892 or 17.3% compared with December 31, 2008.
Service Charges on Deposit Accounts:
This income is principally
derived from overdraft fees, monthly deposit account maintenance and activity fees,
automated teller machine ("ATM") fees and a variety of other deposit account
related fees. Income from service charges on deposit accounts represented 18.2% of total
2010 non-interest income, compared with 23.4% in 2009.
For the year ended December 31, 2010, income generated from service
charges on deposit accounts amounted to $1,359, compared with $1,412 in 2009, representing
a decline of $53, or 3.8%. The decline in service charges on deposit accounts was
principally attributed to a decline in deposit account overdraft fees, reflecting reduced
overdraft activity and the impact of new regulations. On November 12, 2009, the Federal
Reserve issued amendments to Regulation E implementing certain provisions of the
Electronic Fund Transfer Act. The new rules, which became effective on July 1,
2010, limit the ability of a bank to offer overdraft protection to deposit customers
without their consent and to derive fees from overdraft programs.
For the year ended December 31, 2009, income generated from service
charges on deposit accounts amounted to $1,412, compared with $1,594 in 2008, representing
a decline of $182, or 11.4%. The 2009 decline in service charges on deposit accounts was
principally attributed to declines in deposit account overdraft activity.
Mortgage Banking Activities:
This income is principally derived
from gains on sales of residential mortgage loans into the secondary market and, to a
lesser extent, ongoing retained mortgage loan servicing fees. Income from mortgage banking
activities represented 1.3% of total 2010 non-interest income, compared with 8.1% and 0.2%
in 2009 and 2008, respectively.
For the year ended December 31, 2010, income from mortgage banking
activities amounted to $115, compared with $490 in 2009, representing a decline of $375,
or 76.5%. During 2010, substantially all residential mortgage loan originations were held
in the Banks loan portfolio, whereas in 2009 certain residential mortgage loan
originations were sold into the secondary market with customer servicing retained.
Managements decision to hold 2010 residential mortgage loan originations in the loan
portfolio in part reflected a relative scarcity of alternative earning assets of
comparable quality and yield, and the fact that these loans could be largely funded with
long-term interest bearing liabilities at historically low interest rates.
For the year ended December 31, 2009, income from mortgage banking
activities amounted to $490, compared with $15 in 2008. The increase in 2009 mortgage
origination and servicing income was attributed to the sale of $29,842 of residential real
estate mortgage loans into the secondary market with servicing retained, whereas in 2008
all mortgage loan originations were held in the Banks loan portfolio.
Credit and Debit Card Service Charges and Fees:
This income is
principally derived from the Banks Visa debit card product, merchant credit card
processing fees and fees associated with Visa credit cards. Income from credit and debit
card service charges and fees represented 15.5% of total 2010 non-interest income,
compared with 16.7% and 31.8% in 2009 and 2008, respectively.
For the year ended December 31, 2010, credit and debit card service
charges and fees amounted to $1,160, compared with $1,004 in 2009, representing an
increase of $156, or 15.5%. The increase in credit and debit card service charges and fees
was principally attributed to continued growth of the Banks demand deposits and NOW
accounts, higher levels of merchant credit card processing volumes, and continued success
with a program that offers rewards for certain debit card transactions.
For the year ended December 31, 2009, income generated from credit and
debit card service charges and fees amounted to $1,004, compared with $2,044 in 2008,
representing a decline of $1,040, or 50.9%. The 2009 decline in credit and debit card
service charges and fees principally reflected the Banks sale of its merchant credit
card processing portfolio and its Visa credit card portfolio in the fourth quarter of
2008. In connection with the sale of these portfolios, the Bank entered into certain
future referral, marketing and revenue-sharing agreements, which provide future revenue
streams from these lines of business. The 2009 decline in credit and debit card service
charges and fees were offset by comparable declines in debit and credit card expenses,
which are included in non-interest expense in the Companys consolidated statements
of income.
Net Securities Gains (Losses):
For the year ended December 31, 2010, total net securities gains amounted to
$2,127, compared with $1,521 in 2009, representing an increase of $606, or 39.8%. The
total net securities gains recorded in 2010 were comprised entirely of realized gains on
the sale of securities.
For the year ended December 31, 2009, total net securities gains
amounted to $1,521, compared with net securities losses of $831 in 2008. The 2009 net
securities gains were comprised of realized gains on the sale of securities amounting to
$2,528, largely offset by other-than-temporary securities impairment ("OTTI")
losses of $1,007. The 2008 net securities losses were comprised of OTTI losses amounting
to $1,435, largely offset by realized gains on the sale of securities amounting to $604.
The 2009 and 2008 OTTI losses that were included
as a component of net securities gains (losses) were recorded prior to the Companys
adoption of a new accounting standard, which became effective April 1, 2009.
Further information regarding securities gains and losses and OTTI
losses is incorporated by reference to Part II, Item 8, Notes 1 and 2 of the Consolidated
Financial Statements in this Annual Report on Form 10-K.
Net OTTI Losses Recognized in Earnings:
For the year ended
December 31, 2010, net OTTI losses recognized in earnings amounted to $898, compared with
$1,454 in 2009, representing a decline of $556, or 38.2%. During 2010 the Company
determined that unrealized losses on certain available-for-sale, private-label
mortgage-backed securities were other-than-temporarily impaired, because the Company could
no longer conclude that it was probable it would recover all of the principal and interest
on these securities.
The OTTI losses recorded in 2010 related to ten, available for sale,
private-label MBS, nine of which the Company had previously determined to be
other-than-temporarily impaired. These OTTI losses represented managements best
estimate of credit losses or additional credit losses on the collateral underlying these
securities. The $898 in estimated 2010 credit losses were previously recorded, net of
taxes, in unrealized gains or losses on securities available for sale within accumulated
other comprehensive income or loss, a component of total shareholders equity on the
Companys consolidated balance sheet.
For the year ended December 31, 2009, total OTTI losses amounted to
$2,773 of which $1,454 represented credit losses recognized in earnings. As discussed
immediately above, prior to the adoption of a new accounting standard on April 1, 2009,
OTTI losses were recorded as a component of net securities gains (losses).
During 2009 the Company determined that unrealized losses on certain
available-for-sale, private-label MBS were other-than-temporarily impaired, because the
Company could no longer conclude that it was probable it would recover all of the
principal and interest on these securities. The total 2009 OTTI losses amounted to $2,773,
of which $1,454 represented estimated credit losses on the collateral underlying the
security. The $1,454 in estimated credit losses were recorded in earnings, with the $1,319
non-credit portion of the unrealized losses recorded within accumulated other
comprehensive income, net of taxes.
Further information regarding impaired securities,
other-than-temporarily impaired securities and evaluation of securities for impairment is
incorporated by reference to Part II, Item 8, Notes 1 and 2 of the Consolidated Financial
Statements in this Annual Report on Form 10-K.
Other Operating Income:
Other operating income includes a wide
variety of miscellaneous service charges and fees. Other operating income also includes
income from bank-owned life insurance ("BOLI") representing increases in the
cash surrender value of life insurance policies on the lives of certain retired employees
who had provided positive consent allowing the Bank to be the beneficiary of such
policies. Other operating income represented 8.2% of total 2010 non-interest income,
compared with 10.0% and 17.1% in 2009 and 2008, respectively.
For the year ended December 31, 2010, other operating income amounted
to $611, compared with $605 in 2009, representing an increase of $6, or 1.0%. For the year
ended December 31, 2009, other operating income amounted to $605, compared with $1,097 in
2008, representing a decline of $492, or 44.8%.
The decline in 2009 other operating income was principally attributed
to a $313 gain recorded in 2008 representing the proceeds from shares redeemed in
connection with the Visa, Inc. initial public offering. As previously reported in
connection with the Banks merchant services and Visa credit card business, prior to
September 2007 the Bank was a member of Visa U.S.A. Inc. Card Association. As a part of
the Visa Inc. reorganization in 2007, (the "Visa Reorganization"), the Bank
received its proportionate number of Class U.S.A. shares of Visa Inc. common stock, or
20,187 shares.
In connection with the Visa Inc. initial public offering that occurred
in March of 2008, the Banks Class U.S.A. shares were converted to 18,949 shares of
Visa Inc. Class B Common Stock, of which 7,326 shares were immediately redeemed. The
proceeds from this redemption amounted to $313 and were recorded in other operating income
in the Companys consolidated statement of income. The 11,623 post redemption
non-marketable shares owned by the Bank are convertible to Class A Visa Inc. shares three
years after the initial public offering, or upon settlement of certain litigation between
Visa Inc. and other third parties, whichever is later.
The decline in 2009 non-interest income compared with 2008 was also
attributed to $214 of non-recurring gains from the sale of the Banks merchant credit
card processing portfolio and the net gains from the sale of the Banks Visa credit
card portfolio in 2008.
Non-interest Expense
For the year ended December 31, 2010, total non-interest expense
amounted to $22,046, compared with $21,754 in 2009, representing an increase of $292, or
1.3%.
For the year ended December 31, 2009, total non-interest expense
amounted to $21,754, compared with $20,513 in 2008, representing an increase of $1,241, or
6.0%.
Factors contributing to the changes in non-interest expense are
enumerated in the following discussion and analysis.
Salaries and Employee Benefits:
For the year ended December 31,
2010, total salaries and employee benefit expenses amounted to $12,193, compared with
$11,594 in 2009, representing an increase of $599, or 5.2%. The increase in salaries and
employee benefits expense was principally attributed to increases in employee health
insurance premiums, normal increases in base salaries, as well as changes in staffing
levels and mix. The foregoing increases were partially offset by $402 of employee health
insurance expense credits attained during 2010 based on favorable claims experience.
For the year ended December 31, 2009, total salaries and employee
benefit expenses amounted to $11,594, compared with $10,827 in 2008, representing an
increase of $767, or 7.1%. The 2009 increase in salaries and employee benefits was
principally attributed to increases in employee health insurance premiums, normal
increases in base salaries, as well as changes in staffing levels and mix.
Occupancy Expense:
For the year ended December 31, 2010, total
occupancy expense amounted to $1,357, compared with $1,329 in 2009, representing an
increase of $28, or 2.1%.
For the year ended December 31, 2009, total occupancy expense amounted
to $1,329, compared with $1,387 in 2008, representing a decline of $58, or 4.2%. The
decline in occupancy expense was largely attributed to lower utilities costs associated
with declining fuel prices during 2009 compared with 2008.
Furniture and Equipment Expense:
For the year ended December
31, 2010, total furniture and equipment expense amounted to $1,602, compared with $1,378
in 2009, representing an increase of $224, or 16.3%. The increase in furniture and
equipment expenses was principally attributed to a variety of technology upgrades and new
technology systems and applications. These included the implementation of a fully
integrated deposit platform origination system, a fully integrated human resources
management system, a new core processing mainframe and disaster recovery facility, and a
variety of new or upgraded electronic banking applications.
For the year ended December 31, 2009, total furniture and equipment
expense amounted to $1,378, compared with $1,539 in 2008, representing a decline of $161,
or 10.5%. The 2009 decline in furniture and equipment expense was attributed to declines
in a variety of expense categories including depreciation expense, maintenance contract
expenses, miscellaneous equipment purchases and repairs, and personal property taxes.
Credit and Debit Card Expenses:
These expenses principally
relate to the Banks Visa debit card processing activities. In 2008 and prior years,
these expenses also included merchant credit card processing fees and processing fees
associated with Visa credit cards.
For the year ended December 31, 2010, total debit card expenses
amounted to $295, compared with $332 in 2009, representing a decline of $37, or 11.1%.
This decline was largely attributed to lower card re-issuance costs in 2010 compared with
2009.
For the year ended December 31, 2009, credit and debit card expenses
amounted to $332, compared with $1,416 in 2008, representing a decline of $1,084 or 76.6%.
The decline in credit and debit card expenses was principally attributed to the sale of
the merchant credit card processing and Visa credit card portfolios in the fourth quarter
of 2008. The 2009 decline in credit and debit card expenses were essentially offset by a
like decline in credit and debit card income, which is included in non-interest income in
the Companys consolidated statements of income.
FDIC Insurance Assessments:
For the year ended December 31,
2010, FDIC insurance assessments amounted to $1,066, compared with $1,420 in 2009,
representing a decline of $354, or 24.9%. This decline was principally attributed to a
$495 emergency special assessment recorded in the second quarter of 2009. As discussed
immediately below, the special assessment was levied on all financial institutions. The
year-over-year impact of the special assessment was partially offset by FDIC insurance
assessment increases attributed to higher levels of insured deposits on the Banks
balance sheet.
For the year ended December 31, 2009, FDIC insurance assessments
amounted to $1,420, compared with $134 in 2008, representing an increase of $1,286, or
959.7%.
During 2009, the FDICs Deposit Insurance Fund ("DIF")
posted record losses, causing its reserve ratio to fall well below 1.15%. A reserve ratio
below 1.15% triggers the need for a DIF restoration plan in accordance with the FDI Reform
Act of 2005 and conforming amendments. Pursuant to the Act, the FDIC must bring the
reserve ratio back to 1.15% within five years. Deposit insurance premiums for all FDIC
insured banks were increased as a result of the FDICs plan to reestablish the
Deposit Insurance Fund to statutory levels.
Included in 2009 FDIC insurance assessments expense was a special FDIC
deposit insurance assessment amounting to $492. In the second quarter of 2009 the FDIC
levied a special emergency assessment on all FDIC insured financial institutions. The
special assessment represented five basis points on the Banks total assets, less
Tier I Capital, as of June 30, 2009. The special assessment was in addition to the normal
second quarter 2009 assessment.
The increases in the Banks 2009 FDIC insurance assessment
premiums were also attributed to historical insurance assessment credits recorded during
2008 amounting to $147. In this regard, the FDI Reform Act required the FDIC to establish
a one-time historical assessment credit that provided banks with a credit that could be
used to offset insurance assessments in 2007 and 2008. This one-time, historical
assessment credit was established to benefit banks that had funded deposit insurance funds
prior to December 31, 1996.
Other Operating Expense:
For the year ended December 31, 2010,
total other operating expenses amounted to $5,533, compared with $5,701 in 2009,
representing a decline of $168, or 2.9%. This decline was principally attributed to a $281
write-down of certain non-marketable venture capital equity investment funds considered
other-than-temporarily impaired ("OTTI") recorded during 2009. The Bank did not
record any further OTTI on these investments during 2010. These investment funds, which
generally qualify for Community Reinvestment Act credit, represent socially responsible
venture capital investments in small businesses throughout Maine and New England. These
write-downs principally reflected the impact current economic conditions have had on these
funds.
Notable increases in other operating expenses during 2010 compared with 2009 included
marketing expenses, software depreciation expense, and staff development expenses. Notable
declines included professional service fees, and loan collection and foreclosure expenses.
For the year ended December 31, 2009, total other operating expenses
amounted to $5,701, compared with $5,210 in 2008, representing an increase of $491, or
9.4%. The increase in 2009 other operating expenses compared with 2008 was principally
attributed to $281 in OTTI write-downs of certain non-marketable venture capital equity
investment funds considered other-than-temporarily impaired as described immediately
above, compared with $68 in 2008.
The increase in 2009 other operating expenses compared with 2008 was
also attributed to loan collection and foreclosure expenses. Reflecting increased loan
collection and foreclosure activity, the Banks loan collection and foreclosure
expenses increased $185 in 2009, or 250.7%, compared with 2008.
Income Taxes
For the year ended December 31, 2010, total income taxes amounted to
$4,132, compared with $3,992 in 2009, representing an increase of $140, or 3.5%.
For the year ended December 31, 2009, total income taxes amounted to
$3,992, compared with $3,384 in 2008, representing an increase of $608, or 18.0%.
The Companys 2010 effective income tax rate amounted to 27.9%,
compared with 27.8% and 30.4% in 2009 and 2008, respectively. The income tax provisions
for these periods were less than the expense that would result from applying the federal
statutory rate of 35% to income before income taxes, principally because of the impact of
tax-exempt income from certain investment securities, loans and bank owned life insurance.
Fluctuations in the Companys effective tax rate are generally
attributed to changes in the relationship between non-taxable income and non-deductible
expense, and income before income taxes, during any given reporting period.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and the accompanying Notes to the
Consolidated Financial Statements presented elsewhere in this report have been prepared in
accordance with U.S. generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical dollars
without considering changes in the relative purchasing power of money over time due to
inflation.
Unlike many industrial companies, substantially all of the assets and
virtually all of the liabilities of the Company are monetary in nature. As a result,
interest rates have a more significant impact on the Companys performance than the
general level of inflation. Over short periods of time, interest rates and the U.S.
Treasury yield curve may not necessarily move in the same direction or in the same
magnitude as inflation.
While the financial nature of the Companys consolidated balance
sheets and statements of income is more clearly affected by changes in interest rates than
by inflation, inflation does affect the Company because as prices increase the money
supply tends to increase, the size of loans requested tends to increase, total Company
assets increase, and interest rates are affected by inflationary expectations. In
addition, operating expenses tend to increase without a corresponding increase in
productivity. There is no precise method, however, to measure the effect of inflation on
the Companys financial statements. Accordingly, any examination or analysis of the
financial statements should take into consideration the possible effects of inflation.
Regulatory and Economic Policies
The Companys business and earnings are affected by general and
local economic conditions and by the monetary and fiscal policies of the United States
government, its agencies and various other governmental regulatory authorities, among
other things. The Federal Reserve Board regulates the supply of money in order to
influence general economic conditions. Among the instruments of monetary policy
historically available to the Federal Reserve Board are (i) conducting open market
operations in United States government obligations, (ii) changing the discount rate
on financial institution borrowings, (iii) imposing or changing reserve requirements
against financial institution deposits, and (iv) restricting certain borrowings and
imposing or changing reserve requirements against certain borrowings by financial
institutions and their affiliates. In addition, the Federal Reserve Board has taken a
variety of extraordinary actions during the current recession that have had a material
expansionary effect on the money supply. These methods are used in varying degrees and
combinations to affect directly the availability of bank loans and deposits, as well as
the interest rates charged on loans and paid on deposits. For that reason alone, the
policies of the Federal Reserve Board could have a material effect on the earnings of the
Company.
Governmental policies have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to do so in the
future; however, the Company cannot accurately predict the nature, timing or extent of any
effect such policies may have on its future business and earnings.
Recent Accounting Developments
The following information presents a summary of Accounting Standards
Updates ("ASUs"), exclusive of technical correction ASUs that will
be subject to implementation in future periods.
ASU 2010-20
,
Disclosures about Credit Quality of Financing
Receivables and Allowance for Credit Losses, which amends FASB ASC 310 Receivables
.
ASU 2010-20 requires an entity to provide a greater level of disaggregated
information about the credit quality of its financing receivables and its allowance for
credit losses. The requirements are intended to enhance transparency regarding credit
losses and the credit quality of loan and lease receivables. Under this standard,
allowance for credit losses and fair value are to be disclosed by portfolio segment, while
credit quality information, impaired financing receivables and non-accrual status are to
be presented by class of financing receivable. Disclosure of the nature and extent, the
financial impact and segment information of troubled debt restructurings will also be
required. The disclosures as of the end of a reporting period (such as accounting policies
for each portfolio segment, ending balances of allowance for credit losses and
credit-quality indicators) were effective as of December 31, 2010. The disclosures about
activity that occurs during a reporting period (such as modifications and roll-forward of
allowance for credit losses) are effective in 2011. The Company has determined that while
these changes will increase reporting disclosures, they will not have an impact on its
financial condition or results of operations.
ASU No. 2010-29,
Business Combinations (Topic 805): Disclosure of
Supplementary Pro Forma Information for Business Combinations (a consensus of the FASB
Emerging Issues Task Force)
.
ASU201-29 specifies that if a public entity presents
comparative financial statements, the entity (acquirer) should disclose revenue and
earnings of the combined entity as though the business combination(s) that occurred during
the current year had occurred as of the beginning of the comparable prior annual reporting
period only. It also expands the supplemental pro forma disclosures under Topic 805 to
include a description of the nature and amount of material, nonrecurring pro forma
adjustments directly attributable to the business combination included in the reported pro
forma revenue and earnings. This topic change is effective for the Company for business
combinations for which the acquisition date is in or after 2011.
ASU No. 2011-01,
Receivables (Topic 310): Deferral of the
Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20
.
ASU 2011-01 temporarily delays the effective date of the disclosures about troubled debt
restructurings in Update 2010-20 for public entities. The delay is intended to allow the
Board time to complete its deliberations on what constitutes a troubled debt
restructuring. The effective date of the new disclosures about troubled debt
restructurings and the guidance for determining what constitutes a troubled debt
restructuring will then be coordinated. Currently, that guidance is anticipated to be
effective for interim and annual periods ending after June 15, 2011.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Market risk is the risk of loss in a financial instrument arising from
adverse changes in market rates/prices, such as interest rates, foreign currency exchange
rates, commodity prices and equity prices. Interest rate risk is the most significant
market risk affecting the Company. Other types of market risk do not arise in the normal
course of the Companys business activities.
The responsibility for interest rate risk management oversight is the
function of the Banks Asset and Liability Committee ("ALCO"), chaired by
the Chief Financial Officer and composed of various members of senior management. ALCO
meets regularly to review balance sheet structure, formulate strategies in light of
current and expected economic conditions, adjust product prices as necessary, implement
policy, monitor liquidity, and review performance against guidelines established to
control exposure to the various types of inherent risk.
Interest Rate Risk:
Interest rate risk can be defined as an
exposure to movement in interest rates that could have an adverse impact on the Bank's net
interest income. Interest rate risk arises from the imbalance in the re-pricing, maturity
and or cash flow characteristics of assets and liabilities. Management's objectives are to
measure, monitor and develop strategies in response to the interest rate risk profile
inherent in the Bank's balance sheet. The objectives in managing the Bank's balance sheet
are to preserve the sensitivity of net interest income to actual or potential changes in
interest rates, and to enhance profitability through strategies that promote sufficient
reward for understood and controlled risk.
The Bank's interest rate risk measurement and management techniques
incorporate the re-pricing and cash flow attributes of balance sheet and off-balance sheet
instruments as they relate to current and potential changes in interest rates. The level
of interest rate risk, measured in terms of the potential future effect on net interest
income, is determined through the use of modeling and other techniques under multiple
interest rate scenarios. Interest rate risk is evaluated in depth on a quarterly basis and
reviewed by the Banks ALCO and Board of Directors.
The Bank's Asset Liability Management Policy, approved annually by the
Banks Board of Directors, establishes interest rate risk limits in terms of
variability of net interest income under rising, flat, and decreasing rate scenarios. It
is the role of ALCO to evaluate the overall risk profile and to determine actions to
maintain and achieve a posture consistent with policy guidelines.
Interest rate risk is monitored through the use of two complementary
measures: static gap analysis ("gap") and interest rate sensitivity modeling.
While each measurement may have its limitations, taken together they form a reasonably
comprehensive view of the magnitude of the Banks interest rate risk, the level of
risk over time, and the quantification of exposure to changes in certain interest rate
relationships.
Static Gap Analysis:
Interest rate gap analysis provides a
static view of the maturity and re-pricing characteristics of the Banks on- and
off-balance sheet positions. Gap is defined as the difference between assets and
liabilities re-pricing or maturing within specified periods. An asset-sensitive position,
or "positive gap," indicates that there are more rate sensitive assets than
rate-sensitive liabilities re-pricing or maturing within a specified time period, which
would imply a favorable impact on net interest income during periods of rising interest
rates. Conversely, a liability-sensitive position, or "negative gap," generally
implies a favorable impact on net interest income during periods of falling interest
rates.
The Banks static interest rate sensitivity gap is summarized
below:
INTEREST RATE RISK
CUMULATIVE STATIC GAP POSITION
DECEMBER 31, 2010, AND 2009
|
One Day
To Six Months
|
Over Six Months
To One Year
|
Over One Year
|
December 31,
2010
|
$102,497
|
$ 95,862
|
$ 147,902
|
December 31, 2009
|
$144,793
|
$163,934
|
$(166,793)
|
Change ($)
|
$ (42,296)
|
$ (68,072)
|
$ 314,695
|
The Banks December 31, 2010, cumulative interest rate risk
sensitivity static gap position indicated that the Banks balance sheet was asset
sensitive over the twelve-month horizon and beyond. Comparing December 31, 2010, with
December 31, 2009, the asset sensitivity of the Banks balance sheet declined over
the one year horizon while showing a significant increase beyond the one year horizon.
Changes in the Banks cumulative static gap position from the prior year principally
reflected higher levels of longer term funding, higher levels of variable rate earning
assets, and overall changes in the maturity and re-pricing mix of earning assets and
interest bearing liabilities.
There are certain limitations inherent in static gap analysis. These
limitations include the fact that it is a static measurement and it does not reflect the
degrees to which interest earning assets and interest bearing liabilities may respond
non-proportionally to changes in market interest rates. Although ALCO reviews all data
used in the model in detail, assets and liabilities do not always have clear re-pricing
dates, and re-pricing may occur earlier or later than assumed in the model.
Interest Rate Sensitivity Modeling:
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 for all balance sheet and off-balance sheet instruments, under different interest
rate scenarios together with a dynamic future balance sheet. Interest rate risk is
measured in terms of potential changes in net interest income based upon shifts in the
yield curve.
The interest rate risk sensitivity model requires that assets and
liabilities be broken down into components as to fixed, variable, and adjustable interest
rates, as well as other homogeneous groupings, which are segregated as to maturity and
type of instrument. The model includes assumptions about how the balance sheet is likely
to evolve through time and in different interest rate environments. The model uses
contractual re-pricing dates for variable products, contractual maturities for fixed rate
products, and product-specific assumptions for deposit accounts, such as money market
accounts, that are subject to re-pricing based on current market conditions. Re-pricing
margins are also determined for adjustable rate assets and incorporated in the model.
Investment securities and borrowings with call provisions are examined on an individual
basis in each rate environment to estimate the likelihood of a call. Prepayment
assumptions for mortgage loans and mortgage-backed securities are developed from industry
median estimates of prepayment speeds, based upon similar coupon ranges and degree of
seasoning. Cash flows and maturities are then determined, and for certain assets,
prepayment assumptions are estimated under different interest rate scenarios. Interest
income and interest expense are then simulated under several hypothetical interest rate
conditions including:
-
A flat interest rate scenario in which current prevailing rates are
locked in and the only balance sheet fluctuations that occur are due to cash flows,
maturities, new volumes, and re-pricing volumes consistent with this flat rate assumption;
-
A 200 basis point rise or decline in interest rates applied against a
parallel shift in the yield curve over a twelve-month horizon together with a dynamic
balance sheet anticipated to be consistent with such interest rate changes;
-
Various non-parallel shifts in the yield curve, including changes in
either short-term or long-term rates over a twelve-month horizon, together with a dynamic
balance sheet anticipated to be consistent with such interest rate changes; and
-
An extension of the foregoing simulations to each of two, three, four
and five year horizons to determine the interest rate risk with the level of interest
rates stabilizing in years two through five. Even though rates remain stable during this
two to five year time period, re-pricing opportunities driven by maturities, cash flow,
and adjustable rate products will continue to change the balance sheet profile for each of
the interest rate conditions.
Changes in net interest income based upon the foregoing simulations are
measured against the flat interest rate scenario and actions are taken to maintain the
balance sheet interest rate risk within established policy guidelines.
The following table summarizes the Bank's net interest income
sensitivity analysis as of December 31, 2010, over one and two-year horizons and under
different interest rate scenarios. In light of the prevailing Federal Funds rate of 0.00%
to 0.25%, and the two-year U.S. Treasury note of 0.59% at December 31, 2010, the analysis
incorporates a declining interest rate scenario of 100 basis points, rather than the 200
basis points as would traditionally be the case. The table also summarizes net interest
income sensitivity under a non-parallel shift in the yield curve, whereby short term rates
increase by 500 basis points.
INTEREST RATE RISK|
CHANGE IN NET INTEREST INCOME FROM THE FLAT RATE SCENARIO
DECEMBER 31, 2010
|
-100 Basis
Points Parallel Yield Curve
Shift
|
+200 Basis
Points Parallel Yield Curve
Shift
|
+500 Basis
Points Short
Term Rates
|
Year 1
|
|
|
|
Net interest
income ($)
|
$(497)
|
$
(109)
|
$
(823)
|
Net interest
income (%)
|
-1.42%
|
-0.31%
|
-2.35%
|
Year 2
|
|
|
|
Net interest
income ($)
|
$(317)
|
$2,316
|
$(1,115)
|
Net interest
income (%)
|
-0.91%
|
6.62%
|
-3.18%
|
As more fully discussed below, the December 31, 2010 interest rate
sensitivity modeling results indicate that the Banks balance sheet was about evenly
matched over the one-year horizon. Over the two-year horizon the model indicates that that
Bank would benefit from a parallel upward shift in the yield curve, but would be
moderately exposed if short term rates increased significantly and the yield curve becomes
flattened or inverted.
Assuming interest rates remain at or near their current levels and the
Banks balance sheet structure and size remain at current levels, the interest rate
sensitivity simulation model suggests that net interest income will remain relatively
stable over the one-year horizon and then begin to trend upward over the two-year horizon
and beyond. The upward trend over the two-year horizon and beyond principally results from
funding costs rolling over at lower prevailing rates while earning asset yields remain
relatively stable.
Assuming short-term and long-term interest rates decline 100 basis
points from current levels (i.e., a parallel yield curve shift) and the Banks
balance sheet structure and size remain at current levels, management believes net
interest income will decline moderately over the one and two-year horizons as declining
earning assets yields outpace reductions in funding costs. Should the yield curve steepen
as rates fall, the model suggests that accelerated earning asset prepayments will slow,
resulting in a more stabilized level of net interest income. Management anticipates that
moderate to strong earning asset growth will be needed to meaningfully increase the
Banks current level of net interest income should both long-term and short-term
interest rates decline in parallel.
Assuming the Banks balance sheet structure and size remain at
current levels and the Federal Reserve increases short-term interest rates by 200 basis
points with the balance of the yield curve shifting in parallel with these increases,
management believes net interest income will remain stable over the one-year horizon and
then trend steadily upward over the two-year horizon and beyond. The interest rate
sensitivity simulation model suggests that as interest rates rise, the Banks funding
costs will initially re-price proportionally with earning asset yields. As funding costs
begin to stabilize in the first year of the simulation, the model suggests that the
earning asset portfolios will continue to re-price at prevailing interest rate levels and
cash flows from the Banks earning asset portfolios will be reinvested into higher
yielding earning assets, resulting in a widening of spreads and a meaningful increase in
net interest income over the two year horizon and beyond. Management believes moderate to
strong earning asset growth will be necessary to meaningfully increase the current level
of net interest income over the one-year horizon should short-term and long-term interest
rates rise in parallel. Over the two-year horizon and beyond, management believes low to
moderate earning asset growth will be necessary to meaningfully increase the current level
of net interest income.
The interest rate sensitivity model is used to evaluate the impact on
net interest income given certain non-parallel shifts in the yield curve, including
changes in either short-term or long-term interest rates. The Federal Reserve addressed
the current economic recession with changes in its monetary policy, by reducing the
Federal Funds rate to historic levels. During 2007 and 2008 the targeted fed funds rate
fell from 5.25% to a range of 0% to 0.25% where it stayed for all of 2009 and 2010,
whereas the 10 year U.S, Treasury note has declined only 125 basis points. Accordingly,
management modeled a non-parallel shift in the yield curve assuming a 500 basis point
increase in the short-term Federal Funds interest rate with the balance of the yield curve
returning to its historical ten-year average. Using this future interest rate scenario,
the interest rate sensitivity model suggests that net interest income will decline
moderately over the one and two-year horizons and stabilize thereafter, as earning asset
yields re-price proportionally with funding costs. Management believes moderate to strong
earning asset growth will be necessary to meaningfully increase the current level of net
interest income should short-term interest rates increase 500 basis points.
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, and reinvestment or
replacement of asset and liability cash flows. 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 and refinancing levels
deviating from those assumed; renegotiated loan terms with borrowers, the impact of
interest rate caps or floors on adjustable rate assets; the potential effect of changing
debt service levels on customers with adjustable rate loans; depositor early withdrawals
and product preference changes; and other such variables. The sensitivity analysis also
does not reflect additional actions that the Banks ALCO and Board of Directors might
take in responding to or anticipating changes in interest rates, and the anticipated
impact on the Banks net interest income.
The Bank engages an independent consultant to periodically review its
interest rate risk position and the reasonableness of assumptions used, with periodic
reports provided to the Banks Board of Directors. At December 31, 2009, there were
no significant differences between the views of the independent consultant and management
regarding the Banks interest rate risk exposure.
The following table summarizes the Banks net interest income
sensitivity analysis that was prepared as of December 31, 2009, over one and two-year
horizons assuming 200 basis point parallel shifts in the yield curve. The table also
summarized net interest income sensitivity under a non-parallel shift in the yield curve,
whereby short-term rates increased by 500 basis points.
|
-100 Basis Points Parallel Yield
Curve Shift
|
+200 Basis Points Parallel Yield
Curve Shift
|
+500 Basis Points Short-term Rates
|
Year 1
|
|
|
|
Net
interest income
|
($248)
|
$208
|
($438)
|
%
change
|
(0.72%)
|
0.60%
|
(1.27%)
|
Year 2
|
|
|
|
Net
interest income
|
($792)
|
$2,407
|
$126
|
%
change
|
(2.29%)
|
6.96%
|
0.36%
|
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Bar Harbor Bankshares:
We have audited the accompanying consolidated balance sheets of Bar
Harbor Bankshares and subsidiaries (the Company) as of December 31, 2010 and 2009, and the
related consolidated statements of income, changes in shareholders equity,
comprehensive income, and cash flows for each of the years in the three-year period ended
December 31, 2010. These consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Bar Harbor Bankshares
and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and
their cash flows for each of the years in the three-year period ended December 31, 2010,
in conformity with U. S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the Companys internal
control over financial reporting as of December 31, 2010, based on criteria established in
Internal Control Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated March 16, 2011
expressed an unqualified opinion on the effectiveness of the Companys internal
control over financial reporting.
/s/ KPMG LLP
Albany, New York
March 16, 2011
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2010 AND 2009
(in thousands, except share and per share data)
|
December 31,
|
|
December 31,
|
|
2010
|
|
2009
|
Assets
|
|
|
|
Cash and cash equivalents
|
12,815
|
|
9,832
|
Securities available for sale, at fair value
|
357,882
|
|
347,026
|
Federal Home Loan Bank stock
|
16,068
|
|
16,068
|
Loans
|
700,670
|
|
669,492
|
Allowance for loan losses
|
(8,500)
|
|
(7,814)
|
Loans, net of allowance for loan losses
|
692,170
|
|
661,678
|
Premises and equipment, net
|
13,505
|
|
11,927
|
Goodwill
|
3,158
|
|
3,158
|
Bank owned life insurance
|
7,112
|
|
6,846
|
Other assets
|
15,223
|
|
15,846
|
TOTAL ASSETS
|
$1,117,933
|
|
$1,072,381
|
|
|
|
|
Liabilities
|
|
|
|
Deposits:
|
|
|
|
Demand and other non-interest bearing deposits
|
$ 60,350
|
|
$ 57,743
|
NOW accounts
|
82,656
|
|
74,538
|
Savings and money market deposits
|
211,748
|
|
171,791
|
Time deposits
|
353,574
|
|
337,101
|
Total deposits
|
708,328
|
|
641,173
|
Short-term borrowings
|
119,880
|
|
91,893
|
Long-term advances from Federal Home Loan Bank
|
175,134
|
|
214,736
|
Junior subordinated debentures
|
5,000
|
|
5,000
|
Other liabilities
|
5,983
|
|
6,065
|
TOTAL
LIABILITIES
|
1,014,325
|
|
958,867
|
|
|
|
|
Shareholders'
equity
|
|
|
|
Capital stock, par value $2.00; authorized 10,000,000 shares; issued 4,525,635 shares at
December 31, 2010 and 4,443,614
shares at December 31, 2009
|
9,051
|
|
8,887
|
Preferred stock, par value $0; authorized 1,000,000 shares; issued 18,751 shares at
December 31, 2009
|
---
|
|
18,358
|
Surplus
|
26,165
|
|
24,360
|
Retained earnings
|
80,379
|
|
75,001
|
Accumulated other comprehensive income:
|
|
|
|
Prior service cost and unamortized net actuarial losses on employee benefit plans,
net
of tax of $29 and $56, at December 31, 2010 and December 31, 2009, respectively
|
(56)
|
|
(109)
|
Net unrealized appreciation on securities available for sale, net of tax of $445 and
$1,074,
at
December 31, 2010 and December 31, 2009, respectively
|
865
|
|
2,084
|
Portion of OTTI attributable to non-credit losses, net of tax of $270 and $931,
at December 31, 2010 and 2009, respectively
|
(525)
|
|
(1,808)
|
Net unrealized appreciation on derivative instruments, net of tax of
$0 and $209 at December 31, 2010 and December 31, 2009, respectively
|
---
|
|
406
|
Total accumulated other comprehensive income
|
284
|
|
573
|
Less: cost of 702,690 and 752,431 shares of treasury stock at December 31, 2010
and December 31, 2009, respectively
|
(12,271)
|
|
(13,665)
|
|
|
|
|
TOTAL
SHAREHOLDERS' EQUITY
|
103,608
|
|
113,514
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
$1,117,933
|
|
$1,072,381
|
The accompanying notes are an integral part of these consolidated financial statements
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
(in thousands, except share and per share data)
|
2010
|
2009
|
2008
|
Interest and
dividend income:
|
|
|
|
Interest and fees on loans
|
$
34,867
|
$
34,797
|
$
37,653
|
Interest on securities
|
16,274
|
19,570
|
15,415
|
Dividends on FHLB stock
|
---
|
---
|
526
|
Total interest
and dividend income
|
51,141
|
54,367
|
53,594
|
|
|
|
|
Interest
expense:
|
|
|
|
Deposits
|
9,906
|
10,724
|
14,976
|
Short-term borrowings
|
284
|
602
|
1,421
|
Long-term debt
|
9,242
|
9,760
|
10,006
|
Total interest
expense
|
19,432
|
21,086
|
26,403
|
|
|
|
|
Net interest
income
|
31,709
|
33,281
|
27,191
|
Provision for loan losses
|
2,327
|
3,207
|
1,995
|
Net interest
income after provision for loan losses
|
29,382
|
30,074
|
25,196
|
|
|
|
|
Non-interest
income:
|
|
|
|
Trust and other financial services
|
2,984
|
2,444
|
2,513
|
Service charges on deposit accounts
|
1,359
|
1,412
|
1,594
|
Mortgage banking activities
|
115
|
490
|
15
|
Credit and debit card service charges and fees
|
1,160
|
1,004
|
2,044
|
|
|
|
|
Net securities gains (losses)
|
2,127
|
1,521
|
(831)
|
Total other-than-temporary impairment ("OTTI") losses
|
(898)
|
(2,773)
|
---
|
Non-credit portion of OTTI losses (before taxes) (1)
|
---
|
1,319
|
---
|
|
|
|
|
Net OTTI losses recognized in earnings
|
(898)
|
(1,454)
|
---
|
Other operating income
|
611
|
605
|
1,097
|
Total
non-interest income
|
7,458
|
6,022
|
6,432
|
|
|
|
|
Non-interest
expense:
|
|
|
|
Salaries and employee benefits
|
12,193
|
11,594
|
10,827
|
Occupancy expense
|
1,357
|
1,329
|
1,387
|
Furniture and equipment expense
|
1,602
|
1,378
|
1,539
|
Credit and debit card expenses
|
295
|
332
|
1,416
|
FDIC insurance assessments
|
1,066
|
1,420
|
134
|
Other operating expense
|
5,533
|
5,701
|
5,210
|
Total
non-interest expense
|
22,046
|
21,754
|
20,513
|
|
|
|
|
Income before
income taxes
|
14,794
|
14,342
|
11,115
|
Income taxes
|
4,132
|
3,992
|
3,384
|
|
|
|
|
Net income
|
$ 10,662
|
$ 10,350
|
$ 7,731
|
|
|
|
|
Preferred stock
dividends and accretion of discount
|
653
|
1,034
|
---
|
Net income
available to common shareholders
|
$ 10,009
|
$ 9,316
|
$ 7,731
|
|
|
|
|
|
|
|
|
Computation
of Earnings Per Share:
|
|
|
|
Weighted
average number of capital stock shares outstanding
|
|
|
|
Basic
|
3,782,881
|
2,916,643
|
2,943,694
|
Effect of dilutive employee stock options
|
45,821
|
57,182
|
63,555
|
Effect of dilutive warrants
|
---
|
9,604
|
---
|
Diluted
|
3,828,702
|
2,983,429
|
3,007,249
|
|
|
|
|
Per
Common Share Data:
|
|
|
|
Basic Earnings Per Share
|
$ 2.65
|
$ 3.19
|
$ 2.63
|
Diluted Earnings Per Share
|
$ 2.61
|
$ 3.12
|
$ 2.57
|
(1) Included in other comprehensive income, net of taxes
The accompanying notes are an integral part of these consolidated
financial statements.
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
(in thousands, except share and per share data)
|
Capital
Stock
|
Preferred
Stock
|
Surplus
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
income (loss)
|
Treasury
Stock
|
Total
Shareholders'
Equity
|
|
|
|
|
|
|
|
|
Balance
December 31, 2007
|
$7,287
|
$
---
|
$4,668
|
$63,292
|
$ 1,118
|
$(10,391)
|
65,974
|
Net income
|
---
|
---
|
---
|
7,731
|
---
|
---
|
7,731
|
Total other
comprehensive loss
|
---
|
---
|
---
|
---
|
(1,642)
|
---
|
(1,642)
|
Cash dividends
declared
($1.02 per share)
|
---
|
---
|
---
|
(3,004)
|
---
|
---
|
(3,004)
|
Purchase of
treasury stock (138,409 shares)
|
---
|
---
|
---
|
---
|
---
|
(4,028)
|
(4,028)
|
Stock options
exercised (9,725 shares),
including related tax effects
|
---
|
---
|
31
|
(111)
|
---
|
290
|
210
|
Recognition of
stock option expense
|
---
|
---
|
204
|
---
|
---
|
---
|
204
|
Balance
December 31, 2008
|
$7,287
|
$ ---
|
$4,903
|
$67,908
|
$ (524)
|
$(14,129)
|
$ 65,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2008
|
$7,287
|
$
---
|
$4,903
|
$67,908
|
$ (524)
|
$(14,129)
|
$ 65,445
|
Net income
|
---
|
---
|
---
|
10,350
|
---
|
---
|
10,350
|
Cumulative
effect adjustment for the
adoption of FSP FAS 115-2
|
---
|
---
|
---
|
937
|
(937)
|
---
|
---
|
Total other
comprehensive income
|
---
|
---
|
---
|
---
|
2,034
|
---
|
2,034
|
Dividend
declared:
|
---
|
---
|
---
|
|
|
---
|
|
Common stock
($1.04 per share)
|
---
|
---
|
---
|
(2,994)
|
---
|
---
|
(2,994)
|
Preferred stock
|
---
|
---
|
---
|
(790)
|
---
|
---
|
(790)
|
Issuance of
common stock
(800,000 shares)
|
1,600
|
---
|
18,812
|
---
|
---
|
---
|
20,412
|
Issuance of
preferred stock
(18,751 shares)
|
---
|
18,114
|
(232)
|
---
|
---
|
---
|
17,882
|
Issuance of
stock warrants
|
---
|
---
|
638
|
---
|
---
|
---
|
638
|
Purchase of
treasury stock
(5,571 shares)
|
---
|
---
|
---
|
---
|
---
|
(144)
|
(144)
|
Stock options
exercised
(22,775 shares),
including related tax effects
|
---
|
---
|
110
|
(166)
|
---
|
608
|
552
|
Recognition of
stock option expense
|
---
|
---
|
129
|
---
|
---
|
---
|
129
|
Cumulative
dividends on preferred stock
|
---
|
122
|
---
|
(122)
|
---
|
---
|
---
|
Accretion of
discount
|
---
|
122
|
---
|
(122)
|
---
|
---
|
---
|
Balance
December 31, 2009
|
$8,887
|
$18,358
|
$24,360
|
$75,001
|
$ 573
|
$(13,665)
|
$113,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2009
|
$8,887
|
$18,358
|
$24,360
|
$75,001
|
$ 573
|
$(13,665)
|
$113,514
|
Net income
|
---
|
---
|
---
|
10,662
|
---
|
---
|
10,662
|
Total other
comprehensive income
|
---
|
---
|
---
|
---
|
(289)
|
---
|
(289)
|
Dividend
declared:
|
|
|
|
|
|
---
|
|
Common stock
($1.045 per share)
|
---
|
---
|
---
|
(3,955)
|
---
|
---
|
(3,955)
|
Preferred stock
|
---
|
---
|
---
|
(138)
|
---
|
---
|
(138)
|
Issuance of
common stock
(82,021 shares)
|
164
|
---
|
1,777
|
---
|
---
|
---
|
1,941
|
Purchase of
preferred stock and warrants
(18,751 shares)
|
---
|
(18,873)
|
(279)
|
---
|
---
|
---
|
(19,152)
|
Purchase of
treasury stock
(10,000 shares)
|
---
|
---
|
---
|
---
|
---
|
(275)
|
(275)
|
Stock options
exercised (57,141 shares),
including related tax effects
|
---
|
---
|
161
|
(670)
|
---
|
1,592
|
1,083
|
Recognition of
stock based expense
|
---
|
---
|
217
|
---
|
---
|
---
|
217
|
Restricted
stock grants
|
---
|
---
|
(71)
|
(6)
|
---
|
77
|
---
|
Accretion of
discount
|
---
|
515
|
---
|
(515)
|
---
|
---
|
---
|
Balance
December 31, 2010
|
$ 9,051
|
$ ---
|
$ 26,165
|
$80,379
|
$ 284
|
$(12,271)
|
$103,608
|
The accompanying notes are an integral part of these consolidated financial statements.
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
(in thousands)
|
2010
|
2009
|
2008
|
|
|
|
|
Net income
|
$10,662
|
$10,350
|
$ 7,731
|
Other
comprehensive income:
|
|
|
|
Net unrealized appreciation (depreciation) on securities
available for sale, net of tax of
$451, $1,239, and ($1,490), respectively
|
875
|
2,407
|
(2,893)
|
Less reclassification adjustment for net (gains) losses related to securities
available for sale included in net
income, net of tax of ($724), ($517) and $283,
respectively
|
(1,404)
|
(1,004)
|
548
|
Add other-than-temporary adjustment, net of tax of $305, $943 and $0,
repectively
|
593
|
1,830
|
---
|
Less non-credit portion of other-than-temporary losses, net of tax of $0, $448,
and $0, respectively
|
---
|
(871)
|
---
|
Net unrealized (depreciation) appreciation and other amounts for interest rate
derivatives, net of tax of ($209),
($173) and $358, respectively
|
(406)
|
(334)
|
694
|
Amortization of actuarial gain for supplemental executive retirement plan,
net of related tax of $3, $3
and $5, respectively
|
6
|
6
|
9
|
Actuarial gain on supplemental executive retirement plan, net of related tax of
$24, $0, and $0 respectively
|
47
|
---
|
---
|
Total other comprehensive (loss) income
|
(289)
|
2,034
|
(1,642)
|
Total
comprehensive income
|
$10,373
|
$12,384
|
$ 6,089
|
The accompanying notes are an integral part of these consolidated financial statements.
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
(in thousands)
|
2010
|
2009
|
2008
|
Cash flows from
operating activities:
|
|
|
|
Net income
|
$ 10,662
|
$ 10,350
|
$ 7,731
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
Depreciation and amortization of premises and equipment
|
1,081
|
914
|
1,004
|
Amortization of core deposit intangible
|
---
|
67
|
67
|
Provision for loan losses
|
2,327
|
3,207
|
1,995
|
Net securities (gains) losses
|
(2,127)
|
(1,521)
|
831
|
Other-than-temporary impairment
|
898
|
1,454
|
---
|
Net amortization (accretion) of bond premiums and discounts
|
1,193
|
(965)
|
(748)
|
Deferred tax (benefit) expense
|
(211)
|
(1,742)
|
(714)
|
Recognition of stock based expense
|
217
|
129
|
204
|
Gain on sale of credit card processing business
|
---
|
---
|
(111)
|
Gain on sale of merchant card processing business
|
---
|
---
|
(103)
|
Proceeds from sale of mortgages held for sale
|
846
|
29,898
|
---
|
Origination of mortgage loans held for sale
|
(829)
|
(29,842)
|
---
|
Net gains on sale of mortgage loans held for sale
|
(26)
|
(446)
|
---
|
Net change in other assets
|
(214)
|
(6,047)
|
1,536
|
Net change in other liabilities
|
(81)
|
1,327
|
(768)
|
Net cash provided by operating activities
|
13,736
|
6,783
|
10,924
|
|
|
|
|
Cash flows from
investing activities:
|
|
|
|
Purchases of securities available for sale
|
(158,584)
|
(184,554)
|
(100,222)
|
Proceeds from maturities, calls and principal paydowns of mortgage-backed securities
|
116,790
|
70,266
|
49,656
|
Proceeds from sales of securities available for sale
|
31,070
|
62,357
|
21,064
|
Net increase in Federal Home Loan Bank stock
|
---
|
(1,272)
|
(1,640)
|
Proceeds from sale of credit card processing business
|
---
|
---
|
2,284
|
Net loans made to customers
|
(33,268)
|
(37,148)
|
(57,337)
|
Proceeds from sale of other real estate owned
|
854
|
83
|
340
|
Capital expenditures
|
(2,659)
|
(1,987)
|
(1,063)
|
Net cash used in investing activities
|
(45,797)
|
(92,255)
|
(86,918)
|
|
|
|
|
Cash flows from
financing activities:
|
|
|
|
Net increase in deposits
|
67,155
|
62,980
|
39,077
|
Net increase in securities sold under repurchase agreements and fed funds purchased
|
9,665
|
(726)
|
(1,177)
|
(Paydown of) proceeds from Federal Reserve borrowings
|
(20,000)
|
20,000
|
---
|
Proceeds from Federal Home Loan Bank advances
|
28,750
|
47,490
|
97,180
|
Repayments of Federal Home Loan Bank advances
|
(30,030)
|
(79,038)
|
(55,953)
|
Proceeds from issuance of junior subordinated debentures
|
---
|
---
|
5,000
|
Proceeds from issuance of common stock
|
1,941
|
20,412
|
---
|
Net proceeds from issuance of preferred stock and stock warrants
|
---
|
18,520
|
---
|
Purchase treasury stock
|
(275)
|
---
|
---
|
Purchases of preferred stock and warrants
|
(19,152)
|
(144)
|
(4,028)
|
Proceeds from stock based exercises, including excess tax benefits
|
1,083
|
552
|
210
|
Payments of dividends
|
(4,093)
|
(3,784)
|
(3,004)
|
Net cash provided by financing activities
|
35,044
|
86,262
|
77,305
|
|
|
|
|
Net increase in
cash and cash equivalents
|
2,983
|
790
|
1,311
|
Cash and cash
equivalents at beginning of period
|
9,832
|
9,042
|
7,731
|
Cash and cash
equivalents at end of period
|
$ 12,815
|
$ 9,832
|
$ 9,042
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
Cash paid during the period for:
|
|
|
|
Interest
|
$ 19,601
|
$ 21,191
|
$ 26,667
|
Income taxes
|
4,826
|
5,954
|
3,427
|
|
|
|
|
Schedule of
noncash investing activities:
|
|
|
|
Transfers from loans to other real estate owned
|
$ 656
|
$ 854
|
$ 83
|
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BAR HARBOR BANKSHARES AND SUBSIDIARIES
(All dollar amounts expressed in thousands, except per share data)
Note 1: Summary of Significant Accounting Policies
The accounting and reporting policies of Bar Harbor Bankshares (the
"Company") and its wholly-owned operating subsidiary, Bar Harbor Bank &
Trust (the "Bank"), conform to U.S. generally accepted accounting principles and
to general practice within the banking industry.
The Companys principal business activity is retail and commercial
banking and, to a lesser extent, financial services including trust, financial planning,
investment management and third-party brokerage services. The Companys business is
conducted through the Companys twelve banking offices located throughout downeast
and midcoast Maine.
The Company is a bank holding company registered under the Bank Holding
Company Act of 1956, as amended, and is subject to supervision, regulation and examination
by the Board of Governors of the Federal Reserve System. The Company is also a Maine
Financial Institution Holding Company for the purposes of the laws of the state of Maine,
and as such is subject to the jurisdiction of the Superintendent of the Maine Bureau of
Financial Institutions. The Bank is subject to the supervision, regulation, and
examination of the FDIC and the Maine Bureau of Financial Institutions.
Financial Statement Presentation:
The accompanying consolidated
financial statements have been prepared in accordance with U.S. generally accepted
accounting principles.
The consolidated financial statements include the accounts of Bar
Harbor Bankshares and its wholly-owned subsidiary, Bar Harbor Bank & Trust. All
significant inter-company balances and transactions have been eliminated in consolidation.
Whenever necessary, amounts in the prior years financial statements are reclassified
to conform to current presentation. Assets held in a fiduciary capacity are not assets of
the Company and, accordingly, are not included in the consolidated balance sheets.
In preparing financial statements in conformity with U.S. generally
accepted accounting principles, management is required to make estimates and assumptions
that affect the reported amount of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues and expenses
during the reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to change in the near term relate to the
determination of the allowance for loan losses, reviews of goodwill and intangible assets
for impairment, accounting for postretirement plans, and income taxes.
Cash and Cash Equivalents:
For purposes of reporting cash
flows, cash and cash equivalents include cash and due from banks, federal funds sold and
other short-term investments with maturities less than 90 days.
The Bank is required to maintain an average reserve balance with the
Federal Reserve Bank or maintain such reserve balance in the form of cash on hand. The
required reserve balance at December 31, 2010, and 2009 was $436 and $545, respectively,
and was met by holding cash on hand. The Banks clearing balance requirement was $150
at December 31, 2010, and 2009.
In the normal course of business, the Bank has funds on deposit at
other financial institutions in amounts in excess of the $250 that is insured by the
Federal Deposit Insurance Corporation.
Investment Securities:
All securities held at December 31, 2010
and 2009 were classified as available-for-sale ("AFS"). Available-for-sale
securities primarily consist of debt securities and mortgage-backed securities, and are
carried at estimated fair value. Changes in estimated fair value of AFS securities, net of
applicable income taxes, are reported in accumulated other comprehensive income (loss) as
a separate component of shareholders equity. The Bank does not have a securities
trading portfolio or securities held-to-maturity.
Premiums and discounts on securities are amortized and accreted over
the term of the securities using the interest method. Gains and losses on the sale of
securities are recognized at the trade date using the specific-identification method and
are shown separately in the consolidated statements of income.
Other-Than-Temporary Impairments on Investment Securities
:
One
of the significant estimates relating to securities is the evaluation of
other-than-temporary impairment. If a decline in the fair value of a debt security is
judged to be other-than-temporary, and management does not intend to sell the security and
believes it is more-likely-than-not the Company will not be required to sell the security
prior to recovery of cost or amortized cost, the portion of the total impairment
attributable to the credit loss is recognized in earnings, and the remaining difference
between the securitys amortized cost basis and its fair value is included in other
comprehensive income.
For impaired available-for-sale debt securities that management intends
to sell, or where management believes it is more-likely-than-not that the Company will be
required to sell, an other-than-temporary impairment charge is recognized in earnings
equal to the difference between fair value and cost or amortized cost basis of the
security. The fair value of the other-than-temporarily impaired security becomes its new
cost basis.
The evaluation of securities for impairments is a quantitative and
qualitative process, which is subject to risks and uncertainties and is intended to
determine whether declines in the fair value of securities should be recognized in current
period earnings. The risks and uncertainties include changes in general economic
conditions, the issuers financial condition and/or future prospects, the effects of
changes in interest rates or credit spreads and the expected recovery period of unrealized
losses. The Company has a security monitoring process that identifies securities that, due
to certain characteristics, as described below, are subjected to an enhanced analysis on a
quarterly basis.
Securities that are in an unrealized loss position are reviewed at
least quarterly to determine if they are other-than-temporarily impaired based on certain
quantitative and qualitative factors and measures. The primary factors considered in
evaluating whether a decline in value of securities is other-than-temporary include: (a)
the cause of the impairment; (b) the financial condition, credit rating and future
prospects of the issuer; (c) whether the debtor is current on contractually obligated
interest and principal payments; (d) the volatility of the securities fair
value; (e) performance indicators of the underlying assets in the security including
default rates, delinquency rates, percentage of non-performing assets, loan to collateral
value ratios, third party guarantees, current levels of subordination, vintage, and
geographic concentration and; (f) any other information and observable data considered
relevant in determining whether other-than-temporary impairment has occurred, including
the expectation of the receipt of all principal and interest due.
For securitized financial assets with contractual cash flows, such as
private-label mortgage-backed securities, the Company periodically updates its best
estimate of cash flows over the life of the security. The Companys best estimate of
cash flows is based upon assumptions consistent with the current economic recession,
similar to those the Company believes market participants would use. If the fair value of
a securitized financial asset is less than its cost or amortized cost and there has been
an adverse change in timing or amount of anticipated future cash flows since the last
revised estimate, to the extent that the Company does not expect to receive the entire
amount of future contractual principal and interest, an other-than-temporary impairment
charge is recognized in earnings representing the estimated credit loss if management does
not intend to sell the security and believes it is more-likely-than-not the Company will
not be required to sell the security prior to recovery of cost or amortized cost.
Estimating future cash flows is a quantitative and qualitative process that incorporates
information received from third party sources along with certain assumptions and judgments
regarding the future performance of the underlying collateral. In addition, projections of
expected future cash flows may change based upon new information regarding the performance
of the underlying collateral.
Federal Home Loan Bank Stock
: The Bank is a member of the
Federal Home Loan Bank ("FHLB") of Boston. The FHLB of Boston is a
cooperatively owned wholesale bank for housing and finance in the six New England States.
As a requirement of membership in the FHLB of Boston, the Bank must own a minimum required
amount of FHLB stock, calculated periodically based primarily on its level of borrowings
from the FHLB. The Bank uses the FHLB of Boston for most of its wholesale funding
needs.
FHLB stock is a non-marketable equity security and therefore is
reported at cost, which equals par value. Shares held in excess of the minimum required
amount are generally redeemable at par value; however, in 2009 the FHLB announced a
moratorium on such redemptions in response to operating losses, declining capital levels
and current market conditions, and this moratorium continued in effect through December
31, 2010. The minimum required shares are redeemable, subject to certain limitations, five
years following termination of FHLB membership. The Bank has no intention of terminating
its FHLB membership. The investment in FHLB of Boston stock is periodically evaluated for
impairment based on, among other things, the capital adequacy of the FHLB of Boston and
its overall financial condition. No impairment losses have been recorded through December
31, 2010.
Loans:
Loans are carried at the principal amounts outstanding
adjusted by partial charge-offs and net deferred loan origination costs or fees.
Interest on loans is accrued and credited to income based on the
principal amount of loans outstanding. Residential real estate and home equity loans are
generally placed on non-accrual status when reaching 90 days past due, or in process
of foreclosure, or sooner if judged appropriate by management. Consumer loans are
generally placed on non-accrual when reaching 90 days or more past due, or sooner if
judged appropriate by management, and any home equity line in the process of foreclosure
is generally placed on non-accrual status, or sooner if judged appropriate by management.
Secured consumer loans are written down to realizable value and unsecured consumer loans
are charged-off upon reaching 120 days past due. Commercial real estate loans and
commercial business loans that are 90 days or more past due are generally placed on
non-accrual status, unless secured by sufficient cash or other assets immediately
convertible to cash, and the loan is in the process of collection. Commercial real estate
and commercial business loans may be placed on non-accrual status prior to the 90 days
delinquency date if considered appropriate by management. When a loan has been placed on
non-accrual status, previously accrued and uncollected interest is reversed against
interest on loans. A loan can be returned to accrual status when collectibility of
principal is reasonably assured and the loan has performed for a period of time, generally
six months.
Commercial real estate and commercial business loans are considered
impaired when it becomes probable the Bank will not be able to collect all amounts due
according to the contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment status and collateral value. In considering
loans for evaluation of impairment, management generally excludes smaller balance,
homogeneous loans: residential mortgage loans, home equity loans, and all consumer loans,
unless such loans were restructured in a troubled debt restructuring. These loans are
collectively evaluated for risk of loss.
Loan origination and commitment fees and direct loan origination costs
are deferred, and the net amount is amortized as an adjustment of the related loans
yield, using the level yield method over the estimated lives of the related loans.
Allowance for Loan Losses:
The allowance for loan losses (the
"allowance") is a significant accounting estimate used in the preparation of the
Companys consolidated financial statements. The allowance is available to absorb
losses inherent in the current loan portfolio and is maintained at a level that, in
managements judgment, is appropriate for the amount of risk inherent in the loan
portfolio, given past and present conditions. The allowance is increased by provisions
charged to operating expense and by recoveries on loans previously charged off, and is
decreased by loans charged off as uncollectible.
Arriving at an appropriate level of allowance for loan losses involves
a high degree of judgment. The determination of the adequacy of the allowance and
provisioning for estimated losses is evaluated regularly based on review of loans, with
particular emphasis on non-performing and other loans that management believes warrant
special consideration. The ongoing evaluation process includes a formal analysis, which
considers among other factors: the character and size of the loan portfolio, business and
economic conditions, real estate market conditions, collateral values, changes in product
offerings or loan terms, changes in underwriting and/or collection policies, loan growth,
previous charge-off experience, delinquency trends, non-performing loan trends, the
performance of individual loans in relation to contract terms, and estimated fair values
of collateral.
The allowance for loan losses consists of allowances established for
specific loans including impaired loans; allowances for pools of loans based on historical
charge-offs by loan types; and supplemental allowances that adjust historical loss
experience to reflect current economic conditions, industry specific risks, and other
observable data.
While management uses available information to recognize losses on
loans, changing economic conditions and the economic prospects of the borrowers may
necessitate future additions or reductions to the allowance. In addition, various
regulatory agencies, as an integral part of their examination process, periodically review
the Banks allowance, which also may necessitate future additions or reductions to
the allowance, based on information available to them at the time of their examination.
Refer to Note 3 of these consolidated financial statements,
Loans
and Allowance for Loan Losses,
for further information on the allowance for loan
losses, including the Companys loan loss estimation methodology.
Premises and Equipment:
Premises and equipment and related
improvements are stated at cost less accumulated depreciation. Depreciation is computed on
the straight-line method over the estimated useful lives of related assets; generally 25
to 40 years for premises and 3 to 7 years for furniture and equipment.
Goodwill and Identifiable Intangible Assets:
In connection with
acquisitions, the Company generally records as assets on its consolidated financial
statements both goodwill and identifiable intangible assets, such as core deposit
intangibles.
The Company evaluates whether the carrying value of its goodwill has
become impaired, in which case the value is reduced through a charge to its earnings.
Goodwill is evaluated for impairment at least annually, or upon a triggering event, using
certain fair value techniques. Goodwill impairment testing is performed at the segment (or
"reporting unit") level. Goodwill is assigned to reporting units at the date the
goodwill is initially recorded. Once goodwill has been assigned to the reporting units, it
no longer retains its association with a particular acquisition, and all if the activities
within a reporting unit, whether acquired or organically grown, are available to support
the value of the goodwill.
The goodwill impairment analysis is a two-step test. The first steps
used to identify potential impairment, involves comparing each units fair value to
its carrying value including goodwill. If the fair value of a reporting unit exceeds its
carrying value, applicable goodwill is considered not to be impaired. If the carrying
value exceeds fair value, there is an indication of impairment and the second step is to
measure the amount of impairment.
At December 31, 2010 and 2009, the Company did not have any
identifiable intangible assets on its consolidated balance sheets.
Any changes in the estimates used by the Company to determine the
carrying value of its goodwill and identifiable intangible assets, or which otherwise
adversely affect their value or estimated lives, would adversely affect the Companys
consolidated results of operations.
Bank-Owned Life Insurance:
Bank-owned life insurance
("BOLI") represents life insurance on the lives of certain retired employees who
had provided positive consent allowing the Bank to be the beneficiary of such policies.
Increases in the cash value of the policies, as well as insurance proceeds received in
excess of the cash value, are recorded in other non-interest income, and are not subject
to income taxes. The cash surrender value is included in other assets on the
Companys consolidated balance sheet. The Company reviews the financial strength of
the insurance carrier prior to the purchase of BOLI and annually thereafter.
Mortgage Servicing Rights
:
Mortgage servicing rights are
recognized as separate assets when purchased or when retained in a sale of financial
assets. Capitalized servicing rights are reported in other assets and are amortized into
non-interest income in proportion to, and over the period of, the estimated future net
servicing income of the underlying financial assets. Servicing assets are evaluated for
impairment based upon the fair value of the rights as compared to amortized cost. Fair
value is determined using prices for similar assets with similar characteristics, when
available, or based upon discounted cash flows using market-based assumptions. Impairment
is recognized through a valuation allowance to the extent that fair value is less than the
carrying value of the rights.
Other Real Estate Owned
:
Real estate acquired in satisfaction
of a loan is reported in other assets. Properties acquired by foreclosure or deed in lieu
of foreclosure are transferred to other real estate owned and recorded at the lower of
cost or fair market value less estimated costs to sell based on appraised value at the
date actually or constructively received. Loan losses arising from the acquisition of such
property are charged against the allowance for loan losses. Subsequent reductions in
market value below the carrying value are charged to other operating expenses.
Derivative Financial Instruments:
The Company recognizes all
derivative instruments on the consolidated balance sheet at fair value. On the date the
derivative instrument is entered into, the Company designates whether the derivative is
part of a hedging relationship (i.e., cash flow or fair value hedge). The Company formally
documents relationships between hedging instruments and hedged items, as well as its risk
management objective and strategy for undertaking hedge transactions. The Company also
assesses, both at the hedges inception and on an ongoing basis, whether the
derivatives used in hedging transactions are highly effective in offsetting the changes in
cash flows or fair values of hedged items.
Changes in fair value of derivative instruments that are highly
effective and qualify as a cash flow hedge are recorded in other comprehensive income or
loss. Any ineffective portion is recorded in earnings. For fair value hedges that are
highly effective, the gain or loss on the derivative and the loss or gain on the hedged
item attributable to the hedged risk are both recognized in earnings, with the differences
(if any) representing hedge ineffectiveness. The Company discontinues hedge accounting
when it is determined that the derivative is no longer highly effective in offsetting
changes of the hedged risk on the hedged item, or management determines that the
designation of the derivative as a hedging instrument is no longer appropriate.
Off-Balance Sheet Financial Instruments
:
In the ordinary course
of business the Company has entered into off-balance sheet financial instruments
consisting of commitments to extend credit, and standby letters of credit. Such financial
instruments are recorded in the financial statements when they are funded or related fees
are incurred or received.
Stock Based Compensation:
The Company has stock option plans,
which are described more fully in Note 12. The Company expenses the grant date fair value
of options granted. The expense is recognized over the vesting periods of the grants.
Accounting for Retirement Benefit Plans:
The Company has
non-qualified supplemental executive retirement agreements with certain retired officers.
The agreements provide supplemental retirement benefits payable in installments over a
period of years upon retirement or death. The Company recognized the net present value of
payments associated with the agreements over the service periods of the participating
officers. Interest costs continue to be recognized on the benefit obligations. The Company
also has supplemental executive retirement agreements with certain current executive
officers. These agreements provide a stream of future payments in accordance with
individually defined vesting schedules upon retirement, termination, or in the event that
the participating executive leaves the Company following a change of control event. The
Company recognizes the net present value of payments associated with these agreements over
the service periods of the participating executive officers. Upon retirement, interest
costs will continue to be recognized on the benefit obligation.
The Company recognizes the over-funded or under-funded status of
postretirement benefit plans as an asset or liability on the balance sheet and recognizes
changes in that funded status through other comprehensive income. Gains and losses, prior
service costs and credits, and any remaining transition amounts that have not yet been
recognized through net periodic benefit costs are recognized in accumulated other
comprehensive income (loss), net of tax effects, until they are amortized as a component
of net periodic cost. The measurement date, which is the date at which the benefit
obligation and plan assets are measured, is the Company's fiscal year end.
Income Taxes:
The Company uses the asset and liability method
of accounting for income taxes. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their
respective tax bases. If current available information indicates that it is more likely
than not that deferred tax assets will not be realized, a valuation allowance is
established. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the enactment
date.
The Company performs an analysis of its tax positions and has not
identified any uncertain tax positions for which tax benefits should not be recognized as
of December 31, 2010. The Companys policy is to report interest and penalties, if
any, related to unrecognized tax benefits in income tax expense in the consolidated
statements of income.
The Companys income tax returns are currently open to audit under
the statute of limitations by the Internal Revenue Service for the years ended December
31, 2006 through 2009.
Earnings Per Share:
Basic earnings per share excludes dilution
and is computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per share
reflect the potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the Company, such as the Companys
dilutive stock options.
Segment Reporting:
An operating segment is defined as a
component of a business for which separate financial information is available that is
evaluated regularly by the chief operating decision-maker in deciding how to allocate
resources and evaluate performance. The Company has determined that its operations are
solely in the community banking industry and include traditional community banking
services, including lending activities, acceptance of demand, savings and time deposits,
business services, investment management, trust and third-party brokerage services. These
products and services have similar distribution methods, types of customers and regulatory
responsibilities. Accordingly, disaggregated segment information is not presented in the
notes to the consolidated financial statements.
Note 2: Securities Available For Sale
A summary of the amortized cost and market values of securities
available for sale follows:
|
December 31, 2010
|
Available
for Sale:
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Estimated
Fair Value
|
|
|
|
|
|
Obligations of
US Government-sponsored enterprises
|
$ 1,000
|
$ 34
|
$ ---
|
$ 1,034
|
Mortgage-backed
securities:
|
|
|
|
|
US Government-sponsored enterprises
|
217,319
|
7,812
|
578
|
224,553
|
US Government agency
|
56,083
|
1,216
|
356
|
56,943
|
Private-label
|
22,720
|
311
|
2,201
|
20,830
|
Obligations of
states and political subdivisions thereof
|
60,245
|
327
|
6,050
|
54,522
|
Total
|
$357,367
|
$9,700
|
$9,185
|
$357,882
|
|
|
|
|
|
|
December 31, 2009
|
Available
for Sale:
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Estimated
Fair Value
|
|
|
|
|
|
Obligations of
US Government-sponsored enterprises
|
$ 2,770
|
$ 13
|
$ 227
|
$ 2,556
|
Mortgage-backed
securities:
|
|
|
|
|
US Government-sponsored enterprises
|
226,740
|
7,613
|
3
|
234,350
|
US Government agency
|
21,522
|
606
|
21
|
22,107
|
Private-label
|
31,754
|
27
|
5,428
|
26,353
|
Obligations of
states and political subdivisions thereof
|
63,821
|
1,674
|
3,835
|
61,660
|
Total
|
$346,607
|
$9,933
|
$9,514
|
$347,026
|
Securities Impairment:
As a part of the Companys ongoing
security monitoring process, the Company identifies securities in an unrealized loss
position that could potentially be other-than-temporarily impaired.
Effective April 1, 2009, the Company adopted FSP FAS 115-2,
Recognition
and Presentation of Other-than Temporary Impairments
, now included in the
FASB
Accounting Standards Codification
as part of FASB ASC 320-10-65,
Investments
Debt and Equity Securities.
This new accounting standard amended the OTTI guidance
included in GAAP for debt securities, which among other things clarified the interaction
of the factors that should be considered when determining whether a debt security is
other-than-temporarily impaired and changed the presentation and calculation of OTTI on
debt securities in the financial statements. Additionally, when adopting this accounting
standard, an entity is required to record a cumulative-effect adjustment as of the
beginning of the period of adoption to reclassify the non-credit component of a previously
recognized other-than-temporary impairment from retained earnings to accumulated other
comprehensive income (loss) if the entity does not intend to sell the security and it is
not likely that the entity will be required to sell the security before recovery of its
amortized cost. Upon the adoption of this accounting standard the Company recognized the
effect of applying it as a change in accounting principle. The Company recognized a $937
cumulative effect of initially applying this standard as an adjustment to retained
earnings as of April 1, 2009, with a corresponding adjustment to accumulated other
comprehensive income (loss).
Prior to the adoption of the new accounting standard, in the first
quarter of 2009 the Company recorded other-than-temporary impairment losses of $1,007
related to five available-for-sale, 1-4 family non-agency mortgage-backed securities
because the Company could no longer conclude it was probable that it would recover all of
the principal and interest on these securities. This charge represented the total amount
of unrealized losses on these securities at March 31, 2009 and was recorded within net
securities gains in the Companys consolidated statement of income.
For the year ended December 31, 2009, the Company recorded total OTTI
losses amounting to $2,773 (before taxes), related to twelve, available-for-for sale,
private-label mortgage-backed securities. Of the $2,773 in total OTTI losses, $1,454
(before taxes) represented estimated credit losses on the collateral underlying the
securities, while $1,319 (before taxes) represented unrealized losses for the same
securities resulting from factors other than credit. The $1,454 in estimated credit losses
were recorded in earnings (before taxes), with the $1,319 non-credit portion of the
unrealized losses recorded within accumulated other comprehensive income, net of taxes.
For the year ended December 31, 2010, total OTTI losses recorded in
earnings amounted to $898 (before taxes). These OTTI losses related to nine,
available-for-sale, private-label mortgage-backed securities, all but one of which the
Company had previously determined were other-than-temporarily impaired. The $898 in OTTI
losses recognized in 2010 earnings represented estimated credit losses on the collateral
underlying the securities
The 2010 and 2009 OTTI losses recognized in earnings represented
managements best estimate of credit losses inherent in the securities based on
discounted, bond-specific future cash flow projections using assumptions about cash flows
associated with the pools of loans underlying each security. In estimating those cash
flows the Company considered loan level credit characteristics, current delinquency and
non-performing loan rates, current levels of subordination and credit support, recent
default rates and future constant default rate estimates, loan to collateral value ratios,
recent collateral loss severities and future collateral loss severity estimates, recent
prepayment rates and future prepayment rate assumptions, and other estimates of future
collateral performance.
Despite some rising levels of delinquencies, defaults and losses in the
underlying residential mortgage loan collateral, given credit enhancements resulting from
the structures of
the individual securities, the Company currently
expects that as of December 31, 2010 it will recover the amortized cost basis of its
private-label mortgage-backed securities as depicted in the table below and has therefore
concluded that such securities were not other-than-temporarily impaired as of that date.
Nevertheless, given recent market conditions, it is possible that adverse changes in
repayment performance and fair value could occur in future periods that could impact the
Companys current best estimates.
The following table displays the beginning balance of OTTI related to
credit losses on debt securities held by the Company at the beginning of the current
reporting period for which the other than credit related portion of the OTTI was included
in accumulated other comprehensive income (net of tax), as well as changes in estimated
credit losses recognized in pre-tax earnings for the years ended December 31, 2010,
and 2009.
|
2010
|
2009
|
|
|
|
Estimated
credit losses as of December 31
|
$ 2,475
|
$ ---
|
Additions for
credit losses for securities on which OTTI
has been previously recognized
|
444
|
987
|
Additions for
credit losses for securities on which OTTI
has not been previously recognized
|
454
|
467
|
Estimated
credit losses as of December 31
|
$3,373
|
$2,475
|
As of December 31, 2010, the
total OTTI losses included in accumulated other comprehensive income amounted to $525, net
of tax, compared with $1,808 at December 31, 2009. These OTTI losses related to thirteen
private-label mortgage-backed securities, with a total unamortized cost of $6,395 at
December 31, 2010.
As of December 31, 2010, based on a review of each of the remaining
securities in the securities portfolio, the Company concluded that it expects to recover
its amortized cost basis for such securities. This conclusion was based on the
issuers continued satisfaction of the securities obligations in accordance with
their contractual terms and the expectation that they will continue to do so through the
maturity of the security, the expectation that the Company will receive the entire amount
of future contractual cash flows, as well as the evaluation of the fundamentals of the
issuers financial condition and other objective evidence. Accordingly, the Company
concluded that the declines in the values of those securities were temporary and that any
additional other-than-temporary impairment charges were not appropriate at December 31,
2010. As of that date, the Company did not intend to sell nor believed it is more likely
than not that it would be required to sell any of its impaired securities, that is, where
fair value is less than the cost basis of the security.
The following tables summarize the fair value of securities with
continuous unrealized losses for less than 12 months and those that have been in a
continuous unrealized loss position for 12 months or longer as of December 31,
2010 and 2009. All securities referenced are debt securities. At December 31, 2010 and
2009, the Company did not hold any common stock or other equity securities in its
securities portfolio.
2010
|
Less than 12 months
|
12 months or longer
|
Total
|
Description
of Securities:
|
Estimated
Fair
Value
|
Number of
Investments
|
Unrealized
Losses
|
Estimated
Fair
Value
|
Number of
Investments
|
Unrealized
Losses
|
Estimated
Fair
Value
|
Number of
Investments
|
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities:
|
|
|
|
|
|
|
|
|
|
US Government-
sponsored enterprises
|
$34,940
|
37
|
$ 578
|
$ 20
|
1
|
$ ---
|
$ 34,960
|
38
|
$ 578
|
US Government agency
|
27,966
|
25
|
353
|
270
|
9
|
3
|
28,236
|
34
|
356
|
Private-label
|
51
|
1
|
1
|
13,361
|
38
|
2,200
|
13,412
|
39
|
2,201
|
Obligations of states and political
subdivisions thereof
|
23,223
|
54
|
1,635
|
11,951
|
59
|
4,415
|
35,174
|
113
|
6,050
|
Total
|
$86,180
|
117
|
$2,567
|
$25,602
|
107
|
$6,618
|
$111,782
|
224
|
$9,185
|
2009
|
Less than 12 months
|
12 months or longer
|
Total
|
Description
of Securities:
|
Estimated
Fair
Value
|
Number of
Investments
|
Unrealized
Losses
|
Estimated
Fair
Value
|
Number of
Investments
|
Unrealized
Losses
|
Estimated
Fair
Value
|
Number of
Investments
|
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. Government-
sponsored enterprises
|
$ 1,543
|
2
|
$ 227
|
$ ---
|
---
|
$ ---
|
$ 1,543
|
2
|
$ 227
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
US Government-sponsored
enterprises
|
954
|
1
|
2
|
21
|
1
|
1
|
975
|
2
|
3
|
US Government agency
|
2,855
|
2
|
14
|
843
|
14
|
7
|
3,698
|
16
|
21
|
Private-label
|
3,346
|
11
|
1,852
|
18,489
|
45
|
3,576
|
21,835
|
56
|
5,428
|
Obligations of states and political
subdivisions thereof
|
15,287
|
36
|
744
|
10,943
|
50
|
3,091
|
26,230
|
86
|
3,835
|
Total
|
$23,985
|
52
|
$2,839
|
$30,296
|
110
|
$6,675
|
$54,281
|
162
|
$9,514
|
For securities with unrealized losses, the following information was
considered in determining that the impairments were not other-than-temporary:
-
Mortgage-backed securities issued by
U.S. Government-sponsored enterprises
: As of December 31, 2010, the total
unrealized losses on these securities amounted to $578, compared with $3 at December 31,
2009. All of these securities were credit rated "AAA" by the major credit rating
agencies. Company management believes these securities have minimal credit risk, as these
enterprises play a vital role in the nations financial markets. Managements
analysis indicates that the unrealized losses at December 31, 2010 were attributed to
changes in current market yields and pricing spreads for similar securities since the date
the underlying securities were purchased, and does not consider these securities to be
other-than-temporarily impaired at December 31, 2010.
-
Mortgage-backed securities issued by U.S. Government agencies:
As
of December 31, 2010, the total unrealized losses on these securities amounted to $356,
compared with $21 at December 31, 2009. All of these securities were credit rated
"AAA" by the major credit rating agencies. Managements analysis indicates
that these securities bear no credit risk because they are backed by the full faith and
credit of the United States. The Company attributes the unrealized losses at December 31,
2010 to changes in current market yields and pricing spreads for similar securities since
the date the underlying securities were purchased, and does not consider these securities
to be other-than-temporarily impaired at December 31, 2010.
-
Private-label mortgage-backed securities
: As of
December 31, 2010, the total unrealized losses on the Banks private-label
mortgage-backed securities amounted to $2,201, compared with $5,428 at December 31 2009.
The Company attributes the unrealized losses at December 31, 2010 to the current illiquid
market for non-agency mortgage-backed securities, a seriously depressed and still
declining housing market, significantly elevated levels of home foreclosures, risk-related
market pricing discounts for non-agency mortgage-backed securities and credit rating
downgrades on certain private-label MBS owned by the Company. Based upon the foregoing
considerations, and the expectation that the Company will receive all of the future
contractual cash flows related to the amortized cost on these securities, the Company does
not consider there to be any additional other-than-temporary impairment with respect to
these securities at December 31, 2010.
-
Obligations of states of the U.S. and political subdivisions
thereof
: As of December 31, 2010, the total unrealized losses on the Banks
municipal securities amounted to $6,050, compared with $3,835 at December 31, 2009. The
Banks municipal securities are supported by the general taxing authority of the
municipality and in the cases of school districts, are supported by state aid. At December
31, 2010, all municipal bond issuers were current on contractually obligated interest and
principal payments. At December 31, 2010, the Banks municipal bond portfolio did not
contain any below investment grade securities as reported by major credit rating agencies.
-
During the fourth quarter of 2010, municipal bond yields, even on the
very best quality obligations increased approximately 100 basis points. The factors that
pushed these yields to distended levels included record municipal bond fund outflows,
increased credit fears and media attention, and a very narrow base for long-term
tax-exempt securities. Municipal bond yields were also impacted by the pending year-end
expiration of the governments bond subsidiary program, Build America Bonds
("BABs"), causing a rush of new securities issuance that flooded the market and
pressured prices even further. These conditions prompted a fourth quarter sell off,
resulting in the worst quarterly performance for tax-free municipals since the first
quarter of 1994. The Company attributes the unrealized losses at December 31, 2010 to the
foregoing factors and, accordingly, the Company does not consider these municipal
securities to be other-than-temporarily impaired at December 31, 2010.
At December 31, 2010, the Company had no intent to sell nor believed it
is more likely than not that it would be required to sell any of its impaired securities
as identified and discussed immediately above, and therefore did not consider these
securities to be other-than-temporarily impaired as of that date.
Maturity Distribution:
The following table summarizes the
maturity distribution of the amortized cost and estimated fair value of securities
available for sale as of December 31, 2010.
Securities
Available for Sale
|
Amortized
Cost
|
Estimated
Fair Value
|
|
|
|
Due after one
year through five years
|
$ 2,978
|
$ 3,090
|
Due after five
years through ten years
|
15,813
|
15,945
|
Due after ten
years
|
338,576
|
338,847
|
Total
|
$357,367
|
$357,882
|
Actual maturities may differ from the final contractual maturities
depicted above because of securities call or prepayment provisions with or without call or
prepayment penalties. The contractual maturity of mortgage-backed securities is not a
reliable indicator of their expected life because borrowers have the right to prepay their
obligations at any time. Mortgage-backed securities monthly pay downs cause the average
lives of the securities to be much different than their stated lives. Mortgage-backed
securities are allocated among the maturity groupings based on their final maturity dates.
Realized Securities Gains and Losses:
The following table summarizes realized gains and losses and other than
temporary impairment losses on securities available for sale for the years ended December
31, 2010, 2009 and 2008.
|
Proceeds
from Sale of
Securities
Available
for Sale
|
Realized
Gains
|
Realized
Losses
|
Other
Than
Temporary
Impairment
Losses
|
Net
|
|
|
|
|
|
|
2010
|
$31,070
|
$2,127
|
$ ---
|
$ 898
|
$1,229
|
2009
|
$62,357
|
$2,528
|
$
---
|
$2,461
|
$ 67
|
2008
|
$21,064
|
$ 604
|
$
---
|
$1,435
|
$ (831)
|
Pledged Securities:
At December 31, 2010 and 2009, securities available-for-sale, at fair
value, totaling $30,736 and $32,826, respectively, were pledged as collateral for
securities sold under repurchase agreements and for other purposes required by law.
Note 3: Loans and Allowance for Loan Losses
The Companys lending activities are principally conducted in
downeast and midcoast Maine. The following table summarizes the composition of the loan
portfolio as of December 31, 2010 and 2009:
|
2010
|
2009
|
|
|
|
Commercial
real estate mortgages
|
$260,357
|
$242,875
|
Commercial
and industrial
|
80,765
|
77,284
|
Commercial
construction and land development
|
32,114
|
26,901
|
Agricultural
and other loans to farmers
|
24,359
|
22,192
|
Total commercial loans
|
397,595
|
369,252
|
|
|
|
Residential
real estate mortgages
|
231,434
|
225,750
|
Home
equity loans
|
54,289
|
54,889
|
Consumer
loans
|
4,417
|
4,665
|
Total consumer loans
|
290,140
|
285,304
|
|
|
|
Tax
exempt loans
|
12,126
|
14,138
|
|
|
|
Deferred
origination costs(fees), net
|
809
|
798
|
Total
loans
|
700,670
|
669,492
|
Allowance
for loan losses
|
(8,500)
|
(7,814)
|
Total
loans net of allowance for loan losses
|
$692,170
|
$661,678
|
Loan Origination/Risk Management:
The Company has certain
lending policies and procedures in place that are designed to maximize loan income within
an acceptable level of risk. The Companys board of directors reviews and approves
these policies and procedures on a regular basis. A reporting system supplements the
review process by providing management and the board with frequent reports related to loan
production, loan quality, concentrations of credit, loan delinquencies and non-performing
loans and potential problem loans. Diversification in the loan portfolio is also a means
of managing risk associated with fluctuations in economic conditions.
Commercial Real Estate Mortgages
: The Banks commercial real
estate mortgage loans are collateralized by liens on real estate, typically have variable
interest rates (or five year or less fixed rates) and amortize over a 15 to 20 year
period. These loans are viewed primarily as cash flow loans and secondarily as loans
secured by real estate. Payments on loans secured by such properties are largely dependent
on the successful operation of the property securing the loan or the business conducted on
the property securing the loan. Accordingly, repayment of these loans may be subject to
adverse economic conditions to a greater extent than other types of loans. The Company
seeks to minimize these risks in a variety of ways, including giving careful consideration
to the propertys operating history, future operating projections, current and
projected occupancy, location and physical condition in connection with underwriting these
loans. The underwriting analysis also includes credit verification, analysis of global
cash flows, appraisals and a review of the financial condition of the borrower. Reflecting
the Banks business region, approximately 33.1% of the commercial real estate
mortgage portfolio is represented by loans to the lodging industry. The Bank underwrites
hotel loans as operating businesses, lending primarily to seasoned establishments with
stabilized cash flows.
Commercial and Industrial Loans:
Commercial and industrial loans
are underwritten after evaluating and understanding the borrowers ability to operate
profitability, and prudently expand its business. In nearly all cases, commercial and
industrial loans are made in the Banks market areas and are underwritten on the
basis of the borrowers ability to service the debt from income. As a general
practice, the Bank takes as collateral a lien on any available real estate, equipment or
other assets owned by the borrower and obtains a personal guaranty of the borrower or
principal. Working capital loans are primarily collateralized by short-term assets whereas
term loans are primarily collateralized by long-term assets. In general, commercial and
industrial loans involve more credit risk than residential mortgage loans and commercial
mortgage loans and, therefore, usually yield a higher return. The increased risk in
commercial and industrial loans is principally due to the type of collateral securing
these loans. The increased risk also derives from the expectation that commercial and
industrial loans generally will be serviced principally from the operations of the
business, and those operations may not be successful. As a result of these additional
complexities, variables and risks, commercial and industrial loans generally require more
thorough underwriting and servicing than other types of loans.
Construction and Land Development Loans:
The Company makes
loans to finance the construction of residential and, to a lesser extent, nonresidential
properties. Construction loans generally are collateralized by first liens on real estate
and have floating interest rates. The Company conducts periodic inspections, either
directly or through an agent, prior to approval of periodic draws on these loans.
Underwriting guidelines similar to those described above are also used in the
Companys construction lending activities. Construction loans involve additional
risks attributable to the fact that loan funds are advanced against a project under
construction, and the project is of uncertain value prior to its completion. Because of
uncertainties inherent in estimating construction costs, the market value of the completed
project and the effects of governmental regulation on real property, it can be difficult
to accurately evaluate the total funds required to complete a project and the related loan
to value ratio. As a result of these uncertainties, construction lending often involves
the disbursement of substantial funds with repayment dependent, in part, on the success of
the ultimate project rather than the ability of a borrower or guarantor to repay the loan.
In many cases the success of the project can also depend upon the financial
support/strength of the sponsorship. If the Company is forced to foreclose on a project
prior to completion, there is no assurance that the Company will be able to recover the
entire unpaid portion of the loan. In addition, the Company may be required to fund
additional amounts to complete a project and may have to hold the property for an
indeterminate period of time. While the Company has underwriting procedures designed to
identify what it believes to be acceptable levels of risks in construction lending, no
assurance can be given that these procedures will prevent losses from the risks described
above.
Residential Real Estate Mortgages
: The Company originates
first-lien, adjustable-rate and fixed-rate, one-to-four-family residential real estate
loans for the construction, purchase or refinancing of a single family residential
property. These loans are principally collateralized by owner-occupied properties,
substantially all of which are located in the Companys market area, and are
amortized over 10 to 30 years. All residential real estate loans were originated by the
Company. From time to time the Company will sell longer term low rate, residential
mortgage loans to the FHLMC with servicing rights retained. This practice allows the
Company to better manage interest rate risk and liquidity risk. In an effort to manage
risk of loss and strengthen secondary market liquidity opportunities, management typically
uses secondary market underwriting, appraisal, and servicing guidelines for all loans,
including those held in its portfolio. Loans on one-to-four-family residential real estate
are mostly originated in amounts of no more than 80% of appraised value or have private
mortgage insurance. Mortgage title insurance and hazard insurance are normally required.
Construction loans have a unique risk, because they are secured by an incomplete dwelling.
This risk is reduced through periodic site inspections, including inspections at each loan
draw period.
Home Equity Loans:
The Company originates home equity lines of
credit and second mortgage loans (loans secured by a second [junior] lien position on
one-to-four-family residential real estate). These loans carry a higher risk than first
mortgage residential loans as they are in a second position relating to collateral. Risk
is reduced through underwriting criteria, which include credit verification, appraisals, a
review of the borrower's financial condition, and personal cash flows. A security
interest, with title insurance when necessary, is taken in the underlying real estate.
Non-performing Loans:
The following table sets forth
information regarding non-accruing loans and accruing loans 90 days or more overdue at
December 31, 2010, 2009 and 2008.
|
2010
|
2009
|
2008
|
|
|
|
|
Commercial real
estate mortgages
|
$ 3,572
|
$3,096
|
$1,645
|
Commercial
construction and land development
|
5,899
|
392
|
---
|
Commercial and
industrial loans
|
778
|
237
|
294
|
Agricultural
and other loans to farmers
|
254
|
1,848
|
199
|
Total commercial loans
|
10,503
|
5,573
|
2,138
|
|
|
|
|
Residential
real estate mortgages
|
3,022
|
2,498
|
1,696
|
Home equity
loans
|
146
|
304
|
26
|
Residential
construction and development
|
---
|
24
|
25
|
Consumer loans
|
---
|
5
|
16
|
Total consumer loans
|
3,168
|
2,831
|
1,763
|
|
|
|
|
Total non-accrual loans
|
13,671
|
8,404
|
3,901
|
Accruing loans
contractually past due 90 days or more
|
6
|
772
|
503
|
Total non-performing loans
|
$13,677
|
$9,176
|
$4,404
|
During the years ended December 31, 2010, 2009 and 2008, the foregone
interest on non-accrual loans amounted to $536, $382, and $263, respectively.
At December 31, 2010, total other real estate owned amounted to $656
compared with $854 and $83 at December 31, 2009 and 2008.
At December 31, 2010, the Company had no firm commitments to lend
additional funds to borrowers with loans in non-accrual status.
Past Due Loans:
Loans are considered past due if the required
principal and interest payments have not been received as of the date such payments were
due. The following table sets forth information regarding past due loans at December 31,
2010. Amounts shown exclude deferred loan origination fees and costs.
|
30-59 Days
Past Due
|
60-89
Days
Past Due
|
90 Days or
Greater
|
Total
Past Due
|
Current
|
Total
Loans
|
>90 Days
Past Due
and
Accruing
|
Commercial real
estate mortgages
|
$ 374
|
$ 663
|
$2,833
|
$ 3,870
|
$256,487
|
$260,357
|
$ 2
|
Commercial and
industrial
|
37
|
5
|
483
|
525
|
80,240
|
80,765
|
---
|
Commercial
construction and
land development
|
---
|
---
|
704
|
704
|
31,410
|
32,114
|
---
|
Agricultural
and other loans to farmers
|
85
|
48
|
90
|
223
|
24,136
|
24,359
|
---
|
Residential
real estate mortgages
|
2,117
|
290
|
2,376
|
4,783
|
226,651
|
231,434
|
4
|
Home equity
|
68
|
32
|
68
|
168
|
54,121
|
54,289
|
---
|
Consumer loans
|
34
|
16
|
---
|
50
|
4,367
|
4,417
|
---
|
Tax exempt
|
---
|
---
|
---
|
---
|
12,126
|
12,126
|
|
Total
|
$2,715
|
$1,054
|
$6,554
|
$10,323
|
$689,538
|
$699,861
|
$ 6
|
Impaired Loans:
Impaired loans are commercial and commercial
real estate loans for which the Company believes it is probable that it will be unable to
collect all amounts due according to the contractual terms of the loan agreement, as well
as all loans restructured in a troubled debt restructuring, if any. Allowances for losses
on impaired loans are determined by the lower of the present value of the expected cash
flows related to the loan, using the original contractual interest rate, and its recorded
value, or in the case of collateral dependant loans, the lower of the fair value of the
collateral, less costs to dispose, and the recorded amount of the loans. When foreclosure
is probable, impairment is measured based on the fair value of the collateral less cost to
sell.
Summary information pertaining to impaired loans follows:
|
2010
|
2009
|
2008
|
|
|
|
|
Investment in
impaired loans at December 31,
|
$10,503
|
$5,573
|
$2,138
|
Portion of
impaired loan balance for which
an allowance is allocated at December 31,
|
$ 9,020
|
$4,416
|
$1,328
|
Portion of
impaired loan losses allocated
|
|
|
|
to the impaired
loan balance at December 31,
|
$ 1,327
|
$ 702
|
$ 176
|
Interest not
recorded on impaired loans at December 31,
|
$ 536
|
$ 382
|
$ 263
|
Average
investment in impaired loans for the year ended
December 31,
|
$10,239
|
$3,861
|
$1,956
|
Details of impaired loans as of December 31, 2010 follows:
|
Recorded
Investment
|
Unpaid
Principal
Balance
|
Related
Allowance
|
Average
Recorded
Investment
|
Interest
Not
Recorded
|
With
no related allowance:
|
|
|
|
|
|
Commercial
real estate mortgages
|
$ 764
|
$ 764
|
$ ---
|
$ 767
|
$ 52
|
Commercial
and industrial
|
240
|
240
|
---
|
260
|
5
|
Commercial
construction and
land development
|
225
|
225
|
---
|
392
|
127
|
Agricultural
and other loans to farmers
|
254
|
254
|
---
|
353
|
60
|
Subtotal
|
$ 1,483
|
$ 1,483
|
$ ---
|
$1,772
|
$244
|
|
|
|
|
|
|
With
an allowance:
|
|
|
|
|
|
Commercial
real estate mortgages
|
$ 2,808
|
$ 2,808
|
$ 591
|
$1,995
|
$226
|
Commercial
and industrial
|
538
|
---
|
159
|
706
|
42
|
Commercial
construction and land
development
|
5,674
|
5,674
|
577
|
480
|
24
|
Agricultural
and other loans to farmers
|
---
|
---
|
---
|
---
|
---
|
Subtotal
|
$ 9,020
|
$ 9,020
|
$1,327
|
$3,181
|
$292
|
|
|
|
|
|
|
Total
|
$10,503
|
$10,503
|
$1,327
|
$4,953
|
$536
|
Credit Quality Indicators / Classified Loans:
In monitoring the credit quality of the portfolio,
management applies a credit quality indicator to all categories of commercial loans. These
credit quality indicators range from one through nine, with a higher number correlating to
increasing risk of loss. These ratings are used as inputs to the calculation of the
allowance for loan losses. Loans rated 1 through 5 are consistent with the
regulators Pass ratings, and are generally allocated a lesser percentage allocation
in the allowance for loan losses than loans rated from 6 through 9.
Consistent with regulatory guidelines, the Bank provides for the
classification of loans which are considered to be of lesser quality as substandard,
doubtful, or loss. The Bank considers a loan substandard if it is inadequately protected
by the current net worth and paying capacity of the borrower or of the collateral pledged,
if any. Substandard loans have a well defined weakness that jeopardizes liquidation of the
debt. Substandard loans include those loans where there is the distinct possibility that
we will sustain some loss of principal if the deficiencies are not corrected.
Loans that the Bank classifies as doubtful have all of the weaknesses
inherent in those loans that are classified as substandard but also have the added
characteristic that the weaknesses present make collection or liquidation in full, on the
basis of currently existing facts, conditions, and values, highly questionable and
improbable. The possibility of loss is high but because of certain important and
reasonably specific pending factors which may work to the advantage and strengthening of
the loan, its classification as an estimated loss is deferred until its more exact status
may be determined. Pending factors include proposed merger, acquisition, or liquidation
procedures, capital injection, perfecting liens on additional collateral and refinancing
plans. The entire amount of the loan might not be classified as doubtful when collection
of a specific portion appears highly probable. Loans are generally not classified doubtful
for an extended period of time (i.e., over a year).
Loans that the Bank classifies as loss are those considered
uncollectible and of such little value that their continuance as an asset is not warranted
and the uncollectible amounts are charged off. This classification does not mean that the
asset has absolutely no recovery or salvage value, but rather it is not practical or
desirable to defer writing off this basically worthless asset even though partial recovery
may be affected in the future. Losses are taken in the period in which they surface as
uncollectible.
Loans that do not expose the Bank to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess some weaknesses,
are designated special mention. A special mention loan has potential weaknesses that
deserve managements close attention. If left uncorrected, these potential weaknesses
may result in deterioration of the repayment prospects for the asset or in the
institutions credit position at some future date. This might include loans which the
lending officer may be unable to supervise properly because of: lack of expertise,
inadequate loan agreement, the poor condition of or lack of control over collateral,
failure to obtain proper documentation or any other deviations from prudent lending
practices. Economic or market conditions which may, in the future, affect the obligor may
warrant special mention of the asset. Loans for which an adverse trend in the borrower's
operations or an imbalanced position in the balance sheet which has not reached a point
where the liquidation is jeopardized may be included in this classification. Special
mention assets are not adversely classified and do not expose an institution to sufficient
risks to warrant classification.
The following table summarizes the commercial loan portfolio as of
December 31, 2010 by credit quality indicator. Credit quality indicators are reassessed
for each applicable commercial loan at least annually, or upon receipt and analysis of the
borrowers financial statements, when applicable. Consumer loans, which principally
consist of residential mortgage loans, are not rated, but are evaluated for credit quality
after origination based on delinquency status (see past due loan aging table above).
|
Commercial
real estate
mortgages
|
Commercial
and
industrial
|
Commercial
construction
and land
development
|
Agricultural
and other loans
to farmers
|
Total
|
Pass
|
$228,554
|
$69,566
|
$24,661
|
$22,735
|
$345,516
|
Other Assets
Especially
Mentioned
|
25,898
|
8,231
|
794
|
1,066
|
35,989
|
Substandard
|
5,905
|
2,968
|
6,659
|
558
|
16,090
|
Doubtful
|
---
|
---
|
---
|
---
|
---
|
Loss
|
---
|
---
|
---
|
---
|
---
|
Total
|
$260,357
|
$80,765
|
$32,114
|
$24,359
|
$397,595
|
Allowance For Loan Losses:
The allowance for loan losses (the
"allowance") is a reserve established through a provision for loan losses (the
"provision) charged to expense, which represents managements best estimate of
probable losses that have been incurred within the existing portfolio of loans. The
allowance, in the judgment of management, is necessary to provide for estimated loan
losses and risks inherent in the loan portfolio. The Companys allowance for loan
loss methodology includes allowance allocations calculated in accordance with ASC
Topic 310, "Receivables" and allowance allocations calculated in accordance
with ASC Topic 450, "Contingencies." Accordingly, the methodology is based
on historical loss experience by type of credit and internal risk grade, specific
homogeneous risk pools and specific loss allocations, with adjustments for current events
and conditions. The Companys process for determining the appropriate level of the
allowance is designed to account for credit deterioration as it occurs. The provision
reflects loan quality trends, including the levels of and trends related to non-accrual
loans, past due loans, potential problem loans, criticized loans and net charge-offs or
recoveries, among other factors. The provision also reflects the totality of actions taken
on all loans for a particular period. In other words,
the amount
of the provision reflects not only the necessary increases in the allowance related to
newly identified criticized loans, but it also reflects actions taken related to other
loans including, among other things, any necessary increases or decreases in required
allowances for specific loans or loan pools.
The level of the allowance reflects managements continuing
evaluation of industry concentrations, specific credit risks, loan loss experience,
current loan portfolio quality, present economic, political and regulatory conditions and
unidentified losses inherent in the current loan portfolio. Portions of the allowance may
be allocated for specific credits; however, the entire allowance is available for any
credit that, in managements judgment, should be charged off. While management
utilizes its best judgment and information available, the ultimate adequacy of the
allowance is dependent upon a variety of factors beyond the Companys control,
including, among other things, the performance of the Companys loan portfolio, the
economy, changes in interest rates and the view of the regulatory authorities toward loan
classifications.
The Companys allowance for loan losses consists of three
principal elements: (i) specific valuation allowances determined in accordance with
ASC Topic 310 based on probable losses on specific loans; (ii) historical
valuation allowances determined in accordance with ASC Topic 450 based on historical
loan loss experience for similar loans with similar characteristics and trends, adjusted,
as necessary, to reflect the impact of current conditions; and (iii) general
valuation allowances determined in accordance with ASC Topic 450 based on general
economic conditions and other qualitative risk factors both internal and external to the
Company.
The allowances established for probable losses on specific loans are
based on a regular analysis and evaluation of problem loans. Loans are classified based on
an internal credit risk grading process that evaluates, among other things: (i) the
obligors ability to repay; (ii) the underlying collateral, if any; and
(iii) the economic environment and industry in which the borrower operates. This
analysis is performed at the relationship level for all commercial loans. When a loan has
a calculated grade of 6 or higher, the Company analyzes the loan to determine whether the
loan is impaired and, if impaired, the need to specifically allocate a portion of the
allowance to the loan. Specific valuation allowances are determined by analyzing the
borrowers ability to repay amounts owed, collateral deficiencies, the relative risk
grade of the loan and economic conditions affecting the borrowers industry, among
other observable considerations.
Historical valuation allowances are calculated based on the historical
loss experience of specific types of loans and the internal risk grade of such loans at
the time they were charged-off. The Company calculates historical loss ratios for pools of
similar loans with similar characteristics based on the proportion of actual charge-offs
experienced to the total population of loans in the pool. The historical loss ratios are
periodically updated based on actual charge-off experience. A historical valuation
allowance is established for each pool of similar loans based upon the product of the
historical loss ratio and the total dollar amount of the loans in the pool, net of any
loans for which reserves are already established. The Companys pools of similar
loans include similarly risk-graded groups of, commercial real estate loans, commercial
and industrial loans, consumer real estate loans and consumer and other loans.
General valuation allowances are based on general economic conditions
and other qualitative risk factors both internal and external to the Company. In general,
such valuation allowances are determined by evaluating, among other things: (i) the
experience, ability and effectiveness of the banks lending management and staff;
(ii) the effectiveness of the Companys loan policies, procedures and internal
controls; (iii) changes in asset quality; (iv) changes in loan portfolio volume;
(v) the composition and concentrations of credit; (vi) the impact of competition
on loan structuring and pricing; (vii) the effectiveness of the internal loan review
function; (viii) the impact of environmental risks on portfolio risks; and
(ix) the impact of rising interest rates on portfolio risk. Management evaluates the
degree of risk that each one of these components has on the quality of the loan portfolio
on a quarterly basis. The results are then used to determine an appropriate general
valuation allowance.
Loans identified as losses by management, internal loan review
and/or bank examiners are charged-off. Furthermore, consumer loan accounts are charged-off
automatically based on regulatory requirements.
A summary of activity in the allowance for loan losses for each of the
three years ended December 31 follows:
|
2010
|
2009
|
2008
|
|
|
|
|
Balance,
beginning of year
|
$ 7,814
|
$5,446
|
$ 4,743
|
|
|
|
|
Provision for
loan losses
|
2,327
|
3,207
|
1,995
|
Less: Loans
charged-off
|
(1,874)
|
(995)
|
(1,336)
|
Recoveries on
loans previously charged-off
|
233
|
156
|
44
|
Net loans
charged-off
|
(1,641)
|
(839)
|
(1,292)
|
|
|
|
|
Balance, end of
year
|
$ 8,500
|
$7,814
|
$ 5,446
|
The following table details activity in the allowance for loan losses
by portfolio segment for the year ended December 31, 2010. The table also provides details
regarding the Companys recorded investment in loans related to each balance in the
allowance for loan losses by portfolio segment and disaggregated on the basis of the
Companys impairment methodology. Allocation of a portion of the Allowance to one
category of loans does not preclude its availability to absorb losses in other categories.
|
Commercial Real Estate
|
Commercial and Industrial
|
Commercial Construction and Land Development
|
Agricultural
|
Residential Real Estate
|
Consumer
|
Home Equity
|
Tax Exempt
|
Total
|
Beginning
Balance
|
$ 4,094
|
$ 1,570
|
$ 349
|
$ 242
|
$
1,146
|
$
122
|
$
137
|
$
154
|
$
7,814
|
Charged Off
|
(296)
|
(652)
|
(167)
|
(396)
|
(160)
|
(103)
|
(100)
|
---
|
(1,874)
|
Recoveries
|
3
|
10
|
---
|
5
|
106
|
69
|
40
|
---
|
233
|
Provision
|
459
|
309
|
817
|
372
|
230
|
(15)
|
199
|
(44)
|
2,327
|
Ending Balance
|
$ 4,260
|
$ 1,237
|
$ 999
|
$ 223
|
$ 1,322
|
$ 73
|
$ 276
|
$ 110
|
$ 8,500
|
|
|
|
|
|
|
|
|
|
|
of which:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount for
loans
Individually
evaluated
for impairment
|
$ 591
|
$ 159
|
$ 577
|
$ ---
|
$ ---
|
$ ---
|
$ ---
|
$ ---
|
$ 1,327
|
|
|
|
|
|
|
|
|
|
|
Amount for
loans
collectively
evaluated
for impairment
|
$ 3,669
|
$ 1,078
|
$ 422
|
$ 223
|
$1,322
|
$ 73
|
$276
|
$ 110
|
$ 7,173
|
|
|
|
|
|
|
|
|
|
|
Loans
individually
evaluated for
impairment
|
$ 3,572
|
$ 778
|
$ 5,899
|
$ 254
|
$ ---
|
$ ---
|
$ ---
|
$ ---
|
$ 10,503
|
|
|
|
|
|
|
|
|
|
|
Loans
collectively
evaluated for
impairment
|
$256,785
|
$79,987
|
$26,215
|
$ 24,105
|
$ 231,434
|
$ 4,417
|
$54,289
|
$12,126
|
$689,358
|
Loan Concentrations:
Because of the Companys proximity to
Acadia National Park, a large part of the economic activity in the Banks area is
generated from the hospitality business associated with tourism. At December 31, 2010 and
2009, loans to the lodging industry amounted to approximately $86,142 and $70,846,
respectively.
Loans to Related Parties:
In the ordinary course of business,
the Bank has made loans at prevailing rates and terms to directors, officers and other
related parties. In managements opinion, such loans do not present more than the
normal risk of collectability or incorporate other unfavorable features, and were made
under terms that are consistent with the Companys lending policies.
Loans to related parties at December 31 are summarized below. Balances
have been adjusted to reflect changes in status of directors and officers for each year
presented.
|
2010
|
|
2009
|
|
|
|
|
Beginning
balance
|
$ 7,621
|
|
$ 7,560
|
|
|
|
|
Changes in
composition
|
(302)
|
|
0
|
New loans
|
80
|
|
1,239
|
Less:
repayments
|
(853)
|
|
(1,178)
|
|
|
|
|
Ending balance
|
$ 6,546
|
|
$ 7,621
|
As of December 31, 2010, and 2009, there were no non-performing loans to related
parties.
Note 4: Mortgage Loan Servicing
Residential real estate mortgages are originated by the Company both
for portfolio and for sale into the secondary market. The Company may sell its loans to
institutional investors such as Freddie Mac. Under loan sale and servicing agreements with
the investor, the Company continues to service the residential real estate mortgages. The
Company pays the investor an agreed-upon rate on the loan, which is less than the interest
rate the Company receives from the borrower. The Company retains the difference as a fee
for servicing the residential real estate mortgages. The Company capitalizes mortgage
servicing rights at their fair value upon sale of the related loans, amortizes the asset
over the estimated life of the serviced loan, and periodically assesses the asset for
impairment.
The balance of capitalized mortgage servicing rights, net of a
valuation allowance, included in other assets at December 31, 2010 was $210 compared with
$278 at December 31, 2009. In evaluating the reasonableness of the carrying values of
mortgage servicing rights, the Company obtains third party valuations based on loan level
data including note rate, type and term of the underlying loans. The model utilizes a
variety of assumptions, the most significant of which are loan prepayment assumptions and
the discount rate used to discount future cash flows. Prepayment assumptions, which are
impacted by loan rates and terms, are calculated using a three-month moving average of
weekly prepayment data and modeled against the serviced loan portfolio by the third party
valuation specialist. The discount rate is the quarterly average 10-year US Treasury rate
plus 4.93%, rounded up to the nearest 25 basis points. Other assumptions include
delinquency rates, foreclosure rates, servicing cost inflation, and annual unit loan cost.
All assumptions are adjusted periodically to reflect current circumstances. Amortization
of the mortgage servicing rights, as well as write-offs of capitalized rights due to
prepayments of the related mortgage loans, are recorded as a charge against mortgage
servicing fee income.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets of the Company and amounted to $30,525 and $32,810 at December
31, 2010 and 2009, respectively.
Note 5: Premises and Equipment
The detail of premises and equipment as of December 31 follows:
|
2010
|
2009
|
|
|
|
Land
|
$ 2,267
|
$ 2,267
|
Buildings and
improvements
|
16,177
|
14,689
|
Furniture and
equipment
|
9,709
|
10,207
|
Less:
accumulated depreciation
|
(14,648)
|
(15,236)
|
Total
|
$ 13,505
|
$ 11,927
|
Depreciation expense amounted to $1,081, $914 and $1,004 in 2010, 2009
and 2008, respectively.
Note 6: Goodwill and Other Intangible Assets
Goodwill totaled $3,158 at December 31, 2010 and 2009, and there were
no additions or impairments recorded during the years ended December 31, 2010, 2009 or
2008.
At December 31, 2010 and 2009, the Company did not have any other intangible assets.
Note 7: Income Taxes
The following table summarizes the current and deferred components of
income tax expense (benefit) for each of the three years ended December 31:
|
2010
|
2009
|
2008
|
Current
|
|
|
|
Federal
|
$4,148
|
$5,013
|
$3,943
|
State
|
196
|
190
|
155
|
|
4,344
|
5,203
|
4,098
|
Deferred
|
(212)
|
(1,211)
|
(714)
|
|
$4,132
|
$3,992
|
$3,384
|
The following table reconciles the expected federal income tax expense
(computed by applying the federal statutory tax rate of 35% to income before taxes in 2010
and 2009 and 34% in 2008) to recorded income tax expense, for each of the three years
ended December 31:
|
2010
|
2009
|
2008
|
|
|
|
|
Computed
tax expense
|
$5,178
|
$5,020
|
$3,779
|
Increase
(reduction) in income
|
|
|
|
taxes resulting from:
|
|
|
|
Officers' life insurance
|
(88)
|
(91)
|
(74)
|
Tax exempt interest
|
(1,126)
|
(1,052)
|
(590)
|
State taxes, net of federal benefit
|
127
|
123
|
102
|
Other
|
41
|
(8)
|
167
|
|
$4,132
|
$3,992
|
$3,384
|
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31, 2010 and 2009 are summarized
below. The net deferred tax asset, which is included in other assets, amounted to $3,406
at December 31, 2010 and $3,044 at December 31, 2009.
|
2010
|
2009
|
|
Asset
|
Liability
|
Asset
|
Liability
|
|
|
|
|
|
Allowance for
losses on loans and
other real estate owned
|
$3,002
|
$ ---
|
$2,751
|
$ ---
|
Deferred
compensation
|
1,066
|
---
|
997
|
---
|
Unrealized gain
or loss on
securities available for sale
|
---
|
175
|
---
|
143
|
Unrealized gain
or loss
|
|
|
|
|
on derivatives
|
---
|
---
|
---
|
209
|
Unfunded
retirement benefits
|
29
|
---
|
56
|
---
|
Depreciation
|
---
|
672
|
---
|
323
|
Deferred loan
origination costs
|
---
|
537
|
---
|
596
|
Write down of
impaired investments
|
1,180
|
---
|
832
|
---
|
Other
|
319
|
806
|
213
|
534
|
|
$5,596
|
$2,190
|
$4,849
|
$1,805
|
The Company has determined that a valuation allowance is not required
for its net deferred tax asset since it is more likely than not that this asset is
realizable principally through the ability to carry-back to taxable income in prior years,
future reversals of existing taxable temporary differences, and future taxable income.
Note 8: Deposits
The aggregate amount of jumbo time deposits, each with a minimum
denomination of $100, was $120,417 and $109,551 at December 31, 2010 and 2009,
respectively. At December 31, 2010, the scheduled maturities of jumbo certificates of
deposit were as follows:
Three months or
less
|
$ 39,513
|
Over three to
six months
|
24,399
|
Over six to
twelve months
|
27,213
|
Over twelve
months
|
29,292
|
|
$120,417
|
At December 31, 2010, the scheduled maturities of total time deposits
were as follows:
2011
|
$201,313
|
2012
|
35,412
|
2013
|
37,482
|
2014
|
37,185
|
2015
|
40,556
|
2016 and
thereafter
|
1,626
|
Total
|
$353,574
|
Note 9: Short-term Borrowings
The Companys short-term borrowings consist of borrowings from the
Federal Home Loan Bank (the "FHLB"), borrowings from the Federal Reserve Bank
("FRB") and securities sold under agreements to repurchase. The following table
summarizes short-term borrowings at December 31, 2010 and 2009.
|
2010
|
|
2009
|
|
|
Weighted
|
|
|
Weighted
|
|
Total
|
Average
|
|
Total
|
Average
|
|
Principal
|
Rate
|
|
Principal
|
Rate
|
|
|
|
|
|
|
Federal Home
Loan Bank Advances
|
$ 89,573
|
2.73%
|
|
$51,250
|
2.70%
|
Federal Reserve
Bank
|
---
|
0.00%
|
|
20,000
|
0.37%
|
Fed Funds
Purchased
|
9,450
|
0.25%
|
|
---
|
0.00%
|
Securities sold
under agreements to repurchase
|
20,857
|
0.82%
|
|
20,643
|
1.22%
|
Total short-term borrowings
|
$119,880
|
|
|
$91,893
|
|
Federal Home Loan Bank Borrowings:
Information concerning
short-term Federal Home Loan Bank borrowings for 2010 and 2009 is summarized below:
|
2010
|
2009
|
|
|
|
Average daily
balance during the year
|
$69,829
|
$ 78,415
|
Maximum
month-end balance during the year
|
$89,573
|
$128,776
|
Amount
outstanding at end of year
|
$89,573
|
$ 51,250
|
All short-term FHLB advances are fixed-rate instruments. Pursuant to an
agreement with the FHLB, advances are collateralized by stock in the FHLB, investment
securities and a blanket lien on qualified collateral, consisting primarily of loans with
first mortgages secured by one to four family properties, and other qualifying assets. All
short-term advances are payable at their maturity dates.
Federal Reserve Bank Borrowings:
Information concerning
short-term Federal Reserve Bank borrowings for 2010 and 2009 is summarized below:
|
2010
|
2009
|
|
|
|
Average daily
balance during the year
|
$ 712
|
$20,241
|
Average
interest rate during the year
|
0.25%
|
0.37%
|
Maximum
month-end balance during the year
|
$ ---
|
$30,000
|
Amount
outstanding at end of year
|
$ ---
|
$20,000
|
Securities Sold Under Agreements to Repurchase:
Securities sold
under agreements to repurchase generally mature within one to four days from the
transaction date. Information concerning securities sold under agreements to repurchase
for 2010 and 2009 is summarized below:
|
2010
|
2009
|
|
|
|
Average daily
balance during the year
|
$19,498
|
$18,062
|
Average
interest rate during the year
|
1.06%
|
1.64%
|
Maximum
month-end balance during the year
|
$25,190
|
$22,025
|
Amount
outstanding at end of year
|
$20,857
|
$20,643
|
Securities collateralizing repurchase agreements, which are held in
safekeeping by nonaffiliated financial institutions and not under the Bank's control, were
as follows at December 31:
|
2010
|
2009
|
|
|
|
Carrying value
|
$30,083
|
$31,373
|
Estimated fair
value
|
$30,736
|
$32,826
|
Note 10: Long-term Debt
A summary of long-term debt by contractual maturity is as follows:
December 31, 2010
Maturity
|
Total
Principal
|
Rate
|
Range of
Interest Rates
|
|
|
|
|
|
|
2012
|
$ 39,664
|
4.01%
|
2.99%
|
to
|
5.07%
|
2013
|
43,480
|
3.66%
|
2.77%
|
to
|
4.39%
|
2014
|
53,990
|
3.24%
|
2.73%
|
to
|
4.80%
|
2015
|
21,000
|
2.44%
|
1.68%
|
to
|
4.70%
|
2016 and
thereafter
|
17,000
|
3.96%
|
2.25%
|
to
|
4.50%
|
Total long-term
debt
|
$175,134
|
|
|
|
|
December 31, 2009
Maturity
|
Total
Principal
|
Rate
|
Range of
Interest Rates
|
|
|
|
|
|
|
2011
|
$ 58,147
|
4.08%
|
2.75%
|
to
|
5.30%
|
2012
|
40,119
|
4.02%
|
2.99%
|
to
|
5.07%
|
2013
|
43,480
|
3.66%
|
2.77%
|
to
|
4.39%
|
2014
|
53,990
|
3.24%
|
2.73%
|
to
|
4.80%
|
2015 and
thereafter
|
19,000
|
4.00%
|
2.25%
|
to
|
4.70%
|
Total long-term
debt
|
$214,736
|
|
|
|
|
All of the long-term debt represents advances from the FHLB. All FHLB
advances are fixed-rate instruments. Pursuant to an agreement with the FHLB, advances are
collateralized by stock in the FHLB, investment securities and a blanket lien on qualified
collateral, consisting primarily of loans with first mortgages secured by one to four
family properties, and other qualifying assets. Advances are payable at their call dates
or final maturity.
The maturity distribution of the long-term debt with callable features
was as follows:
December 31, 2010
|
Total
Principal
|
Weighted Average
Interest Rate
|
|
|
|
2012
|
$21,000
|
4.60%
|
2013
|
7,500
|
3.79%
|
2014
|
12,000
|
4.11%
|
2015
|
2,000
|
4.35%
|
2016 and
thereafter
|
17,000
|
3.96%
|
Total
|
$59,500
|
|
December 31, 2009
|
|
|
|
Maturity
|
Total
Principal
|
Weighted
Average
Interest Rate
|
|
|
|
2011
|
$10,500
|
5.20%
|
2012
|
21,000
|
4.60%
|
2013
|
7,500
|
3.79%
|
2014
|
12,000
|
4.11%
|
2015 and
thereafter
|
19,000
|
4.00%
|
Total
|
$70,000
|
|
At December 31, 2010, and 2009, the Company had $48,000 and $50,500 of
long-term debt that was currently callable, respectively. The remaining callable debt has
call dates ranging from May 2011 to November 2012.
Junior Subordinated Debentures:
In April 2008, the
Companys wholly-owned subsidiary, Bar Harbor Bank & Trust (the
"Bank"), issued $5,000 aggregate principal amount of subordinated debentures.
These debt securities qualify as Tier 2 capital for the Company and the Bank. The
subordinated debt securities are due in 2023, but are callable by the Bank after five
years without penalty. The rate of interest on these debt securities is three month LIBOR
plus 345 basis points. The subordinated debt securities are classified as borrowings on
the Companys consolidated balance sheet. The Company incurred $197 in costs to issue
the securities and these costs are being amortized over 15 years using the interest
method.
Note 11: Shareholders Equity
Regulatory Capital Requirements:
The Company and Bank are
subject to various regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Companys financial statements. Under capital adequacy
guidelines and the regulatory frameworks for prompt corrective action, the Company and
Bank must meet specific capital guidelines that involve quantitative measures of the
Companys and Banks assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Companys and Banks
capital amounts and classification are also subject to qualitative judgment by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital to risk-weighted assets and average assets.
As of December 31, 2010, the Company and the Bank exceeded all capital adequacy
requirements to which they are subject. As of December 31, 2010, the most recent
notification from the federal regulators categorized the Bank as well-capitalized. To be
categorized as well-capitalized, the Company and Bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following
table. There are no conditions or events since that notification that management believes
have changed the Banks or the Companys category.
The following table sets forth the Companys and the Banks
regulatory capital at December 31, 2010, under the rules applicable at that date.
|
C
onsolidated
|
For capital
adequacy purposes
|
To be well
capitalized under
prompt corrective
action provisions
|
|
Actual
Amount
|
Ratio
|
Required
Amount
|
Ratio
|
Required
Amount
|
Ratio
|
As of
December 31, 2010
|
|
|
|
|
|
|
Total Capital
|
|
|
|
|
|
|
(To
Risk-Weighted Assets)
|
|
|
|
|
|
|
Consolidated
|
$113,741
|
15.41%
|
$59,065
|
8.0%
|
N/A
|
|
Bank
|
$114,735
|
15.56%
|
$58,999
|
8.0%
|
$73,748
|
10.0%
|
Tier 1 Capital
|
|
|
|
|
|
|
(To
Risk-Weighted Assets)
|
|
|
|
|
|
|
Consolidated
|
$100,166
|
13.57%
|
$29,532
|
4.0%
|
N/A
|
|
Bank
|
$101,160
|
13.72%
|
$29,499
|
4.0%
|
$44,249
|
6.0%
|
Tier 1 Capital
|
|
|
|
|
|
|
(To Average
Assets)
|
|
|
|
|
|
|
Consolidated
|
$100,166
|
9.01%
|
$44,493
|
4.0%
|
N/A
|
|
Bank
|
$101,160
|
9.10%
|
$44,459
|
4.0%
|
$55,574
|
5.0%
|
The following table sets forth the Companys and the Banks
regulatory capital at December 31, 2009, under the rules applicable at that date.
|
Consolidated
|
For capital
adequacy purposes
|
To be well
capitalized under
prompt corrective
action provisions
|
|
Actual
Amount
|
Ratio
|
Required
Amount
|
Ratio
|
Required
Amount
|
Ratio
|
As of
December 31, 2009
|
|
|
|
|
|
|
Total Capital
|
|
|
|
|
|
|
(To
Risk-Weighted Assets)
|
|
|
|
|
|
|
Consolidated
|
$122,615
|
17.14%
|
$57,241
|
8.0%
|
N/A
|
|
Bank
|
$123,383
|
17.26%
|
$57,175
|
8.0%
|
$71,469
|
10.0%
|
Tier 1 Capital
|
|
|
|
|
|
|
(To
Risk-Weighted Assets)
|
|
|
|
|
|
|
Consolidated
|
$109,755
|
15.34%
|
$28,620
|
4.0%
|
N/A
|
|
Bank
|
$110,569
|
15.47%
|
$28,587
|
4.0%
|
$42,881
|
6.0%
|
Tier 1 Capital
|
|
|
|
|
|
|
(To Average
Assets)
|
|
|
|
|
|
|
Consolidated
|
$109,755
|
10.35%
|
$42,431
|
4.0%
|
N/A
|
|
Bank
|
$110,569
|
10.43%
|
$42,395
|
4.0%
|
$52,993
|
5.0%
|
Dividend Limitations:
Dividends paid by the Bank are the
primary source of funds available to the Company for payment of dividends to its
shareholders. The Bank is subject to certain requirements imposed by federal banking laws
and regulations. These requirements, among other things, establish minimum levels of
capital and restrict the amount of dividends that may be distributed by the Bank to the
Company. At December 31, 2010, the Bank had $40,987 available for dividends that
could be paid without prior regulatory approval.
Series A Fixed Rate Cumulative Perpetual Preferred Stock and Warrant:
As previously reported, on January 16, 2009, as part of the Capital Purchase Program
(the "CPP") established by the U.S. Department of the Treasury (the
"Treasury") under the Emergency Economic Stabilization Act of 2008, the Company
sold to Treasury (i) 18,751 shares of the Companys Fixed Rate Cumulative Perpetual
Preferred Stock, Series A, no par value, having a liquidation preference of one thousand
dollars per share (the "Preferred Stock"); and (ii) a ten-year warrant to
purchase up to 104,910 shares of the Companys common stock, par value two dollars
per share at an initial exercise price of $26.81 per share, for an aggregate purchase
price of $18,751 in cash. All of the proceeds from the sale were treated as Tier 1 capital
for regulatory purposes.
On February 24, 2010 the Company redeemed all 18,751 shares of its
Preferred Stock sold to Treasury. The Company paid $18,774 to the Treasury to redeem the
Preferred Stock, consisting of $18,751 of principal and $23 of accrued and unpaid
dividends. The Company and the Bank received approvals from their respective regulators to
redeem the Preferred Stock. The Companys redemption of the Preferred Stock is not
subject to additional conditions or stipulations from the Treasury.
The preferred stock that the Company repurchased for $18,751 had a then
current carrying value of $18,255 (net of $496 unaccreted discount) on the Companys
consolidated balance sheet. As a result of the repurchase, the Company accelerated the
accretion of the $496 discount and recorded a total reduction in shareholders equity
of $18,751.
In the fourth quarter of 2009, the warrant received by the Treasury to
purchase up to 104,910 shares of the Companys common stock was reduced by one half
to 52,455 shares as a result of the Companys successful completion of a common stock
offering in December 2009. On July 28, 2010, the Company repurchased the Warrant in its
entirety for $250. The repurchase of the Warrant did not have any effect on the
Companys earnings or earnings per share. As a result of the Warrant repurchase, the
Company has repurchased all securities issued to Treasury under CPP.
Common Stock Offering:
In December 2009 the Company completed
its previously announced offering of 800,000 shares of common stock to the public at
$27.50 per share. The net proceeds from this offering, after deducting underwriting
discounts and expenses amounted to $20,412. As previously reported, in January 2010 the
Company completed the closing of the underwriters exercise of its over-allotment
option to purchase an additional 82,021 shares of the Companys common stock at a
purchase price to the public of $27.50 per share. The Company received total net proceeds
from the offering, including the exercise of the over allotment option, after deducting
underwriting discounts and expenses, amounting to approximately $22,411. All of the net
proceeds from this offering are treated as Tier 1 capital for regulatory purposes. In
February 2010, the Company used $18,751 of the net proceeds from this offering to
repurchase all of its Series A preferred shares sold to the U.S. Department of the
Treasury.
Stock Repurchase Plan:
In August 2008, the Companys Board
of Directors approved a program to repurchase up to 300,000 shares of the Companys
common stock, or approximately 10.2% of the shares then currently outstanding. The new
stock repurchase program became effective as of August 21, 2008 and was authorized to
continue for a period of up to twenty-four consecutive months. In August 2010, the
Companys board of directors authorized the continuance of this program through
August 19, 2012. Depending on market conditions and other factors, these purchases may be
commenced or suspended at any time, or from time to time, without prior notice and may be
made in the open market or through privately negotiated transactions. As of December 31,
2010, the Company had repurchased 76,782 shares of stock under this plan, at a total cost
of $2,108 and an average price of $27.45 per share. The Company recorded the repurchased
shares as treasury stock.
The new stock repurchase program replaced the Companys stock
repurchase program that had been in place since February 2004, which had authorized the
repurchase of up to 310,000 or approximately 10% of the Companys outstanding shares
of common stock. As of August 19, 2008, the date this program was terminated, the Company
had repurchased 288,799 shares at a total cost of $8,441 and an average price of $29.23
per share.
Note 12: Stock-Based Compensation Plans:
On October 3, 2000, the shareholders of the Company approved the Bar
Harbor Bankshares and Subsidiaries Incentive Stock Option Plan of 2000 ("ISOP")
for its officers and employees, which provided for the issuance of up to 450,000 shares of
common stock. The purchase price of the stock covered by each option must be at least 100%
of the trading value on the date such option was granted. Vesting terms ranged from three
to seven years. No option shall be granted after October 3, 2010, ten years after the
effective date of the ISOP.
In May, 2009, the shareholders of the Company approved the adoption of
the 2009 Bar Harbor Bankshares and Subsidiaries Equity Incentive Plan (the "2009
Plan") for employees and directors of the Company and its subsidiaries. Subject to
adjustment for stock splits, stock dividends, and similar events, the total number of
shares of common stock that can be issued under the 2009 Plan over the 10 year period in
which the plan will be in place is 175,000 shares of common stock, provided that no more
than 75,000 shares of such stock can be awarded in the form of restricted stock or
restricted stock units, as further described in the 2009 Plan. The 2009 Plan is to be
administered by the Companys Compensation Committee. All employees and directors of
the Company and it subsidiaries are eligible to participate in the 2009 Plan, subject to
the discretion of the Administrator and the terms of the 2009 Plan. The maximum stock
award granted to one individual may not exceed 20,000 shares of common stock (subject to
adjustment for stock splits, and similar events) for any calendar year.
In 2010 and 2009, the Company recognized $217 and $129, respectively,
of share-based compensation in salaries and employee benefits expense.
For the years ended December 31, 2010, 2009, and 2008, the total
anti-dilutive stock options amounted to 157, 135, and 138 thousand shares, respectively.
The fair value of options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted-average assumptions for
stock option grants during the years ended December 31:
|
2010
|
2009
|
2008
|
|
|
|
|
Risk free
interest rate
|
2.61%
|
2.94%
|
3.08%
|
Expected market
volatility factor for the Company's stock
|
25.50%
|
22.69%
|
18.82%
|
Dividend yield
|
3.79%
|
3.85%
|
3.41%
|
Expected life
of the options (years)
|
6.9
|
7.0
|
7.0
|
Options granted
|
38,648
|
11,500
|
27,000
|
Estimated fair
value of options granted
|
$ 5.12
|
$ 4.25
|
$ 4.61
|
The expected market price volatility for the grants during 2010 was
determined by using the Companys historical stock price volatility on a daily basis
during the 3-7 year periods ending December 31, 2010, consistent with the expected life of
the 2010 options.
Stock Option Activity:
A summary combined status of the ISOP
and the 2009 Plan as of December 31, 2010, and changes during the year then ended is
presented below:
|
Number of Stock
Options Outstanding
|
Exercise Price
Range
|
Weighted Average Exercise Price
|
Intrinsic Value
|
Aggregate Intrinsic Value
|
|
|
From
|
To
|
|
|
|
Outstanding at
January 1, 2010
|
273,797
|
$15.40
|
$34.65
|
$22.80
|
|
|
Granted
|
38,648
|
$26.48
|
$28.49
|
$27.78
|
|
|
Exercised
|
(57,141)
|
$15.40
|
$23.15
|
$16.16
|
|
|
Cancelled
|
(16,934)
|
$18.50
|
$33.00
|
$29.48
|
|
|
Outstanding at
December 31, 2010
|
238,370
|
$15.40
|
$34.65
|
$24.73
|
$ 5.02
|
$1,197
|
|
|
|
|
|
|
|
Ending vested
and expected to vest
December 31, 2010
|
222,832
|
$15.40
|
$34.65
|
$24.46
|
$ 5.29
|
$1,179
|
|
|
|
|
|
|
|
Exercisable at
December 31, 2010
|
153,753
|
$15.40
|
$34.65
|
$22.55
|
$ 7.17
|
$1,102
|
|
Number of Restricted Stock Awards Outstanding
|
Weighted Average Grant Date Fair Value
|
|
|
|
Outstanding at
January 1, 2010
|
---
|
|
Awarded
|
2,600
|
$27.32
|
Released
|
(2,600)
|
$27.32
|
Outstanding at
December 31, 2010
|
---
|
---
|
The intrinsic value of the options exercised and cash received by the
Company for options exercised for the years ended December 31, 2010, 2009, and 2008, was
approximately $659 and $922, $287 and $430 and $108 and $179, respectively.
The tax benefit received related to the exercise of options in 2010,
2009 and 2008, was $161, $52 and $31, respectively.
As of December 31, 2010, there was approximately $248 of unrecognized
compensation cost related to unvested stock option awards, net of estimated forfeitures.
This amount is expected to be recognized as expense over the next seven years, with a
weighted average recognition period of 4.64 years.
Stock Options Outstanding:
The following table summarizes stock options
outstanding and exercisable by exercise price range at December 31, 2010:
|
Options Outstanding
|
|
Options Exercisable
|
Range of
Exercise Prices
|
Number Outstanding
As of
12/31/10
|
Weighted Average Remaining Contractual Term (years)
|
Weighted Average Exercise Price
|
|
Number Exercisable
As of
12/31/10
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contractual Term
|
|
|
|
|
|
|
|
|
|
$15.40
|
$15.80
|
9,268
|
|
$15.49
|
|
9,268
|
$15.49
|
|
$16.05
|
$16.05
|
52,620
|
|
$16.05
|
|
52,620
|
$16.05
|
|
$18.25
|
$26.90
|
47,862
|
|
$22.70
|
|
32,826
|
$21.38
|
|
$26.99
|
$28.41
|
51,131
|
|
$27.52
|
|
22,886
|
$27.24
|
|
$28.49
|
$34.65
|
77,489
|
|
$31.13
|
|
36,153
|
$31.89
|
|
|
|
|
|
|
|
|
|
|
$15.40
|
$34.65
|
238,370
|
4.73
|
$24.73
|
|
153,753
|
$22.55
|
3.07
|
Note 13: Retirement Benefit Plans
The Company has non-qualified supplemental executive retirement
agreements with certain retired officers. The agreements provide supplemental retirement
benefits payable in installments over a period of years upon retirement or death. The
Company also has supplemental executive retirement agreements with certain current
executive officers. These agreements provide a stream of future payments in accordance
with individually defined vesting schedules upon retirement, termination, or in the event
that the participating executive leaves the Company following a change of control event.
The after tax components of accumulated other comprehensive income
(loss), which have not yet been recognized in net periodic benefit cost, related to
postretirement benefits are net actuarial losses related to supplemental retirement plans
of $56 and $109, as of December 31, 2010 and 2009, respectively.
A December 31 measurement date is used for the supplemental executive
retirement plans. The following table sets forth changes in benefit obligation, changes in
plan assets, and the funded status of the plans as of and for the years ended December 31:
|
Supplemental Executive
|
|
Retirement Plans
|
|
|
|
|
|
Fiscal Year Ending
|
|
2010
|
|
2009
|
Obligations
and Funded Status
|
|
|
|
|
|
|
|
Change
in Benefit Obligation
|
|
|
|
Benefit
obligation at beginning of year
|
$ 3,286
|
|
$ 3,107
|
Service
cost
|
184
|
|
222
|
Interest
cost
|
180
|
|
179
|
Actuarial
gain (loss)
|
(71)
|
|
---
|
Benefits
paid
|
(209)
|
|
(222)
|
Benefit
obligation at end of year
|
$ 3,370
|
|
$ 3,286
|
|
|
|
|
|
Supplemental Executive
|
|
Retirement Plans
|
|
|
|
|
|
Fiscal Year Ending
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
Change
in plan assets
|
|
|
|
Fair
value of plan assets at beginning of year
|
$ ---
|
|
$ ---
|
Employer
contributions
|
209
|
|
222
|
Benefits
paid
|
(209)
|
|
(222)
|
Fair
value of plan assets at end of year
|
$ ---
|
|
$ ---
|
|
|
|
|
|
|
|
|
Over
(under) funded status at end of year
|
$(3,370)
|
|
$(3,286)
|
As of December 31, 2010 and 2009, the Company had recognized
liabilities of $3,370 and $3,286, respectively, for the supplemental executive retirement
plans. These amounts are reported within other liabilities on the consolidated balance
sheets.
The following table summarizes the assumptions used to determine the
benefit obligations and net periodic benefit costs for the years ended December 31, 2010,
2009, and 2008:
|
Supplemental
Executive
Retirement Plans
|
|
|
Assumptions
|
Fiscal Year Ending
|
|
2010
|
2009
|
2008
|
Weighted-average
assumptions used to determine
benefit obligations at December 31:
|
|
|
|
Discount rate
|
5.75%
|
6.00%
|
6.00%
|
|
|
|
|
Weighted-average
assumptions used to determine
net periodic benefit cost for the years ended
December 31:
|
|
|
|
Discount rate
|
6.00%
|
6.00%
|
6.00%
|
The net periodic benefit cost for the years ended December 31 included
the following components:
|
Supplemental Executive
|
|
Retirement Plans
|
|
|
|
|
|
Fiscal Year Ending
|
|
2010
|
2009
|
2008
|
Components
of Net Periodic Benefit Cost and Other Amounts
Recognized in the Consolidated Income Statements
|
|
|
|
|
|
|
|
Service cost
|
$ 184
|
$222
|
$209
|
Interest cost
|
180
|
179
|
170
|
Recognition of
net actuarial gain
|
9
|
9
|
14
|
Total
recognized in the consolidated income statements
|
$ 373
|
$410
|
$393
|
|
|
|
|
Other
Changes and Benefit Obligations Recognized in
Other Comprehensive Income (pre-tax)
|
|
|
|
Recognition of
net actuarial (gain) loss
|
(9)
|
(9)
|
(14)
|
Total recognized in other comprehensive income (pre-tax)
|
(9)
|
(9)
|
(14)
|
Total recognized in the consolidated income statements and
other comprehensive income
(pre-tax)
|
$364
|
$401
|
$379
|
The estimated net actuarial loss for the supplemental executive
retirement plan that will be amortized from accumulated other comprehensive income into
net periodic benefit cost over the next fiscal year is ($4).
The Company expects to contribute the following amounts to fund benefit
payments under the supplemental executive retirement plans:
2011
|
$ 206
|
2012
|
284
|
2013
|
340
|
2014
|
340
|
2015
|
291
|
2016 and thereafter
|
5,129
|
401(k) Plan:
The Company maintains a Section 401(k)
savings plan for substantially all of its employees. Employees are eligible to participate
in the 401(k) Plan on the first day of any quarter following their date of hire. Under the
plan, the Company makes a matching contribution of a portion of the amount contributed by
each participating employee, up to a percentage of the employees annual salary. The
plan allows for supplementary profit sharing contributions by the Company, at its
discretion, for the benefit of participating employees. The total expense for this plan in
2010, 2009 and 2008 was $296, $276, and $265, respectively.
Note 14: Financial Derivative Instruments
As part of its overall asset and liability management strategy, the
Bank periodically uses derivative instruments to minimize significant unplanned
fluctuations in earnings and cash flows caused by interest rate volatility. The
Banks interest rate risk management strategy involves modifying the re-pricing
characteristics of certain assets and liabilities so that changes in interest rates do not
have a significant effect on net interest income.
During 2010, the Bank had two outstanding, off-balance sheet,
derivative instruments, both of which matured during the year. These derivative
instruments were interest rate floor agreements, with notional principal amounts totaling
$30,000. The details are summarized as follows:
INTEREST RATE FLOOR AGREEMENTS
Notional
Amount
|
Expiration
Date
|
Prime
Strike Rate
|
Premium
Paid
|
Cumulative
Cash Flows
Received
|
|
|
|
|
|
$20,000
|
08/01/10
|
6.00%
|
$186
|
$1,072
|
$10,000
|
11/01/10
|
6.50%
|
$ 69
|
$
751
|
During 2005, interest rate floor agreements were purchased to limit the
Banks exposure to falling interest rates on two pools of loans indexed to the Prime
interest rate. Under the terms of the agreements, the Bank paid premiums of $186 and $69
for the right to receive cash flow payments if the Prime interest rate falls below the
floors of 6.00% and 6.50%, thus effectively ensuring interest income on the pools of
prime-based loans at minimum rates of 6.00% and 6.50% for the duration of the agreements.
The interest rate floor agreements were designated as cash flow hedges.
During the third and fourth quarters of 2010 the interest rate floor
agreements matured, effectively reducing 2010 and future interest income on the $30,000
pool of loans indexed to the Prime interest rate.
For the year ended December 31, 2010, total cash flows received from
counterparties amounted to $588, compared with $884 in 2009. The cash flows received from
counterparties were recorded in interest income.
At December 31, 2009, the total fair market value of the interest rate
floor agreements was $671. The fair market values of the interest rate floor agreements
were included in other assets on the Companys consolidated balance sheets. Changes
in the fair value, representing unrealized gains or losses, were recorded in accumulated
other comprehensive income (loss).
At December 31, 2010 and 2009, the following amounts were recorded in
accumulated other comprehensive income (loss) on the consolidated balance sheets:
|
December 31, 2010
|
|
December 31, 2009
|
|
Gross
|
Net of Tax
|
|
Gross
|
Net of Tax
|
Unrealized
gain on interest rate floors
|
$ ---
|
$ ---
|
|
$671
|
$443
|
Unrealized
gain on interest rate swaps
|
---
|
---
|
|
---
|
---
|
Unamortized
premium on interest rate floors
|
---
|
---
|
|
(56)
|
(37)
|
Total
|
$ ---
|
$ ---
|
|
$615
|
$406
|
Note 15: Commitments and Contingent Liabilities
The Bank is a party to financial instruments in the normal course of
business to meet financing needs of its customers. These financial instruments include
commitments to extend credit, unused lines of credit, and standby letters of credit.
Commitments to originate loans, including unused lines of credit, are
agreements to lend to a customer provided there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank uses the same credit policy to
make such commitments as it uses for on-balance-sheet items, such as loans. The Bank
evaluates each customers creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on
managements credit evaluation of the borrower.
The Bank guarantees the obligations or performance of customers by
issuing standby letters of credit to third parties. These standby letters of credit are
primarily issued in support of third party debt or obligations. The risk involved in
issuing standby letters of credit is essentially the same as the credit risk involved in
extending loan facilities to customers, and they are subject to the same credit
origination, portfolio maintenance and management procedures in effect to monitor other
credit and off-balance sheet instruments. Exposure to credit loss in the event of
nonperformance by the counter-party to the financial instrument for standby letters of
credit is represented by the contractual amount of those instruments. Typically, these
standby letters of credit have terms of five years or less and expire unused; therefore,
the total amounts do not necessarily represent future cash requirements.
The following table summarizes the contractual amounts of commitments
and contingent liabilities as of December 31, 2010 and 2009.
|
December 31,
2010
|
|
December 31,
2009
|
|
|
|
|
Commitments
to originate loans
|
$ 24,112
|
|
$ 42,694
|
Unused
lines of credit
|
84,360
|
|
78,607
|
Un-advanced
portions of construction loans
|
11,215
|
|
12,565
|
Total
|
$119,687
|
|
$133,866
|
|
|
|
|
Standby
letters of credit
|
$ 750
|
|
$ 372
|
As of December 31, 2010 and 2009, the fair values of the standby
letters of credit were not significant to the Companys consolidated financial
statements.
Operating Lease Obligations
The Company leases certain properties used in operations under terms of
operating leases, which include renewal options. The following table sets forth the
approximate future lease payments over the remaining terms of the non-cancelable leases as
of December 31, 2010.
2011
|
$126
|
2012
|
$119
|
2013
|
$ 86
|
2014
|
$ 90
|
2015 and
thereafter
|
$145
|
In connection the foregoing lease obligations, in 2010, 2009 and 2008,
the Company recorded $121, $92, and $88 in rent expense, respectively, which is included
in occupancy expense in the consolidated statements of income.
Note 16: Fair Value Measurements
The Company measures fair value as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market
participants. A fair value measurement assumes that the transaction to sell the asset or
transfer the liability occurs in the principal market for the asset or liability or, in
the absence of a principal market, the most advantageous market for the asset or
liability. The price in the principal (or most advantageous) market used to measure the
fair value of the asset or liability shall not be adjusted for transaction costs. An
orderly transaction is a transaction that assumes exposure to the market for a period
prior to the measurement date to allow for marketing activities that are usual and
customary for transactions involving such assets and liabilities; it is not a forced
transaction. Market participants are buyers and sellers in the principal market that are
(i) independent, (ii) knowledgeable, (iii) able to transact, and
(iv) willing to transact.
The Companys fair value measurements employ valuation techniques
that are consistent with the market approach, the income approach and/or the cost
approach. The market approach uses prices and other relevant information generated by
market transactions involving identical or comparable assets and liabilities. The income
approach uses valuation techniques to convert future amounts, such as cash flows or
earnings, to a single present amount on a discounted basis. The cost approach is based on
the amount that currently would be required to replace the service capacity of an asset
(replacement cost). Valuation techniques should be consistently applied. Inputs to
valuation techniques refer to the assumptions that market participants would use in
pricing the asset or liability. Inputs may be observable, meaning those that reflect the
assumptions market participants would use in pricing the asset or liability developed
based on market data obtained from independent sources, or unobservable, meaning those
that reflect the reporting entity's own assumptions about the assumptions market
participants would use in pricing the asset or liability developed based on the best
information available in the circumstances. The Company uses a fair value hierarchy for
valuation inputs that gives the highest priority to quoted prices in active markets (Level
1 measurements) for identical assets or liabilities and the lowest priority to
unobservable inputs (Level 3 measurements). The fair value hierarchy is as follows:
-
Level 1
Valuation is based on unadjusted quoted
prices in active markets for identical assets or liabilities that the reporting entity has
the ability to access at the measurement date.
-
Level 2
Valuation is based on quoted prices for
similar instruments in active markets, quoted prices for identical or similar assets or
liabilities in markets that are not active, and model-based techniques for which all
significant assumptions are observable in the market.
-
Level 3
Valuation is principally generated from
model-based techniques that use at least one significant assumption not observable in the
market. These unobservable assumptions reflect estimates that market participants would
use in pricing the asset or liability. Valuation techniques include use of discounted cash
flow models and similar techniques.
The level in the fair value hierarchy within which the fair value
measurement in its entirety falls is determined based on the lowest level input that is
significant to the fair value measurement in its entirety.
The most significant instruments that the Company values are
securities, all of which fall into Level 2 in the fair value hierarchy. The securities in
the available for sale portfolio are priced by independent providers. In obtaining such
valuation information from third parties, the Company has evaluated their valuation
methodologies used to develop the fair values in order to determine whether valuations are
appropriately placed within the fair value hierarchy and whether the valuations are
representative of an exit price in the Companys principal markets. The
Companys principal markets for its securities portfolios are the secondary
institutional markets, with an exit price that is predominantly reflective of bid level
pricing in those markets. Additionally, the Company periodically tests the reasonableness
of the prices provided by these third parties by obtaining fair values from other
independent providers and by obtaining desk bids from a variety of institutional brokers.
A description of the valuation methodologies used for instruments
measured at fair value, as well as the general classification of such instruments pursuant
to the valuation hierarchy, is set forth below.
-
Securities Available for Sale:
All securities and major
categories of securities classified as available for sale are reported at fair value
utilizing Level 2 inputs. For these securities, the Company obtains fair value
measurements from independent pricing providers. The fair value measurements used by the
pricing providers consider observable data that may include dealer quotes, market maker
quotes and live trading systems. If quoted prices are not readily available, fair values
are determined using matrix pricing models, or other model-based valuation techniques
requiring observable inputs other than quoted prices such as market pricing spreads,
credit information, callable features, cash flows, the U.S. Treasury yield curve, trade
execution data, market consensus prepayment speeds, default rates, and the
securities terms and conditions, among other things.
-
Derivative Instruments:
Derivative instruments are
reported at fair value utilizing Level 2 inputs. The Company obtains independent dealer
market price estimates to value its Prime interest rate floors. Derivative instruments are
priced by independent providers using observable market data and assumptions with
adjustments based on widely accepted valuation techniques. A discounted cash flow analysis
on the expected cash flows of each derivative reflects the contractual terms of the
derivatives, including the period to maturity, and uses observable market-based inputs,
including interest rate curves, implied volatilities, transaction size, custom tailored
features, counterparty credit quality, and the estimated current replacement cost of the
derivative instrument.
The foregoing valuation methodologies may produce fair value
calculations that may not be fully indicative of net realizable value or reflective of
future fair values. While Company management believes these valuation methodologies are
appropriate and consistent with other market participants, the use of different
methodologies or assumptions to determine the fair value of certain financial instruments
could result in a different estimate of fair value at the reporting date.
The following table summarizes financial assets and financial
liabilities measured at fair value on a recurring basis as of December 31, 2010, and
December 31, 2009, segregated by the level of the valuation inputs within the fair value
hierarchy utilized to measure fair value:
|
Level 1
Inputs
|
Level 2
Inputs
|
Level 3
Inputs
|
Total Fair Value
|
December 31, 2010
|
|
|
|
|
Securities
available for sale:
|
|
|
|
|
Obligations of US Government-
sponsored enterprises
|
$ ---
|
$ 1,034
|
$ ---
|
$ 1,034
|
Mortgage-backed securities:
|
|
|
|
|
US Government-sponsored
enterprises
|
$ ---
|
$224,553
|
$ ---
|
$224,553
|
US Government agencies
|
$ ---
|
$ 56,943
|
$ ---
|
$ 56,943
|
Private-label
|
$ ---
|
$ 20,830
|
$ ---
|
$ 20,830
|
Obligations
of states and political
subdivisions thereof
|
$ ---
|
$ 54,522
|
$ ---
|
$ 54,522
|
December 31, 2009
|
Level 1 Inputs
|
Level 2
Inputs
|
Level 3 Inputs
|
Total Fair Value
|
|
|
|
|
|
Securities
available for sale:
|
|
|
|
|
Obligations of US Government-
sponsored enterprises
|
$ ---
|
$ 2,556
|
$ ---
|
$ 2,556
|
Mortgage-backed securities:
|
|
|
|
|
US Government-sponsored
enterprises
|
$ ---
|
$234,350
|
$ ---
|
$234,350
|
US Government agencies
|
$ ---
|
$ 22,107
|
$ ---
|
$ 22,107
|
Private-label
|
$ ---
|
$ 26,353
|
$ ---
|
$ 26,353
|
Obligations of
states and political
subdivisions thereof
|
$ ---
|
$ 61,660
|
$ ---
|
$ 61,660
|
Derivative
assets
|
$ ---
|
$ 671
|
$ ---
|
$ 671
|
During the years ended December 31, 2010 and 2009, there were no
transfers between levels of the fair value hierarchy.
The Company also makes fair value measurements on a non-recurring
basis; that is, the instruments are not measured at fair value on an ongoing basis but are
subject to fair value adjustments in certain circumstances (for example, when there is
evidence of impairment).
The following table summarizes financial assets and financial
liabilities measured at fair value on a non-recurring basis as of December 31, 2010,
segregated by the level of the valuation inputs within the fair value hierarchy utilized
to measure fair value.
|
Principal Balance as of 12/31/10
|
Level 1 Inputs
|
Level 2
Inputs
|
Level 3 Inputs
|
Fair Value as
of 12/31/10
|
|
|
|
|
|
|
Mortgage
servicing rights
|
$ 210
|
$ ---
|
$210
|
$ ---
|
$ 262
|
Collateral
dependent impaired loans
|
$7,151
|
$ ---
|
$ ---
|
$7,151
|
$6,061
|
The Company had collateral dependent impaired loans with a carrying
value of approximately $6,061 which had specific reserves included in the allowance of
$1,090 at December 31, 2010.
Mortgage servicing rights represent the value associated with servicing
residential mortgage loans. Servicing assets and servicing liabilities are reported using
the fair value measurement method. In evaluating the carrying values of mortgage servicing
rights, the Company obtains third party valuations based on loan level data including note
rate, type and term of the underlying loans. As such, the Company classifies mortgage
servicing rights as nonrecurring measurements using Level 2 inputs.
Note 17: Fair Value of Financial Instruments
The Company discloses fair value information about financial
instruments for which it is practicable to estimate fair value. Fair value estimates are
made as of a specific point in time based on the characteristics of the financial
instruments and relevant market information. Where available, quoted market prices are
used. In other cases, fair values are based on estimates using present value or other
valuation techniques. These techniques involve uncertainties and are significantly
affected by the assumptions used and judgments made regarding risk characteristics of
various financial instruments, discount rates, estimates of future cash flows, future
expected loss experience and other factors. Changes in assumptions could significantly
affect these estimates. Derived fair value estimates cannot be substantiated by comparison
to independent markets and, in certain cases, could not be realized in an immediate sale
of the instrument.
Fair value estimates are based on existing financial instruments
without attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments. Accordingly, the
aggregate fair value amounts presented do not purport to represent the underlying market
value of the Company.
The following describes the methods and significant assumptions used by
the Company in estimating the fair values of significant financial instruments:
Cash and cash equivalents:
For cash and cash equivalents,
including cash and due from banks and other short-term investments with maturities of
90 days or less, the carrying amounts reported on the consolidated balance sheet
approximate fair values.
Loans:
For variable rate loans that re-price frequently and
have no significant change in credit risk, fair values are based on carrying values. The
fair value of other loans is estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities.
Deposits
:
The fair value of deposits with no stated maturity is
equal to the carrying amount. The fair value of time deposits is based on the discounted
value of contractual cash flows, applying interest rates currently being offered on
wholesale funding products of similar maturities. The fair value estimates for deposits do
not include the benefit that results from the low-cost funding provided by the deposit
liabilities compared to the cost of alternative forms of funding ("deposit base
intangibles").
Borrowings:
For borrowings that mature or re-price in
90 days or less, carrying value approximates fair value. The fair value of the
Companys remaining borrowings is estimated by using discounted cash flows based on
current rates available for similar types of borrowing arrangements taking into account
any optionality.
Accrued interest receivable and payable:
The carrying amounts
of accrued interest receivable and payable approximate their fair values.
Off-balance sheet financial instruments
:
The Companys off-balance sheet instruments consist of loan commitments and
standby letters of credit. Fair values for standby letters of credit and loan commitments
were insignificant.
A summary of the carrying values and estimated fair values of the
Companys significant financial instruments at December 31, 2010 and 2009 follows:
|
December 31, 2010
|
December 31, 2009
|
|
Carrying
Value
|
Fair
Value
|
Carrying
Value
|
Fair
Value
|
Financial
assets:
|
|
|
|
|
Cash and cash equivalents
|
$ 12,815
|
$ 12,815
|
$ 9,832
|
$ 9,832
|
Loans, net
|
692,170
|
696,515
|
661,678
|
663,717
|
Interest receivable
|
4,159
|
4,159
|
4,441
|
4,441
|
Securities, available for sale
|
357,882
|
357,882
|
347,026
|
347,026
|
Derivative instruments
|
---
|
---
|
671
|
671
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
Deposits (with no stated maturity)
|
354,754
|
354,754
|
304,072
|
304,072
|
Time deposits
|
353,574
|
361,481
|
337,101
|
340,242
|
Borrowings
|
300,014
|
309,561
|
311,629
|
319,216
|
Interest payable
|
1,078
|
1,078
|
1,246
|
1,246
|
Note 18: Legal Contingencies
The Company and its subsidiaries are parties to certain ordinary
routine litigation incidental to the normal conduct of their respective businesses, which
in the opinion of management based upon currently available information will have no
material effect on the Company's consolidated financial statements.
Note 19: Condensed Financial Information Parent Company Only
The condensed financial statements of Bar Harbor Bankshares as of
December 31, 2010 and 2009, and for the years ended December 31, 2010, 2009 and 2008 are
presented below:
BALANCE SHEETS
December 31
|
2010
|
2009
|
|
|
|
Cash
|
$ 317
|
$ 196
|
Investment in
subsidiaries
|
104,602
|
114,328
|
Premises
|
734
|
750
|
Other assets
|
91
|
28
|
Total assets
|
$105,744
|
$115,302
|
|
|
|
Liabilities
|
|
|
Total liabilities
|
$ 2,136
|
$ 1,788
|
|
|
|
Shareholders'
equity
|
|
|
Total shareholders' equity
|
103,608
|
113,514
|
|
|
|
Liabilities and
Shareholders' equity
|
$105,744
|
$115,302
|
STATEMENTS OF INCOME
Years Ended December 31
|
2010
|
2009
|
2008
|
|
|
|
|
Dividend income
from subsidiaries
|
$ 4,068
|
$ 3,691
|
$7,249
|
Equity in
undistributed earnings of subsidiaries (1)
|
7,464
|
7,459
|
1,242
|
Bankshares
expenses
|
(1,206)
|
(1,083)
|
(1,046)
|
Tax benefit
|
336
|
283
|
286
|
Net income
|
$10,662
|
$10,350
|
$7,731
|
(1) Amount in parentheses represents the excess of dividends over net income
subsidiaries.
STATEMENTS OF CASH FLOWS
Years Ended December 31
|
2010
|
2009
|
2008
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
Net income
|
$ 10,662
|
$ 10,350
|
$ 7,731
|
|
|
|
|
Adjustments
to reconcile net income to cash
|
|
|
|
provided by operating activities:
|
|
|
|
Depreciation
|
16
|
25
|
14
|
Recognition of stock based expense
|
217
|
129
|
204
|
Net change in other assets
|
216
|
(58)
|
13
|
Net change in other liabilities
|
348
|
118
|
498
|
Equity in undistributed earnings of subsidiaries
|
(7,464)
|
(7,459)
|
(1,242)
|
|
|
|
|
Net
cash provided by operating activities
|
3,995
|
3,105
|
7,218
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
Additional investments in subsidiaries
|
16,631
|
(38,932)
|
---
|
Capital expenditures
|
(9)
|
(8)
|
(52)
|
|
|
|
|
Net
cash provided by (used in) investing activities
|
16,622
|
(38,940)
|
(52)
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
Purchases of treasury stock
|
(275)
|
(144)
|
(4,028)
|
Purchase of preferred stock and warrants
|
(19,152)
|
---
|
---
|
Proceeds from issuance of equity instruments
|
1,941
|
38,932
|
---
|
Proceeds from stock option exercises
|
1,083
|
552
|
210
|
Dividend paid
|
(4,093)
|
(3,784)
|
(3,004)
|
|
|
|
|
Net
cash (used in) provided by financing activities
|
(20,496)
|
35,556
|
(6,822)
|
|
|
|
|
Net
increase (decrease) in cash
|
121
|
(279)
|
344
|
|
|
|
|
Cash
and cash equivalents, beginning of year
|
196
|
475
|
131
|
|
|
|
|
Cash
and cash equivalents, end of year
|
$ 317
|
$ 196
|
$ 475
|
Note 20: Selected Quarterly Financial Data (Unaudited)
|
Quarter
|
|
2010
|
1
|
2
|
3
|
4
|
YTD
|
|
|
|
|
|
|
Interest and
dividend income
|
$12,954
|
$12,605
|
$12,879
|
$12,703
|
$51,141
|
Interest
expense
|
4,896
|
4,810
|
4,933
|
4,793
|
19,432
|
Net interest
income
|
8,058
|
7,795
|
7,946
|
7,910
|
31,709
|
Provision for
loan losses
|
500
|
550
|
450
|
827
|
2,327
|
Non-interest
income
|
1,910
|
1,795
|
2,065
|
1,688
|
7,458
|
Non-interest
expense
|
5,205
|
5,392
|
5,518
|
5,931
|
22,046
|
Income before
income taxes
|
4,263
|
3,648
|
4,043
|
2,840
|
14,794
|
Income taxes
|
1,212
|
936
|
1,173
|
811
|
4,132
|
Net income
|
$ 3,051
|
$ 2,712
|
$ 2,870
|
$ 2,029
|
$10,662
|
|
|
|
|
|
|
Preferred stock
dividends and accretion of discount
|
653
|
---
|
---
|
---
|
653
|
Net income
available to common shareholders
|
$ 2,398
|
$ 2,712
|
$ 2,870
|
$ 2,029
|
$10,009
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
common share data:
|
|
|
|
|
|
Basic earnings per share
|
$ 0.64
|
$ 0.72
|
$ 0.76
|
$ 0.53
|
$ 2.65
|
Diluted earnings per share
|
$ 0.63
|
$ 0.71
|
$ 0.75
|
$ 0.53
|
$ 2.61
|
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
: The Company
carried out an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of its disclosure controls and procedures as of the end of the period
covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are designed to
ensure that the information required to be disclosed by us in our reports filed or
submitted under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commissions rules and
forms and are operating in an effective manner.
Management Report on Internal Control over Financial Reporting:
Management
of the Company is responsible for establishing and maintaining adequate internal control
over financial reporting. Internal control over financial reporting as defined in Rule
13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the
supervision of, the Companys principal executive and principal financial officers
and effected by the Companys board of directors, management and other personnel to
provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally
accepted accounting principles and includes those policies and procedures that:
-
Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the assets of the
Company;
-
Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of the
Company; and
-
Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Companys assets that could
have a material effect on the financial statements.
Management assessed the effectiveness of the Companys internal
control over financial reporting as of December 31, 2010. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO") in
Internal Control-Integrated Framework
.
Based on its assessment, management believes that as of December 31,
2010, the Companys internal control over financial reporting is effective, based on
the criteria set forth by COSO in
Internal Control Integrated Framework
.
The Companys independent registered public accounting firm has
issued an audit report on the effectiveness of the Companys internal control over
financial reporting. This report appears within Item 9A of this report on Form 10-K.
Changes in Internal Control Over Financial Reporting:
No change
in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the last fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
Attestation Report of the Companys Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Bar Harbor Bankshares:
We have audited Bar Harbor Bankshares and subsidiaries (the
Company) internal control over financial reporting as of December 31, 2010, based on
criteria established in
Internal Control -- Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Management Report on Internal
Control Over Financial Reporting.
Our responsibility is to express an opinion on
the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk. Our audit also
included performing such other procedures we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A companys internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2010, based on
criteria established in
Internal Control Integrated Framework
issued by
COSO.
We also have audited in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance sheets of Bar
Harbor Bankshares and subsidiaries as of December 31, 2010 and 2009, and the related
consolidated statements of income, changes in shareholders equity, comprehensive
income, and cash flows for each of the years in the three-year period ended December 31,
2010, and our report dated March 16, 2011 expressed an unqualified opinion on those
consolidated financial statements.
/s/ KPMG LLP
Albany, New York
March 16, 2011
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Directors and Executive Officers
: Information required by Item 401
of Regulation S-K with respect to the directors and executive officers will appear under
the heading "DIRECTORS AND EXECUTIVE OFFICERS" in the Companys definitive
Proxy Statement for the 2011 Annual Meeting of Shareholders, which the Company intends to
file with the Commission within 120 days of the end of the Companys 2010 fiscal year
(hereinafter the "Proxy") and is incorporated herein by reference.
Compliance with Section 16(a) of the Securities Exchange Act of 1934:
Information
required by Item 405 of Regulation S-K with respect to Compliance with Section 16(a) of
the Securities Exchange Act of 1934 will appear under the heading "SECTION 16(a)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" in the Companys Proxy and is
incorporated herein by reference.
Stockholder Nominees to Board of Directors:
There have been no
material changes to the procedures by which security holders may recommend nominees to the
Companys Board of Directors. Those procedures will be set forth in the Proxy under
the headings entitled "CORPORATE GOVERNANCE" "Governance
Committee" and "OTHER MATTERS" "Nominations by
Stockholders" and are incorporated herein by reference.
Audit Committee:
Information required by Items 407(d)(4) of
Regulation S-K will appear under the heading "CORPORATE GOVERNANCE"
"Audit Committee" in the Companys Proxy, and is incorporated herein by
reference. Information required by Item 407(d)(5) of Regulation S-K will appear under
"Appendix A" Report of the Audit Committee, contained in the Companys
Proxy and is incorporated herein by reference.
Code of Ethics:
Information required by Item 406 of Regulation S-K
will appear under the heading "OTHER MATTERS" "Code of Ethics"
contained in the Companys Proxy and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K will appear
under the heading "COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS-COMPENSATION OF
EXECUTIVE OFFICERS," in the Companys Proxy, which information is incorporated
herein by reference.
The information required by Item 407(e)(4) of Regulation S-K will
appear under the heading
"Compensation Committee Interlocks and Insider
Participation"
in the Companys Proxy, which information is incorporated
herein by reference.
The information required by Item 407(e)(5) of Regulation S-K will
appear under the heading "Report of the Compensation and Human Resources
Committee" in the Companys Proxy, which information is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The Information required by Item 201(d) of Regulation S-K appears in
this Report as Part II, Item 5, under the heading "Market for Registrants
Common Stock, Related Shareholder Matters and Issuer Purchases of Equity Securities"
"Incentive Stock Option Plan," which information is incorporated herein by
reference.
Information required by Item 403 of Regulation S-K will appear under
the heading "VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF" in the
Companys Proxy, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
Information required by Item 404 of Regulation S-K will appear under
the heading "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" in the
Companys Proxy, which information is incorporated herein by reference.
Information required by Section 407(a) of Regulation S-K will appear
under the headings "Directors and Nominees" and "CORPORATE
GOVERNANCE"- "Board of Directors" in the Companys Proxy, which
information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by this item will appear under the heading
"INDEPENDENT REGISTERED ACCOUNTANTS," in the Companys Proxy, which
information is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) 1. All Financial Statements
The consolidated financial statements of the Company and report of the
Companys independent registered public accounting firm incorporated herein are
included in Item 8 of this Report as follows:
Item
|
Page
|
|
|
Report of
Independent Registered Public Accounting Firm
|
87
|
|
|
Consolidated
Balance Sheets
|
88
|
|
|
Consolidated
Statements of Income
|
89
|
|
|
Consolidated
Statements of Changes in Shareholders Equity
|
90
|
|
|
Consolidated
Statements of Comprehensive Income
|
91
|
|
|
Consolidated
Statements of Cash Flows
|
92
|
|
|
Notes to
Consolidated Financial Statements
|
93
|
2. Financial Statement Schedules. Schedules have been omitted because they are not
applicable or are not required under the instructions contained in Regulation S-X or
because the information required to be set forth therein is included in the consolidated
financial statements or notes thereto.
3. Exhibits. A list of exhibits to this Form 10-K is set forth on the Exhibit Index
immediately preceding such exhibits and is incorporated herein by reference.
(b) Exhibits to this Form 10-K are attached or incorporated herein by
reference as stated above.
(c) There are no other financial statements and financial statement
schedules, which were excluded from this report, which are required to be included herein.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
March 16, 2011
|
BAR HARBOR BANKSHARES
(Registrant)
|
|
|
|
/s/ Joseph M. Murphy
|
|
|
|
Joseph M. Murphy
President and Chief Executive Officer
|
Pursuant to the requirements of the Securities Exchange Act of 1934,
the following persons have signed this report in the capacities indicated on behalf of the
Registrant.
/s/ Peter Dodge
Peter Dodge
Chairman, Board of Directors
|
/s/ Joseph M. Murphy
Joseph M. Murphy, Director
President and Chief Executive Officer
|
|
|
/s/
Thomas A. Colwell
Thomas A. Colwell
Vice Chairman, Board of Directors
|
/s/
Robert M. Phillips
Robert M. Phillips, Director
|
|
|
/s/ Robert C. Carter
Robert C. Carter, Director
|
/s/ Gerald Shencavitz
Gerald Shencavitz
EVP, Chief Financial Officer, & Principal Accounting Officer
|
|
|
/s/
Martha Tod Dudman
Martha Tod Dudman, Director
|
/s/
Kenneth E. Smith
Kenneth E. Smith, Director
|
|
|
/s/
Jacquelyn S. Dearborn
Jacquelyn S. Dearborn, Director
|
/s/
Constance C. Shea
Constance C. Shea, Director
|
|
|
/s/
Lauri E. Fernald
Lauri E. Fernald, Director
|
/s/
Scott G. Toothaker
Scott G. Toothaker, Director
|
|
|
/s/
Gregg S. Hannah
Gregg S. Hannah, Director
|
/s/
David B. Woodside
David B. Woodside, Director
|
|
|
/s/Clyde
H. Lewis
Clyde H. Lewis, Director
|
|
EXHIBIT INDEX
The following exhibits are included as part of this Form 10-K.
EXHIBIT
NUMBER
|
|
|
|
|
|
|
|
3
|
Articles of
Incorporation and Bylaws
|
|
|
|
|
|
|
3.1
|
Articles of
Incorporation, as amended to date
|
|
Incorporated
herein by reference to Form 10-K, Part IV, Item 15, Exhibit 3.1, filed with the commission
on March 16, 2009
|
|
|
|
|
3.2
|
Bylaws, as amended
to date
|
|
Incorporated
herein by reference to Form 8-K, Exhibit 3, filed with the Commission on December 17, 2008
|
|
|
|
|
4
|
Instruments
Defining Rights of Security Holders
|
|
|
|
|
|
|
4.1
|
Certificate of
Designations, Fixed Rate Cumulative Perpetual Preferred Stock, Series A
|
|
Incorporated
herein by reference to Form 8-K, Exhibit 3.1, filed with the Commission on January 21,
2009
|
|
|
|
|
4.2
|
Form of Specimen
Stock Certificate for Series A Preferred Sock
|
|
Incorporated
by reference to Form 8-K, Exhibit 4.1, filed with the Commission on January 21, 2009
|
|
|
|
|
4.3
|
Letter Agreement
with U. S. Treasury for purchase of Series A Preferred Stock
|
|
Incorporated
by reference to Form 8-K, Exhibit 10.1, filed with the Commission on January 21, 2009
|
|
|
|
|
4.4
|
Warrant to
Purchase Shares of Company Common Stock issued to U.S. Treasury
|
|
Incorporated
by reference to Form 8-K, Exhibit 4.2, filed with the Commission on January 21, 2009
|
|
|
|
|
4.5
|
Debt Securities
Purchase Agreement
|
|
Incorporated
herein by reference to Form 10-K, Part IV, Item 15, Exhibit 4.5, filed with the commission
on March 16, 2009.
|
|
|
|
|
4.6
|
Form of
Subordinated Debt Security of Bar Harbor Bank & Trust
|
|
Incorporated
herein by reference to Form 10-K, Part IV, Item 15, Exhibit 4.6, filed with the commission
on March 16, 2009.
|
|
|
|
|
10
|
Material Contracts
|
|
|
|
|
|
|
10.1
|
Deferred
Compensation Plans
|
|
Incorporated
by reference to Form 10-K filed with the Commission March 31, 1987.
|
|
|
|
|
10.2
|
Supplemental
Executive Retirement Plan Adopted by the Board of Directors on September 16, 2003, and
effective as of January 1, 2003, providing Joseph M. Murphy, President and CEO of the
Company, Gerald Shencavitz, the Companys Chief Financial Officer, and Dean S. Read,
former President of the Bank, with certain defined retirement benefits (the "2003
SERP")
|
|
Incorporated
by reference to Form 10-Q, Part II, Item 6, Exhibit 10.2, filed with the Commission
November 13, 2003 (Commission File Number 001-13349)
|
|
|
|
|
10.3
|
Amendment No. 1 to
the 2003 SERP
|
|
Incorporated
by reference to Form 8-K, Exhibit 10.6, filed with the Commission on November 24, 2008
|
|
|
|
|
10.4
|
Joseph M. Murphy
Amended and Restated Employment Contract
|
|
Incorporated
by reference to Form 8-K, Exhibit 10.10, filed with the Commission on November 24, 2008
|
|
|
|
|
10.5
|
Change in Control,
Confidentiality, and Non-competition Agreement between the Company and Joseph M. Murphy
|
|
Incorporated
by reference to Form 8-K, Exhibit 10.6, filed with the Commission on November 24, 2008
|
|
|
|
|
10.6
|
Supplemental
Executive Retirement Plan, Section 409A
|
|
Incorporated
by reference to Form 8-K, Exhibit 10.7, filed with the Commission on November 24, 2008
|
|
|
|
|
10.7
|
Incentive Stock
Option Plan of 2000
|
|
Incorporated
by reference to Form 10-K, Item 14(a)(3), Exhibit 10.3, filled with the Commission March
28, 2002 (Commission File Number 001-13349)
|
|
|
|
|
10.8
|
Amended and
Restated Change in Control, Confidentiality, and Non-competition Agreement between the
Company and Gerald Shencavitz
|
|
Incorporated
by reference to Form 8-K, Exhibit 10.9, filed with the Commission on November 24, 2008
|
|
|
|
|
10.9
|
Amended and
Restated Change in Control, Confidentiality, and Non-competition Agreements between the
Company and Daniel A. Hurley III, Senior Vice President of the Bank and President of Bar
Harbor Trust Services; Michael W.Bonsey, Senior Vice President of the Bank Credit
Administration; Gregory W. Dalton, Senior Vice President of the Bank Business Banking
|
|
Incorporated
by reference to Form 8-K, Exhibit 10.8, "Specimen 409A Change in Control
Confidentiality and Non-competition Agreement" filed with the Commission on November
24, 2008
|
|
|
|
|
10.10
|
Change in Control,
Confidentiality, and Non-competition Agreement between the Company and Marsha C. Sawyer,
Senior Vice President Human Resources
|
|
Incorporated
by reference to Form 8-K, filed with the Commission on November 24, 2008, and Form 8-K/A,
Exhibit 10.1, filed with the Commission on November 26, 2008
|
|
|
|
|
10.11
|
Change in Control,
Confidentiality, and Non-competition Agreement between the Company and Cheryl D. Curtis,
Senior Vice President Marketing and Community Relations
|
|
Incorporated
by reference to Form 8-K, Exhibit 10.2, filed with the Commission on November 24, 2008
|
|
|
|
|
10.12
|
Change in Control,
Confidentiality, and Non-competition Agreement between the Company and Craig Worcester,
Managing Director Bar Harbor Financial Services
|
|
Incorporated
by reference to Form 8-K, Exhibit 10.3, filed with the Commission on November 24, 2008
|
|
|
|
|
10.13
|
Change in Control,
Confidentiality, and Non-competition Agreement between the Company and Joshua A. Radel,
Chief Investment Officer, Bar Harbor Trust Services
|
|
Incorporated
by reference to Form 8-K, Exhibit 10.4, filed with the Commission on November 24, 2008
|
|
|
|
|
10.14
|
Change in Control,
Confidentiality, and Non-competition Agreement between the Company and David W. Thibault,
Senior Vice President Operations and Information Systems
|
|
Incorporated
by reference to Form 8-K, Exhibit 10.5, filed with the Commission on November 24, 2008
|
|
|
|
|
10.16
|
Summary of the
2008 Annual Incentive Plan not pursuant to a written plan or agreement
|
|
Incorporated
by reference to Form 10-Q, Exhibit 10.1, filed with the Commission on August 11, 2008
|
|
|
|
|
10.17
|
Infinex Agreement
third party brokerage services
|
|
Incorporated
by reference to Form 10-K, Part III, Item 15(a), Exhibit 10.10, filed with the Commission
on March 16, 2005 (Commission File Number 001-13349)
|
|
|
|
|
10.18
|
Somesville Bank
Branch Lease dated October 27, 2005
|
|
Incorporated
by reference to Form 10-K, Part III, Item 15(a), Exhibit 10.13, filed with the Commission
on March 16, 2006 (Commission File Number 001-13349)
|
|
|
|
|
10.19
|
Merchant Portfolio
Purchase Agreement between Bar Harbor Bank & Trust and TransFirst, LLC
("TransFirst") and Columbus Bank and Trust Company, dated September 30, 2008
|
|
Incorporated
by reference to Form 10-Q, Exhibit 10.1, filed with the Commission on November 10, 2008
|
|
|
|
|
10.20
|
Merchant Portfolio
Assignment and Assumption Agreement
|
|
Incorporated
by reference to Form 10-Q, Exhibit 10.2, filed with the Commission on November 10, 2008
|
|
|
|
|
10.21
|
Referral and Sales
Agreement between Bar Harbor Bank & Trust and TransFirst dated September 30, 2008
|
|
Incorporated
by reference to Form 10-Q, Exhibit 10.3, filed with the Commission on November 10, 2008
|
|
|
|
|
10.22
|
Credit Card
Account Purchase Agreement between Bar Harbor Bank & Trust and U. S. Bank National
Association D/B/A Elan Financial Services
|
|
Incorporated
by reference to Form 10-K, Exhibit 10.22, filed with the Commission on March 16, 2009
|
|
|
|
|
10.23
|
Letter Agreement
(including the Securities Purchase Agreement Standard Terms incorporated by
reference therein (the "Purchase Agreement"), between the Company and the U. S.
Treasury pursuant to which the Company issued and sold to Treasury (i) 18,751 shares of
the Companys Fixed Rate Cumulative Perpetual Preferred Stock, Series A, no par
value, having a liquidation preference of $1,000 per share and (ii) a ten-year warrant to
purchase up to 104,910 shares of the Companys common stock, par value $2.00 per
share, at an initial exercise price of $26.81 per share (the "Warrant"), for an
aggregate purchase price of $18,751
|
|
Incorporated
by reference to Form 8-K, Exhibits 4.2 and 10.1, filed with the Commission on January 21,
2009
|
|
|
|
|
10.24
|
2009 Annual
Incentive Plan for certain executive officers of the Company
|
|
Incorporated
by reference to Form 10-K, Part III, Item 15(a). Exhibit 10.24, filed with the Commission
on March 16, 2010 (Commission File Number 001-13349)
|
|
|
|
|
10.25
|
2010 Annual
Incentive Plan for certain executive officers of the Company
|
|
Incorporated
by reference to Form 10-K, Part III, Item 15(a). Exhibit 10.25, filed with the Commission
on March 16, 2010 (Commission File Number 001-13349)
|
|
|
|
|
10.26
|
Bar Harbor
Bankshares and Subsidiaries Equity Incentive Plan of 2009
|
|
Incorporated
by reference to Appendix "C" to the Companys Definitive Proxy Statement
(DEF 14A) filed with the commission on April 7, 2009
|
|
|
|
|
11.1
|
Statement re
computation of per share earnings
|
|
Statement
re computation of per share earnings is provided in Note 1 to the Notes to Consolidated
Financial Statements in this Report).
|
|
|
|
|
21
|
Subsidiaries of
the Registrant
|
|
Incorporated
by reference to Form 10-K, Exhibit 21, filed with the commission on March 16, 2009
|
|
|
|
|
23
|
Consent of
Independent Registered Public Accounting Firm
|
|
Filed
herewith
|
|
|
|
|
31.1
|
Certification of
Chief Executive Officer under Rule 13a-14(a)/15d-14(a)
|
|
Filed
herewith.
|
|
|
|
|
31.2
|
Certification of
Chief Financial Officer under Rule 13a-14(a)/15d-14(a)
|
|
Filed
herewith.
|
|
|
|
|
32.1
|
Certification of
Chief Executive Officer under 18 U.S.C. Sec. 1350.
|
|
Filed
herewith.
|
|
|
|
|
32.2
|
Certification of
Chief Financial Officer under 18 U.S.C. Sec. 1350.
|
|
Filed
herewith.
|
|
|
|
|
99.1
|
Certification of
Chief Executive Officer pursuant to Section 111(b)(4) of the Economic Stabilization Act of
2008
|
|
Filed
herewith
|
|
|
|
|
99.2
|
Certification of
Chief Financial Officer pursuant to Section 111(b)(4) of the Economic Stabilization Act of
2008
|
|
Filed
herewith
|
Bar Harbor Bankshares (AMEX:BHB)
Historical Stock Chart
Von Jun 2024 bis Jul 2024
Bar Harbor Bankshares (AMEX:BHB)
Historical Stock Chart
Von Jul 2023 bis Jul 2024