UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2011
OR
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number:
001-13349
BAR HARBOR BANKSHARES
(Exact name of registrant as specified in its charter)
Maine
|
01-0393663
|
(State
or other jurisdiction of
incorporation or organization)
|
(I.R.S.
Employer
Identification Number)
|
|
|
PO Box 400
|
|
82 Main Street, Bar Harbor, ME
|
04609-0400
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(207) 288-3314
(Registrant's telephone number, including area code)
Inapplicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90
days.
YES
x
NO ___
Indicate by check mark whether the Registrant has submitted
electronically and posted on its corporate Web site, 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 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
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date:
Class of Common Stock
|
Number of Shares Outstanding May 2, 2011
|
$2.00 Par Value
|
3,843,808
|
TABLE OF CONTENTS
|
|
Page
No.
|
PART I
|
FINANCIAL INFORMATION
|
|
|
|
|
Item
1.
|
Interim
Financial Statements (
unaudited)
:
|
|
|
|
|
|
Consolidated
Balance Sheets at March 31, 2011, and December 31, 2010
|
3
|
|
|
|
|
Consolidated
Statements of Income for the three months ended March 31, 2011 and 2010
|
4
|
|
|
|
|
Consolidated
Statements of Changes in Shareholders' Equity for the three months ended March 31, 2011
and 2010
|
5
|
|
|
|
|
Consolidated
Statements of Cash Flows for the three months ended March 31, 2011 and 2010
|
6
|
|
|
|
|
Consolidated
Statements of Comprehensive Income for the three months ended March 31, 2011 and 2010
|
7
|
|
|
|
|
Notes
to Consolidated Interim Financial Statements
|
8-31
|
|
|
|
Item 2.
|
Management's
Discussion and Analysis of Financial Condition and Results of Operations
|
31-58
|
|
|
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
58-61
|
|
|
|
Item 4.
|
Controls and Procedures
|
61
|
|
|
|
|
|
|
PART II
|
OTHER INFORMATION
|
|
|
|
|
Item 1.
|
Legal Proceedings
|
62
|
|
|
|
Item 1A.
|
Risk Factors
|
62
|
|
|
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
62
|
|
|
|
Item 3.
|
Defaults Upon Senior Securities
|
62
|
|
|
|
Item 4.
|
(Removed and Reserved)
|
62
|
|
|
|
Item 5.
|
Other Information
|
62
|
|
|
|
Item 6.
|
Exhibits
|
62-63
|
|
|
|
Signatures
|
|
63
|
|
|
|
Exhibit Index
|
64
|
|
|
Exhibits
|
|
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2011 AND DECEMBER 31, 2010
(Dollars in thousands, except per share data)
(
unaudited
)
|
March 31,
2011
|
|
December 31,
2010
|
Assets
|
|
|
|
Cash and cash equivalents
|
$ 8,626
|
|
$ 12,815
|
Securities available for sale, at fair value
|
379,585
|
|
357,882
|
Federal Home Loan Bank stock
|
16,068
|
|
16,068
|
Loans
|
727,658
|
|
700,670
|
Allowance for loan losses
|
(9,093)
|
|
(8,500)
|
Loans, net of allowance for loan losses
|
718,565
|
|
692,170
|
Premises and equipment, net
|
13,812
|
|
13,505
|
Goodwill
|
3,158
|
|
3,158
|
Bank owned life insurance
|
7,176
|
|
7,112
|
Other assets
|
15,494
|
|
15,223
|
TOTAL ASSETS
|
$1,162,484
|
|
$1,117,933
|
|
|
|
|
Liabilities
|
|
|
|
Deposits:
|
|
|
|
Demand and other non-interest bearing deposits
|
$ 54,595
|
|
$ 60,350
|
NOW accounts
|
74,767
|
|
82,656
|
Savings and money market deposits
|
214,205
|
|
211,748
|
Time deposits
|
360,976
|
|
353,574
|
Total deposits
|
704,543
|
|
708,328
|
Short-term borrowings
|
187,746
|
|
119,880
|
Long-term advances from Federal Home Loan Bank
|
154,754
|
|
175,134
|
Junior subordinated debentures
|
5,000
|
|
5,000
|
Other liabilities
|
5,491
|
|
5,983
|
TOTAL
LIABILITIES
|
1,057,534
|
|
1,014,325
|
|
|
|
|
Shareholders'
equity
|
|
|
|
Capital stock, par value $2.00; authorized 10,000,000 shares;
issued 4,525,635 shares at March
31, 2011 and December 31, 2010
|
9,051
|
|
9,051
|
Surplus
|
26,238
|
|
26,165
|
Retained earnings
|
81,979
|
|
80,379
|
Accumulated other comprehensive income:
|
|
|
|
Prior service cost and unamortized net actuarial losses on employee
benefit plans, net of tax of ($28)
and ($29), at March 31, 2011 and
December 31, 2010, respectively
|
(56)
|
|
(56)
|
Net unrealized (depreciation) appreciation on securities available for sale,
net of tax of ($118) and $445, at
March 31, 2011 and December 31, 2010, respectively
|
(230)
|
|
865
|
Portion of OTTI attributable to non-credit losses, net of tax of $155 and $270,
at March 31, 2011, and December 31,
2010, respectively
|
(300)
|
|
(525)
|
Total accumulated other comprehensive (loss) income
|
(586)
|
|
284
|
Less: cost of
684,045 and 702,690 shares of treasury stock at March 31, 2011 and
|
|
|
|
December 31, 2010, respectively
|
(11,732)
|
|
(12,271)
|
|
|
|
|
TOTAL
SHAREHOLDERS' EQUITY
|
104,950
|
|
103,608
|
|
|
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
$1,162,484
|
|
$1,117,933
|
The accompanying notes are an integral part of these unaudited
consolidated interim financial statements.
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010
(Dollars in thousands, except per share data)
(unaudited)
|
Three Months Ended
|
|
March 31,
|
|
2011
|
2010
|
Interest and
dividend income:
|
|
|
Interest and fees on loans
|
$ 8,481
|
$ 8,572
|
Interest on securities
|
4,185
|
4,382
|
Dividend on FHLB stock
|
12
|
---
|
Total interest
and dividend income
|
12,678
|
12,954
|
|
|
|
Interest
expense:
|
|
|
Deposits
|
2,214
|
2,478
|
Short-term borrowings
|
78
|
71
|
Long-term debt
|
2,052
|
2,347
|
Total interest
expense
|
4,344
|
4,896
|
|
|
|
Net interest
income
|
8,334
|
8,058
|
Provision for loan losses
|
500
|
500
|
Net interest
income after provision for loan losses
|
7,834
|
7,558
|
|
|
|
Non-interest
income:
|
|
|
Trust and other financial services
|
779
|
640
|
Service charges on deposit accounts
|
289
|
314
|
Mortgage banking activities
|
21
|
25
|
Credit and debit card service charges and fees
|
288
|
252
|
Net securities gains
|
785
|
852
|
Total other-than-temporary impairment ("OTTI") losses
|
(565)
|
(298)
|
Non-credit portion of OTTI losses (before taxes) (1)
|
---
|
---
|
Net OTTI losses recognized in earnings
|
(565)
|
(298)
|
Other operating income
|
135
|
125
|
Total
non-interest income
|
1,732
|
1,910
|
|
|
|
Non-interest
expense:
|
|
|
Salaries and employee benefits
|
3,108
|
2,943
|
Occupancy expense
|
431
|
372
|
Furniture and equipment expense
|
418
|
352
|
Credit and debit card expenses
|
72
|
77
|
FDIC insurance assessments
|
264
|
264
|
Other operating expense
|
1,242
|
1,197
|
Total
non-interest expense
|
5,535
|
5,205
|
|
|
|
Income before
income taxes
|
4,031
|
4,263
|
Income taxes
|
1,162
|
1,212
|
|
|
|
Net income
|
2,869
|
3,051
|
|
|
|
Preferred stock
dividends and accretion of discount
|
---
|
653
|
Net income
available to common shareholders
|
$2,869
|
$ 2,398
|
|
|
|
|
|
|
Per
Common Share Data:
|
|
|
Basic earnings per share
|
$ 0.75
|
$ 0.64
|
Diluted earnings per share
|
$ 0.74
|
$ 0.63
|
(1) Included in other comprehensive loss, net of tax
The accompanying notes are an integral part of these unaudited
consolidated interim financial statements.
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010
(Dollars in thousands, except per share data)
(unaudited)
|
Capital
Stock
|
Preferred
Stock
|
Surplus
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
income (loss)
|
Treasury
Stock
|
Total
Shareholders'
Equity
|
|
|
|
|
|
|
|
|
Balance
December 31, 2009
|
$8,887
|
$
18,358
|
$24,360
|
$75,001
|
$ 573
|
$(13,665)
|
$113,514
|
Net income
|
---
|
---
|
---
|
3,051
|
---
|
---
|
3,051
|
Total other
comprehensive income
|
---
|
---
|
---
|
---
|
1,066
|
---
|
1,066
|
Dividend
declared:
|
|
|
|
|
|
|
|
Common stock ($0.26 per share)
|
---
|
---
|
---
|
(981)
|
---
|
---
|
(981)
|
Preferred stock
|
---
|
---
|
---
|
(138)
|
---
|
---
|
(138)
|
Issuance of
common stock (82,021 shares)
|
164
|
---
|
1,787
|
---
|
---
|
---
|
1,951
|
Purchase of
preferred stock (18,751 shares)
|
---
|
(18,873)
|
---
|
---
|
---
|
---
|
(18,873)
|
Stock options
exercised (1,770 shares),
including related tax effects
|
---
|
---
|
---
|
(19)
|
---
|
47
|
28
|
Recognition of
stock based expense
|
---
|
---
|
41
|
---
|
---
|
---
|
41
|
Accretion of
discount
|
---
|
515
|
---
|
(515)
|
---
|
---
|
---
|
Balance
March 31, 2010
|
$9,051
|
$ ---
|
$26,188
|
$76,399
|
$1,639
|
$(13,618)
|
$ 99,659
|
|
Capital
Stock
|
Surplus
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
income (loss)
|
Treasury
Stock
|
Total
Shareholders'
Equity
|
|
|
|
|
|
|
|
Balance
December 31, 2010
|
$9,051
|
$26,165
|
$80,379
|
$ 284
|
$(12,271)
|
$103,608
|
Net
income
|
---
|
---
|
2,869
|
---
|
---
|
2,869
|
Total
other comprehensive loss
|
---
|
---
|
---
|
(870)
|
---
|
(870)
|
Dividend
declared:
|
|
|
|
|
|
|
Common stock ($0.27 per share)
|
---
|
---
|
(1,032)
|
---
|
---
|
(1,032)
|
Stock
options exercised (18,645 shares),
including related tax effects
|
---
|
43
|
(237)
|
---
|
539
|
345
|
Recognition
of stock based expense
|
---
|
30
|
---
|
---
|
---
|
30
|
Balance
March 31, 2011
|
$ 9,051
|
$26,238
|
$81,979
|
$(586)
|
$(11,732)
|
$104,950
|
The accompanying notes are an integral part of these unaudited
consolidated interim financial statements.
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010
(Dollars in thousands)
(unaudited)
|
2011
|
2010
|
Cash flows from
operating activities:
|
|
|
Net income
|
$ 2,869
|
$ 3,051
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
Depreciation and amortization of premises and equipment
|
311
|
229
|
Provision for loan losses
|
500
|
500
|
Net securities (gains) losses
|
(785)
|
(852)
|
Other-than-temporary impairment
|
565
|
298
|
Net amortization of bond premiums and discounts
|
406
|
9
|
Recognition of stock based expense
|
30
|
41
|
Proceeds from sale of mortgages
|
---
|
848
|
Origination of mortgage loans held for sale
|
---
|
(829)
|
Net gains on sale of mortgage loans held for sale
|
---
|
(17)
|
Net change in other assets
|
296
|
957
|
Net change in other liabilities
|
(492)
|
(510)
|
Net cash provided by operating activities
|
3,700
|
3,725
|
|
|
|
Cash flows from
investing activities:
|
|
|
Purchases of securities available for sale
|
(58,151)
|
(24,778)
|
Proceeds from maturities, calls and principal paydowns of mortgage-backed securities
|
20,996
|
29,052
|
Proceeds from sales of securities available for sale
|
13,949
|
12,292
|
Net loans made to customers
|
(27,079)
|
(2,770)
|
Proceeds from sale of other real estate owned
|
---
|
72
|
Capital expenditures
|
(618)
|
(1,010)
|
Net cash used in investing activities
|
(50,903)
|
12,858
|
|
|
|
Cash flows from
financing activities:
|
|
|
Net increase in deposits
|
(3,785)
|
23,642
|
Net increase (decrease) in securities sold under repurchase agreements and fed funds
purchased
|
(50)
|
(2,420)
|
Paydown of Federal Reserve borrowings
|
---
|
(20,000)
|
Proceeds from Federal Home Loan Bank advances
|
65,800
|
9,325
|
Repayments of Federal Home Loan Bank advances
|
(18,264)
|
(12,254)
|
Proceeds from issuance of common stock
|
---
|
1,951
|
Purchases of preferred stock
|
---
|
(18,873)
|
Proceeds from stock option exercises, including excess tax benefits
|
345
|
28
|
Payments of dividends
|
(1,032)
|
(1,119)
|
Net cash provided by financing activities
|
43,014
|
(19,720)
|
|
|
|
Net increase in
cash and cash equivalents
|
(4,189)
|
(3,137)
|
Cash and cash
equivalents at beginning of period
|
12,815
|
9,832
|
Cash and cash
equivalents at end of period
|
$ 8,626
|
$ 6,695
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
Cash paid during the period for:
|
|
|
Interest
|
$ 4,426
|
$ 4,988
|
Income taxes
|
---
|
---
|
|
|
|
Schedule of
noncash investing activities:
|
|
|
Transfers from loans to other real estate owned
|
$ 184
|
$ ---
|
The accompanying notes are an integral part of these unaudited
consolidated interim financial statements.
BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010
(Dollars in thousands)
(unaudited)
|
Three Months Ended
March 31,
|
|
2011
|
2010
|
|
|
|
Net income
|
$2,869
|
$3,051
|
Other
comprehensive income:
|
|
|
Net unrealized (depreciation) appreciation on securities available for sale,
net of tax of ($374) and $805,
respectively
|
(724)
|
1,563
|
Less reclassification adjustment for net gains related to securities available
for sale included in net income,
net of tax of ($266) and ($290), respectively
|
(518)
|
(562)
|
Add other-than-temporary impairment adjustment, net of tax of $193 and $101, respectively
|
372
|
196
|
Net unrealized depreciation and other amounts for interest rate derivatives,
net of tax of $0 and $69,
respectively
|
---
|
(133)
|
Amortization of actuarial gain for supplemental executive retirement plan,
net of related tax of $1 and $1,
respectively
|
---
|
2
|
Total other comprehensive (loss) income
|
(870)
|
1,066
|
Total
comprehensive income
|
$1,999
|
$4,117
|
The accompanying notes are an integral part of these unaudited consolidated interim
financial statements
BAR HARBOR BANKSHARES AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
MARCH 31, 2011
(Dollars in thousands, except share data)
(
unaudited
)
Note 1: Basis of Presentation
The accompanying consolidated interim financial statements are
unaudited. In the opinion of management, all adjustments considered necessary for a fair
presentation have been included. All inter-company transactions have been eliminated in
consolidation. Amounts in the prior period financial statements are reclassified whenever
necessary to conform to current period presentation. The net income reported for the three
months ended March 31, 2011, is not necessarily indicative of the results that may be
expected for the year ending December 31, 2011, or any other interim periods.
The consolidated balance sheet at December 31, 2010, has been derived
from audited consolidated financial statements at that date. The accompanying unaudited
interim consolidated financial statements have been prepared in accordance with United
States ("U.S.") generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X (17
CFR Part 210). Accordingly, they do not include all of the information and footnotes
required by U.S. generally accepted accounting principles for complete financial
statements. For further information, refer to the consolidated financial statements
included in the Companys Annual Report on Form 10-K for the year ended December 31,
2010, and notes thereto.
Note 2: Managements Use of Estimates
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Material estimates that are particularly susceptible to significant
change in the near-term relate to the determination of the allowance for loan losses,
other-than-temporary impairments on securities, income tax estimates, and the valuation of
intangible assets.
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 on loans 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 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 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 allowance, which also may necessitate future additions or reductions to the allowance,
based on information available to them at the time of their examination.
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 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 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 the current economic environment,
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.
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. Significant management judgment is required in determining income tax expense and
deferred tax assets and liabilities. As of March 31, 2011 and December 31, 2010, there was
no valuation allowance for deferred tax assets. Deferred tax assets are included in other
assets on the consolidated balance sheet.
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 of 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 step,
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 March 31, 2011, there was no indication of
impairment.
At March 31, 2011 and December 31, 2010, the Company did not have any
identifiable intangible assets on its consolidated balance sheet.
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, would adversely affect the Companys consolidated results of
operations.
Note 3: Earnings Per Share
Basic earnings per share excludes dilution and is computed by dividing
income available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential dilution
that could occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that then shared
in the earnings of the Company, such as the Companys dilutive stock options.
The following is a reconciliation of basic and diluted earnings per
share for the three months ended March 31, 2011 and 2010:
|
Three Months Ended
March 31,
|
|
2011
|
2010
|
|
|
|
Net income
|
$ 2,869
|
$ 3,051
|
|
|
|
Preferred stock
dividends and accretion of discount
|
---
|
653
|
Net income
available to common shareholders
|
$ 2,869
|
$ 2,398
|
|
|
|
Weighted
average common shares outstanding
|
|
|
Basic
|
3,829,469
|
3,756,164
|
Effect of dilutive employee stock options
|
30,258
|
52,408
|
Effect of dilutive warrants
|
---
|
4,193
|
Diluted
|
3,859,727
|
3,812,765
|
|
|
|
Anti-dilutive
options excluded from earnings per share calculation
|
109,863
|
142,013
|
|
|
|
Per
Common Share Data:
|
|
|
Basic earnings per share
|
$
0.75
|
$ 0.64
|
Diluted earnings per share
|
$
0.74
|
$ 0.63
|
Note 4: Securities Available For Sale
The following tables summarize the securities available for sale
portfolio as of March 31, 2011 and December 31, 2010:
March
31, 2011
Available for Sale:
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Estimated
Fair Value
|
|
|
|
|
|
Obligations of
US Government sponsored enterprises
|
$ 1,000
|
$ 28
|
$ ---
|
$ 1,028
|
Mortgage-backed
securities:
|
|
|
|
|
US Government-sponsored enterprises
|
237,461
|
6,280
|
989
|
242,752
|
US Government agency
|
61,575
|
1,300
|
329
|
62,546
|
Private label
|
19,644
|
568
|
2,449
|
17,763
|
Obligations of
states and political subdivisions thereof
|
60,708
|
650
|
5,862
|
55,496
|
Total
|
$380,388
|
$8,826
|
$9,629
|
$379,585
|
|
|
|
|
|
|
|
|
|
|
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
|
Securities Maturity Distribution:
The following table
summarizes the maturity distribution of the amortized cost and estimated fair value of
securities available for sale as of March 31, 2011. Actual maturities may differ from the
final maturities noted below because issuers may have the right to prepay or call 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.
|
March 31, 2011
|
|
|
|
Securities
Available for Sale
|
Amortized
Cost
|
Estimated
Fair Value
|
|
|
|
Due after one
year through five years
|
$ 2,917
|
$ 3,031
|
Due after five
years through ten years
|
16,467
|
16,619
|
Due after ten
years
|
361,004
|
359,935
|
|
$380,388
|
$379,585
|
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 ("OTTI").
For the three months ended March 31, 2011, the Company recognized total
OTTI losses of $565 in the statement of income (before taxes) related to seven, available
for sale, private label mortgage-backed securities, all of which the Company had
previously determined were other-than-temporarily impaired. In all cases the OTTI losses
represented managements best estimate of additional credit losses on the collateral
underlying these securities.
The $565 of first quarter 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 mortgage 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 it will recover the amortized cost basis of its private label mortgage-backed
securities 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 estimated 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 three months
ending March 31, 2011 and 2010.
|
2011
|
2010
|
|
|
|
Estimated credit losses, beginning of period
|
$3,373
|
$2,475
|
Additions for
estimated credit losses for securities on which OTTI has
been previously recognized
|
565
|
298
|
Estimated
credit losses as of March 31, 2011 and 2010
|
$3,938
|
$2,773
|
As of March 31, 2011, the total OTTI losses included in accumulated
other comprehensive income amounted to $300 net of tax, compared with $525 at December 31,
2010. These OTTI losses related to thirteen private label mortgage-backed securities, with
a total unamortized cost of $5,565 at March 31, 2011.
As of March 31, 2011, 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 March 31,
2011. As of that date, the Company did not intend to sell nor anticipated that it would
more-likely-than-not 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 table summarizes 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 March 31, 2011
and December 31, 2010. All securities referenced are debt securities. At March 31, 2011,
and December 31, 2010, the Company did not hold any common stock or other equity
securities in its securities portfolio.
March 31, 2011
|
Less than 12 months
|
12 months or longer
|
Total
|
|
Estimated
Fair
Value
|
Number of
Investments
|
Unrealized
Losses
|
Estimated
Fair
Value
|
Number of
Investments
|
Unrealized
Losses
|
Estimated
Fair
Value
|
Number of
Investments
|
Unrealized
Losses
|
Description
of Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities:
|
|
|
|
|
|
|
|
|
|
US Government-sponsored
enterprises
|
$ 73,028
|
65
|
$ 989
|
$
20
|
1
|
$ ---
|
$ 73,048
|
66
|
$ 989
|
US Government agency
|
23,270
|
22
|
328
|
231
|
8
|
1
|
23,501
|
30
|
329
|
Private label
|
598
|
4
|
509
|
10,842
|
31
|
1,940
|
11,440
|
35
|
2,449
|
Obligations of
states and political
subdivisions thereof
|
19,256
|
41
|
1,337
|
12,759
|
60
|
4,525
|
32,015
|
101
|
5,862
|
Total
|
$116,152
|
132
|
$3,163
|
$23,852
|
100
|
$6,466
|
$140,004
|
232
|
$9,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
Less than 12 months
|
12 months or longer
|
Total
|
|
Estimated
Fair
Value
|
Number of
Investments
|
Unrealized
Losses
|
Estimated
Fair
Value
|
Number of
Investments
|
Unrealized
Losses
|
Estimated
Fair
Value
|
Number of
Investments
|
Unrealized
Losses
|
Description
of Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
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 March 31, 2011, the total
unrealized losses on these securities amounted to $989, compared with $578 at December 31,
2010. 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
Government-sponsored enterprises play a vital role in the nations financial markets.
Managements analysis indicates that the unrealized losses at March 31, 2011 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 March 31, 2011.
-
Mortgage-backed securities issued by U.S. Government agencies:
As
of March 31, 2011, the total unrealized losses on these securities amounted to $329,
compared with $356 at December 31, 2010. 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 March 31,
2011 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 March 31, 2011.
-
Private label mortgage-backed securities
: As of March
31, 2011, the total unrealized losses on the Banks private label mortgage-backed
securities amounted to $2,449, compared with $2,201 at December 31, 2010. The Company
attributes the unrealized losses at March 31, 2011 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 mortgage-backed securities owned by the Company. Based upon the
foregoing considerations and the expectation that the Company will receive all of the
future cash flows related to 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 March 31, 2011.
-
Obligations of states of the U.S. and political subdivisions
thereof
: As of March 31, 2011, the total unrealized losses on the Banks
municipal securities amounted to $5,862, compared with $6,050 at December 31, 2010. 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 March
31, 2011, all municipal bond issuers were current on contractually obligated interest and
principal payments. At March 31, 2011, the Banks municipal bond portfolio did not
contain any below investment grade securities as reported by major credit rating agencies.
The Company attributes the unrealized losses at March 31, 2011, to
changes in prevailing market yields and pricing spreads since the date the underlying
securities were purchased, driven in part by current media attention and market concerns
about the prolonged recovery from economic recession and the impact it might have on the
future financial stability of municipalities throughout the country. Accordingly, the
Company does not consider these municipal securities to be other-than-temporarily impaired
at March 31, 2011.
At March 31, 2011, 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.
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 three months ended March 31, 2011 and 2010.
Three months
ended March 31,
|
Proceeds
from Sale of
Securities
Available
for Sale
|
Realized
Gains
|
Realized
Losses
|
Other
Than
Temporary
Impairment
Losses
|
Net
|
|
|
|
|
|
|
2011
|
$13,949
|
$785
|
$ ---
|
$565
|
$220
|
2010
|
$12,292
|
$852
|
$---
|
$298
|
$554
|
Note 5: Loans and Allowance for Loan Losses
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 status when reaching 90 days or more past due, or
sooner if judged appropriate by management. Secured consumer loans are written down to
realizable value and unsecured consumer loans are charged-off upon reaching 120 days
past due. Commercial real estate loans and commercial business loans that are 90 days
or more past due are generally placed on non-accrual status, unless secured by sufficient
cash or other assets immediately convertible to cash, and the loan is in the 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 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.
When a loan is classified as non-accrual or impaired, any payments
received are typically applied to reduce the principal balance of the loan. In situations
where the Company reasonably believes there is no longer doubt regarding the ultimate
collectability of principal on a non-accrual or impaired loan, subsequent interest
payments received are recorded as interest income on the cash basis in accordance with the
contractual terms. For the three months ended March 31, 2011 and 2010, the Company did not
recognize any interest income on impaired loans using a cash-basis method of accounting
during the time within those periods that the loans were impaired.
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.
The Companys lending activities are principally conducted in
downeast and midcoast Maine. The following table summarizes the composition of the loan
portfolio as of March 31, 2011 and December 31, 2010:
LOAN PORTFOLIO SUMMARY
|
March 31,
2011
|
December 31,
2010
|
|
|
|
Commercial real
estate mortgages
|
$257,981
|
$260,357
|
Commercial and
industrial
|
86,883
|
80,765
|
Commercial
construction and land development
|
31,702
|
32,114
|
Agricultural
and other loans to farmers
|
24,243
|
24,359
|
Total commercial loans
|
400,809
|
397,595
|
|
|
|
Residential
real estate mortgages
|
230,501
|
231,434
|
Home equity
loans
|
54,216
|
54,289
|
Consumer loans
|
28,408
|
4,417
|
Total consumer loans
|
313,125
|
290,140
|
|
|
|
Tax exempt
loans
|
12,956
|
12,126
|
|
|
|
Deferred
origination costs(fees), net
|
768
|
809
|
Total loans
|
727,658
|
700,670
|
Allowance for
loan losses
|
(9,093)
|
(8,500)
|
Total loans net
of allowance for loan losses
|
$718,565
|
$692,170
|
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. The Company seeks to diversify the loan portfolio as 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, at March 31, 2011 approximately 35.6% of the commercial
real estate mortgage portfolio is represented by loans to the lodging industry. The Bank
underwrites lodging industry loans as operating businesses, lending primarily to seasonal
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, if not successful, these loans are secured only by tangible, non-real
estate collateral. 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, non-residential
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 immediately 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 borrower. 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 Federal Home Loan Mortgage Corporation
("
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
March 31, 2011 and December 31, 2010.
TOTAL NON-PERFORMING LOANS
|
March 31,
|
December 31,
|
|
2011
|
2010
|
|
|
|
Commercial real
estate mortgages
|
$ 3,433
|
$ 3,572
|
Commercial
construction and land development
|
5,893
|
5,899
|
Commercial and
industrial loans
|
959
|
778
|
Agricultural
and other loans to farmers
|
235
|
254
|
Total commercial loans
|
10,520
|
10,503
|
|
|
|
Residential
real estate mortgages
|
2,933
|
3,022
|
Home equity
loans
|
134
|
146
|
Consumer loans
|
19
|
---
|
Total consumer loans
|
3,086
|
3,168
|
|
|
|
Total non-accrual loans
|
13,606
|
13,671
|
Accruing loans
contractually past due 90 days or more
|
---
|
6
|
Total non-performing loans
|
$13,606
|
$13,677
|
|
|
|
Allowance for
loan losses to non-performing loans
|
67%
|
62%
|
Non-performing
loans to total loans
|
1.87%
|
1.95%
|
Allowance to
total loans
|
1.25%
|
1.21%
|
At March 31, 2011, total other real estate owned amounted to $840
compared with $656 at December 31, 2010.
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 tables set forth information regarding past due loans at March 31, 2011
and December 31, 2010. Amounts shown exclude deferred loan origination fees and costs.
March 31,
2011
|
|
|
|
|
|
|
|
|
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
|
$1,068
|
$ 658
|
$2,696
|
$
4,422
|
$253,559
|
$257,981
|
$ ---
|
Commercial and
industrial
|
210
|
500
|
664
|
1,374
|
85,509
|
86,883
|
---
|
Commercial
construction and
land development
|
---
|
---
|
658
|
658
|
31,044
|
31,702
|
---
|
Argicultural
and other loans to farmers
|
136
|
---
|
85
|
221
|
24,022
|
24,243
|
---
|
Residential
real estate mortgages
|
2,926
|
305
|
1,717
|
4,948
|
225,553
|
230,501
|
---
|
Home equity
|
321
|
199
|
56
|
576
|
53,640
|
54,216
|
---
|
Consumer loans
|
147
|
3
|
4
|
154
|
28,254
|
28,408
|
---
|
Tax exempt
|
---
|
---
|
---
|
---
|
12,956
|
12,956
|
---
|
Total
|
$4,808
|
$1,665
|
$5,880
|
$12,353
|
$714,537
|
$726,890
|
$ ---
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2010
|
|
|
|
|
|
|
|
|
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.
Details of impaired loans as of March 31, 2011 and December 31, 2010
follows:
2011
|
For the period ended March 31
|
For the three months ended March 31
|
|
Recorded
Investment
|
Unpaid
Principal
Balance
|
Related
Allowance
|
Average
Recorded
Investment
|
Interest
Recorded
|
Interest
Not
Recorded
|
With
no related allowance:
|
|
|
|
|
|
|
Commercial
real estate mortgages
|
$ 551
|
$ 551
|
$ ---
|
$ 824
|
$ ---
|
$139
|
Commercial
and industrial
|
369
|
369
|
---
|
456
|
---
|
22
|
Commercial
construction and
land development
|
---
|
---
|
---
|
---
|
---
|
---
|
Agricultural
and other loans to farmers
|
235
|
235
|
---
|
236
|
---
|
47
|
Subtotal
|
$ 1,155
|
$ 1,155
|
$ ---
|
$ 1,516
|
$ ---
|
$208
|
|
|
|
|
|
|
|
With
an allowance:
|
|
|
|
|
|
|
Commercial
real estate mortgages
|
$ 2,882
|
$ 2,882
|
$ 300
|
$ 2,642
|
$ ---
|
$243
|
Commercial
and industrial
|
590
|
660
|
213
|
546
|
---
|
65
|
Commercial
construction and
land development
|
5,893
|
6,060
|
950
|
6,059
|
---
|
142
|
Agricultural
and other loans to farmers
|
---
|
---
|
---
|
---
|
---
|
---
|
Subtotal
|
$ 9,365
|
$ 9,602
|
$1,463
|
$ 9,247
|
$ ---
|
$450
|
|
|
|
|
|
|
|
Total
|
$10,520
|
$10,757
|
$1,463
|
$10,763
|
$ ---
|
$658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
For the period ended December 31
|
For the year ended December 31
|
|
Recorded
Investment
|
Unpaid
Principal
Balance
|
Related
Allowance
|
Average
Recorded
Investment
|
Interest
Recorded
|
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
|
725
|
159
|
706
|
---
|
42
|
Commercial construction and
land development
|
5,674
|
5,841
|
577
|
480
|
---
|
24
|
Agricultural and other loans to farmers
|
---
|
---
|
---
|
---
|
---
|
---
|
Subtotal
|
$ 9,020
|
$ 9,374
|
$1,327
|
$ 3,181
|
$ ---
|
$292
|
|
|
|
|
|
|
|
Total
|
$10,503
|
$10,857
|
$1,327
|
$ 4,953
|
$ ---
|
$536
|
The average recorded investment in impaired loans for the period ended
March 31, 2011 was $10,763, compared with $9,493 for the period ended March 31, 2010.
Credit Quality Indicators/Classified Loans:
In monitoring the credit quality of the portfolio,
management applies a credit quality indicator ("risk rating") 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.
The Bank provides for classification of commercial and commercial real
estate loans which are considered to be of lesser quality as substandard, doubtful, or
loss. The Bank considers a commercial or commercial real estate loan substandard when it
contains a well defined weakness that jeopardizes the collection of a loans
contractual principal and interest. Such a well defined weakness may include inadequate
borrower cash flow, weak or inadequate collateral protection, and/or weak or inadequate
guarantor support.
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 tables summarize the commercial loan portfolio as of
March 31, 2011 and 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).
March
31, 2011
|
|
|
|
|
|
|
Commercial
real estate
mortgages
|
Commercial
and
industrial
|
Commercial
construction
and land
development
|
Agricultural
and other
loans
to farmers
|
Total
|
|
|
|
|
|
|
Pass
|
$229,450
|
$75,553
|
$24,192
|
$22,579
|
$351,774
|
Other
Assets Especially Mentioned
|
22,354
|
8,658
|
856
|
1,031
|
32,899
|
Substandard
|
6,177
|
2,672
|
6,654
|
633
|
16,136
|
Doubtful
|
---
|
---
|
---
|
---
|
---
|
Loss
|
---
|
---
|
---
|
---
|
---
|
Total
|
$257,981
|
$86,883
|
$31,702
|
$24,243
|
$400,809
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
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 7 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 the three
months ended March 31, 2011 and 2010 follows:
ALLOWANCE FOR LOAN LOSSES
SUMMARY OF LOAN LOSS EXPERIENCE
THREE MONTHS ENDED MARCH 31, 2011 AND 2010
|
2011
|
2010
|
|
|
|
Balance
at beginning of period
|
$ 8,500
|
$ 7,814
|
Charge
offs:
|
|
|
Commercial
real estate mortgages
|
---
|
5
|
Commercial
and industrial
|
5
|
27
|
Commercial
construction and land development
|
---
|
167
|
Agricultural
and other loans to farmers
|
---
|
---
|
Residential
real estate mortgages
|
18
|
---
|
Consumer
loans
|
7
|
17
|
Residential
construction and land development
|
---
|
---
|
Home
equity loans
|
---
|
60
|
Tax
exempt loans
|
---
|
---
|
Total charge-offs
|
30
|
276
|
|
|
|
Recoveries:
|
|
|
Commercial
real estate mortgages
|
1
|
---
|
Commercial
and industrial loans
|
76
|
---
|
Commercial
construction and land development
|
---
|
---
|
Agricultural
and other loans to farmers
|
34
|
---
|
Residential
real estate mortgages
|
---
|
78
|
Consumer
loans
|
12
|
10
|
Residential
construction and land development
|
---
|
---
|
Home
equity loans
|
---
|
40
|
Tax
exempt loans
|
---
|
---
|
Total recoveries
|
123
|
128
|
|
---
|
|
Net
(recoveries) charge-offs
|
(93)
|
148
|
Provision
charged to operations
|
500
|
500
|
|
|
|
Balance
at end of period
|
$ 9,093
|
$ 8,166
|
|
|
|
Average
loans outstanding during period
|
$700,987
|
$669,602
|
|
|
|
Annualized
net (recoveries) charge-offs to average loans outstanding
|
(0.05%)
|
0.09%
|
The following table details activity in the allowance for loan losses
by portfolio segment for the three months ended March 31, 2011. 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.
March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
Commercial and
Industrial
|
Commercial Construction and Land Development
|
Agricultural
|
Residential Real Estate
|
Consumer
|
Home
Equity
|
Tax
Exempt
|
Total
|
Beginning
Balance
|
$ 4,260
|
$ 1,237
|
$ 999
|
$ 223
|
$ 1,322
|
$ 73
|
$ 276
|
$ 110
|
$ 8,500
|
Charged
Off
|
---
|
(5)
|
---
|
---
|
(18)
|
(7)
|
---
|
---
|
(30)
|
Recoveries
|
1
|
76
|
---
|
34
|
---
|
12
|
---
|
---
|
123
|
Provision
|
(127)
|
(88)
|
182
|
(8)
|
210
|
286
|
22
|
23
|
500
|
Ending
Balance
|
$ 4,134
|
$ 1,220
|
$ 1,181
|
$ 249
|
$ 1,514
|
$ 364
|
$ 298
|
$ 133
|
$ 9,093
|
|
|
|
|
|
|
|
|
|
|
of
which:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
for loans
individually
evaluated for
impairment
|
$ 300
|
$
213
|
$
950
|
$
---
|
$ ---
|
$ ---
|
$ ---
|
$ ---
|
$ 1,463
|
|
|
|
|
|
|
|
|
|
|
Amount
for loans
collectively
evaluated for
impairment
|
$ 3,834
|
$ 1,007
|
$
231
|
$ 249
|
$ 1,514
|
$ 364
|
$ 298
|
$ 133
|
$ 7,630
|
|
|
|
|
|
|
|
|
|
|
Loans
individually
evaluated for
impairment
|
$ 3,433
|
$ 959
|
$ 5,893
|
$ 235
|
$
---
|
$ ---
|
$ ---
|
$ ---
|
$ 10,520
|
|
|
|
|
|
|
|
|
|
|
Loans
collectively
evaluated for
impairment
|
$254,548
|
$85,924
|
$25,809
|
$24,008
|
$230,501
|
$54,216
|
$28,408
|
$12,956
|
$716,370
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate
|
Commercial and Industrial
|
Commercial Construction and Land
Development
|
Agricultural
|
Residential Real Estate
|
Consumer
|
Home Equity
|
Tax Exempt
|
Total
|
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 March 31, 2011 and
December 31, 2010, loans to the lodging industry amounted to approximately $91,788 and
$86,142, respectively.
Note 6: 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
upon a change of control.
The following table summarizes the net periodic benefit costs for the
three months ended March 31, 2011 and 2010:
|
Supplemental Executive
Retirement Plans
|
|
|
|
Three Months
Ended March 31,
|
2011
|
2010
|
|
|
|
Service cost
|
$11
|
$46
|
Interest cost
|
49
|
47
|
Amortization of
actuarial loss
|
1
|
3
|
Net periodic benefit cost
|
$61
|
$96
|
The Company is expected to recognize $239 of expense for the foregoing
plans for the year ended December 31, 2011. The Company is expected to contribute $205 to
the foregoing plans in 2011. As of March 31, 2011, the Company had contributed
$50.
Note 7: Commitments and Contingent Liabilities
The Companys wholly owned subsidiary, Bar Harbor Bank & Trust
(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
non-performance 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 March 31, 2011 and December 31, 2010:
|
March 31,
|
|
December 31,
|
|
2011
|
|
2010
|
|
|
|
|
Commitments to
originate loans
|
$25,608
|
|
$24,112
|
Unused lines of
credit
|
$89,287
|
|
$91,753
|
Un-advanced
portions of construction loans
|
$ 9,331
|
|
$11,215
|
Standby letters
of credit
|
$ 846
|
|
$ 750
|
As of March 31, 2011 and December 31, 2010, the fair value of the
standby letters of credit was not significant to the Companys consolidated financial
statements.
Note 8: 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.
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 tables summarize financial assets and financial
liabilities measured at fair value on a recurring basis as of March 31, 2011 and December
31, 2010, 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
|
March 31, 2011
|
|
|
|
|
|
|
|
|
|
Securities
available for sale:
|
|
|
|
|
Obligations of US
Government-sponsored enterprises
|
$ ---
|
$ 1,028
|
$ ---
|
$ 1,028
|
Mortgage-backed securities:
|
|
|
$ ---
|
|
US Government-sponsored enterprises
|
$ ---
|
$242,752
|
$ ---
|
$242,752
|
US Government agencies
|
$ ---
|
$ 62,546
|
$ ---
|
$ 62,546
|
Private label
|
$ ---
|
$ 17,763
|
$ ---
|
$ 17,763
|
Obligations of states and
political subdivisions thereof
|
$ ---
|
$ 55,496
|
$ ---
|
$ 55,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
The following table summarizes financial assets and financial
liabilities measured at fair value during the quarter, on a non-recurring basis as of
March 31, 2011, segregated by the level of the valuation inputs within the fair value
hierarchy utilized to measure fair value.
|
Principal Balance
as of 3/31/11
|
Level 1 Inputs
|
Level 2 Inputs
|
Level 3 Inputs
|
Fair Value
as of 3/31/11
|
|
|
|
|
|
|
Mortgage
servicing rights
|
$ 193
|
$ ---
|
$193
|
$ ---
|
$278
|
Collateral
dependent impaired loans
|
$1,138
|
$ ---
|
$ ---
|
$1,138
|
$988
|
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
|
$1,957
|
$ ---
|
$ ---
|
$1,957
|
$1,444
|
The Company had total collateral dependent impaired loans with a
carrying value of approximately $3,815 and $3,294, which had specific reserves included in
the allowance of $513 and $513, at March 31, 2011, and December 31, 2010, respectively.
Note 9: 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 March 31, 2011, and December 31, 2010,
follows:
|
March 31, 2011
|
December 31, 2010
|
|
|
|
|
|
|
Carrying
Value
|
Fair
Value
|
Carrying
Value
|
Fair
Value
|
|
|
|
|
|
Financial
assets:
|
|
|
|
|
Cash and cash equivalents
|
$ 8,626
|
$ 8,626
|
$ 12,815
|
$ 12,815
|
Loans, net
|
718,565
|
723,081
|
692,170
|
696,515
|
Interest receivable
|
4,960
|
4,960
|
4,159
|
4,159
|
Securities, available for sale
|
379,585
|
379,585
|
357,882
|
357,882
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
Deposits (with no stated maturity)
|
343,567
|
343,567
|
354,754
|
354,754
|
Time deposits
|
360,976
|
368,433
|
353,574
|
361,481
|
Borrowings
|
347,500
|
365,199
|
300,014
|
309,561
|
Interest payable
|
996
|
996
|
1,078
|
1,078
|
Item 2. MANAGEMENT'S 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 three
months ended March 31, 2011 and 2010, and financial condition at March 31, 2011, and
December 31, 2010, 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 report on Form 10-Q.
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 taxable equivalent basis. Specifically, included
in first quarter 2011 and 2010 interest income was $790 and $879, 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 $379
and $416 in the first quarter of 2011 and 2010, respectively, which increased net interest
income accordingly. The analysis of net interest income tables included in this report on
Form 10-Q provide a reconciliation of tax equivalent financial information to the
Company's consolidated financial statements, which have been prepared in accordance with
U.S. generally accepted accounting principles.
Management believes the disclosure of tax equivalent net interest
income information improves the clarity of financial analysis, and is particularly useful
to investors in understanding and evaluating the changes and trends in the Company's
results of operations. 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.
FORWARD LOOKING STATEMENTS DISCLAIMER
Certain statements, as well as certain other discussions contained in
this quarterly report on Form 10-Q, or incorporated herein by reference, contain
statements which may be considered to be forward-looking within the meaning of Section 27A
of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act
of 1934, as amended. You can identify these forward-looking statements by the use of words
like "strategy," "expects," "plans," "believes,"
"will," "estimates," "intends," "projects,"
"goals," "targets," and other words of similar meaning. You can also
identify them by the fact that they do not relate strictly to historical or current facts.
Investors are cautioned that forward-looking statements are inherently
uncertain. Forward-looking statements include, but are not limited to, those made in
connection with estimates with respect to the future results of operation, financial
condition, and the business of the Company which are subject to change based on the impact
of various factors that could cause actual results to differ materially from those
projected or suggested due to certain risks and uncertainties. Those factors include but
are not limited to:
(i)
|
|
The
Company's success is 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 investments 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 non-traditional institutions, such as credit unions and
finance companies;
|
|
|
|
(iv)
|
|
A
significant portion of the Bank's loan portfolio is comprised of commercial loans and
loans secured by real estate, exposing the Company to the risks inherent in financings
based upon analysis of credit risk, the value of underlying collateral, and other
intangible factors which are considered in making commercial loans and, accordingly, the
Company's profitability may be negatively impacted by judgment errors in risk analysis, by
loan defaults, and the ability of certain borrowers to repay such loans during a downturn
in general economic conditions;
|
|
|
|
(v)
|
|
A
significant delay in, or inability to execute strategic initiatives designed to increase
revenues and or control expenses;
|
|
|
|
(vi)
|
|
The
potential need to adapt to changes in information technology systems, on which the Company
is highly 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 further 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 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 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 the Companys Annual Report
on Form 10-K for the year ended December 31, 2010. 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 quarterly report on Form 10-Q and the Company cautions
readers not to place undue reliance on such statements. The Company disclaims any
obligation to publicly update or revise any forward-looking statement contained in the
succeeding discussion, or elsewhere in this quarterly report on Form 10-Q, except to the
extent required by federal securities laws.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Companys significant accounting policies are more fully
enumerated in Note 1 to the Consolidated Financial Statements included in Item 8 of its
December 31, 2010, 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.
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 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. Material estimates that are particularly
susceptible to significant change in the near-term relate to the determination of the
allowance for loan losses, other than temporary impairment on securities, income tax
estimates, and the evaluation of intangible assets. The use of these estimates is more
fully described in Part I, Item 1, Note 2 of the consolidated financial statements in this
quarterly report on Form 10-Q.
SUMMARY FINANCIAL RESULTS
Summary Results of Operations
For the three months ended March 31, 2011 the Company reported net
income available to common shareholders of $2,869, compared with $2,398 in the first
quarter of 2010, representing an increase of $471, or 19.6%. The Companys diluted
earnings per share amounted to $0.74 for the quarter compared with $0.63 in the first
quarter of 2010, representing an increase of $0.11, or 17.5%.
The Companys annualized return on average shareholders
equity amounted to 11.14% for the quarter, compared with 11.24% in the first quarter of
2010. The Companys first quarter return on average assets amounted to 1.03%,
compared with 1.16% in the first quarter of 2010.
A large contributing factor underlying the first quarter increases in
net income available to common shareholders and diluted earnings per share was the
Companys repurchase of all shares of its Preferred Stock from the U.S. Department of
the Treasury (the "Treasury") in the first quarter of 2010. The Preferred Stock
was sold to the Treasury in the first quarter of 2009 as part of 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 net income
available to common shareholders and diluted earnings per share by $496 and $0.13,
respectively. Total preferred stock dividends and accretion of discount amounted to $653
in the first quarter of 2010, compared with none in the current quarter.
For the three months ended March 31, 2011, net interest income on a
tax-equivalent basis amounted to $8,713, representing an increase of $239 or 2.8% compared
with the first quarter of 2010. The increase in first quarter net interest income compared
with the first quarter of 2010 was attributed to average earning asset growth of $72,429,
offset in part by a 13 basis point decline in the net interest margin to 3.21%. The
decline in the net interest margin was principally attributed to declining earning asset
yields.
For the three months ended March 31, 2011, total non-interest income
amounted to $1,732, down $178 or 9.3%, compared with the first quarter of 2010. The
decline in first quarter non-interest income was principally attributed to a decline in
securities gains net of other-than-temporary impairment ("OTTI") losses. Total
first quarter securities gains, net of other-than-temporary impairment losses, amounted to
$220 compared with $554 in the first quarter of 2010, representing a decline of $334, or
60.3%.
For the three months ended March 31, 2011, total non-interest expense
amounted to $5,535, up $330, or 6.3%, compared with the first quarter of 2010. The
increase in non-interest expense was largely attributed to salaries and employee benefits,
which were up $165 or 5.6% compared with the first quarter of 2010. The increase in
salaries and employee benefits was principally attributed to normal increases in base
salaries, as well as changes in staffing levels and mix.
Summary Financial Condition
The Companys total assets ended the quarter at $1,162,484,
representing an increase of $44,551, or 4.0%, compared with December 31, 2010. Asset
growth was attributed to both loans and securities, which were up $26,988 and $21,703, or
3.9% and 6.1%, respectively.
Asset quality remained relatively stable during the first quarter with
non-performing loans declining slightly to $13,606. The Bank enjoyed very low loan loss
experience during the first quarter with recoveries on previously charged off loans
exceeding total loans charged off by $93, or 0.05% of average loans outstanding. For the
three months ended March 31, 2011, the Bank recorded a provision for loan losses of $500,
unchanged compared with the first quarter of 2010.
Total deposits ended the first quarter at $704,543, down $3,785, or
0.5%, compared with December 31, 2010. Demand deposits and NOW accounts experienced a
combined seasonal decline of $13,644, or 9.5%. This decline was largely offset by a $2,457
or 1.2% increase in savings and money market accounts, and a $7,402 or 2.1% increase in
time deposits.
At March 31, 2011, 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 March
31, 2011, the Companys Tier I Leverage, Tier I Risk-based, and Total Risk-based
capital ratios were 9.03%, 13.39% and 15.25%, respectively. At March 31, 2011, the
Companys tangible common equity ratio stood at 8.78%, down from 9.01% at December
31, 2010, which was principally attributed to significant first quarter earning asset
growth.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is the principal component of the Company's income
stream and represents the difference or spread between interest generated from earning
assets and the interest expense 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 three months ended March 31,
2011, net interest income on a tax equivalent basis amounted to $8,713, compared with
$8,474 in the first quarter of 2010, representing an increase of $239, or 2.8%. As more
fully discussed below, the increase in first quarter 2011 tax-equivalent net interest
income compared with the first quarter of 2010 was principally attributed to average
earning asset growth of $72,429, or 7.0%, offset in part by a 13 basis point decline in
the net interest margin.
Factors contributing to the changes in net interest income and the net
interest margin are more fully enumerated in the following discussion and analysis.
Net Interest Income Analysis:
The following table summarizes
the Companys average balance sheets and components of net interest income, including
a reconciliation of tax equivalent adjustments, for the three months ended March 31, 2011
and 2010:
AVERAGE BALANCE SHEET AND
ANALYSIS OF NET INTEREST INCOME
THREE MONTHS ENDED
MARCH 31, 2011 AND 2010
|
2011
|
2010
|
|
|
|
Weighted
|
|
|
Weighted
|
|
Average
|
|
Average
|
Average
|
|
Average
|
|
Balance
|
Interest
|
Rate
|
Balance
|
Interest
|
Rate
|
Interest
Earning Assets:
|
|
|
|
|
|
|
Loans (1,3)
|
$ 700,987
|
$ 8,516
|
4.93%
|
$
669,602
|
$ 8,614
|
5.22%
|
Securities
(2,3)
|
383,067
|
4,529
|
4.79%
|
341,973
|
4,756
|
5.64%
|
Federal Home
Loan Bank stock
|
16,068
|
12
|
0.30%
|
16,068
|
---
|
0.00%
|
Fed funds sold,
money market funds, and time
|
|
|
|
|
|
|
deposits with other banks
|
2
|
---
|
0.00%
|
52
|
---
|
0.00%
|
|
|
|
|
|
|
|
Total Earning Assets
|
1,100,124
|
13,057
|
4.81%
|
1,027,695
|
13,370
|
5.28%
|
|
|
|
|
|
|
|
Non-Interest
Earning Assets:
|
|
|
|
|
|
|
Cash and due
from banks
|
6,869
|
|
|
5,886
|
|
|
Allowance for
loan losses
|
(8,851)
|
|
|
(8,157)
|
|
|
Other assets
(2)
|
36,449
|
|
|
39,145
|
|
|
Total Assets
|
$1,134,591
|
|
|
$1,064,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Bearing Liabilities:
|
|
|
|
|
|
|
Deposits
|
$
660,577
|
$ 2,214
|
1.36%
|
$ 611,445
|
$ 2,478
|
1.64%
|
Borrowings
|
307,239
|
2,130
|
2.81%
|
286,558
|
2,418
|
3.42%
|
Total Interest Bearing Liabilities
|
967,816
|
4,344
|
1.82%
|
898,003
|
4,896
|
2.21%
|
Rate Spread
|
|
|
2.99%
|
|
|
3.07%
|
|
|
|
|
|
|
|
Non-Interest
Bearing Liabilities:
|
|
|
|
|
|
|
Demand and
other non-interest bearing deposits
|
57,237
|
|
|
51,124
|
|
|
Other
liabilities
|
5,087
|
|
|
5,317
|
|
|
Total Liabilities
|
1,030,140
|
|
|
954,444
|
|
|
Shareholders'
equity
|
104,451
|
|
|
110,125
|
|
|
Total
Liabilities and Shareholders' Equity
|
$1,134,591
|
|
|
$1,064,569
|
|
|
Net interest
income and net interest margin (3)
|
|
8,713
|
3.21%
|
|
8,474
|
3.34%
|
Less: Tax
Equivalent adjustment
|
|
(379)
|
|
|
(416)
|
|
Net Interest Income
|
|
$ 8,334
|
3.07%
|
|
$ 8,058
|
3.18%
|
(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, net interest income and net
interest margin are 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.
For the three months ended March 31, 2011, the tax equivalent net
interest margin amounted to 3.21%, compared with 3.34% in the first quarter of 2010,
representing a decline of 13 basis points. The decline in the net interest margin from the
first quarter of 2010 was largely attributed to weighted average earning asset yields,
which declined 47 basis points, whereas the weighted average cost of interest bearing
liabilities declined only 39 basis points.
A variety of factors contributed to the weighted average earning asset
yield decline since the first quarter of 2010, including the replacement of accelerated
cash flows from the Banks mortgage-backed securities portfolio during a period of
historically low interest rates. The decline in the weighted average earning asset yield
was 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 cash flows from the Banks residential mortgage loan portfolio, also
contributed to the earning asset yield decline.
The first quarter net interest margin decline compared with the first
quarter of 2010 was also impacted by a continuing 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 March 31, 2011, 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.
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 further enumerated in the following discussion and analysis.
NET INTEREST MARGIN ANALYSIS
FOR QUARTER ENDED
WEIGHTED
AVERAGE RATES
|
2011
|
|
2010
|
|
2009
|
Quarter:
|
1
|
|
4
|
3
|
2
|
1
|
|
4
|
3
|
2
|
Interest
Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
Loans (1,3)
|
4.93%
|
|
5.00%
|
5.14%
|
5.20%
|
5.22%
|
|
5.16%
|
5.27%
|
5.35%
|
Securities
(2,3)
|
4.79%
|
|
4.73%
|
5.04%
|
4.93%
|
5.64%
|
|
5.70%
|
5.90%
|
6.14%
|
Federal Home
Loan Bank stock
|
0.30%
|
|
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%
|
|
0.00%
|
0.27%
|
0.00%
|
0.00%
|
|
0.00%
|
1.33%
|
0.00%
|
Total Earning Assets
|
4.81%
|
|
4.83%
|
5.01%
|
5.03%
|
5.28%
|
|
5.26%
|
5.40%
|
5.55%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Demand and
other
non-interest bearing deposits
|
1.36%
|
|
1.50%
|
1.56%
|
1.57%
|
1.64%
|
|
1.73%
|
1.79%
|
1.84%
|
Borrowings
|
2.81%
|
|
3.22%
|
3.39%
|
3.24%
|
3.42%
|
|
3.34%
|
3.19%
|
2.90%
|
Total Interest Bearing Liabilities
|
1.82%
|
|
2.03%
|
2.13%
|
2.10%
|
2.21%
|
|
2.27%
|
2.29%
|
2.24%
|
|
|
|
|
|
|
|
|
|
|
|
Rate Spread
|
2.99%
|
|
2.80%
|
2.88%
|
2.93%
|
3.07%
|
|
2.99%
|
3.11%
|
3.31%
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest
Margin (3)
|
3.21%
|
|
3.06%
|
3.15%
|
3.17%
|
3.34%
|
|
3.27%
|
3.38%
|
3.54%
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest
Margin without
Tax Equivalent Adjustments
|
3.07%
|
|
2.92%
|
3.00%
|
3.01%
|
3.18%
|
|
3.10%
|
3.23%
|
3.39%
|
(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, net interest income and net
interest margin are reported on a tax equivalent basis.
The weighted average cost of interest bearing liabilities amounted to
1.82% in the first quarter of 2011, compared with 2.21% in the first quarter of 2010,
representing a decline of 39 basis points and largely reflecting the gathering and or
re-pricing of certain deposits and borrowings in a historically low interest rate
environment. The weighted average yield on average earning assets amounted to 4.81% in the
first quarter of 2011, compared with 5.28% in the first quarter of 2010, representing a
decline of 47 basis points and attributed to reasons discussed immediately above. In
summary, since the first quarter of 2010 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 8 basis points.
Should interest rates continue at current levels, Company management
anticipates the net interest margin will remain relatively stable in 2011, as assets and
liabilities are generally expected to re-price or be replaced proportionally into the
current low interest rate environment.
The Banks interest rate sensitivity position is more fully
described below in Part I, Item 3 of this report on Form 10-Q,
Quantitative and
Qualitative Disclosures About Market Risk.
Interest and Dividend Income:
For the three months ended March
31, 2011, total interest and dividend income on a tax-equivalent basis amounted to
$13,057, compared with $13,370 in the first quarter of 2010, representing a decline of
$313, or 2.3%. The decline in interest and dividend income was principally attributed to a
47 basis point decline in the weighted average earning asset yield, largely offset by
average earning asset growth of $72,429, or 7.0%.
For the quarter ended March 31, 2011, interest income from the
securities portfolio amounted to $4,529, representing a decline of $227, or 4.8%, compared
with the first quarter of 2010. The decline in interest income from securities was
principally attributed to an 85 basis point decline in the weighted average yield, largely
offset by average securities portfolio growth of $41,094, or 12.0%. The decline in
securities income from the first quarter of 2010 was largely attributed to the ongoing
replacement of accelerated portfolio cash flows in a historically low interest rate
environment, combined with incremental securities purchases at low prevailing market
yields. Accelerated cash flows were principally attributed to increased securitized loan
refinancing activity and defaults, as well as the previously reported cash flow impact of
the Fannie Mae and Freddie Mac securitized loan buyouts. These cumulative buyouts of
seriously delinquent loans were completed during the second quarter of 2010.
For the quarter ended March 31, 2011, interest income from the loan
portfolio amounted to $8,516, representing a decline of $98, or 1.1%, compared with the
first quarter of 2010. While the average loan portfolio increased $31,385 or 4.7%, the
impact of this increase was more than offset by a 29 basis point decline in the weighted
average yield on the loan portfolio.
As depicted on the rate/volume analysis table below, comparing the
three months ended March 31, 2011 with the same quarter in 2010, the impact of the lower
weighted average earning asset yield contributed $1,246 to the decline in total
tax-equivalent interest income, largely offset by a $933 increase attributed to the
increased volume of total average earning assets.
Interest Expense:
For the three months ended March 31, 2011,
total interest expense amounted to $4,344, compared with $4,896 in the first quarter of
2010, representing a decline of $552, or 11.3%. The decline in interest expense was
principally attributed to a 39 basis point decline in the weighted average cost of
interest bearing liabilities, the impact of which was partially offset by a $69,813 or
7.8% increase in total average interest bearing liabilities, compared with the first
quarter of 2010. The 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.
For the three months ended March 31, 2011, the total weighted average
cost of interest bearing liabilities amounted to 1.82%, compared with 2.21% for the same
quarter in 2010, representing a decline of 39 basis points. The weighted average cost of
interest bearing deposits declined 28 basis points to 1.36%, compared with the first
quarter of 2010, while the weighted average cost of borrowed funds declined 61 basis
points to 2.81%.
As depicted on the rate/volume analysis table below, comparing the
three months ended March 31, 2011 with the same quarter in 2010, the impact of the lower
weighted average rate paid on interest bearing liabilities contributed $926 to the decline
in interest expense, while the impact of the increased volume of average interest bearing
liabilities contributed $374.
ANALYSIS OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME
THREE MONTHS ENDED MARCH 31, 2011 VERSUS MARCH 31, 2010
INCREASES (DECREASES) DUE TO:
|
Average
Volume
|
Average
Rate
|
Total
Change
|
|
|
|
|
Loans (1,3)
|
$ 405
|
$ (503)
|
$ (98)
|
Securities
(2,3)
|
528
|
(755)
|
(227)
|
Investment in
Federal Home Loan Bank stock
|
---
|
12
|
12
|
|
|
|
|
TOTAL
EARNING ASSETS
|
$ 933
|
$(1,246)
|
$(313)
|
|
|
|
|
Interest
bearing deposits
|
199
|
(463)
|
(264)
|
Borrowings
|
175
|
(463)
|
(288)
|
TOTAL
INTEREST BEARING LIABILITIES
|
$ 374
|
$ (926)
|
$(552)
|
|
|
|
|
NET CHANGE
IN NET INTEREST INCOME
|
$ 559
|
$ (320)
|
$ 239
|
(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, net interest income and net interest margin
are reported on a tax equivalent basis.
Provision for Loan Losses
The provision for loan losses (the "provision") reflects the
amount necessary to maintain the allowance for loan losses at a level that, in
managements judgment, is appropriate for the amount of inherent risk of probable
loss in the Banks current loan portfolio.
The credit quality of the Banks loan portfolio remained
relatively stable during the first quarter. First quarter loan loss experience was very
low, with recoveries on previously charged off loans actually exceeding loans charged off
by $93. And, while still at elevated levels, the Banks non-performing loans were
down slightly from December 31, 2010.
For the three months ended March 31, 2011, the provision for loan
losses amounted to $500, unchanged compared with the first quarter of 2010. The first
quarter 2011 provision continued to be higher than historical experience, largely
reflecting significant first quarter loan growth and continued elevated levels of
non-performing and potential problem loans, and an increase in delinquent loans as of
quarter-end.
Refer below to Item 2 of this Part I, Financial Condition, Loans,
Non-Performing
Loans, Potential Problem Loans
and
Allowance for Loan Losses,
in this report on
Form 10-Q
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.
For the three months ended March 31, 2011, total non-interest income
amounted to $1,732, compared with $1,910 for the same quarter in 2010, representing a
decline of $178 or 9.3%.
The more significant factors contributing to the changes in
non-interest income are enumerated in the following discussion and analysis:
Trust and Other Financial Services:
Income from trust and other
financial services is principally derived from fee income based on a percentage of the
market value of client assets under management and held in custody and, to a lesser
extent, revenue from brokerage services conducted through Bar Harbor Financial Services,
an independent third-party broker.
For the three months ended March 31, 2011, income from trust and other
financial services amounted to $779, compared with $640 for the same quarter in 2010,
representing an increase of $139, or 21.7%. The increase in fee income from trust and
financial services was largely attributed to increases in the market values of assets
under management, new client relationships, as well as increased brokerage activity.
Reflecting additional new business and further recovery in the equity
markets, quarter-end assets under management stood at $321,334, representing an increase
of $44,741 or 16.2% compared with March 31, 2010.
Service Charges on Deposits:
This income is principally derived
from deposit account overdraft fees and, to a lesser extent, monthly deposit account
maintenance and activity fees, and a variety of other deposit account related service
charges.
For the three months ended March 31, 2011, income from service charges
on deposit accounts amounted to $289, compared with $314 for the same quarter in 2010,
representing a decline of $25 or 8.0%. 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.
Mortgage Banking Activities:
This income is principally derived
from gains on sales of residential mortgage loans into the secondary market and ongoing
retained mortgage loan servicing fees.
For the three months ended March 31, 2011, income from mortgage banking
activities amounted to $21, compared with $25 in the first quarter of 2010. During the
first quarter of 2011 and 2010 substantially all residential mortgage loan originations
were held in the Banks loan portfolio. Managements decision to hold
residential mortgage loan originations in the loan portfolio in part reflects a relative
scarcity of alternative earning assets of comparable quality and yield, and the fact that
these loans could be funded with long-term interest bearing liabilities at historically
low interest rates.
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.
For the three months ended March 31, 2011, credit and debit card
service charges and fees amounted to $288, compared with $252 in the first quarter of
2010, representing an increase of $36, or 14.3%.
The increases in credit and debit card service charges and fees were
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.
In July 2010, Congress enacted regulatory reform legislation known 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. 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.
Net Securities Gains:
For the three months ended March 31,
2011, total net securities gains amounted to $785, compared with $852 in the first quarter
of 2010, representing a decline of $67, or 7.9%. The total securities gains recorded in
the first quarter of 2011 and 2010 were comprised entirely of realized gains on the sale
of securities.
Net Other-than-temporary Impairment Losses Recognized in Earnings:
During
the first quarter of 2011 the Company determined that certain available-for-sale
securities were other-than-temporarily impaired ("OTTI") because the Company
could no longer conclude that it was probable it would recover all of its amortized cost
and interest on these securities.
For the three months ended March 31, 2011, net OTTI losses recognized
in earnings amounted to $565, compared with $298 in the first quarter of 2010,
representing an increase of $267, or 89.6%. The $565 charge resulted from an increase in
projected losses on the collateral underlying certain private-label mortgage-backed
securities. The OTTI losses recorded in the first quarter of 2011 related to seven,
available for sale, private-label MBS, all of which the Company had previously determined
to be other-than-temporarily impaired. In all cases the OTTI losses represented
managements best estimate of additional credit losses on the mortgage loan
collateral underlying these securities. The $565 in estimated credit losses, net of taxes,
were previously recorded 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.
The increase in credit losses attributable to OTTI, compared with the
first quarter of 2010, principally reflected an increase in the loss severity assumptions
resulting from declining real estate values and extended foreclosure timelines that affect
the expected performance of the mortgage loans underlying the Banks private-label
mortgage-backed securities.
Further information regarding impaired securities,
other-than-temporarily impaired securities, and evaluation of securities for impairment is
incorporated by reference to Notes 2 and 4 of the consolidated financial statements in
Part I, Item 1 of this quarterly report on Form 10-Q.
Non-interest Expense
For the three months ended March 31, 2011, total non-interest expense
amounted to $5,535, compared with $5,205 in the first quarter of 2010, representing an
increase of $330, or 6.3%.
The more significant factors contributing to the changes in
non-interest expense are enumerated in the following discussion and analysis.
Salaries and Employee Benefit Expenses:
For the three months
ended March 31, 2011, total salaries and employee benefits expense amounted to $3,108,
compared with $2,943 for the same quarter in 2010, representing an increase of $165, or
5.6%. The increase in salaries and employee benefits expense was principally attributed to
normal increases in base salaries, as well as changes in staffing levels and mix.
Occupancy Expenses:
For the three months ended March 31, 2011,
total occupancy expenses amounted to $431, compared with $372 for the same quarter in
2010, representing an increase of $59, or 15.9%. The increase in occupancy expense was
largely attributed to higher utilities and grounds keeping costs in the first quarter
compared with the first quarter of 2010.
Furniture and Equipment Expenses:
For the three months ended
March 31, 2011, furniture and equipment expenses amounted to $418, compared with $352 in
the first quarter of 2010, representing an increase of $66, or 18.8%. The increase in
furniture and equipment expenses was principally attributed to higher levels of
depreciation expense and maintenance contract expenses, which were related to a variety of
technology upgrades and new technology systems and applications.
FDIC Insurance Assessments:
For the three months ended March
31, 2011, FDIC insurance assessments amounted to $264, unchanged compared with the first
quarter of 2010.
Pursuant to the Dodd-Frank Act which was enacted in July 2010, 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 March 31, 2011, payment.
Income Taxes
For the three months ended March 31, 2011, total income taxes amounted
to $1,162, compared with $1,212 in the first quarter of 2010, representing a decline of
$50, or 4.1%.
The Company's effective tax rate for the three months ended March 31,
2011 amounted to 28.8%, compared with 28.4% for the first quarter of 2010. 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 interest income on 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.
FINANCIAL CONDITION
Total Assets
The Companys assets principally consist of loans and securities,
which at March 31, 2011 represented 62.6% and 32.7% of total assets, compared with 62.7%
and 32.0% at December 31, 2010, respectively.
At March 31, 2011, the Companys total assets amounted to
$1,162,484, compared with $1,117,933 at December 31, 2010, representing an increase of
$44,551, or 4.0%.
Securities
The securities portfolio is comprised of Mortgage-backed securities
("MBS") issued by U.S. government agencies, U.S. government sponsored
enterprises, and other non-agency, private label issuers. The portfolio also includes
tax-exempt obligations of state and political subdivisions, and debt obligations of other
U.S. government sponsored enterprises. At March 31, 2011, the securities portfolio did not
contain any pools of sub-prime MBS, collateralized debt obligations or commercial MBS.
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
FHLMC or FNMA, or any interests in pooled trust preferred securities or auction rate
securities.
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 compared with the Banks
other earning assets 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 represented 34.8% of the Companys
average earning assets during the three months ended March 31, 2011 and generated 34.7% of
total tax equivalent interest and dividend income, compared with 33.3% and 35.6% for the
same quarter in 2010, respectively.
Securities available for sale represented 100% of total securities at
March 31, 2011, and December 31, 2010. Securities 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. At March 31, 2011, total net
unrealized securities losses amounted to $803, compared with net unrealized gains of $515
at December 31, 2010.
Total Securities:
At March 31, 2011, total securities amounted
to $379,585, compared with $357,882 at December 31, 2010, representing an increase of
$21,703, or 6.1%. Securities purchased during the first quarter of 2011 consisted of
mortgage-backed securities issued and guaranteed by U.S. Government agencies and
sponsored-enterprises.
The following tables summarize the securities available for sale
portfolio as of March 31, 2011 and December 31, 2010:
March
31, 2011
|
|
Gross
|
Gross
|
|
|
Amortized
|
Unrealized
|
Unrealized
|
Estimated
|
Available
for Sale:
|
Cost
|
Gains
|
Losses
|
Fair Value
|
|
|
|
|
|
Obligations
of US Government
sponsored enterprises
|
$ 1,000
|
$ 28
|
$ ---
|
$ 1,028
|
Mortgage-backed
securities:
|
|
|
|
|
US Government-sponsored enterprises
|
237,461
|
6,280
|
989
|
242,752
|
US Government agency
|
61,575
|
1,300
|
329
|
62,546
|
Private label
|
19,644
|
568
|
2,449
|
17,763
|
Obligations
of states and
political subdivisions thereof
|
60,708
|
650
|
5,862
|
55,496
|
Total
|
$380,388
|
$8,826
|
$9,629
|
$379,585
|
|
|
|
|
|
|
|
|
|
|
December
31, 2010
|
|
Gross
|
Gross
|
|
|
Amortized
|
Unrealized
|
Unrealized
|
Estimated
|
Available
for Sale:
|
Cost
|
Gains
|
Losses
|
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
|
Impaired Securities:
The securities portfolio contains certain
securities where amortized cost exceeds fair value, which at March 31, 2011, amounted to
an excess of $9,629, or 2.5% of the amortized cost of the total securities portfolio. At
December 31, 2010 this amount represented an excess of $9,185, or 2.6% of the total
securities portfolio. As of March 31, 2011, unrealized losses on securities in a
continuous unrealized loss position more than twelve-months amounted to $6,466, compared
with $6,618 at December 31, 2010.
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. If a decline in the fair value of an available for sale
security is judged to be other-than-temporary, a charge is recorded in pre-tax earnings
equal to the estimated credit losses inherent in the security.
Further information regarding impaired securities,
other-than-temporarily impaired securities and evaluation of securities for impairment is
incorporated by reference to above Notes 2 and 4 of the interim consolidated financial
statements in Part I, Item 1 of this report on Form 10-Q.
Federal Home Loan Bank Stock
The Bank is a member of the Federal Home Loan Bank of Boston (the
"FHLB"). The FHLB 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, 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 for most
of its wholesale funding needs.
At March 31, 2011, the Banks investment in FHLB stock totaled
$16,068, unchanged compared with December 31, 2010.
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 and the first quarter of 2011. 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 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
throughout 2010. Following five consecutive quarters of profitability, the FHLBs
board of directors declared first and second quarter 2011 cash dividends equal to an
annual yield of 0.30% and 0.31%, respectively, based on the average stock outstanding. 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 and its overall
financial condition. The FHLB recently reported that it remained in compliance with all
regulatory capital ratios as of March 31, 2011, and, in the most recent information
available, was classified "adequately capitalized" by its regulator, the Federal
Housing Finance Agency. The FHLB also reported a total regulatory capital-to-asset ratio
of 7.2% at March 31, 2011, exceeding the regulatory minimum requirement of 4.0%, and its
permanent capital was $4.0 billion, exceeding its $1.2 billion 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,
liquidity position and return to profitability of the FHLB, management believes there is
no impairment related to the carrying amount of the Banks FHLB stock as of March 31,
2011. The Bank will continue to monitor its investment in FHLB stock.
Loans
Total Loans:
At March 31, 2011, total loans stood at $727,658,
compared with $700,670 at December 31, 2010, representing an increase of $26,988, or 3.9%.
The loan portfolio is primarily secured by real estate in the counties
of Hancock, Washington and Knox, Maine. The following table summarizes the components of
the Bank's loan portfolio as of the dates indicated.
LOAN PORTFOLIO SUMMARY
|
March 31,
2011
|
December 31,
2010
|
|
|
|
Commercial real
estate mortgages
|
$257,981
|
$260,357
|
Commercial and
industrial
|
86,883
|
80,765
|
Commercial
construction and land development
|
31,702
|
32,114
|
Agricultural
and other loans to farmers
|
24,243
|
24,359
|
Total commercial loans
|
400,809
|
397,595
|
|
|
|
Residential
real estate mortgages
|
230,501
|
231,434
|
Home equity
loans
|
54,216
|
54,289
|
Consumer loans
|
28,408
|
4,417
|
Total consumer loans
|
313,125
|
290,140
|
|
|
|
Tax exempt
loans
|
12,956
|
12,126
|
|
|
|
Deferred
origination costs(fees), net
|
768
|
809
|
Total loans
|
727,658
|
700,670
|
Allowance for
loan losses
|
(9,093)
|
(8,500)
|
Total loans net
of allowance for loan losses
|
$718,565
|
$692,170
|
Commercial Loans:
At March 31, 2011, total commercial loans
amounted to $400,809, compared with $397,595 at December 31, 2010, representing an
increase of $3,214, or 0.8%. Commercial loan growth has been challenged by a troubled
economy, declining loan demand, and strong competition for quality loans. Bank management
attributes the continued 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.
At March 31, 2011, commercial loans represented 55.1% of the
Banks total loan portfolio, compared with 56.7% at December 31, 2010.
Consumer Loans:
At March 31, 2011, total consumer loans, which
principally consisted of residential real estate mortgage loans, amounted to $313,125,
compared with $290,140 at December 31, 2010, representing an increase of $22,985, or 7.9%.
The first quarter increase in consumer loans was attributed to the
end-of-quarter purchase of a Maine-based, seasoned portfolio of prime consumer loans
amounting to $23,522. The underlying collateral supporting these consumer loans consists
of recreational vehicles
and vessels (i.e. pleasure boats), and none of the loans
purchased had any history of delinquency. Based on the weighted average note rate of this
portfolio, the purchase premium paid, and the approximate weighted average life of 3.5
years, the Bank anticipates this portfolio will generate an earning asset yield of
approximately 6.60%.
At March 31, 2011, the Banks residential mortgage loan portfolio
totaled $230,501, compared with $231,434 at December 31, 2010, representing a decline of
$933, or 0.4%. Residential mortgage loan origination activity continued at a slow pace
during the first quarter of 2011, largely reflecting current economic conditions and
uncertainties with respect to further real estate declines in the communities served by
the Bank. During the first quarter of 2011, loans originated and closed by the Bank were
essentially offset by cash flows and principal pay-downs from the existing residential
real estate loan portfolio.
Tax Exempt Loans:
At March 31, 2011, tax exempt loans, amounted
to $12,956, compared with $12,126 at December 31, 2010, representing an increase of $830,
or 6.8%.
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).
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.
Subprime Mortgage Lending:
Subprime mortgage lending, which has
been the riskiest sector of the residential housing market, is not a market that Bank
management has ever actively pursued. In general, the industry does not apply a uniform
definition of what actually constitutes "subprime" lending. In referencing
subprime lending activities, Bank management relies upon several sources, including
Maines predatory lending law enacted January 1, 2008, and the "statement of
subprime mortgage lending" issued by the federal bank regulatory agencies (the
"agencies") on June 29, 2007, which further references the expanded guidance for
subprime lending programs (the "expanded guidance"), issued by the agencies by
press release dated January 31, 2001.
In the expanded guidance, the agencies indicated that subprime lending
does not refer to individual subprime 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 subprime arena. According to the expanded guidance, subprime 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 subprime borrowers and may not match all markets or
institutions specific subprime 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 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 amply collateralized and documented, and otherwise conformed to the
Banks prime lending standards.
Credit Risk:
Credit risk is managed through loan officer
authorities, loan policies, and oversight from the Banks Senior Credit Officer, the
Bank's Senior Loan Officers Committee, the Director's Loan Committee, and the Bank's Board
of Directors. Management follows a policy of continually identifying, analyzing and
grading credit risk inherent in the loan portfolio. An ongoing independent review,
subsequent to management's review, of individual credits is performed by an independent
loan review consulting firm, which reports to the Audit Committee of the Board of
Directors.
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. During the first quarter of 2011,
there were no troubled debt restructurings in the loan portfolio. The following table sets
forth the details of non-performing loans as of the dates indicated:
TOTAL NON-PERFORMING LOANS
|
March 31,
|
December 31,
|
|
2011
|
2010
|
|
|
|
Commercial real
estate mortgages
|
$ 3,433
|
$3
,
572
|
Commercial
construction and land development
|
5,893
|
5,899
|
Commercial and
industrial loans
|
959
|
778
|
Agricultural
and other loans to farmers
|
235
|
254
|
Total commercial loans
|
10,520
|
10,503
|
|
|
|
Residential
real estate mortgages
|
2,933
|
3,022
|
Home equity
loans
|
134
|
146
|
Consumer loans
|
19
|
---
|
Total consumer loans
|
3,086
|
3,168
|
|
|
|
Total non-accrual loans
|
13,606
|
13,671
|
Accruing loans
contractually past due 90 days or more
|
---
|
6
|
Total non-performing loans
|
$13,606
|
$13,677
|
|
|
|
Allowance for
loan losses to non-performing loans
|
67%
|
62%
|
Non-performing
loans to total loans
|
1.87%
|
1.95%
|
Allowance to
total loans
|
1.25%
|
1.21%
|
At March 31, 2011, total non-performing loans amounted to $13,606,
compared with $13,677 at December 31, 2010, representing a decline of $71, or 0.5%.
One commercial real estate loan to a local, non-profit housing
authority in support of an affordable housing project accounted for $5,235, or 38.5% of
total non-performing loans at March 31, 2011. This loan is principally secured by the
housing units from the project and there are no guarantees associated with this loan. The
project is fully constructed and there is no further construction risk. The primary source
of repayment is the sale of the housing units, as well as the sale of certain
affordability covenants associated with the project. Sales of both the housing units and
the affordability covenants have continued over the past fifteen months and are expected
to continue in the future. This loan is impaired and was put on non-accrual status in
2010. Based on an analysis of the present value of expected future cash flows, the Bank
has in place a specific loss allocation of $850 for this loan as of March 31, 2011.
Non-performing commercial real estate mortgages amounted to $3,433 at
March 31, 2011, representing a decrease of $139, or 3.9%, compared with December 31, 2010.
At March 31, 2011, non-performing commercial real estate mortgages were represented by
eleven business relationships, with outstanding balances ranging from $51 to $879.
Non-performing residential real estate mortgages totaled $2,933 at
March 31, 2011, compared with $3,022 at December 31, 2010, representing a decline of $89,
or 2.9%. At March 31, 2011, non-performing residential real estate loans were represented
by 35, conventional, 1-4 family mortgage loans, with outstanding balances ranging from $6
to $448.
While the level and mix of non-performing loans continued to reflect
favorably on the overall quality of the Banks loan portfolio at March 31, 2011, 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 $6,019 and $3,749 at March 31, 2011 and December 31,
2010, or 0.82% and 0.54% 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 March 31, 2011, the Bank identified twenty-one commercial
relationships totaling $5,517 as potential problem loans, or 0.76% of total loans. At
December 31, 2010, the Bank identified eighteen commercial relationships totaling $4,886
as potential problem loans, or 0.70% 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
quarter-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 March 31, 2011, the allowance for
loan losses (the "allowance") stood at $9,093, compared with $8,500 at December
31, 2010, representing an increase of $593, or 7.0%. At March 31, 2011, the allowance
expressed as a percentage of total loans stood at 1.25%, up from 1.21% at December 31,
2010. The increase in the allowance was largely attributed to significant loan growth
during the first quarter, including the purchase of a $23,522 consumer loan portfolio. The
increase in the allowance was also attributed to continued elevated levels of
non-performing and potential problem loans, and an increase in delinquent loans at
quarter-end.
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 net 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 dependent impaired loans totaled $3,815 as of March 31, 2011,
compared with $3,294 as of December 31, 2010. The related allowances for loan losses on
these loans amounted to $513 as of March 31, 2011, compared with $513 as of December 31,
2010.
Management recognizes that early and accurate recognition of risk is
the best means to reduce credit losses. The Bank employs a comprehensive risk management
structure to identify and manage the risk of loss. For consumer loans, the Bank identifies
loan delinquency beginning at 10-day delinquency and provides appropriate follow-up by
written correspondence or personal contact. Non-residential mortgage consumer loan losses
are recognized no later than the point at which a loan is 120 days past due. Residential
mortgage losses are recognized during the foreclosure process, or sooner, when that loss
is quantifiable and reasonably assured. For commercial loans, the Bank applies a risk
grading system, which stratifies the portfolio and allows management to focus appropriate
efforts on the highest risk components of the portfolio. The risk grades include ratings
that correlates substantially with regulatory definitions of "Pass," "Other
Assets Especially Mentioned," "Substandard," "Doubtful," and
"Loss."
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 and summarizes
loan loss experience by loan type for the three-month periods ended March 31, 2011 and
2010.
ALLOWANCE FOR LOAN LOSSES
THREE MONTHS ENDED
MARCH 31, 2011 AND 2010
|
2011
|
2010
|
|
|
|
Balance at
beginning of period
|
$ 8,500
|
$ 7,814
|
Charge offs:
|
|
|
Commercial real
estate mortgages
|
---
|
5
|
Commercial and
industrial
|
5
|
27
|
Commercial
construction and land development
|
---
|
167
|
Agricultural
and other loans to farmers
|
---
|
---
|
Residential
real estate mortgages
|
18
|
---
|
Consumer loans
|
7
|
17
|
Residential
construction and land development
|
---
|
---
|
Home equity
loans
|
---
|
60
|
Tax exempt
loans
|
---
|
---
|
Total charge-offs
|
30
|
276
|
|
|
|
Recoveries:
|
|
|
Commercial real
estate mortgages
|
1
|
---
|
Commercial and
industrial loans
|
76
|
---
|
Commercial
construction and land development
|
---
|
---
|
Agricultural
and other loans to farmers
|
34
|
---
|
Residential
real estate mortgages
|
---
|
78
|
Consumer loans
|
12
|
10
|
Residential
construction and land development
|
---
|
---
|
Home equity
loans
|
---
|
40
|
Tax exempt
loans
|
---
|
---
|
Total recoveries
|
123
|
128
|
|
---
|
|
Net
(recoveries) charge-offs
|
(93)
|
148
|
Provision
charged to operations
|
500
|
500
|
|
|
|
Balance at end
of period
|
$ 9,093
|
$ 8,166
|
|
|
|
Average loans
outstanding during period
|
$700,987
|
$669,602
|
|
|
|
Annualized net
(recoveries) charge-offs to average loans outstanding
|
(0.05%)
|
0.09%
|
The Banks loan loss experience was very low during three months
ended March 31, 2011, with recoveries on previously charged off loans exceeding total
loans charged off by $93, or 0.05% of average loans outstanding. Total loans charged off
during the quarter amounted to $30. In the first quarter of 2010, total net charge-offs
amounted to $148, or 0.09% of average loans outstanding.
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 the first
quarter of 2011.
Based upon the process employed and giving recognition to all attendant
factors associated with the loan portfolio, Company management believes the allowance for
loan losses at March 31, 2011, is appropriate for the amount of risk inherent in the
current loan portfolio and adequate to provide for estimated probable losses.
Further information regarding loans and the allowance for loan losses,
is incorporated by reference to above Notes 5, Loans and Allowance for Loan Losses, of the
interim consolidated financial statements in Part I, Item 1 of this report on Form 10-Q.
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 March 31, 2011, the Banks OREO totaled $840 compared with $656
at December 31, 2010. Three residential and two commercial proprieties comprised the March
31, 2011 balance of OREO.
Deposits
During the three months ended March 31, 2011, the most significant
funding source for the Banks earning assets continued to be retail deposits,
gathered through its network of twelve banking offices throughout downeast and midcoast
Maine.
Historically, the banking business in the Banks market area has
been seasonal, with lower deposits in the winter and spring and higher deposits in 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 of Boston, brokered certificates of deposit obtained from the national market and
cash flows from the securities portfolio.
At March 31, 2011, total deposits stood at $704,543, compared with
$708,328 at December 31, 2010, representing a decline of $3,785, or 0.5%.
Principally reflecting the seasonality of the Banks deposit base,
demand deposits and NOW accounts declined $5,755 and $7,889, or 9.5% in each category,
compared with December 31, 2010, respectively. The foregoing declines were largely offset
by increases in savings and money market accounts and time deposits, which were up $2,457
and $7,402, or 1.2% and 2.1%, respectively.
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 March 31, 2011, the weighted average cost of time deposits was 2.03% compared with
2.07% at December 31, 2010. Given the current, historically low interest rate environment
and continuing time deposit maturities, Company management anticipates that the weighted
average cost of time deposits will continue to show declines for the balance of 2011.
Borrowed Funds
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 fund purchased and borrowings from the Federal Reserve Bank of Boston.
Advances from the FHLB are secured by stock in the FHLB, investment securities, blanket
liens on qualifying mortgage loans and home equity loans, and certain commercial real
estate loans. Borrowings from the Federal Reserve Bank of Boston are principally secured
by municipal securities and liens on certain commercial real-estate loans.
The Bank utilizes borrowed funds in leveraging its strong capital
position and supporting its earning asset portfolios. Borrowed funds are principally
utilized to support the 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.
At March 31, 2011, total borrowings amounted to $347,500, compared with
$300,014 at December 31, 2010, representing an increase of $47,486, or 15.8%, compared
with December 31, 2010. The increase in total borrowings was principally used to fund
significant first quarter earning asset growth and, to a lesser extent, fund seasonal
deposit outflows.
At March 31, 2011, total borrowings expressed as a percent of total
assets amounted to 29.9%, compared with 26.8% December 31, 2010.
Capital Resources
Consistent with its long-term goal of operating a sound and profitable
organization, at March 31, 2011, 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 March 31, 2011, 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 March 31, 2011 the Companys Total Risk-based, Tier I Risk-based,
and Tier I Leverage ratios were 15.25%, 13.39% and 9.03%, respectively.
The following tables set forth the Company's and the Banks
regulatory capital at March 31, 2011 and December 31, 2010, 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 March
31, 2011
|
|
|
|
|
|
|
Total Capital
|
|
|
|
|
|
|
(To Risk-Weighted Assets)
|
|
|
|
|
|
|
Consolidated
|
$116,353
|
15.25%
|
$61,043
|
8.0%
|
N/A
|
|
Bank
|
$116,495
|
15.28%
|
$60,977
|
8.0%
|
$76,221
|
10.0%
|
Tier 1 Capital
|
|
|
|
|
|
|
(To Risk-Weighted Assets)
|
|
|
|
|
|
|
Consolidated
|
$102,185
|
13.39%
|
$30,522
|
4.0%
|
N/A
|
|
Bank
|
$102,327
|
13.43%
|
$30,488
|
4.0%
|
$45,732
|
6.0%
|
Tier 1 Capital
|
|
|
|
|
|
|
(To Average Assets)
|
|
|
|
|
|
|
Consolidated
|
$102,185
|
9.03%
|
$45,250
|
4.0%
|
N/A
|
|
Bank
|
$102,327
|
9.05%
|
$45,216
|
4.0%
|
$56,520
|
5.0%
|
|
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, 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%
|
Series A Fixed Rate Cumulative Perpetual Preferred Stock and Warrant:
As previously reported, on February 24, 2010 the Company redeemed all 18,751 shares of
its Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the "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 ("CPP") established by
the Treasury under the Emergency Economic Stabilization Act of 2008. 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. In the fourth quarter of 2009, the warrant (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 with an exercise
price of $26.81 per share. As previously announced, on July 28, 2010 the Company
repurchased the Warrant 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 Treasury
under the 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 estimated 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 Preferred Stock sold to the U.S. Department of the Treasury.
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.
Cash Dividends:
The Company's principal source of funds to pay
cash dividends and support its commitments is derived from Bank operations.
The Company paid regular cash dividends of $0.27 per share of common
stock in the first quarter of 2011, representing an increase of $0.01 or 3.8% compared
with the dividend paid for the same quarter in 2010. The Companys Board of Directors
recently declared a second quarter 2011 regular cash dividend of $0.27 per share of common
stock, representing an increase of $0.01 or 3.8% compared with the second quarter of 2010.
The dividend will be paid June 15, 2011 to shareholders of record as of the close of
business on May 18, 2011.
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 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 March 31, 2011, 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,
though there were no shares repurchased under the plan during the quarter ending March 31,
2011. The Company recorded the repurchased shares as treasury stock.
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 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 general policy is to maintain a liquidity position of at least 4.0% of total
assets. At March 31, 2011, liquidity, as measured by the basic surplus/deficit model, was
5.0% over the 30-day horizon and 3.9% over the 90-day horizon.
At March 31, 2011, the Bank had unused lines of credit and net
unencumbered qualifying collateral availability to support its credit line with the FHLB
of Boston approximating $100 million. 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 March 31, 2011 the Banks available secured line of credit
at the Federal Reserve Bank of Boston stood at $167,436, or 14.4% of the Companys
total assets. The Bank also has access to the national brokered deposit market, and has
been using this funding source to bolster its on-balance sheet 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. The Company 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.
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 effects 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.
Recent Accounting Developments
The following information addresses new or proposed accounting
standards that could have an impact on the Companys financial condition or results
of operations.
Accounting Standards Update ("ASU") No. 2010-20,
"Receivables (Topic 310) - Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses."
ASU 2010-20 requires
entities to provide disclosures designed to facilitate financial statement users
evaluation of (i) the nature of credit risk inherent in the entitys portfolio
of financing receivables, (ii) how that risk is analyzed and assessed in arriving at
the allowance for credit losses and (iii) the changes and reasons for those changes
in the allowance for credit losses. Disclosures must be disaggregated by portfolio
segment, the level at which an entity develops and documents a systematic method for
determining its allowance for credit losses, and class of financing receivable, which is
generally a disaggregation of portfolio segment. The required disclosures include, among
other things, a roll-forward of the allowance for credit losses as well as information
about modified, impaired, non-accrual and past due loans and credit quality indicators.
ASU 2010-20 became effective for the Companys financial statements as of
December 31, 2010, as it relates to disclosures required as of the end of a reporting
period. Disclosures that relate to activity during a reporting period became effective for
the Companys financial statements beginning on January 1, 2011. ASU 2011-01,
"Receivables (Topic 310) - Deferral of the Effective Date of Disclosures about
Troubled Debt Restructurings in Update No. 2010-20," temporarily deferred the
effective date for disclosures related to troubled debt restructurings to coincide with
the effective date of the then proposed ASU 2011-02, "Receivables (Topic 310) -
A Creditors Determination of Whether a Restructuring Is a Troubled Debt
Restructuring," which is further discussed below.
ASU No. 2010-28, "Intangibles - Goodwill and Other (Topic
350) - When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with
Zero or Negative Carrying Amounts."
ASU 2010-28 modifies Step 1 of the
goodwill impairment test for reporting units with zero or negative carrying amounts. For
those reporting units, an entity is required to perform Step 2 of the goodwill
impairment test if it is more likely than not that a goodwill impairment exists. In
determining whether it is more likely than not that a goodwill impairment exists, an
entity should consider whether there are any adverse qualitative factors indicating that
an impairment may exist such as if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying amount.
ASU 2010-28 became effective for the Company on January 1, 2011 and did not have
an impact on the Companys financial statements.
ASU No. 2011-02, "Receivables (Topic 310) - A Creditors
Determination of Whether a Restructuring Is a Troubled Debt Restructuring."
ASU 2011-02 clarifies which loan modifications constitute troubled debt
restructurings and is intended to assist creditors in determining whether a modification
of the terms of a receivable meets the criteria to be considered a troubled debt
restructuring, both for purposes of recording an impairment loss and for disclosure of
troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled
debt restructuring, a creditor must separately conclude, under the guidance clarified by
ASU 2011-02, that both of the following exist: (a) the restructuring constitutes
a concession; and (b) the debtor is experiencing financial difficulties.
ASU 2011-02 will be effective for the Company on July 1, 2011, and applies
retrospectively to restructurings occurring on or after January 1, 2011. Adoption of
ASU 2011-02 is not expected have a significant impact on the Companys financial
statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss in a financial instrument arising from
adverse changes in market rates/prices, such as interest rates, foreign currency exchange
rates, commodity prices and equity prices. Interest rate risk is the most significant
market risk affecting the Company. Other types of market risk do not arise in the normal
course of the Companys business activities.
Interest Rate Risk:
Interest rate risk can be defined as an
exposure to movement in interest rates that could have an adverse impact on the Bank's net
interest income. Interest rate risk arises from the imbalance in the re-pricing, maturity
and/or cash flow characteristics of assets and liabilities. Management's objectives are to
measure, monitor and develop strategies in response to the interest rate risk profile
inherent in the Bank's balance sheet. The objectives in managing the Bank's balance sheet
are to preserve the sensitivity of net interest income to actual or potential changes in
interest rates, and to enhance profitability through strategies that 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 Asset/Liability Committee ("ALCO") and the Banks 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.
The Bank utilizes an interest rate risk model widely recognized in the
financial industry to monitor and measure interest rate risk. The model simulates the
behavior of interest income and expense of all balance sheet and off-balance sheet
instruments, under different interest rate scenarios together with a dynamic future
balance sheet. Interest rate risk is measured in terms of potential changes in net
interest income based upon shifts in the yield curve.
The interest rate risk sensitivity model requires that assets and
liabilities be broken down into components as to fixed, variable, and adjustable interest
rates, as well as other homogeneous groupings, which are segregated as to maturity and
type of instrument. The model includes assumptions about how the balance sheet is likely
to evolve through time and in different interest rate environments. The model uses
contractual re-pricing dates for variable products, contractual maturities for fixed rate
products, and product specific assumptions for 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 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 period 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.
-
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 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 March 31, 2011, over one and two-year horizons and under rising
and declining interest rate scenarios. In light of the Federal Funds rate of 0% - 0.25%
and the two-year U.S. Treasury note of 0.82% on the date presented, the analysis
incorporates a declining interest rate scenario of 100 basis points, rather than the 200
basis points, as would traditionally be the case.
INTEREST RATE RISK
CHANGE IN NET INTEREST INCOME FROM THE FLAT RATE SCENARIO
MARCH 31, 2011
|
-100 Basis Points Parallel Yield Curve Shift
|
+200 Basis Points Parallel Yield Curve Shift
|
Year 1
|
|
|
Net interest
income change ($)
|
$(309)
|
$(738)
|
Net interest
income change (%)
|
(0.82%)
|
(1.95%)
|
Year 2
|
|
|
Net interest
income change ($)
|
$(573)
|
$289
|
Net interest
income change (%)
|
(1.51%)
|
0.76%
|
As more fully discussed below, the March 31, 2010 interest rate
sensitivity modeling results indicate that the Banks balance sheet was about evenly
matched over the one and two-year horizons.
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 decline moderately 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 disproportionately with earning asset yields. As funding
costs begin to stabilize late 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 increases 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.
Management believes the most significant ongoing factor affecting
market risk exposure and the impact on net interest income continues to be the very slow
recovery from the severe nationwide recession and the U.S. Governments extraordinary
responses, including a variety of government stimulus programs and quantitative easing
strategies. Interest rates plummeted during 2008 and have remained historically low ever
since, as the global economy slowed at unprecedented levels, unemployment levels soared,
delinquencies on all types of loans increased along with decreased consumer confidence and
dramatic declines in housing prices. Net interest income exposure is also significantly
affected by the shape and level of the U.S. Government securities and interest rate swap
yield curve, and changes in the size and composition of the Banks loan, investment
and deposit portfolios. The spread between the two-year and the ten-year Treasury notes
ended the quarter at a still historically high level of 265 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, reinvestment or
replacement of asset and liability cash flows, and renegotiated loan terms with borrowers.
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; the impact of interest rate change caps or floors on
adjustable rate assets; the potential effect of changing debt service levels on customers
with adjustable rate loans; depositor early withdrawals and product preference changes;
and other such variables. The sensitivity analysis also does not reflect 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.
ITEM 4. CONTROLS AND PROCEDURES
Company management evaluated, with the participation of the Chief
Executive Officer and Chief Financial Officer, the effectiveness of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this quarterly
report. Based on such evaluation, the Chief Executive Officer and the Chief Financial
Officer have concluded that the Company's disclosure controls and procedures are designed
to ensure that information required to be disclosed by the Company in the reports it files
or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange Commission's
rules and regulations and are operating in an effective manner.
No change in the Company's internal control over financial reporting
(as defined in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934)
occurred during the most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over financial
reporting.
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
The Company and its subsidiaries are parties to certain ordinary
routine litigation incidental to the normal conduct of their respective businesses, which
in the opinion of management based upon currently available information will have no
material effect on the Company's consolidated financial statements.
Item 1A: Risk Factors
There have been no material changes to the Risk Factors previously
disclosed in Part I, Item 1A of the Companys Annual Report on Form 10-K for the
year-ended December 31, 2010.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
(a) None
(b)
None
(c)
During the quarter ended March 31, 2011, there were no purchases made by or on behalf of
the Company or any "affiliated purchaser," of shares of the Companys
common stock pursuant to the Companys previously announced program to repurchase up
to 300,000 shares of Company common stock.
Item 3: Defaults Upon Senior Securities
|
None
|
Item 4: (Removed and Reserved)
Item 5: Other Information
(a) None
(b)
None
Item 6: Exhibits
(a)
Exhibits.
EXHIBIT
NUMBER
|
|
|
|
|
|
|
|
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
|
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.
|
|
|
|
|
4.4
|
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.
|
|
|
|
|
11.1
|
Statement re
computation of per share earnings
|
|
Data
required by SFAS No. 128, Earnings Per Share, is provided in Note 3 to the consolidated
financial statements in this report on Form 10-Q.
|
|
|
|
|
31.1
|
Certification of
the Chief Executive Officer under
Rule 13a-14(a)/15d-14(a)
|
|
Filed
herewith.
|
|
|
|
|
31.2
|
Certification of
the 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. Section 1350
|
|
Filed
herewith.
|
|
|
|
|
32.2
|
Certification of
Chief Financial Officer under|
18 U.S.C. Section 1350
|
|
Filed
herewith.
|
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
|
BAR HARBOR BANKSHARES
(Registrant)
|
|
|
|
/s/Joseph
M. Murphy
|
|
|
Date:
May 10, 2011
|
Joseph
M. Murphy
|
|
President
& Chief Executive Officer
|
|
|
|
/s/Gerald
Shencavitz
|
|
|
Date:
May 10, 2011
|
Gerald
Shencavitz
|
|
Executive
Vice President, Chief Financial Officer & Principal Accounting Officer
|
Exhibit Index
3.1
|
|
Articles
of Incorporation, as amended to date
|
|
|
|
3.2
|
|
Bylaws,
as amended to date
|
|
|
|
4
|
|
Instruments
Defining Rights of Security Holders
|
|
|
|
4.1
|
|
Certificate of
Designations, Fixed Rate Cumulative Perpetual Preferred Stock, Series A
|
|
|
|
4.2
|
|
Form of Specimen
Stock Certificate for Series A Preferred Sock
|
|
|
|
4.3
|
|
Debt Securities
Purchase Agreement
|
|
|
|
4.4
|
|
Form of
Subordinated Debt Security of Bar Harbor Bank & Trust
|
|
|
|
11.1
|
|
Statement re
computation of per share earnings
|
|
|
|
31.1
|
|
Certification of
the Chief Executive Officer under
Rule 13a-14(a)/15d-14(a)
|
|
|
|
31.2
|
|
Certification of
the Chief Financial Officer under
Rule 13a-14(a)/15d-14(a)
|
|
|
|
32.1
|
|
Certification of
Chief Executive Officer under
18 U.S.C. Section 1350
|
|
|
|
32.2
|
|
Certification of
Chief Financial Officer under
18 U.S.C. Section 1350
|
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