SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] Annual report pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the fiscal year ended: December 31, 1997
Commission file number: 0-21500
KSB Bancorp, Inc.
(Name of small business issuer in its charter)
Delaware 04-3189069
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
Main Street
Kingfield, Maine 04947
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Telephone Number: (207) 265-2181
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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 [ ]
Securities Registered Pursuant to Section 12(g) of the Exchange Act:
Common Stock
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained to
the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, computed by reference to the last reported sales price of such
stock on the NASDAQ National Market system on March 19, 1998 was approximately
$23,448,018.
The number of shares outstanding of the registrant's Common Stock, the
registrant's only class of outstanding capital stock, as of March 19, 1998, was
1,258,954.
Issuer's revenues for the year ended December 31, 1997: $ $13,189,915.
<PAGE>
Documents Incorporated by Reference
The following documents, in whole or in part are specifically
incorporated by reference in the indicated Part of this Annual Report Form
10-KSB:
I. Portions of the KSB Bancorp Inc. 1997 Annual Report are incorporated by
reference into certain items of Part I and Part II.
II. Portions of the KSB Bancorp Inc. Proxy Statement for the 1997 Annual
Meeting of Shareholders are incorporated by reference into certain
items of Part III.
<PAGE>
KSB BANCORP, INC.
INDEX
PART I.
Item 1. Description of Business.......................................
Item 2. Description of Property.......................................
Item 3. Legal Proceedings.............................................
Item 4. Submission of Matters to a Vote of Security Holders...........
PART II
Item 5. Market for Common Equity and Related Stockholder Matters......
Item 6. Management's Discussion and Analysis of Plan of Operation.....
Item 7. Financial Statements..........................................
Item 8. Change In and Disagreements With Accountants on
Accounting and Financial Disclosure...........................
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act....
Item 10. Executive Compensation........................................
Item 11. Security Ownership of Certain Beneficial Owners and Management
Item 12. Certain Relationships and Related Transactions................
PART IV
Item 13. Exhibits and Reports on Form 8-K..............................
Signature page ..............................................................
<PAGE>
Item 1 - Description of Business.
General
KSB Bancorp (the "Company"), a Delaware Corporation, was organized in 1993 to
act as the holding Company for Kingfield Savings Bank (the "Bank") upon
completion of the Bank's conversion from a mutual to a stock form of ownership,
(the "Conversion"). The Company received approval from the Federal Reserve to
acquire all outstanding stock of the Bank upon completion of the conversion. The
Conversion was completed on June 24, 1993. The Bank is a Maine-chartered savings
Bank headquartered in Kingfield, Maine. Originally chartered in 1895, the Bank
is a community-oriented financial institution that conducts its business through
eight full-service retail banking offices located in Franklin, Androscoggin and
Somerset Counties, Maine (see Market Area and Competition).
At December 31, 1997, the Company had total assets of $152.8 million, total
loans of $118.9 million, deposits of $110.7 million and tangible stockholders'
equity of $11.0 million.
The Bank is subject to regulation, examination and supervision by the
Superintendent of the Bureau of Banking of the State of Maine (the
"Superintendent") and the Federal Deposit Insurance Corporation (the "FDIC").
The Company is subject to regulation by the Board of Governors of the Federal
Reserve System (the "FRB") and to a limited extent by the Superintendent and the
FDIC.
The Bank's principal business consists of attracting deposits from the general
public and investing those deposits, together with borrowings and funds
generated from operations, in mortgage loans secured by one-to-four family
residential real estate, commercial business loans, the majority of which are
secured by real estate, and mortgage-backed securities. At December 31, 1997,
the Bank had $54.7 million of loans (including loans held for sale), or 46.0% of
total net loans receivable (including loans held for sale), secured by
one-to-four family, residential real property. An additional $38.8 million of
loans, or 32.7% of total net loans receivable (there were no commercial loans
held for sale), were commercial business loans secured by real estate. At
December 31, 1997, the Bank's mortgage-backed securities portfolio totaled $23.4
million, or 15.3% of total assets at such date.
Pages 6 and 7 of the Company's Annual Report to Stockholders are herein
incorporated by reference.
Market Area and Competition The Bank's home office is located in Kingfield,
Maine. Since 1988, the Bank has expanded its market area within Franklin County
and into Androscoggin and Somerset Counties, Maine. In 1988, the Bank opened a
branch office in Stratton, Maine. In 1990, a loan production office located in
Waterville, Maine was expanded to a full service branch and later closed in 1995
when loan production decreased. In April 1991, the Bank purchased two branches
located in Phillips and Rangeley, Maine from Maine National Bank. In June 1993,
the Bank opened its Farmington, Maine office. In March 1994 the Bank purchased
one branch located in Lewiston, Maine from the Resolution Trust Corporation. In
March 1995 the Bank purchased four branches located in Kingfield, Stratton,
Bingham and Strong, Maine from Fleet Bank of Maine. In March 1998 the Bank
purchased the Madison, Maine branch from KeyBank of Maine. Bank management
believes that all of its offices are located in communities that can generally
be characterized as stable and, with the exception of Lewiston, predominantly
rural areas. The Bank faces significant competition both in lending and in
attracting deposits. The Bank's competition for loans comes principally from
commercial banks, savings banks, credit unions and mortgage banking companies.
The most direct competition for deposits has historically come from savings
banks, commercial banks and credit unions; however, additional competition from
short-term money market funds and other security funds offered by brokerage
firms and insurance companies is significant.
<PAGE>
Average Balance Sheet
The following table sets forth certain information relating to the Bank's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid. Such yields and costs are derived by dividing interest income or expense
by the average balance of assets or liabilities, respectively, for the periods
presented.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ------------------------------ -----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest(1) Cost(%) Balance Interest(1) Cost(%) Balance Interest(1) Cost(%)
------- ----------- ------- ------- ------------------- ------- ----------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets: (2)
Interest-earning assets:
Residential mortgage loans $ 53,494 $ 4,595 8.59 $ 50,396 $4,346 8.62 $ 44,490 $ 3,759 8.45
Commercial loans (3) 40,970 4,077 9.95 33,144 3,309 9.98 27,251 2,752 10.10
Consumer loans 15,105 1,386 9.18 9,992 1,020 10.21 9,559 1,027 10.74
Investments Available for
Sale 10,257 670 6.53 7,915 467 5.90 1,071 60 5.60
Investments to be Held to
Maturity 17,775 1,160 6.53 21,808 1,412 6.47 34,156 2,243 6.57
Interest-bearing deposits 213 15 7.04 1,076 61 5.67 388 20 5.15
-------- -------- ---- --------- ------ ---- --------- ------- ----
Total interest-earning
assets 137,814 11,903 8.64 124,331 10,615 8.54 116,915 9,861 8.43
Non-interest-earning assets 6,644 6,411 5,984
-------- -------- --------
Total assets 144,458 $130,742 $122,899
-------- -------- --------
Interest-bearing liabilities:
Regular Savings $21,567 599 2.78 $ 22,258 626 2.81 23,097 689 2.98
NOW accounts 13,678 245 1.79 13,144 216 1.64 10,496 160 1.52
Money market accounts 5,691 217 3.81 5,681 211 3.71 4,085 143 3.50
Time deposits 58,396 3,317 5.68 58,873 3,431 5.83 52,369 3,033 5.79
Borrowings 23,390 1,374 5.87 11,624 682 5.87 16,082 999 6.21
-------- -------- --------- ------ ---- --------- ------- ----
Total interest-bearing
liabilities 122,722 5,752 4.69 111,580 5,166 4.63 106,129 5,024 4.73
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------------------------------------
1997 1996 1996
------------------------------ ------------------------------ -----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest(1) Cost(%) Balance Interest(1) Cost(%) Balance Interest(1) Cost(%)
------- ----------- ------- ------- ------------------- ------- ----------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing
liabilities 11,124 10,028 8,809
Stockholders equity 10,612 9,134 7,961
-------- -------- --------
Total liabilities and
stockholder's Equity $144,458 $130,742 $122,899
-------- -------- --------
Net interest income 6,151 $5,449 $ 4,837
------ ------ -------
Net interest rate spread (4) 3.95% 3.91% 3.70%
----- ----- -----
Net interest margin (5) 4.46% 4.38% 4.14%
----- ----- -----
Ratio of average 1.11x 1.10x
interest-earning
assets to average interest- 1.12x
bearing liabilities
</TABLE>
- --------------------
(1) Interest for purpose of yield calculations excludes $75, $80, and $119 of
loan fees in 1997, 1996 and 1995, respectively, and $ 26, $9 and $(-25) of
net interest rate swap income in 1997, 1996 and1995, respectively.
(2) Loan balances include non-performing loans of $2,090, $1,895 and $1,645 in
1997, 1996 and 1995, respectively.
(3) Includes $ 33.4 million at December 31, 1997 of loans for commercial
business purposes secured by real estate and non-real estate (e.g.,
equipment) collateral.
(4) Interest rate spread represents the difference between the average rate on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net interest margin represents net interest income before the provision for
loan losses divided by average interest-earning assets.
<PAGE>
<TABLE>
<CAPTION>
Actual Balance Sheet
At December 31,
1997
---------------------------
Actual Yield/
Balance Cost
------- ----
(Dollars in Thousands)
<S> <C> <C>
Assets: (1)
Interest-earning assets:
Residential mortgage loans ................... $ 54,717 9.82%
Commercial loans (2) ......................... 47,300 8.65
Consumer Loans ............................... 18,385 9.13
Investments Available for Sale ............... 9,261 7.05
Investments to be Held to Maturity ........... 14,171 6.42
Interest-bearing deposits .................... 6 5.50
-------- ----
Total interest-earning assets .............. 143,840 8.83
Other noninterest-earning assets ............... 8,912
--------
Total assets ............................... $152,752
========
Interest-bearing liabilities
Regular savings and clubs .................... $ 20,765 2.78
NOW accounts ................................. 13,914 2.03
Money market accounts ........................ 6,211 3.96
Time deposits ................................ 58,387 5.65
Borrowings ................................... 28,219 6.04
-------- ----
Total int.-bearing liabilities ............. 127,496 4.79
Noninterest-bearing liabilities ................ 13,701
Stockholders equity ............................ 11,555
--------
Total liabilities and
Stockholders equity ...................... $152,752
========
Interest rate spread (3) ....................... 4.04%
Net interest margin (4) ........................ 4.46%
Ratio of average interest-earning
assets to average interest-bearing
liabilities .................................. 1.12x
</TABLE>
(1) Loan balances include non-performing loans of $2,090, $1,895 and $1,645 in
1997, 1996 and 1995, respectively.
(2) Includes $ 38.8 million at December 31, 1997 of loans for commercial
business purposes secured by real estate.
(3) Interest rate spread represents the difference between the average rate on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net interest margin represents net interest income before the provision for
loan losses divided by average interest-earning assets.
<PAGE>
Rate/Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in average volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) the net change.
Changes attributable to both rate and volume have been allocated proportionately
to the change due to volume and the change due to rate.
<TABLE>
<CAPTION>
1997 vs. 1996 1996 vs.1995
------------------------------------ ------------------------------------
Increase/(Decrease) Total Increase/(Decrease) Total
Due to Increase/ Due to Increase/
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Residential mortgage loans, (net). $ 267 ($ 18) $ 249 $ 499 $ 88 $ 587
Commercial loans ................ 781 (13) 768 595 (38) 557
Consumer loans .................. 522 (156) 366 47 (54) (7)
Investments Available for sale... 138 65 203 383 24 407
Investments to be Held to Maturity (261) 9 (252) (811) (20) (831)
Maturity Interest-bearing deposits (49) 3 (46) 35 6 41
------- ------- ------- ------- ------- -------
Total interest-earning assets $ 1,398 ($ 110) $ 1,288 748 6 754
------- ------- ------- ------- ------- -------
Interest expense:
Deposits ........................ ($ 28) ($ 78) ($ 106) 443 16 459
Borrowings ...................... 690 2 692 (277) (40) (317)
------- ------- ------- ------- ------- -------
Total int.-bearing liabilities $ 662 ($ 76) $ 586 166 (24) 142
------- ------- ------- ------- ------- -------
Change in net interest income ..... $ 736 ($ 34) $ 702 $ 582 $ 30 $ 612
------- ------- ------- ------- ------- -------
</TABLE>
<PAGE>
Lending Activities
The amount and type of loans which may be originated by the Bank are subject to
certain limitations established by the laws of the State of Maine and
regulations promulgated thereunder. Under Maine law, the Bank has general
authority to originate and purchase loans secured by real estate located
anywhere in New England, or by property located anywhere if the loan is approved
by the Bank's Board of Directors, meets the provisions of Maine law governing
loans to one borrower and does not exceed 10% of the Bank's deposits. Moreover,
the Bank may originate and purchase any first mortgage loan permitted to
federally-chartered savings institutions, which currently have nationwide
lending authority, subject to the approval of the Superintendent.
Notwithstanding these authorities, virtually all of the mortgage loans in the
Bank's portfolio are secured by properties located in the State of Maine.
Moreover, substantially all of the Bank's non-mortgage loan portfolio consists
of loans made to Maine residents and businesses. The Bank may invest in loans
other than loans secured by real estate, in an aggregate amount not in excess of
40% of its assets.
Maine law also imposes various limitation on the amount of loans that may be
made by the Bank to any one borrower and related entities. In this regard, Maine
law limits loans to one borrower and related entities to 20% of the Bank's total
capital and surplus, and total loans to one borrower and related entities in
excess of 10% of surplus and capital must be approved by a majority of the
Board, or by the executive committee. In general, the typical balance of a loan
extended by the Bank is significantly below the applicable loan limits imposed
by Maine Law.
Loan Portfolio Composition
The Bank's loan portfolio totaled $118.9 million at December 31, 1997 (including
loans held for sale). As of December 31, 1997, 46.0% of total net loans
receivable consisted of one-to-four family residential loans. The remaining
loans consisted of commercial business loans secured by real estate ($38.8
million or 32.7%), commercial business loans secured by collateral other than
real estate (e.g. equipment) ($8.2 million or 6.9%), and consumer loans ($18.6
million or 15.7%), consisting of home equity loans, student loans, automobile
loans, and other collateralized and unsecured loans. At December 31, 1997, the
Bank had loans held for sale of $2.0 million or 1.7% of net loans receivable.
In line with the Bank's asset/liability management strategy, the Bank sells to
the secondary mortgage market most of the 30-year, fixed-rate loans that it
originates which conform to secondary mortgage market standards. While it may
hold or sell shorter-term fixed-rate loans, including 10- and 15-year first
mortgages, the Bank has recently been holding these loans in portfolio, along
with adjustable-rate mortgage loans, short-term and adjustable-rate commercial
business loans and consumer loans. The Bank also had $23.4 million, or 15.3% of
its assets at December 31, 1997, invested in mortgage-backed securities.
<PAGE>
The following table sets forth the composition of the Bank's loan portfolio in
dollar amounts and in percentages of the portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------------
(Dollars in Thousand)
<S> <C> <C> <C> <C> <C> <C>
Residential mortgage loans:
One- to four-family (1) ........... $ 51,014 42.9% $ 49,666 50.1% $ 44,950 52.3%
Loans to be sold .................. 2,007 1.7 1,819 1.8 1,126 1.3
Construction ...................... 1,696 1.4 1,208 1.2 963 1.1
--------- ---- --------- ---- --------- ----
Total residential mortgage loans .. 54,717 46.0 52,693 3.1 47,039 54.7
--------- ---- --------- ---- --------- ----
Commercial loans :
Commercial real estate ............ 38,826 32.7 29,902 30.1 24,313 28.3
Other commercial .................. 8,231 6.9 6,498 6.6 5,410 6.3
--------- ---- --------- ---- ---------
Total commercial loans ............ 47,057 39.6 36,400 36.7 29,723 34.6
--------- ---- --------- ---- ---------
Consumer:
Home equity lines of credit ....... 13,718 11.5 6,042 6.1 5,189 6.1
Collateral loans .................. 4,255 3.6 4,401 4.4 3.596 4.2
Other ............................. 654 0.6 763 0.8 1,396 1.6
--------- ---- --------- ---- ---------
Total consumer loans .............. 18,627 15.7 11,206 11.3 10,181 11.9
--------- ---- --------- ---- ---------
Less:
Deferred loan fees and loan premium (203) (0.2) (209) (0.2) (186) (0.2)
Allowance for loan losses ......... (1,342) (1.1) (893) (0.9) (867) (1.0)
--------- ---- --------- ---- ---------
Loans receivable, net ............. $ 118,856 100.0% $ 99,197 100.0% $ 85,890 100.0%
========= ===== ========= ===== ========= =====
</TABLE>
(1)Includes second mortgage loans of $3,552,000, $3,247,000 and $2,884,000 at
December 31, 1997, 1996 and 1995, respectively.
<PAGE>
The following table sets forth the Bank's loan originations and loan purchases,
sales and principal repayments for the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1997 1996 1995
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Mortgage loans (gross):
At beginning of period (1) .............. $82,595 $71,352 $59,244
Mortgage loans originated: (2)
One- to four-family .............. 15,836 19,242 21,173
Commercial real estate ........... 14,274 18,881 10,652
Construction ..................... 1,756 937 2,537
------- ------- -------
Total mortgage loans originated .. 31,866 39,060 34,362
------- ------- -------
Mortgage loans purchased:
One- to four-family (3) .......... 0 0 2,290
Commercial real estate (3) ....... 0 0 494
------- ------- -------
Total mortgage loans purchased ... 0 0 2,784
------- ------- -------
Total mortgage loans originated
and purchased ................. 31,866 39,060 37,146
Less:
Transfer of mortgage loans to
foreclosed real estate ......... 159 76 73
Principal repayments ............. 16,299 22,541 17,684
Sales of loans ................... 4,460 5,200 7,281
------- ------- -------
At end of period (2) ............... $93,543 $82,595 $71,352
======= ======== =======
Other loans (gross):
At beginning of period ............. $17,704 $15,591 $10,229
Other loans originated ........... 18,002 11,574 8,043
Principal repayments ............. 8,848 9,461 6,237
Other loans purchased ............ 0 0 3,695
Other loans sold ................... 0 0 139
------- ------- -------
At end of period ................... $26,858 $17,704 $15,591
======= ======= -------
</TABLE>
- ---------
(1) Includes loans held for sale at beginning of 1997, 1996 and 1995 of $1.8
million, $1.1 million and $3.7 million, respectively.
(2) Includes loans held for sale at end of 1997, 1996 and 1995 of $2.0 million,
$1.8 million and $1.1 million, respectively.
(3) Includes loans acquired through branch acquisition.
<PAGE>
Loan Maturity
The following table shows the maturity of the Bank's loan portfolio at December
31, 1997. The table does not include prepayments or scheduled principal
amortization. Prepayments and scheduled principal amortization on mortgage loans
totaled$16.3 million, $22.5 million and $17.7 million for the years ended
December 31, 1997,1996 and1995, respectively.
<TABLE>
<CAPTION>
At December 31, 1997
---------------------------------------------------------------------------------
One-to Total
Four Commercial Other Consumer Loans
Family(1) Real Estate Construction Commercial & other Receivable
--------- ----------- ------------ ---------- ------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Amounts due:
Within 1 year .................. $ 394 $ 7,519 $ 1,696 $ 888 $ 1,766 $ 12,263
After 1 year:
1 to 3 years ................. 164 3,105 0 1,493 3,187 7,949
3 to 5 years ................. 1,027 6,073 0 3,609 13,326 24,035
5 to 10 ...................... 5,691 4,397 0 1,673 229 11,990
10 to 20 years ............... 24,757 17,473 0 568 119 42,197
--------- ----- --------- --------- --------- ---------
Over 20 years ................ 20,988 259 0 0 0 21,247
Total due after 1 year ....... 52,627 31,307 0 7,343 16,861 108,138
--------- ----- --------- --------- --------- ---------
Total amounts due ............ 53,021 38,826 1,696 8,231 18,627 $ 120,401
Plus (Less):
Unearned discounts, premiums and
deferred loan fees, net ...... 0 0 0 0 0 (203)
Allowance for possible loan
losses ....................... 0 0 0 0 0 (1,342)
Loans receivable, net .......... $ 53,021 $ 38,826 $ 1,696 $ 8,231 $ 18,627 $ 118,856
========= ========= ========= ========= ========= =========
</TABLE>
- -------------
(1)Includes loans held for sale of $2.0 million.
<PAGE>
The following table sets forth at December 31, 1997, the dollar amount of all
loans contractually due after December 31, 1997, and whether such loans have
fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
Contractually Due After December 31, 1997
-----------------------------------------
Fixed Adjustable Total
(In Thousands)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family (1) ........ $ 32,247 $ 20,380 $ 52,627
Commercial real estate ........ 12,664 18,643 31,307
Construction .................. 0 0 0
Commercial loans ............... 5,366 1,977 7,343
Consumer loans ................. 3,004 13,857 16,861
-------- -------- --------
Total loans receivable ........ $ 53,281 $ 54,857 $108,138
======== ======== ========
</TABLE>
(1)Includes loans held for sale of $2.0 million.
One- to Four- Family Mortgage Loans
The Bank offers first mortgage loans secured by one- to four-family, owner
occupied residences, including condominium units, in the Bank's lending area.
Loan originations are generally obtained from existing or past customers and
members of the local community located in the Bank's primary market area.
Substantially all of the 30-year one- to four-family residential mortgage loans
that conform to FHLMC, GNMA and FNMA guidelines are sold into the secondary
mortgage market. 10- and 15-year conforming mortgage loans may be held in
portfolio.
Upon receipt of a completed loan application from a prospective borrower
for a loan secured by one- to four-family residential real estate, a credit
report is ordered, income and certain other information is verified and, if
necessary, additional financial information is requested. An appraisal of the
real estate intended to secure the proposed loan is required. It is the Bank's
policy to obtain title insurance and/or title certification on all real estate
first mortgage loans. Borrowers must also obtain hazard insurance prior to
closing. Borrowers generally are required to advance funds on a monthly basis
together with each payment of principal and interest to a mortgage escrow
account from which the Bank makes disbursements for items such as real estate
taxes and hazard insurance premiums.
The Bank generally makes one- to four-family residential mortgage loans in
amounts up to 80% of the appraised value of the secured property. Originated
mortgage loans in the Bank's portfolio generally include due-on-sale clauses
which provide the Bank with the contractual right to deem the loan immediately
due and payable in the event that the borrower transfers ownership of the
property without the Bank's consent. It is the Bank's policy to enforce
due-on-sale provisions.
<PAGE>
Loan Authority Policy
The Bank maintains a Board Loan Committee consisting of the President,
Regional Vice Presidents and one or more outside Directors. The committee has
the authority to approve loans that do not specifically conform to loan policy
and loans in excess of $400,000 up to $600,000. Loans exceeding $600,000 require
full Board approval.
Construction Lending
Generally, the Bank's construction loans consist of loans to borrowers to
purchase land and build a primary residence or second home. The Bank requires an
appraisal of the property and the loan amount cannot exceed 80% of the appraised
value of the property to be built. The Bank also requires lien waivers prior to
disbursing funds on construction loans. Generally the same underwriting
requirements of one- to four-family loans are applied to construction loans.
Commercial Business Lending
The Bank offers loans to small businesses to finance the purchase or
expansion of, or to provide operating capital for, a business. Generally, these
loans are secured by real estate and/or other business assets. The borrower is
required to complete an application, which consists of a financial statement and
the two prior years' income statements on the business as well as the
individual. An analysis is done of the ability of the cash flow of the business
to repay the debt. Generally, the loan cannot exceed 80% of the appraised value
of the real estate assets securing the loan. The Bank also offers lines of
credit, both secured and unsecured, to businesses to finance receivables and
seasonal cash flow needs. These lines of credit are reviewed annually and
renewed based upon an analysis similar to that done when the loan was made.
Generally, the interest rate applicable to commercial business loans is a
prime-based rate, adjusting monthly or fixed for a period not exceeding five
years and adjusting thereafter.
Commercial business loans are generally viewed as exposing a lender to
greater risk than residential real estate loans. In particular, the repayment of
interest and principal, in accordance with the terms of the loan, is often
dependent on the generation by the business of sufficient operating income.
Consumer Lending
The Bank offers loans to consumers to purchase automobiles, recreational
vehicles and finance other needs. These loans generally are one to four years in
length and are amortized over the term of the loan. The Bank requires borrowers
to complete an application and performs a credit analysis, which includes
obtaining a credit report and verifying the income of the borrower. The Bank
also offers second mortgage loans as well as home equity lines of credit secured
by a first or second mortgage on a principal or second residence. Generally,
these loans are originated in loan amounts up to 75% of the appraised value of
the home (less pre-existing liens). However, in instances where a borrower
qualifies, the Bank may loan up to 90% of the home's value. The home equity
lines of credit carry a variable interest rate, adjusting monthly, based on the
prime rate.
The Bank is also involved in other lending, such as loans to municipalities
and other municipal entities for tax anticipation notes, short-term construction
of infrastructure, and other needs.
<PAGE>
Investments
The Bank invests in U.S. Government and government agency notes and bonds
as well as mortgage-backed securities. Certain of the Bank's mortgage-backed
securities have been converted from loans originated by the Bank, as a way of
improving the liquidity and reducing the credit risk on these loans. As of
December 31, 1997, substantially all of the Bank's mortgage-backed securities
were guaranteed or insured by FNMA, GNMA or FHLMC. The market value of the
Bank's mortgage-backed securities was approximately $23.7 million as of December
31, 1997, and the recorded book value was $23.4 million.
Delinquencies and Classified Assets
Delinquent Loans. Delinquencies on all loans are reviewed monthly by the
Board of Directors. The Bank's collection procedures include sending a past due
notice to the borrower on the 17th day of non-payment, making telephone contact
with the borrower, and sending a letter when the loan is 30 days delinquent. A
Notice of Intent to Foreclose is sent by the 60th day of delinquency. When the
borrower is contacted, the Bank attempts to obtain full payment of the amount
past due. However, the Bank generally will seek to reach agreement with the
borrower on a forbearance plan to avoid foreclosure.
It is the policy of the Bank to discontinue the accrual of interest on any
loan that is 90 days or more past due. The Bank, historically, has not incurred
any significant losses on delinquent one- to four-family residential mortgage
loans.
Most loan delinquencies are cured within 90 days and no legal action is taken.
In the case of a mortgage loan, if the delinquency exceeds 90 days, the Bank
institutes measures to enforce its remedies resulting from the default. As to
FHA and VA mortgage loans, the Bank follows notification and foreclosure
procedures prescribed by FHA and VA.
Classified Assets. The Bank is required to have a system of classification
of loans and other assets, such as debt and equity securities, considered to be
of lesser quality as "substandard", "doubtful" or "loss" by the paying capacity
and net worth of the obligor or the collateral pledged, if any. "Substandard"
assets include those characterized by the "distinct possibility" that the
insured institution will sustain "some loss" if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the weaknesses inherent
in those classified "substandard", with the added characteristic that the
weaknesses present make "collection or liquidation in full," "highly
questionable and improbable," on the basis of currently existing facts,
conditions, and values. Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of specific loss reserve is not warranted. Assets
which do not currently expose the insured institution to a sufficient degree of
risk to warrant classification in one of the aforementioned categories but
possess credit deficiencies or potential weaknesses are required to be
designated "special mention".
When an insured institution classifies problem assets as either
"substandard" or "doubtful," it is required to establish general allowances for
losses in an amount deemed prudent by management. General allowances represent
loss allowances which have been established to recognize the inherent risk
associated with lending activities, but which, unlike specific allowances, have
not been allocated to particular problem assets. When an insured institution
classifies problem assets as "loss," it is required either to establish a
<PAGE>
specific allowance for losses equal to 100% of the amount of the asset so
classified or to charge-off such amount. An institutions's determination as to
the classification of its assets and the amount of its valuation allowances is
subject to review by the FDIC and the state, which can require the establishment
of additional general or specific loss allowances. The Bank regularly reviews
the assets in its portfolio to determine whether any assets require
classification in accordance with applicable regulations.
As of December 31, 1997 the Bank had total classified and special mention
assets of $1.5 million, of which $242,000 were classified "substandard" or
"doubtful." Special mention assets totaled $1.3 million at December 31, 1997,
which included $0.8 million of commercial business loans.
<PAGE>
At December 31, 1997, 1996 and 1995, delinquencies in the Bank's portfolio were
as follows:
<TABLE>
<CAPTION>
At December 31, 1997 At December 31, 1996
------------------------------------- ------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
---------------- ----------------- ---------------- ------------------
Number Principal Number Principal Number Principal Number Principal
of Balance of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans Loans of Loans
----- -------- ----- -------- ----- -------- ----- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage:
One- to four-family ............ 5 $175 9 $497 6 $343 9 $301
Construction ................... 0 0 0 0 0 0 0 0
Commercial ..................... 3 228 8 229 3 261 3 424
------------------------------------------------------------------------
Total mortgage loans ............ 8 403 17 726 9 604 12 725
Other commercial ................ 3 150 3 102 2 5 0 0
Consumer ........................ 27 83 52 73 20 31 9 18
------------------------------------------------------------------------
Total all loans ................. 38 $636 72 $901 31 $640 21 $743
========================================================================
Delinquent loans to total loans . .53% 0.75% 0.64% .74%
<CAPTION>
At December 31,1995
-------------------------------------------
60-89 Days 90 Days or More
---------------- -----------------
Number Principal Number Principal
of Balance of Balance
Loans of Loans Loans of Loans
<S> <C> <C> <C> <C>
Mortgage:
One- to four-family ............ 14 $590 6 $232
Construction ................... 0 0 0 0
Commercial ..................... 4 163 8 556
-------------------------------------
Total mortgage loans ............ 18 753 14 788
Other commercial ................ 5 42 2 59
Consumer ........................ 46 41 14 33
--------------------------------------
Total all loans ................. 69 $836 30 $880
======================================
Delinquent loans to total loans . 0.99% 1.04%
</TABLE>
<PAGE>
The following table sets forth information regarding non-accrual loans. The Bank
discontinues accruing interest on loans ninety days or more past due, at which
time all accrued but uncollected interest is reversed. Loans are returned to
accrual status when in management's judgement, the borrower's ability to make
periodic principal and interest payments is back to normal. In addition, some
restructured loans which are now current continue as non-accrual loans until
such time as the borrower has demonstrated a continued capacity to keep the loan
current. Interest income under the original terms of non-accruing loans for the
year ended December 31, 1997 would have been $205,906. Interest income on loans
that were non-accruing at December 31, 1997 that was included in income during
1997 was $89,041.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------
1997 1996 1995
------ ------ -----
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accruing mortgage loans delinquent
more than 90 days............................. $1,080 $1,341 $ 788
Non-accruing other loans delinquent more
than 90 days.................................. 134 53 92
Non-accruing loans other than loans
90 days or more delinquent.................... 876 501 765
------ ------ -------
Total non-performing loans.................... 2,090 1,895 1,645
Total foreclosed real estate, net of
related allowance for losses.................. 159 117 41
------ ------ -------
Total non-performing assets.................... $2,249 $2,012 $1,686
====== ======= ======
Non-performing loans to net loans.............. 1.76% 1.91% 1.92%
Total non-performing assets to total assets.... 1.47% 1.50% 1.35%
</TABLE>
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of the risk inherent in its loan
portfolio and the general economy. Such evaluation, which includes a review of
all loans on which full collectibility may not be reasonably assured, considers
among other matters, the estimated net realizable value of the underlying
collateral, economic conditions, historical loan loss experience and other
factors that warrant recognition in providing for an adequate loan loss
allowance.
<PAGE>
The following table sets forth certain information regarding the Bank's
allowance for possible loan losses at the dates indicated.
<TABLE>
<CAPTION>
At or for the year ended December 31,
-------------------------------------
1997 1996 1995
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period ....... $ 893 $ 867 $ 613
Gross charge-offs:
Commercial business ................. (24) (94) (2)
Commercial real estate ............. (19) (223) (36)
Residential mortgage ................ (25) (19) (10)
Consumer ............................ (72) (65) (47)
------- ------- -------
Total charge-offs ................. (140) (401) (95)
------- ------- -------
Gross recoveries:
Commercial business ................. 0 0 32
Commercial real estate .............. 49 27 0
Residential mortgage ............... 0 0 0
Consumer ............................ 10 10 2
------- ------- -------
Total recoveries .................. 59 37 34
------- ------- -------
Net charge-offs ...................... (81) (364) (61)
------- ------- -------
Provision for loan losses ............ 530 390 315
------- ------- -------
Balance at end of year ............... $ 1,342 $ 893 $ 867
======= ======= =======
Ratio of net charge-offs during the
period to average loans outstanding
during the period ................... 0.07% 0.39% 0.08%
Ratio of allowance for loan losses to
gross loans receivable at the end
of period ........................... 1.11% 0.89% 1.00%
Ratio of allowance for loan losses to
non-performing loans at end of
period .............................. 64.21% 47.12% 52.71%
</TABLE>
<PAGE>
The following table sets forth the allocation of the allowance for loan
losses by loan category at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------
1997 1996 1995
--------------------- --------------------- --------------------
% of Loans % of Loans % of Loans
In Each In Each In Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial business ........... $ 195 6.8% $ 161 6.5% $ 120 6.2%
Commercial real estate ........ 798 32.3 488 29.8 541 28.0
Residential mortgage .......... 274 45.4 207 52.5 150 54.1
Consumer ...................... 75 15.5 37 11.2 56 11.7
------ ----- ------ ----- ------ -----
Total allowance for loan losses $1,342 100.0% $ 893 100.0% $ 867 100.0%
------ ----- ------ ----- ------ -----
</TABLE>
When reviewing the adequacy of the allowance for loan losses, the
amount of impaired loans is also taken into consideration. The Bank adopted SFAS
Statement No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS
Statement No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures" as of January 1, 1995.
Within the context of SFAS 114 and 118, certain loan categories which
represent groups of smaller balance homogeneous loans are collectively evaluated
and excluded from the provision of the standards. The Bank has determined that
those categories include residential real estate loans, consumer loans. The
standards are applied to loans categorized as commercial and real estate
commercial.
Impaired Loans: December 31, 1997
Commercial $ 159,088 Based on fair value of collateral
R/E Commercial 1,414,128 Based on fair value of collateral
Total $1,573,216
When, during the term of a loan, it becomes apparent that the loan
principal or interest may not be repaid according to its original term or some
event impacts the sufficiency of the collateral, it is considered impaired and
is normally placed on non-accrual status. Criteria used when reviewing for
impairment include: a loan that is past due more than 90 days, a loan that must
be renegotiated as a result of the borrower's inability to meet the original
loan contract, or the loan officer is aware of other circumstances relating to
the individual borrower, the collateral, or economic circumstances which may
result in difficulty collecting the loan principal and interest. The risk
factors in an impaired loan situation vary based on the category of the loan and
the collateral involved. Loans in the commercial category vary in terms of
underlying collateral and therefore usually carry a higher degree of risk even
though policy guidelines may require a collateral position with an adequate loan
to value ratio. Real Estate commercial loans normally have real property as the
primary collateral, therefore risk of loss is minimized. There is at December
31, 1997, very little specific allowance for loan losses allocated to impaired
loans because in most cases the realizable value of the collateral exceeds the
loan balance.
<PAGE>
It is the Bank's policy that accrual of interest on loans be
discontinued when, in the opinion of management, there is an indication that the
borrower may be unable to meet payments as they become due. Although interest
income is not accrued on loans reclassified to non-accrual status, interest
income may be recognized on a cash basis. A loan will generally be recognized as
impaired if it is 90 days past due and on non-accrual status. It should be
noted, that the adoption of Statement 114 has had no effect on Industry Guide 3
disclosures.
In determining whether or not an impaired loan should be charged-off
management will consider both the adequacy of the collateral and the other
resources of the borrower. If the collateral is insufficient and collectibility
is highly unlikely, the loan is charged-off.
Investment Activities
It is the Bank's policy to reinvest all available funds in a prudent
manner which will provide for the safety of the funds, the liquidity requirement
of the Bank, and the highest yield. Safety and liquidity standards are not
compromised in favor of increased rates of return. In determining its
investments, the Bank considers investment type, credit quality and maturity of
investments, as well as the maximum credit exposure to one obligor at any one
time. Consideration is also given to each investment's risk-weight as determined
by regulatory risk-based capital guidelines. Prior to 1991, the Bank had
actively invested in equity securities for the purpose of diversifying its
portfolio and enhancing yield. Due to the growth in assets related to the branch
acquisitions and the correspondent need to maintain adequate capital ratios, the
Bank liquidated its equity securities portfolio. The Bank has received approval
from the FDIC to retain its authority to invest in equity securities. See
"Regulation and Supervision - Federal Deposit Insurance Corporation Improvement
Act of 1991 - Restrictions Upon State-Chartered Banks."
<PAGE>
The following table sets forth certain information regarding the
carrying and market values of the Bank's investment securities portfolio at the
dates indicated:
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------
1997 1996 1995
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning deposits:
Certificates of deposit .................... $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Overnight funds ........................... 6 6 2 2 $ 2,461 $ 2,461
-------- ------- ------- ------- ------- -------
Total interest-bearing deposits ...... 6 6 2 2 $ 2,461 $ 2,461
======== ======= ======= ======= ======= =======
Investment securities:
Available for sale ......................... $ 9,261 $ 9,261 $ 7,452 $ 7,452 $ 8,377 $ 8,377
To be Held to Maturity (1) ................. 15,709 15,964 19,837 19,908 20,423 $20,594
-------- ------- ------- ------- ------- -------
Total investment securities......... $ 24,970 $25,225 $27,289 $27,360 $28,800 $28,971
======== ======= ======= ======= ======= =======
</TABLE>
- --------------
(1) Includes stock in the FHLB of Boston of $1,537,650, $1,320,550 and
$1,320,550 at December 31, 1997,1996 and1995, respectively.
The table below sets forth certain information regarding the carrying value,
weighted average yields and maturities of the Bank's investment securities at
December 31, 1997.
Investment Securities Available for Sale
<TABLE>
<CAPTION>
Approximate Weighted
Carrying Market Average
Value Value Yield
----- ----- -----
<S> <C> <C> <C>
U.S. Government and agency obligations
Due in one year or less ................ $ 0 $ 0 0.00%
Due from one to five years ............. 0 0 0.00
Due from five to ten years ............. 2,732 2,731 5.96
Due after 10 years ..................... 6,419 6,530 7.51
Total .................................. $9,151 $9,261 7.05%
</TABLE>
<PAGE>
Investment Securities to be Held to Maturity
<TABLE>
<CAPTION>
Approximate Weighted
Carrying Market Average
Value Value Yield
----- ----- -----
<S> <C> <C> <C>
U.S. Government and agency obligations
Due in one year or less ........... $ 239 $ 237 5.99%
Due from one to five years ........ 5,271 5,337 6.79
Due from five to ten years ........ 3,581 3,667 7.21
Due after ten years ............... 4,517 4,638 7.36
Total ............................. $13,608 $13,879 7.08%
Other
Due in one year or less (1) ....... $ 1,538 $ 1,538 6.47%
Due from one to five years ........ 0 0 0.00
Due from five to ten years ........ 563 547 5.16
Due after ten years ............... 0 0 0.00
Total ............................. $ 2,101 $ 2,085 6.12%
Total Investment securities
to be Held to Maturity ........ $15,709 $15,964 6.95
</TABLE>
- ----------------
(1) Represents stock in the FHLB of Boston
There were no investment securities (exclusive of obligations of the U.S.
Government and agencies) issued by any one entity with a total carrying value in
excess of 10% of stockholders' equity at December 31, 1997.
Source of Funds
General. Deposits, advances from the FHLB of Boston, loan repayments and
retained earnings are the primary source of the Bank's funds for use in lending,
investment and for other general purposes.
Deposits. The Bank offers a variety of deposit accounts having a range of
interest rates and terms. The Bank's deposits consist of passbook savings, NOW,
money market and certificate accounts. The flow of deposits is influenced
significantly by general economic conditions, changes in money market and
prevailing interest rates and competition. The Bank's deposits are obtained
primarily from the areas in which its branches are located. The Bank relies
primarily on customer service and long-standing relationships with customers to
attract and retain deposits. Certificate accounts in excess of $100,000 are not
actively solicited by the Bank.
<PAGE>
The following table sets forth the distribution of the Bank's deposit accounts
at the dates indicated and the weighted average nominal interest rates on each
category of deposits presented. Management does not believe that the use of
year-end balances resulted in any material difference in the information
presented.
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------- ------------------------------ ---------------------------
Weighted Weighted Weighted
Percent Average Percent Average Percent Average
Of Total Nominal of Total Nominal of Total Nominal
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
------ -------- ---- ------ -------- ---- ------ -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Savings and transaction accounts:
Commercial NOW $ 6,074 5.4% 3.16% $ 5,693 5.2% 2.64% $ 4,094 3.9% 2.34%
NOW 7,840 7.0 1.16 8,382 7.6 1.15 8,670 8.3 1.32
Regular Savings (1) 20,765 18.6 2.78 21,802 19.8 2.77 22,548 21.5 3.00
Money market 6,211 5.6 3.96 5,701 5.2 3.78 5,763 5.5 3.95
Demand deposits (1) 12,445 11.1 9,367 8.4 8,111 7.8
-------- ----- -------- ----- -------- -----
Total 53,335 47.7 2.71 50,945 46.2 2.57 49,186 47.0 2.71
-------- ----- -------- ----- -------- -----
Certificate accounts:
Three month 1,084 1.0 4.72 944 0.9 4.30 1,498 1.4 5.23
Six month 5,571 5.0 4.97 10,710 9.7 4.81 5,945 5.7 5.41
Twelve month 14,453 13.0 5.26 12,166 11.0 5.09 12,577 12.0 5.77
Eighteen month 256 0.2 5.57 3,765 3.4 5.59 3,635 3.5 5.23
Two to five years 19,807 17.7 5.76 13,728 12.5 6.36 13,813 13.2 6.35
IRA 17,216 15.4 6.13 18,024 16.3 6.29 18,048 17.2 6.39
-------- ----- -------- ------ -------- -----
Total 58,387 52.3 5.65 59,337 53.8 5.73 55,516 53.0 6.03
-------- ----- -------- -------- -----
Total deposits (1) $111,722 100.0% 4.44% $110,282 100.0% 4.43% $104,702 100.0% 4.62%
======== ===== ======== ===== ======== =====
</TABLE>
(1) Includes escrow and trustee accounts on sold loans.
<PAGE>
At December 31, 1997, the Bank had outstanding $6.7 million in time deposit
accounts in amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
Amount
(In thousands)
<S> <C>
Maturity Period
Three months or less.................................. $2,002
Over three through six months......................... 1,120
Over six through 12 months............................ 738
Over 12 months........................................ 2,883
-----
Total................................................. $6,743
======
</TABLE>
Borrowings
The borrowings utilized by the Bank primarily have been advances from the
FHLB of Boston. In addition, the Bank has in the past utilized borrowings in the
form of repurchase agreements, secured by United States Government or agency
securities, through a nationally recognized investment firm.
The following table sets forth certain information regarding borrowed funds for
the dates indicated:
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
------------------------------------
1997 1996 1995
------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Total borrowings:
Average balance outstanding ............ $23,390 $11,624 $16,082
Maximum amount outstanding at any
month-end during the period .......... 28,952 13,186 26,037
Balance outstanding at end of period ... 28,219 13,186 10,952
Weighted average interest rate during
the period ........................... 5.87% 5.87% 6.21%
Weighted average interest rate at end
of period ............................ 5.94% 5.99% 6.02%
</TABLE>
<PAGE>
Subsidiaries
The Bank is the only subsidiary of the Company. The Bank has no
subsidiaries.
REGULATION AND SUPERVISION
General
The Bank is a Maine-chartered savings bank and its deposit accounts are
insured up to applicable limits by the FDIC primarily under the Bank Insurance
Fund ("BIF"). The Bank is subject to extensive regulation by the FDIC, as the
deposit insurer, and the State of Maine Bureau of Banking ("Bureau"). The Bank
must file reports with the Bureau and the FDIC concerning its activities and
financial condition, in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with or acquisitions of other
depository institutions. There are periodic examinations by the FDIC to test the
Bank's compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which a
savings Bank can engage and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such regulation could have
material adverse impact on the Company and the Bank and their operations and
stockholders. The Company is also required to file certain reports with, and
otherwise comply with the rules and regulations of the Federal Reserve Board
(the "FRB"), the State of Maine Bureau of Banking, and the Securities and
Exchange Commission (the "SEC") under the federal securities laws.
Maine Law
The Superintendent of the Maine Bureau of Banking is vested with the authority
to regulate and supervise banks which are chartered under Maine law. The
Superintendent is required to examine each state chartered bank at least once
every thirty-six months. The Superintendent's approval is required for
establishing or closing branches, for merging with other banks and for
undertaking many other activities. Any Maine bank that does not operate in
accordance with the Superintendent's regulations, policies and directive may be
sanctioned for noncompliance.
Maine-chartered savings banks have lending, investment and other powers similar
to those authorized for federally-chartered savings institutions, including
commercial lending authority and the ability to offer personal and commercial
checking and NOW accounts, and have virtually the same powers as commercial
banks. To the extent authorized by the Superintendent, Maine-chartered savings
banks have all lending, investment and other powers possessed by
federally-chartered savings institutions based in Maine.
The Bureau of Consumer Credit Protection administers the Maine Consumer
Credit Code, which regulates broadly all consumer lending transactions in the
State of Maine, as well as home solicitation sales and the offering of consumer
credit insurance.
<PAGE>
Federal Deposit Insurance Corporation Improvement Act of 1991
On December 19, 1991, the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") became law. While FDICIA primarily addresses additional
sources of funding for the BIF, which insures the deposits of commercial banks
and savings banks, it also imposes a number of new mandatory supervisory
measures on commercial banks, savings banks and savings associations.
FDICIA requires financial institutions to take certain actions relating to
their internal operations, including: providing annual reports on financial
condition and management to the appropriate federal banking regulators, having
an annual independent audit of financial statements performed by an independent
public accountant and establishing an independent audit committee comprised
solely of outside directors. FDICIA also imposes certain operational and
managerial standards on financial institutions relating to internal controls,
loan documentation, credit underwriting, interest rate exposure, asset growth,
compensation, fees and benefits. The federal banking agencies, including the
FDIC, have adopted guidelines implementing these standards.
Pursuant to FDICIA, the banking agencies have issued a regulation requiring
all financial institutions to adopt a written policy governing real estate
lending. The regulation requires that such policy address underwriting,
documentation, approval and reporting standards and portfolio diversification
and administration requirements for real estate loans, so as to provide for
prudent and sound lending practices. The policy also must take into account
guidelines issued by the banking agencies governing such policies. The
guidelines suggest maximum loan-to-value ratios for all real estate loans, other
than permanent financing on one- to four-family residences, and provide limits
and requirements on loans that exceed those limits.
Restrictions Upon State-Chartered Banks.
FDICIA added new Section 24 to the Federal Deposit Insurance Act (the "FDI
Act"), which generally limits the activities and equity investments of state
chartered, FDIC insured savings banks and their subsidiaries to those
permissible for national banks and their subsidiaries, unless such activities
and investments are specifically exempted by Section 24 or consented to by the
FDIC. In October 1992, the FDIC adopted final regulations governing the equity
investments of FDIC insured savings banks, effective on December 9, 1992, which
generally prohibit equity investments by such banks and require the divestiture
of such investments by December 19, 1996. Section 24 provides an exception for
investments in common and preferred stocks listed on a national securities
exchange or the shares of registered investment companies by a bank if (1) the
bank held such types of investments during the 14-month period from September
30, 1990 through November 26, 1991, (2) the state in which the bank is chartered
permitted such investments as of September 30, 1991, and (3) the bank notifies
the FDIC and obtains approval from the FDIC to make or retain such investments.
Upon receiving such FDIC approval, an institution's investment in such equity
securities will be subject to an aggregate limit up to its core capital. Section
24 also contains an exception for certain majority owned subsidiaries. Banks
holding impermissible investments that do not receive FDIC approval must submit
to the FDIC a plan for divestiture of such investments as quickly and prudently
as possible. The Bank applied for, and received, FDIC approval to invest in such
otherwise impermissible equity investments. The Bank currently has no equity
securities portfolio.
<PAGE>
The FDIC has also adopted final regulations pertaining to the activity
restrictions imposed upon insured savings banks and their subsidiaries by
Section 24. The FDIC will not approve an activity that it determines to present
a significant risk to the FDIC insurance funds. Management believes that its
activities are of types permissible under FDICIA.
Risk-Based Premiums
FDICIA required the FDIC to issue regulations, effective by no later than
January 1, 1994,which establish a system for setting deposit insurance premiums
based upon the risks a particular bank or savings association poses to the
deposit insurance funds.
The FDIC has adopted rules to implement a risk-based assessment system.
Under the rule, the FDIC assigns an institution to one of three capital
categories consisting of (1) well capitalized, (2) adequately capitalized or (3)
undercapitalized, and one of the three supervisory subcategories. An
institution's assessment rate depends on the capital category and supervisory
category to which it is assigned. Assessment rates currently range from 0% of
deposits for an institution in the highest category (i.e., well capitalized and
favorable supervisory rating) to 0.27% of deposits for institutions in the
lowest category (i.e., undercapitalized and substantial supervisory concern).
The Bank's deposit insurance assessment will depend upon the category and
subcategory to which the Bank is assigned by the FDIC. The supervisory subgroup
to which an institution is assigned by the FDIC is confidential and may not be
disclosed; the Bank qualifies as "well-capitalized" under the capital
categories. Any increase in insurance assessments could have an adverse effect
on the earnings of the Bank.
Prompt Corrective Action.
FDICIA also establishes a system of prompt corrective action to resolve the
problems of undercapitalized institutions. The FDIC, FRB, Office of the
Comptroller of the Currency ("COC") and the Office of Thrift Supervision ("OTS")
have adopted final rules, effective December 19, 1992, which require such
regulators to take certain supervisory actions against undercapitalized
institutions, the severity of which depends upon the institution's degree of
capitalization. The adopted rules create five categories consisting of
"well-capitalized," "adequately capitalized," "significantly undercapitalized"
and "critically-undercapitalized." Regulatory action taken will depend on the
level of capitalization of the institution and may range from restrictions on
capital distributions and dividends to seizure of the institution. Generally,
subject to a narrow exception, FDICIA requires the banking regulator to appoint
a receiver or conservator for an institution that is critically undercapitalized
within 90 days after becoming critically undercapitalized. FDICIA authorizes the
banking regulators to specify the ratio tangible equity to assets at which an
institution becomes critically-undercapitalized and requires that ratio be no
less than 2% of assets.
The final rule also allows the regulator to downgrade an institution that
meets certain minimum capital requirements but is otherwise in a "less than
satisfactory" condition, which may result in an otherwise "adequately
capitalized" institution with other problems being classified as
"undercapitalized."
<PAGE>
The final rule adopted by the FDIC, on September 15, 1992, to implement the
prompt corrective action section of FDICIA, generally provides that an insured
institution that has risk-based capital of less than 8.0% or a leverage ratio
that is less than 4.0% would be considered to be "undercapitalized", an insured
institution that has risk-based capital less than 6.0% or a leverage ratio that
is less than 3.0% would be considered to be "significantly under-capitalized"
and an insured institution that has a tangible capital to assets ratio equal to
or less than 2% would be deemed to be "critically undercapitalized." Generally,
under the rule, an insured institution that is "undercapitalized,"
"significantly under-capitalized," or "critically undercapitalized" becomes
immediately subject to certain regulatory restrictions, including, but not
limited to, restrictions on growth, investment activities, capital
distributions, and affiliate transactions. The filing of a capital restoration
plan, which must be guaranteed by the parent holding company, is also required.
In addition, "critically undercapitalized" institutions must receive prior
written approval from the FDIC to engage in any material transaction other than
in the normal course of business. The Bank's capital ratios (see "Capital
Maintenance") qualify it for "well-capitalized" status.
Insurance of Deposit Accounts
Under the current risk-based deposit insurance premium structure, insured
institutions will pay a premium ranging from 0.00% of deposits to 0.27% of
deposits depending on the institution's FDIC risk classification. See "Federal
Deposit Insurance Corporation Improvement Act of 1991 - Risk-Based Premiums."
The FDIC is authorized to raise premiums for BIF members if the BIF is expected
to be at levels less than its required reserve ratio. The FDIC has exercised
this authority several times in the past and may raise BIF insurance premiums
again in the near future. If such action is taken by the FDIC it could have an
adverse effect on the earnings of the Bank. Included in the 1996 insurance
premium amount was a one-time assessment of $175,807 on the SAIF-attributed
deposits acquired by the Bank in 1994. This further resulted in a refund of the
4th quarter assessment of $20,492.
During 1994 and until May 1995, the Bank paid insurance premiums under the
risk-based system of 0.23% of deposits. At that time the BIF was determined to
be adequately capitalized and assessments on BIF deposits were restructured to
range from 0.0% to 0.27%. As a well capitalized Bank, the Bank was assessed at
0% for the period from June through December 1995 on its BIF deposits. Pursuant
to the Bank acquisition of First Federal of Lewiston in 1994, an attributable
portion of those deposits are insured under the Savings Association Insurance
Fund ("SAIF"). Prior to May 1995, the Bank's SAIF-attributable deposits were
assessed at the same rate as its BIF deposits. The Bank's attributable deposits
totalled $33.4 million in 1995 and were assessed at 0.23%. The Bank paid the
SAIF assessment rate on these deposits through the 3rd quarter of 1996 when a
special FDIC assessment was levied. The Bank paid a total of $236,135 in federal
deposit insurance premiums to the BIF for the year ended December 31, 1996 and
as a bank categorized as "well-capitalized' paid no BIF or SAIF premium in 1997.
The attributable SAIF deposit amount is adjusted each year according to the
Bank's overall deposits growth (not including growth attributable to mergers or
acquisitions). The Bank's attributable deposit amount for 1997 was $29.5 million
and for 1998 is $30.0 million. In 1998, under the current schedule for
"well-capitalized" banks, the Bank would pay a 0.00% FDIC assessment rate on
it's BIF and SAIF-attributed deposits, a 0.013% Financing Corporation (FICO)
assessment on BIF deposits and a 0.062% FICO assessment on SAIF-attributed
deposits. In 1997 the Bank paid $28,456 in FICO assessments on its BIF and
SAIF-attributed deposits.
<PAGE>
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound condition to
continue operations, or has violated any applicable law, regulation, rule, order
or condition imposed by the FDIC. The management of the Bank does not know of
any practice, condition or violation that might lead to termination of deposit
insurance. At December 31, 1997, the Bank's capital exceeded the minimum capital
requirements imposed by the FDIC.
Capital Maintenance
The Bank is subject to capital requirements imposed by the FDIC and the
Superintendent, which at the present time are substantially identical. The
failure to satisfy capital requirements can result in severe regulatory
sanctions. The Bank's capital currently is significantly in excess of federal
and state requirements.
The FDIC has issued regulations that require BIF-insured banks, such as the
Bank, to maintain minimum levels of capital. The regulations establish a minimum
leverage capital requirement of not less than 3% core capital to total assets
for banks in the strongest financial and managerial condition, with a CAMEL
Rating of 1 (the highest examination rating of the FDIC for banks). For all
other banks, the minimum leverage capital requirement is 3% plus an additional
cushion of at least 100 to 200 basis points. Core capital is comprised of the
sum of common stockholders' equity, non-cumulative perpetual preferred stock
(including any related surplus) and minority interests in consolidated
subsidiaries, minus all intangible assets (other than qualifying servicing
rights). At December 31, 1997, the Bank's ratio of core capital to total assets
equalled 7.0%, which exceeded the minimum leverage requirement.
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard requires the maintenance of total
capital (which is defined as core capital and supplementary capital) to
risk-weighted assets of 8%. In determining the amount of risk-weighted assets,
all assets, including certain off-balance sheet assets, are multiplied by a
risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in
the type of asset. The components of core capital are equivalent to those
discussed earlier under the 3% leverage requirement. The components of
supplementary capital currently include cumulative perpetual preferred stock,
subordinated debt and intermediate preferred stock and allowance for loan and
lease losses. Allowance for loan and lease losses includable in supplementary
capital is limited to a maximum of 1.25% of gross risk-weighted assets. Overall,
the amount of capital counted toward supplementary capital cannot exceed 100% of
core capital.
At December 31, 1997, the Bank's total risk-based capital to risk-weighted
assets was 11.1%, which exceeded the FDIC risk-based capital requirements.
Loans-to-One-Borrower Limitations
With certain limited exceptions, a Maine chartered savings bank may not
make a loan or extend credit (including lease financing) to a single borrower,
together with their related interests, in excess of 20% of the bank's capital
and surplus, while loans to a single borrower, together with their related
entities, in excess of 10% of capital and surplus requires the prior approval of
the majority of the Board of Directors, or of the executive committee. The Bank
currently complies with all applicable loans-to-one-borrower limitations.
<PAGE>
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), as implemented by FDIC
regulations, a savings institution has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of
its entire community, including low and moderate income neighborhoods. The CRA
does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the FDIC, in connection
with its examination of a savings institution, to assess the institution's
record of meeting the credit needs of its community and to take such record into
account in its evaluation of certain applications by such institution. Effective
July 6, 1990, public disclosure of an institution's CRA rating is required. The
FDIC provides a written evaluation of an institution's CRA performance utilizing
a four-tiered descriptive rating system which replaced the five-tiered numerical
rating system. The Bank has an outstanding CRA rating.
Federal Reserve System
Under FRB regulations, the Bank is required to maintain noninterest-earning
reserves against its transaction accounts (primarily NOW and regular checking
accounts). The Federal Reserve Board regulations generally require that reserves
of 3% must be maintained against aggregate transaction accounts of $47.8 million
or less (subject to adjustment by the FRB), and a reserve of $1.4 million, plus
10% (subject to adjustment by the FRB between 8% and 14%) of that portion of
total transaction accounts in excess of $47.8 million. The first $4.7 million of
otherwise reservable balances (subject to adjustments by the FRB) are exempted
from the reserve requirements. The Bank is in compliance with the foregoing
requirements. Because required reserves must be maintained in the form of either
vault cash, a non-interest-bearing account at a Federal Reserve Bank or a
pass-through account as defined by the FRB, the effect of this reserve
requirement is to reduce the Bank's interest-earning assets.
Bank Holding Company Regulation
On May 7, 1993, the Company received approval from the FRB to become a
registered bank holding company pursuant to the Bank Holding Company Act of 1956
("BHCA") by acquiring all of the common stock of the Bank. The Company is
subject to examination, regulation and periodic reporting under the BHCA, as
administered by the FRB.
The Company is required to obtain the prior approval of the FRB to acquire
all, or substantially all, of the assets of any bank or bank holding company.
Prior FRB approval is required for the Company to acquire direct or indirect
ownership or control of any voting securities of any bank or bank holding
company if, after giving effect to such acquisition, it would, directly or
indirectly, own or control more than 5% or any voting shares of such bank or
bank holding company. The BHCA also prohibits the acquisition by the Company of
more than 5% of the voting shares, or substantially all the assets, of a bank
located outside the State of Maine unless such an acquisition is specifically
authorized by the laws of the state in which such bank is located. Maine banking
law permits the interstate acquisition of banking institutions by bank holding
companies on a nationwide basis. See "-Acquisition of the Company." In addition
to the approval of the FRB, before any bank acquisition can be completed, prior
approval thereof may also be required to be obtained from other agencies having
supervisory jurisdiction over the bank to be acquired, including the
Superintendent.
<PAGE>
The status of the Company as a registered bank holding company under the
BHCA does not exempt it from certain federal and state laws and regulations
applicable to corporations generally, including, without limitation, certain
provisions of the federal securities laws.
In addition, a bank holding company is generally prohibited from engaging
in, or acquiring direct or indirect control of, any Company engaged in,
non-banking activities. One of the principal exceptions to this prohibition is
for activities found by the FRB to be so closely related to banking or managing
or controlling banks as to be a proper incident thereto. Some of the principal
activities that the FRB has determined by regulation to be so closely related to
banking are; (i) making or servicing loans; (ii) performing certain data
processing services; (iii) providing discount brokerage services; (iv) acting as
fiduciary, investment or financial advisor; (v) leasing personal or real
property; (vi) making investments in corporations or projects designed primarily
to promote community welfare; and (vii) acquiring a savings and loan
association.
Subsidiary banks of a bank holding company are subject to certain
quantitative and qualitative restrictions imposed by the Federal Reserve Act on
any extension of credit to, or purchase of assets from, or provision of a letter
of credit on behalf of the bank holding company or its subsidiaries, and on the
investment in or acceptance of stocks or securities of such holding company or
its subsidiaries as collateral for loans. In addition, provisions of the Federal
Reserve Act and FRB regulations limit the amount of, and establish required
procedures and credit standards with respect to, loans and other extensions of
credit to officers, directors and principal shareholders of the Bank, the
Company, any subsidiary of the Company and related interests of such persons.
Moreover, subsidiaries of bank holding companies are prohibited from engaging in
certain tie-in arrangements ( with the Company or any of its subsidiaries) in
connection with any extension of credit, lease or sale of property or furnishing
of services.
The Company and its subsidiary, the Bank, are affected by the monetary and
fiscal policies of various agencies of the United States Government, including
the FRB. In view of changing conditions in the national economy and in the money
markets, it is impossible for management of the Company to accurately predict
future changes in monetary policy or the effect of such changes on the business
or financial condition of the Company or the Bank. Restrictions on the
Acquisition of the Company
Under the Federal Change in Bank Control Act ("CIBCA"), a notice must be
submitted to the FRB if any person (including a company), or group acting in
concert, seeks to acquire 10% or more of the Company's shares of Common Stock
outstanding, unless the FRB finds that the acquisition will not result in a
change in control of the Company. Under the CIBCA, the FRB has 60 days within
which to act on such notices, taking into consideration certain factors,
including the financial and managerial resources of the acquiror, the
convenience and needs of the communities served by the Company and the Bank, and
the antitrust effects of the acquisition. Under the BHCA, any Company would also
be required to obtain prior approval from the FRB before it may obtain "control"
of the Company within the meaning of the BHCA. Control generally is defined to
mean the ownership or power to vote 25 percent or more of any class of voting
securities of the Company or the ability to control in any manner the election
of a majority of the Company's directors. See "-Bank Holding Company
Regulation."
<PAGE>
Under Maine law, the Superintendent must approve the following transactions
prior to consummation: (1) the acquisition of control of a Maine financial
institution or Maine financial institution holding company by any person or
company; (2) the acquisition of more than 5% of the voting shares of a Maine
financial institution holding company by a financial institution or financial
institution holding company; and (3) the acquisition of more than 5% of the
voting shares of a financial institution, the operations of which are
principally conducted outside the State of Maine, by a Maine financial
institution or a Maine financial institution holding company. In addition to the
foregoing, any person or company which acquires directly or indirectly more than
5% of the voting shares of a Maine financial institution or a Maine financial
institution holding company must file with the Superintendent within five days
of the acquisition a statement containing information specified under Maine law,
which is comparable to that required to be set forth in a statement on Schedule
13D under the Exchange Act.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Company and the Bank will report their income on a fiscal year
basis using the accrual method of accounting and will be subject to federal
income taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's addition to its reserve for bad debts
discussed below. The following discussion of tax matters is intended only as a
summary and does not purport to be a comprehensive description of the tax rules
applicable to the Bank or the Company.
Bad Debt Reserves. Savings institutions are permitted to establish a
reserve for bad debts and to make annual additions thereto, which additions may,
within specified formula limits, be deducted in arriving at their taxable
income. Qualifying thrifts with average assets of $500 million or less, such as
the Bank, may compute their deduction using a percentage based on the Bank's
actual loss experience.
<PAGE>
Corporate Alternative Minimum Tax. For taxable years beginning after
December 31, 1986, the Internal Revenue Code of 1986, as amended (the "Code")
imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%.
Only 90% of AMTI can be offset by net operating loss carryovers. For taxable
years beginning after December 31, 1989, the adjustment to AMTI based on book
income will be an amount equal to 75% of the amount by which a corporation's
adjusted current earnings exceeds its AMTI (determined without regard to this
adjustment and prior to reduction for net operating losses).
Dividends Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company and the Bank own more than 20% of the stock of a
corporation distributing a dividend, 80% of any dividends received may be
deducted.
State and Local Taxation
The Bank and the Company are subject to a separate state franchise tax in
lieu of state corporate income tax. For tax years beginning on or after January
1, 1986, the amount of the tax is the sum of 1% of Maine net income and $.08 per
$1,000 of Maine assets as defined in Maine law. Maine assets are the
corporation's total end of the year assets as reported on the federal income tax
return. Maine net income is the corporation's net income or loss as reported on
the federal income tax return which is apportioned to Maine under Maine law. The
Bank is not currently under audit with respect to its Maine income tax returns.
MANAGEMENT OF THE COMPANY
Senior Officers Who Are Not Directors
The following table sets forth certain information as of Dec. 31,1997, regarding
the senior officers of the Bank who are not also Directors.
Name Age Positions Held With the Bank
John E. Thien 48 Vice President and Treasurer
Gordon A. Flint 51 Regional Vice President
Robert D. Stone 49 Vice President-Operations
Gerard R. Belanger 53 Regional Vice President
<PAGE>
Biographical Information of Senior Officers Who Are Not Directors
Set forth below is certain information with respect to the senior officers
of the Company and the Bank. Unless otherwise indicated, the principal
occupation listed for each person below has been his or her principal occupation
for the past five years.
Gordon A. Flint joined the Bank in September 1992 as Vice President of
Commercial Lending/Branch Administration. Prior to his association with the
Bank, Mr. Flint was vice president of Private Banking and regional executive
officer of the Western Maine region of Fleet Bank of Maine.
John E. Thien joined the Bank in May 1992 as Vice President and was
appointed Treasurer in January 1993. Prior to joining the Bank, Mr. Thien served
as treasurer from 1979-1992 at American Bank, FSB of Sanford ("American"),
located in Sanford, ME. In 1990, the OTS placed American in receivership and the
Resolution Trust Corporation (the "RTC") took control of the institution. Mr.
Thien remained with American through its resolution in March 1992, and served as
president of the Bank under the RTC.
Robert D. Stone, Vice President of Operations joined the Bank in February
1994. Prior to joining the Bank, Mr. Stone was a technology consultant from
1992-1994 and Senior Vice President, New England Operations, of Fleet Financial
Group from 1972-1992.
Gerard R. Belanger joined the Bank in April 1994 as Vice President and
Commercial Lending Officer. Prior to joining the Bank, Mr. Belanger was Vice
President and Commercial Lending Officer for Fleet Bank and its predecessors
from 1963-1994.
<PAGE>
Item 2. Properties
The Bank conducts its business through eight branch locations and one
seasonal location, as indicated below:
Net Book Value Leased or Lease
Location at 12/31/97 Owned Expiration
- -------- ----------- ----- ----------
Main Street
Kingfield, ME $ 294,636 Owned
Main Street
Stratton, ME 62,818 Owned
Main Street
Phillips, ME 76,389 Owned
Main Street
Rangeley, ME 187,347 Owned
Routes 2&4
Farmington, ME 140,915 Leased 2/28/03
Route 201
Bingham, ME 140,536 Owned
Main Street
Strong, ME 83,038 Owned
110 Canal Street
Lewiston, ME 386,147 Owned
----------
Total Net Book
Value $1,371,826
==========
<PAGE>
Item 3. Legal Proceedings
The Bank is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business, which in
the aggregate involve amounts which are believed by management to be immaterial
to the financial condition of the Bank.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The inside back cover of the Company's 1997 Annual Report to Stockholders
is herein incorporated by reference.
Item 6. Management's Discussion and Analysis of Plan of Operation
Pages 2 through 7 of the Company's 1997 Annual Report to Stockholders are
herein incorporated by reference.
Item 7. Financial Statements
See Item 13.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
There has been no current report on Form 8-K filed within 24 months prior
to the date of the most recent financial statements reporting a change in
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Information concerning directors, executive officers, promoters and control
persons of the Registrant is incorporated herein by reference from the Company's
definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
May 13, 1998, a copy of which will be filed not later than 120 days after the
close of the fiscal year.
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy statement for the Annual Meeting
of Stockholders to be held on May 13, 1998, a copy of which will be filed not
later than 120 days after the close of the fiscal year.
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the Company's definitive
Proxy statement for the Annual Meeting of Stockholders to be held on May 13,
1998, a copy of which will be filed not later than 120 days after the close of
the fiscal year.
Item 12. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions is
incorporated herein by reference from the Company's definitive Proxy statement
for the Annual Meeting of Stockholders to be held on May 13, 1998, a copy of
which will be filed not later than 120 days after the close of the fiscal year.
Item 13. Exhibits and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements of the Company are incorporated by
reference to the following indicated pages of the1997 Annual Report to
Stockholders.
Independent Auditors' Report................................................ 8
Consolidated Statements of Financial Condition as of
December 31, 1997 and 1996................................................... 9
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995............................................ 11
Consolidated Statements of Stockholders' Equity for
the Years Ended December 31, 1997, 1996, and 1995............................ 12
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995....................................... 14
Notes to Consolidated Financial Statements................................... 16
<PAGE>
The remaining information appearing in the Annual Report to Stockholders is
not deemed to be filed as part of this report, except as expressly provided
herein.
(2) All schedules are omitted because they are not required or applicable,
or the required information is shown in the consolidated financial statements or
the notes thereto.
(3) Exhibits
(a) The following exhibits are filed as part of this report.
3.1 Certificate of Incorporation of KSB Bancorp, Inc.(1)
3.2 Bylaws of KSB Bancorp, Inc.(1)
4.0 Stock Certificate of KSB Bancorp, Inc.(1)
10.1 Form of Kingfield Savings Bank Recognition and Retention
Plan and Trust(2)
10.3 Form of KSB Bancorp, Inc. 1993 Incentive Stock Option
Plan.(2)
10.4 Form of KSB Bancorp, Inc. 1993 Stock Option Plan for
Outside Directors.(2)
10.5 Form of KSB Bancorp, Inc. 1998 Long-Term Incentive Stock
Option Plan.(3)
11.0 Computation of earnings per share, incorporated herein by
reference to Note 1 to the Consolidated Financial
Statements on pages 19 and 26, respectively, of the 1997
Annual Report to Stockholders attached hereto as Exhibit
13.
13.0 1997 Annual Report to Stockholders (filed herewith).
21.0 Subsidiary information is incorporated herein by reference
to "Part I - Subsidiaries."
27.0 Financial Data Schedule
- ---------------
(1) Incorporated herein by reference into this document from the Exhibits to
Form S-1, Registration Statement, initially filed on March 18, 1993,
Registration No. 33-59744.
(2) Incorporated herein by reference into this document from the Exhibits to
the 1994 Proxy Statement, filed on April 4, 1994.
(3) Incorporated herein by reference into this document from the Exhibits to
the 1998 Proxy Statement , filed on April 3, 1998.
(b) Reports on Form 8-K.
None
1997 Annual Report
KSB Bancorp
<PAGE>
March 31, 1998
Dear Shareholder:
I am pleased to report to you on the results of operations for KSB Bancorp and
Kingfield Bank this past year. The Bank's earnings in 1997 reached record levels
as the Bank reported net income of $1,549,000 or $1.30 basic earnings per share.
This represents a 24% increase over 1996 earnings. Our earnings growth continues
to reflect the growth in the Bank's balance sheet. Total assets of Kingfield
Bank grew to $153 Million in 1997 or 14% over last year.
The continued growth of Kingfield Bank is due to our commitment of providing
high quality, personalized service to our customers. Kingfield Bank views itself
as a financial partner with its customers and the communities it operates in.
This commitment to serving our customers and communities was evident in the
$58.5 million in loans made in 1997.
The growth in Bank earnings combined with the market's reception of KSB Bancorp
stock to propel the price of KSB Bancorp's stock by 190% in 1997 from $7.67 per
share on December 31, 1996 to $22.50 per share on December 31, 1997. In June
1997 the Board of KSB Bancorp voted a three-for-one stock split effected in the
form of a 200% stock dividend. This stock split has helped create more market
activity in the stock resulting in a higher market price giving more value to
our shareholders.
The Bank continued its investments in technology this past year, helping improve
our services to our customers and develop greater efficiencies internally. The
Bank expanded its ATM network by 200% and we now have ATM service in every
community we serve. We invested over $90,000 in computer technology, creating an
internal network, which improves communication and productivity between our
several locations.
More important than our technological investments are the investments we have
made in our people. In 1997 we embarked on a continuous training process in
quality service. We have also developed an organizational structure that will
help assure that we are proactive in identifying and meeting the needs of our
customers.
In 1998 we look forward to expanding our services in Somerset County. On March
16, 1998 we closed on our acquisition of KeyBank's branch office in Madison,
Maine. We feel confident that Kingfield Bank's philosophy of personalized
community banking will be well received by the greater Madison community.
This is my fifth "letter to shareholders" since we became a stock company in
1993. During this time the Bank has grown from $65.5 million in assets to $152.8
million. Our earnings have more than doubled, and the value of a $10.00 share of
stock purchased on June 23, 1993 was worth an equivalent (dividend/split
adjusted) of $70.00 per share at the end of 1997. These results are due to the
efforts of a very dedicated, hard-working staff and a forward-thinking,
supportive board of directors. All of us at Kingfield Bank are dedicated to
achieving our mission of building the value of the Bank to our shareholders, our
customers and our communities. Thank you, again, for your support as we pursue
this mission.
Sincerely,
/s/John C. Witherspoon
John C. Witherspoon
President/CEO
1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
KSB Bancorp , Inc's wholly-owned subsidiary, "Kingfield Bank", is a community
Bank providing quality, personalized banking services to individuals and
businesses. In 1997 the Bank operated eight retail branch offices located in
Franklin, Somerset and Androscoggin counties, Maine.
The Bank's stated mission is "to continuously improve the Bank's long-term value
to shareholders, customers, employees and the communities it serves". Since
converting to a stock company in 1993, the bank has pursued its mission by
utilizing the capital raised in the offering to fund growth. A total of $61.7
million in deposits were acquired in acquisition of The First Federal Savings
Association in March 1994, and the purchase of four branches of Fleet Bank of
Maine in March 1995 (two of which were subsequently consolidated into existing
Kingfield Bank branches). In March 1998, the Bank will acquire approximately
$16.7 million dollars in deposits with the acquisition of the Madison, Maine
branch of KeyBank. This growth has provided a solid base for earnings and proved
to be an effective use of the Bank's capital. It has also diversified the Bank's
markets, reducing its dependence on a predominantly rural geography and forest
products and tourism-based economy.
Since 1994, when our rapid growth in deposits without corresponding loan growth
put pressure on the Bank's margins, the Bank has pursued a strategy of building
loan volumes in order to increase the margins of the Bank. In 1997 the Bank
originated $58.5 in new loans which resulted in an increase of $19.7 million in
net loan balances including loans available for sale. This helped grow the net
interest margin of the Bank from a low of 3.99% in 1994 to 4.46% in 1997.
In addition to the growth strategies implemented, the Bank has focused on
reducing operating expenses and gaining efficiencies and productivity through
investments in equipment, technology and training. In 1997 these investments
totaled $470,000. The result of these efforts has been a steady decline in the
Bank's operating expense to average asset ratio over the past 5 years from 4.70%
into 3.11%. The Bank's efficiency ratio dropped from 67% in 1996 to 62% for
1997.
MORTGAGE BANKING ACTIVITIES
Mortgage banking activities involve the origination of mortgage loans for sale,
as whole loans or packaging them into securities through the Federal Home Loan
Mortgage Corporation (FHLMC) or Federal National Mortgage association (FNMA).
For the years ended December 31, 1997 and December 31, 1996, the Bank originated
$15.8 and $19.2 million, respectively, of one to four-family mortgage loans. Of
these amounts $4.0 million in 1997 and $5.2 million in 1996 were sold.
The Bank recognizes fees related to the origination and sale of mortgage loans.
These fees totaled $70,000 for 1996 and $84,000 for 1997. The 1997 figure
includes $11,000 of net gains recognized for the present value of future
servicing rights on loans sold. The 1996 figure includes $29,000 of gain
attributed to mortgage servicing rights.
In addition to income earned upon the origination and sale of loans, the Bank
earns fees for the servicing of loans sold. At December 31, 1997, $75.1 in loans
was serviced for others, which generated $297,000 in fee income. At December 31,
1996, $78.3 million in loans were serviced, earning $321,000. The decrease in
the servicing portfolio is due, in part, to the Bank's past decision to keep
many saleable residential loans in its portfolio.
Mortgage banking activities expose the Bank to interest rate risk between the
date that loan rates are committed to a borrower and the date the loan is closed
and sold. Attempts are made to mitigate this risk through pricing of loan rates,
managing the volume of loans held for sale and utilizing forward commitments to
sell loans.
COMMERCIAL LENDING ACTIVITIES
The Bank's commercial loan portfolio continued to grow in 1997. The Bank
originated $25.3 million in commercial loans in the year ending December 31,
1997 resulting in an increase in commercial loan volumes of $10.7 million or 29%
over the levels at year-end 1996. This growth was a result of an increased
awareness of the banks personalized commercial loan services in the
Androscoggin, Somerset, and southern Franklin county markets. The expertise of
the Bank's commercial lending team was recognized by the Finance Authority of
Maine when, for the second time in three
2
<PAGE>
years, Kingfield Bank was named as Maine's Community Bank of the Year. The
Bank's commercial loans are a combination of adjustable rate loans (based on the
Wall Street Journal Prime Rate) and fixed rate loans in keeping with the Bank's
asset/liability management strategies. Loan guarantees available from the Small
Business Administration (SBA) and the Finance Authority of Maine (FAME) are
utilized when appropriate to insure up to 90% of the risk associated with a
portion of the small business loans.
ASSET/LIABILITY MANAGEMENT
A number of measures are used to monitor and manage interest-rate risk,
including income simulation and interest sensitivity (gap) analyses. An
income-simulation model is the primary tool used to assess the direction and
magnitude of changes in net interest income resulting from changes in interest
rates. Key assumptions in the model include prepayment speeds on
mortgage-related assets; cash flows and maturities of derivative and other
financial instruments held for purposes other than trading; changes in market
conditions on loan and deposit pricing; deposit sensitivity; customer
preferences; and management's financial capital plans. These assumptions are
inherently uncertain and, as a result, the model cannot precisely estimate net
interest income or precisely predict the impact of higher or lower interest
rates on net interest income. Actual results will differ from simulated results
due to timing, magnitude, and frequency of interest rate changes and changes in
market conditions and management strategies, among other factors.
Based on the results of the simulation model as of December 31, 1997, the
Company would expect a decrease in net interest income of $112,000 or 1.7% and a
decrease in net-interest income of $21,000 or 0.3% if interest rates gradually
increase or decrease, respectively, from current rates by 200 basis points over
a 12-month period. These results are both within Board-set tolerance limits of
7.5%.
RESULTS OF OPERATIONS
Net income for 1997 was $1,549,000 or $1.30 basic earnings per share compared to
$1,244,000 in 1996 or $1.07 basic earnings per share. 1997 income was positively
impacted by continued growth in the Bank's loan portfolio and corresponding
growth in the net interest margin. Total assets of the Company grew by $18.4
million, or 13.7%, from $134.4 million at December 31, 1996 to $152.8 million at
December 31, 1997. Net portfolio loans increased by $19.5million, or 20.0%, over
December 31, 1996. This loan growth contributed to an increase in the Bank's
margin from 4.38% at December 31, 1996 to 4.46% at December 31, 1997 which
resulted in a 12.8%, or $712,000, increase in net interest income before
provision for loan losses.
Non-interest income increased by $47,000 from 1996. However, included in 1996
income was a $47,000 loss on the sale of securities, which if netted out of
1996, would result in non-interest income in 1997 being even with 1996. Fee
income from origination and sale of mortgage loans (included in "other" income)
was up $14,000 from $70,000 in 1996 to $84,000 in 1997. The increase is due in
part to the Bank's decision to sell fixed rate loans with terms longer than 15
years, thus increasing the volume of sales and income derived from such sales.
In addition, the interest rate climate was more favorable in 1997 resulting in
higher overall loan sale prices than 1996.
Non-interest expense increased by $141,000 from 1996. Included in 1996 expense
is a one-time deposit assessment of $175,000 by the Federal Deposit Insurance
Corporation. If that were removed from the 1996 total, expenses would have shown
an increase of $316,000. Included in 1997's non-interest expense is a salary and
benefit expense of $176,000 which represents an accounting adjustment for the
increase in market value of the Company's stock held in the Employee Stock
Ownership Plan (ESOP). Due to the appreciation in the stock value in 1997, this
adjustment was $106,000 higher in 1997 than in 1996. Non-interest expense also
includes $103,000 in expense associated with the amortization of goodwill. This
is equal to 1996 amortization. Neither the ESOP market value adjustment nor
goodwill expense impacts the tangible capital of the Bank.
3
<PAGE>
FINANCIAL CONDITION
Total assets of the Bank grew by $18.4 million or 13.7% from December 31, 1996
to December 31, 1997. Of the asset growth, $19.5 million was in portfolio loans
while investments in mortgage-backed and other securities declined by $2.5
million. Of the increase in loan volume, $1.8 million was in residential
mortgage loans, $10.7 million was in commercial loans and $7.4 million was in
consumer and other loans. Allowance for loan losses increased $0.4 million. The
decline in investments was due to investment maturities and principal payments
on mortgage-backed securities.
Total deposits grew by $1.4 million or 1.3% during 1997. Borrowings increased by
$15.0 million, more than doubling the borrowings outstanding in 1996. The
increase in borrowings resulted from slower deposit growth coupled with the
funding needs created by strong loan demand. The Bank's borrowings consist of
advances of various maturities from the Federal Home Loan Bank. In March 1998,
the Bank will purchase approximately $16.7 million in deposits from KeyBank with
the acquisition of Key's Madison, Maine Branch. The proceeds of this purchase
will be used to reduce the borrowings of the Bank.
The Bank's non-accrual loans increased from $ 1,895,000 at December 31, 1996 to
$2,090,000 at December 31, 1997. This represents 1.91% and 1.76% of total loans,
respectively. The increase can be attributed to the overall increase in loan
volumes in 1997 and an increase in the number of bankruptcy filings among
mortgage customers which lengthens the time it takes the Bank to foreclose on
properties. During 1997, the Bank incurred net loan charge-offs of $82,000. In
response to the increased loan volumes, the Bank provided $530,000 in loan loss
reserves during 1997 resulting in an increase in the reserve balance from
$893,000 at December 31, 1996 to $1,342,000 at December 31, 1997.
In June 1997 the Board of Directors voted a three-for-one stock split in the
form of a 200% stock dividend, in addition to the semiannual cash dividend of
$0.04 per share. The stock split had the effect of increasing the number of
shares outstanding by 822,110 to a total of 1,233,165. On January 20, 1998, the
Board of Directors voted to increase the semiannual cash dividend to $0.05 per
share.
LIQUIDITY AND CAPITAL RESOURCES
A primary function of asset/liability management includes assuring adequate
liquidity that reflects the ability of the Bank to meet the cash flow
requirements of its customers without significant loss to the Bank.
Liquidity comes from five sources in the balance sheet -- the Bank's investment
portfolio, deposits, borrowings, loan repayments and profits.
Liquidity is needed to fund increased loan demand and to cover the seasonal
outflows of deposits. The Bank's investment portfolio, that consists primarily
of mortgage-backed securities, provides liquidity through repayment of principal
and interest and through its availability as collateral for borrowings and
public sector deposit accounts.
Deposits represent the Bank's primary source of funds. Deposits in 1997 grew by
$1.4 million. Loans grew by $19.5 million. Some of that growth was funded by the
principal pay downs on mortgage-backed securities and some through deposit
growth, but most was funded through borrowings. Borrowings grew by $15.0 million
in 1997.
The Bank's primary approach to measuring liquidity is utilizing a Basic
Surplus/Deficit model. It is used to calculate liquidity over 30-day horizon, by
examining the relationship between liquid assets and short-term liabilities,
which are vulnerable to non-replacement within a 30-day period. The Bank's
minimum policy level of liquidity under this model is 5% of total assets. At
December 31, 1997, the 30-day ratio was 9.74% (14.88% including borrowable funds
available from the Federal Home Loan Bank of Boston).
Regulatory standards for bank capital adequacy require that capital be at least
8% of risk-adjusted assets. KSB Bancorp, Inc.'s total capital ratio of 11.4%
exceeds the guideline, as does the Bank's 11.1% ratio. In dollars, this means
that the Company has the ability to pay dividends subject to the minimum capital
requirement.
The Company's profitable year in 1997 resulted in an increase in stockholder's
equity of $1,763,000 for the year ended December 31, 1997. Included in the
increase is $176,000, which represents the increased market price on ESOP shares
released during 1997 and which, under generally accepted accounting principles,
is included in salaries and benefits expense.
4
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and related notes, presented elsewhere
herein, have been prepared in accordance with generally accepted accounting
principles. These principles 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 KSB Bancorp, Inc. are monetary in nature. As a result,
interest rates have a more significant impact on the Company performance than
the general level of inflation. Over short periods of time, interest rates may
not necessarily move in the same direction or in the same magnitude as
inflation.
RECENT ACCOUNTING DEVELOPMENTS
During 1997, the Company adopted Statements of Financial Accounting Standards
(SFAS) No. 125 and No. 127, which relate to the accounting for transfers and
servicing of financial assets and extinguishment of certain liabilities. The
adoption of these standards did not have a material effect on the financial
statements.
The Financial Accounting Standards Board issued the following Statements of
Financial Accounting Standards during 1997:
SFAS No. 128 Earnings Per Share
SFAS No. 129 Disclosure of Information About Capital Structure
SFAS No. 130 Reporting Comprehensive Income
SFAS No. 131 Disclosures about Segments of an Enterprise and
Related Information
These four statements do not change the measurement or recognition methods used
in financial statements but rather deal with disclosure and presentation
requirements.
The financial statements for 1997 and all prior periods are restated to include
the disclosure requirements relating to earnings per share that are required
under SFAS No. 128. Financial statement disclosures also comply with SFAS No.
129, which summarizes but does not change the Company's requirements to disclose
information about capital structure.
SFAS No. 130 and No. 131 are effective for periods beginning after December 15,
1997. Management expects unrealized gains and losses on available for sale
securities to be the only item reported as other comprehensive income under SFAS
No. 130. The effect, if any, of SFAS No. 131 on disclosure requirements on the
Company has not been determined
YEAR 2000 RISK ASSESSMENT AND ACTION PLAN
Management is aware of reports in the media and elsewhere that many business and
personal computer applications will not operate as intended past the year 1999
without at least some changes in programs or hardware. This potential problem
results from the fact that many computers store dates in two-digit format (e.g.,
97) instead of four-digit format (1997). On January 1, 2000, it is possible that
some hardware systems and software programs will be unable to distinguish
between the years 2000 and 1900, or 2001 and 1901, resulting in calculation
errors or system failures of some magnitude.
During 1997, the Bank established a committee to identify all Bank systems
subject to Year 2000 effects and require vendor and/or in-house testing to
assure that systems will operate properly beyond December 31, 1999.
In addition to the Bank's own stringent identification and testing procedures,
the Bank's deposit insurer, the Federal Deposit Insurance Corporation, is taking
steps to assure that all its insured institutions are in compliance with very
stringent system identification and testing criteria.
5
<PAGE>
<TABLE>
<CAPTION>
Selected Consolidated Financial and Other Data of the Bank
($ in 000's)
Selected Financial Data: 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets 152,752 134,357 125,233 113,003 65,514
Loans receivable, net(1) 118,857 99,197 85,889 68,634 46,661
Investment securities available for sale(2) 9,261 7,452 8,377 0 0
Investment securities to be held to maturity 14,171 18,517 19,102 36,207 14,255
Goodwill 517 620 723 716 322
Deposits(3,4) 111,723 110,282 104,702 81,040 46,406
Borrowed funds 28,219 13,186 10,952 23,367 11,220
Total equity, substantially restricted 11,555 9,792 8,498 7,621 7,365
AVERAGE INTEREST EARNING ASSETS 137,814 124,331 116,915 88,884 55,149
AVERAGE ASSETS 144,458 130,742 122,899 92,459 58,526
AVERAGE INTEREST BEARING LIABILITIES 122,722 111,580 106,129 79,337 46,468
AVERAGE EQUITY 10,612 9,134 7,961 7,502 5,685
Selected Operating Data:
Interest and dividend income 12,003 10,705 9,955 6,942 4,679
Interest expense 5,752 5,166 5,025 3,267 1,720
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 6,251 5,539 4,930 3,675 2,959
Less provision for loan losses 530 390 315 140 120
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 5,721 5,149 4,615 3,535 2,839
Non-interest income
Net security gains (losses) 0 (47) 32 0 0
Mortgage servicing 297 321 328 306 307
Service charges and fees 705 700 568 440 337
Other 184 165 194 211 327
- ------------------------------------------------------------------------------------------------------------------------------------
Total non-interest income 1,186 1,139 1,122 957 971
- ------------------------------------------------------------------------------------------------------------------------------------
Non-interest expense
Salaries and benefits 2,206 2,051 2,100 2,015 1,312
Occupancy 281 299 312 270 162
Equipment 730 629 625 634 367
BIF premium 28 236 137 151 95
Other 1,357 1,246 1,404 1,178 881
- ------------------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 4,602 4,461 4,578 4,248 2,817
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,305 1,827 1,159 244 993
Income tax expense 756 583 336 22 270
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 1,549 1,244 823 222 723
====================================================================================================================================
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Selected Consolidated Financial and Other Data of the Bank
Selected Financial Data: 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on average assets 1.07% 0.95% 0.67% 0.24% 1.24%
Return on average equity 14.60 13.62 10.34 2.95 12.72
Average equity to average assets 7.35 6.99 6.48 8.11 9.71
Equity to total assets 7.56 7.29 6.79 6.74 11.24
Tangible equity to tangible assets 7.25 6.86 6.24 6.15 10.80
Interest rate spread during period 3.95 3.91 3.70 3.54 4.52
Net interest margin(5) 4.46 4.38 4.14 3.99 5.10
Operating expenses to average assets(6) 3.11 3.33 3.73 4.59 4.70
Non-accruing loans to total loans(7) 1.76 1.91 1.92 1.99 1.78
Non-performing assets to total assets(7,8) 1.47 1.50 1.35 1.22 1.28
Allowance for loan losses to
non-performing loans 64.21 47.12 52.69 44.95 60.80
Allowance for loan losses to total loans 1.12 0.89 1.00 0.89 1.08
Average interest-earning assets to
average interest-bearing liabilities 1.12x 1.11x 1.10x 1.12x 1.19x
Basic Earnings per Share(9) $1.30 $1.07 $0.72 $0.20 $0.65
Diluted Earnings per Share(9) $1.23 $1.01 $0.69 $0.19 $0.62
</TABLE>
1 Includes loans held for sale.
2 At market.
3 Includes escrows and trustee accounts for sold loans.
4 In March, 1994 the Bank acquired one branch with deposits of $42.3 million. In
March, 1995, the Bank acquired four branches with deposits of $19.4 million.
5 Calculation is based upon net interest income before provision for loan losses
and before certain loan fees and net income on interest rate swaps, floors and
caps divided by interest-earning assets.
6 For purposes of calculating this ratio, operating expenses equal non-interest
expense less amortization of goodwill.
7 Includes restructured loans that are performing in accordance with their
restructured terms but whose interest is recognized on a cash basis only.
Amounts are $486,000, $672,000, $765,000, $501,000 and $50,000 at December 31,
1993, 1994, 1995, 1996 and 1997, respectively.
8 Non-performing assets consist of non-accruing loans and real estate owned.
9 Earnings per Share, restated to reflect stock dividend and stock split.
7
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
KSB Bancorp, Inc. and Subsidiary
We have audited the accompanying consolidated statements of financial condition
of KSB Bancorp, Inc. and Subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of KSB Bancorp, Inc.
and Subsidiary as of December 31, 1997 and 1996, and the consolidated results of
their operations, and their consolidated cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/Bery, Dunn, McNeil and Parker
- --------------------------------
Bery, Dunn, McNeil and Parker
Portland, Maine
January 16, 1998
8
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Financial Condition
DECEMBER 31, 1997 AND 1996
ASSETS 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 3,233,478 $ 2,479,367
Interest-bearing deposits with banks 5,838 1,556
Securities available for sale, at market value 9,260,779 7,452,341
Securities held to maturity (market value $14,425,808
and $18,587,246 at 1997 and 1996, respectively) 14,170,856 18,516,750
Loans held for sale 2,007,110 1,819,209
Loans receivable
Real estate mortgage 52,710,292 50,873,593
Home equity 13,718,409 6,041,705
Installment 4,255,099 4,401,126
Commercial 47,056,531 36,399,651
Other 654,300 763,332
Deferred loan origination fees (202,808) (209,164)
- ------------------------------------------------------------------------------------------------------------------------------------
118,191,823 98,270,243
Less allowance for possible loan losses (1,341,828) (893,456)
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans receivable, net 116,849,995 97,376,787
- ------------------------------------------------------------------------------------------------------------------------------------
Accrued interest receivable 826,582 767,602
Other real estate owned 158,554 116,500
Federal Home Loan Bank stock, at cost 1,537,650 1,320,550
Premises and equipment, net 2,314,298 2,204,415
Goodwill 516,778 619,825
Deferred tax asset 661,099 464,903
Cash surrender value of life insurance 588,217 554,096
Other assets 620,866 663,036
- ------------------------------------------------------------------------------------------------------------------------------------
$152,752,100 $134,356,937
====================================================================================================================================
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Financial Condition (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities
Deposit accounts
Demand $ 12,140,898 $ 9,206,066
Regular savings 20,055,303 21,043,376
NOW accounts 13,914,421 14,075,564
Money market accounts 6,211,324 5,700,866
Time 58,386,623 59,336,687
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 110,708,569 109,362,559
Advances from Federal Home Loan Bank 28,219,000 13,186,000
Escrows and trustee accounts for sold loans 1,013,894 919,254
Accrued expenses and other liabilities 1,255,534 1,096,962
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 141,196,997 124,564,775
- ------------------------------------------------------------------------------------------------------------------------------------
Commitments and contingency (Notes 9, 15 and 18)
Stockholders' equity
Preferred stock, authorized 200,000 shares -- --
Common stock, par value $.01; authorized 2,400,000 shares,
issued and outstanding 1,246,950 shares in 1997 and
1,233,165 shares in 1996, restated 12,470 4,111
Additional paid-in capital 4,543,655 4,325,499
Retained earnings 7,171,531 5,748,714
Net unrealized gain (loss) on securities available for sale,
net of deferred taxes 72,698 (37,760)
- ------------------------------------------------------------------------------------------------------------------------------------
11,800,354 10,040,564
Less remaining obligation under:
Employee Stock Ownership Plan (117,348) (168,840)
Bank Recognition and Retention Plan (50,918) (79,562)
Treasury stock, at cost (7,964 shares in 1997) (76,985) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 11,555,103 9,792,162
- ------------------------------------------------------------------------------------------------------------------------------------
$152,752,100 $134,356,937
====================================================================================================================================
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and dividend income
Interest and fees on loans $10,133,178 $ 8,756,148 $7,656,814
Interest on securities available for sale 669,865 466,560 2,146,754
Interest on securities held to maturity 1,108,105 1,397,322 60,000
Dividends 92,682 84,501 91,331
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 12,003,830 10,704,531 9,954,899
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense
Interest on deposits 4,378,125 4,483,138 4,025,561
Interest on borrowed funds 1,374,125 682,469 998,852
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 5,752,250 5,165,607 5,024,413
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 6,251,580 5,538,924 4,930,486
Provision for possible loan losses 530,000 390,000 315,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for possible loan losses 5,721,580 5,148,924 4,615,486
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest income
Gain (loss) on disposition of securities -- (46,617) 32,025
Mortgage servicing fees 296,579 320,522 328,038
Service charges and fees 705,160 699,747 567,836
Other 184,346 165,268 193,928
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 1,186,085 1,138,920 1,121,827
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest expense
Salaries and benefits $ 2,205,609 $ 2,050,381 $2,100,216
Occupancy 280,699 298,835 311,975
Equipment 729,862 629,391 625,234
BIF Premium 28,456 236,135 137,100
Other 1,357,196 1,246,321 1,403,861
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 4,601,822 4,461,063 4,578,386
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,305,843 1,826,781 1,158,927
Income tax expense 756,438 582,453 335,964
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,549,405 $ 1,244,328 $ 822,963
====================================================================================================================================
Per Share Data (Note 1)
Basic earnings per common share $ 1.30 $ 1.07 $ 0.72
- ------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 1.23 $ 1.01 $ 0.69
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Stockholders' Equity
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Net
Bank Unrealized
Employee Recognition (Gain) Loss
Additional Stock and on Securities
Common Paid-In Retained Ownership Retention Available Treasury
Stock Capital Earnings Plan Plan for Sale Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances,
December 31, 1994 $ 3,738 $3,435,590 $4,601,767 $(279,661) $(140,870) $-- -- $ 7,620,564
Net income -- -- 822,963 -- -- -- -- 822,963
Cash dividends declared
($.061 per share, net
of dividends on ESOP
shares)* -- -- (64,473) -- -- -- -- (64,473)
Payment of obligation
under Employee Stock
Ownership Plan -- 39,350 -- 56,695 -- -- -- 96,045
Bank Recognition and
Retention Plan -- -- -- -- 32,664 -- -- 32,664
Change in net unrealized loss
on securities available for
sale, net of deferred taxes
of $5,000 -- -- -- -- -- (9,532) -- (9,532)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances,
December 31, 1995 3,738 3,474,940 5,360,257 (222,966) (108,206) (9,532) -- 8,498,231
Net income -- -- 1,244,328 -- -- -- -- 1,244,328
Cash dividends declared
($.064 per share, net
of dividends on ESOP
shares)* -- -- (72,466) -- -- -- (72,466)
10% stock dividend 373 783,032 (783,405) -- -- -- -- --
Payment of obligation
under Employee Stock
Ownership Plan -- 67,527 -- 54,126 -- -- -- 121,653
Bank Recognition and
Retention Plan -- -- -- -- 28,644 -- -- 28,644
Change in net unrealized loss
on securities available for
sale, net of deferred taxes
of $14,400 -- -- -- -- -- (28,228) -- (28,228)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances,
December 31, 1996 $ 4,111 $4,325,499 $5,748,714 $(168,840) $ (79,562) $ (37,760) $-- $ 9,792,162
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Stockholders' Equity (Continued)
Years Ended December 31, 1997, 1996 and 1995
Net
Bank Unrealized
Employee Recognition (Gain) Loss
Additional Stock and on Securities
Common Paid-In Retained Ownership Retention Available Treasury
Stock Capital Earnings Plan Plan for Sale Stock Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balances,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1996 $ 4,111 $4,325,499 $5,748,714 $(168,840) $ (79,562) $ (37,760) $-- $ 9,792,162
Net income -- -- 1,549,405 -- -- -- -- 1,549,405
Cash dividends declared
($.073 per share, net
of dividends on ESOP
shares)* -- -- (85,721) -- -- -- -- (85,721)
Payment of obligation
under Employee
Stock Ownership
Plan -- 176,428 -- 51,492 -- -- -- 227,920
Bank Recognition and
Retention Plan -- -- -- -- 28,644 -- -- 28,644
17,820 shares issued under
Stock Option Plans 59 53,941 -- -- -- -- -- 54,000
Purchase of 12,870
shares of treasury
stock -- -- -- -- -- -- (124,405) (124,405)
Retire 4,035 shares of
treasury stock (13) (12,213) (26,774) -- -- -- 39,000 --
Reissuance of 871 shares
of treasury stock -- -- (5,780) -- -- -- 8,420 2,640
Effect of July 10, 1997,
stock split effect-
ed in the form of a
200% dividend 8,313 -- (8,313) -- -- -- -- --
Change in net unrealized
gain (loss) on securities
available for sale, net
of deferred taxes of
$56,850 -- -- -- -- -- 110,458 110,458
- ------------------------------------------------------------------------------------------------------------------------------------
Balances,
December 31, 1997 $12,470 $4,543,655 $7,171,531 $(117,348) $(50,918) $ 72,698 $(76,985) $11,555,103
====================================================================================================================================
</TABLE>
*Restated for a three-for-one stock split, in the form of a 200% stock dividend
declared in 1997.
13
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,549,405 $ 1,244,328 $ 822,963
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 748,677 745,293 675,561
Decrease in obligation under ESOP and BRP 256,564 150,298 128,708
Provision for loan losses 530,000 390,000 315,000
Deferred income taxes (260,405) (21,857) (91,045)
Net gain on sale of loans held for sale (63,226) (49,738) (35,807)
Net gain on sale of securities available for sale -- -- (32,025)
Net loss on default of security held to maturity -- 46,617 --
Net loss on disposal of equipment 5,973 -- 33,250
Loss on sale of other real estate owned -- 14,204 5,653
Originations of loans held for sale (6,625,287) (5,842,269) (4,626,130)
Proceeds from loans held for sale 4,083,405 5,199,250 7,281,107
Decrease (increase) in
Interest receivable (62,914) 48,726 (81,228)
Other receivables and prepaid expense (57,018) 9,119 116,071
Cash surrender value of life insurance (34,121) (60,337) (21,504)
Increase (decrease) in
Accrued income taxes payable (1,175) (15,690) 5,189
Deferred origination fees (6,356) 22,846 (39,211)
Accrued expenses and other liabilities 167,109 37,745 9,923
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 230,631 1,918,535 4,466,475
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Net decrease (increase) in interest-bearing deposits
with banks (4,282) 2,458,977 (2,440,068)
Proceeds from maturities and principal payments on
securities held to maturity 4,195,590 5,730,367 4,343,000
Purchase of securities held to maturity -- (5,364,445) --
Proceeds from maturities and principal payments on
securities available for sale 5,355,874 860,627 227,549
Purchase of securities available for sale (7,018,176) -- --
Proceeds from sale of securities available for sale -- -- 4,030,625
Net increase in loans (17,738,199) (13,142,669) (13,745,541)
Capital expenditures (548,528) (318,563) (321,512)
Purchase of FHLB stock (217,100) -- (167,200)
Net decrease in other assets 61,638 68,330 18,236
Proceeds from sale of other real estate owned 116,500 26,973 37,783
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (15,796,683) (9,680,403) (8,017,128)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows (Continued)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities
Cash received through branch acquisition $-- $-- $12,314,461
Net increase (decrease) in time deposit accounts (950,065) 3,820,457 5,348,492
Net increase (decrease) in other deposit accounts 2,296,074 1,856,448 (1,364,578)
Net increase (decrease) in FHLB advances 15,033,000 2,234,000 (12,415,000)
Net increase (decrease) in escrow accounts 94,640 (97,000) 245,366
Proceeds from stock issuance under option plan 54,000 -- --
Purchase of treasury stock issued (124,405) -- --
Proceeds from reissuance of treasury stock under
option plan -- 2,640 --
Cash dividends paid (85,721) (72,466) (64,473)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 16,320,163 7,741,439 4,064,268
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 754,111 (20,429) 513,615
Cash and cash equivalents, beginning of year 2,479,367 2,499,796 1,986,181
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 3,233,478 $ 2,479,367 $ 2,499,796
====================================================================================================================================
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 5,703,515 $ 5,200,515 $ 5,058,469
====================================================================================================================================
Income taxes, net of refunds $ 1,018,019 $ 620,000 $ 333,610
====================================================================================================================================
The Company had the following noncash transactions
Cost of securities held to maturity transferred to
securities available for sale $ -- $-- $12,529,371
Net increase (decrease) required by Statement of
Financial Accounting Standards No. 115
Unrealized loss on securities available for sale (167,309) 42,629 14,532
Deferred income tax assets (56,851) 14,400 5,000
Net unrealized loss on securities available for sale (110,458) 28,229 9,532
Net transfer from loans to other real estate owned 158,554 116,500 72,913
</TABLE>
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
Nature of Business
KSB Bancorp, Inc. (the Company) provides a full range of banking services
to individual and corporate customers through its subsidiary and branches
located in Franklin, Somerset, and Androscoggin counties. The Company is
subject to the regulations of certain state and federal agencies and
undergoes periodic examination by those regulatory authorities.
1. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the allowance for loan
losses and the valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans. In connection with the
determination of the allowance for loan losses and the carrying value of
real estate owned, management obtains independent appraisals for
significant properties.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
KSB Bancorp, Inc. and its wholly-owned subsidiary, Kingfield Savings Bank
(the Bank). All significant intercompany balances and transactions have
been eliminated in the accompanying consolidated financial statements.
Cash and Cash Equivalents
For the purpose of presentation in the consolidated statements of cash
flows, cash and cash equivalents include cash on hand and amounts due from
banks.
In the normal course of business, the Bank has funds on deposit at other
financial institutions in amounts in excess of the $100,000 insured by the
FDIC.
The Federal Reserve Board requires the Bank to maintain a reserve balance.
The amount of this reserve balance as of December 31, 1997 is $690,000.
Securities
The Bank's investment accounting policies are as follows:
Securities Available for Sale: Securities available for sale consist of
securities that the Bank anticipates could be made available for sale in
response to changes in market interest rates, liquidity needs, changes in
funding sources and other similar factors. These assets are specifically
identified and are carried at fair value. Amortization of premiums and
accretion of discounts are recognized in interest income using the
interest method over the period to maturity. Unrealized holding gains and
losses for these assets, net of related income taxes, are excluded from
earnings and are reported as a net amount in a separate component of
stockholders' equity. Realized gains and losses on securities sold are
computed on the identified cost basis on the trade date.
16
<PAGE>
1. Summary of Significant Accounting Policies (Continued)
Securities Held to Maturity: Securities held to maturity consist of
securities purchased for which the Bank has the positive intent and
ability to hold such securities until maturity. Securities classified as
held to maturity are carried at cost, adjusted for amortization of
premiums and accretion of discounts. When decline in market value is
considered other than temporary, the loss is recognized in the
consolidated statements of income, resulting in the establishment of a new
cost basis for the security. Market values of securities are determined by
prices obtained from independent market sources.
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market
are carried at the lower of cost or estimated market value in the
aggregate. Net unrealized losses are recognized in a valuation allowance
by charges to income. Gains and losses are computed on the basis of
specific identification.
Loan Servicing
The Bank recognizes a loan servicing fee for the difference between the
principal and interest payment collected on the sold loan and the payment
remitted to the investor.
Statement of Financial Accounting Standards (SFAS) No. 122, "Accounting
for Mortgage Servicing Rights," requires the Company to recognize as
separate assets the rights to service mortgage loans for others for loans
originated after December 31, 1995.
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," was adopted at January 1, 1997. The
Company capitalizes mortgage servicing rights at their allocated cost
based on the relative fair values upon the sale of the related loans. The
cost of mortgage servicing rights is amortized in proportion to, and over
the period of, estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the fair value of those rights. Fair
values are estimated using discounted cash flows based on a current market
interest rate. For purposes of measuring impairment, the rights are
stratified based on the following predominant risk characteristics of the
underlying loans: interest rate, fixed or variable rate and period of
origination. The amount of impairment recognized is the amount by which
the capitalized mortgage servicing rights for a stratum exceed their fair
value. The adoption of SFAS No. 122 and SFAS No. 125 did not have a
material effect on the Company's financial condition or results of
operations.
Loans Receivable
Loans receivable that management has the intent and ability to hold for
the foreseeable future or until maturity or pay-off are reported at their
outstanding principal balance adjusted for any charge-offs, the allowance
for loan losses, and any deferred fees or costs on originated loans.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs, net of recoveries. Management's periodic
evaluation of the adequacy of the allowance is based on the Bank's past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated
value of any underlying collateral, and current economic conditions.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans,
changing economic conditions and the economic prospects of the borrowers
may necessitate future additions to the allowance.
Loans considered to be impaired are reduced to the present value of
expected future cash flows or to the fair value of collateral, by
allocating a portion of the allowance for loan losses to such loans. If
these allocations cause the allowance for loan losses to require an
increase, such increase is reported as loan loss provision.
17
<PAGE>
1. Summary of Significant Accounting Policies (Continued)
The carrying values of impaired loans are periodically adjusted to reflect
cash payments, revised estimates of future cash flows, and increases in
the present value of expected cash flows due to the passage of time. Cash
payments representing interest income are reported as such. Other cash
payments are reported as reductions in carrying value. Increases due to
changes in estimates of future payments are reported as loan loss
provision and decreases are reported as reductions in loan loss provision.
The accrual of interest on loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due.
Uncollectible interest on loans that are contractually past due is
reversed. The loan is returned to accrual status when, in management's
judgment, the borrower's ability to make periodic interest and principal
payments is back to normal. Until the loan is returned to accrual status,
all payments are applied to principal and interest income.
Loan Origination Fees and Related Costs
Loan fees and certain direct loan origination costs are deferred, and the
net fee or cost is recognized as an adjustment to interest income using
the interest method over the contractual life of the loans, adjusted for
estimated prepayments based on the Bank's historical prepayment
experience.
Real Estate Owned
Real estate properties acquired through, or in lieu of, loan foreclosure
are initially recorded at the lower of cost or fair value at the date of
foreclosure. Costs relating to improvement of property are capitalized,
whereas costs relating to the holding of property are expensed. Valuations
are periodically performed by management, and an allowance for losses is
established by a charge to operations if the carrying value of a property
exceeds its fair market value less estimated costs to sell.
Premises and Equipment
Premises and equipment and related improvements are stated at cost, less
accumulated depreciation and amortization.
Premises and equipment are depreciated by the straight-line and
accelerated methods over the assets' estimated useful lives. Leasehold
improvements are amortized by the straight-line method over the lease
terms.
Goodwill
The excess of cost over fair value of net assets acquired in branch
acquisitions is amortized to expense using the straight-line method over
ten years. On an ongoing basis, management reviews the valuation and
amortization of goodwill to determine possible impairment.
Income Taxes
Deferred tax assets and liabilities are determined based on the
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Principal temporary differences
include depreciation, the provision for loan losses, and the deferral of
loan origination fees.
Financial Instruments with Off-Balance Sheet Risk
The Company uses off-balance sheet financial instruments as part of its
asset/liability management activities. The Company does not intend to sell
any of these instruments.
18
<PAGE>
1. Summary of Significant Accounting Policies (Concluded)
Interest rate swap agreements are accounted for using the accrual method.
Net interest income (expense) resulting from the differential between
exchanging floating and fixed-rate interest payments is recorded on a
current basis.
Interest rate floors are contracts in which a floor is established at a
specified rate and period of time. The premium paid for the contract is
amortized over its life. Any cash payments received are recorded as an
adjustment to net interest income.
In the ordinary course of business, the Company has entered into
off-balance sheet financial instruments consisting of commitments to
extend credit and commercial letters of credit. Such financial instruments
are recorded in the financial statements when they are funded or related
fees are incurred or received.
Stockholders' Equity
At December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per
Share." SFAS 128 specifies the computation and disclosure requirements for
earnings per share for entities with publicly held common stock or
potential common stock. The effect of SFAS No. 128 on the Company's
financial statements is to retroactively present diluted earnings per
share, in addition to basic earnings per share already presented.
The basic earnings per share computation is based upon the
weighted-average number of shares of stock outstanding during the period.
Only ESOP shares that have been committed to be released are considered
outstanding. Potential common stock is considered in the calculation of
weighted-average shares outstanding for diluted earnings per share.
In 1997, the Company declared a three-for-one stock split effected in the
form of a 200% stock dividend. Earnings and cash dividends per share and
weighted-average shares outstanding have been retroactively restated to
reflect the stock dividend.
At December 31, 1997, the Company adopted SFAS No. 129, "Disclosure of
Information about Capital Structure." This statement has no effect on the
Company's financial statements as the capital disclosures meet the
requirements of SFAS No. 129.
2. Securities
Debt and equity securities have been classified in the consolidated
statements of financial condition according to management's intent. The
carrying amounts of securities and their approximate fair values at
December 31 follow:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale:
1997
Mortgage-backed securities $ 9,150,630 $113,570 $ 3,421 $ 9,260,779
====================================================================================================================================
1996
U.S. Government agency securities
and obligations $ 3,999,921 $ 1,594 $ 2,452 $ 3,999,063
Mortgage-backed securities 3,509,581 -- 56,303 3,453,278
- ------------------------------------------------------------------------------------------------------------------------------------
$ 7,509,502 $ 1,594 $ 58,755 $ 7,452,341
====================================================================================================================================
Held to Maturity:
1997
Mortgage-backed securities $12,769,001 $231,052 $ 17,512 $12,982,541
REMIC 1,401,855 41,412 -- 1,443,267
- ------------------------------------------------------------------------------------------------------------------------------------
$14,170,856 $272,464 $ 17,512 $14,425,808
====================================================================================================================================
1996
Corporate bonds $ 21,611 $ 54 $ -- $ 21,665
Mortgage-backed securities 16,728,785 160,288 108,438 16,780,635
REMIC 1,766,354 18,592 -- 1,784,946
- ------------------------------------------------------------------------------------------------------------------------------------
$ 18,516,750 $ 178,934 $ 108,438 $ 18,587,246
====================================================================================================================================
</TABLE>
19
<PAGE>
2. Securities (Concluded)
Mortgage-backed securities are subject to risk of prepayment which can
affect the yields realized on the securities by increasing or decreasing
the period over which premiums and discounts are recognized in interest
income.
The amortized cost and fair value of securities at December 31, 1997, by
contractual maturity, are as follows:
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
- ------------------------------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 238,845 $ 237,175 $-- $--
Due from one to five years 5,271,281 5,337,255 -- --
Due from five to ten years 4,143,773 4,213,674 2,731,811 2,731,021
Due after ten years 4,516,957 4,637,704 6,418,819 6,529,758
- ------------------------------------------------------------------------------------------------------------------------------------
$14,170,856 $14,425,808 $9,150,630 $9,260,779
====================================================================================================================================
</TABLE>
For purposes of the maturity table, mortgage-backed securities, which are
not due at a single maturity date, have been allocated over maturity
groupings based on the weighted-average contractual maturities of the
underlying collateral. The mortgage-backed securities may mature earlier
than their weighted-average contractual maturities because of principal
prepayments.
Gross realized gains on sale of securities available for sale were $32,025
for 1995. No securities available for sale were sold in 1996 or 1997. The
Bank realized a loss of $46,617 on the default of a security held to
maturity in 1996. The Bank has pledged $4,250,000 of its FHLMC
mortgage-backed securities against public unit deposits.
3. Loans Receivable
Activity in the allowance for loan losses is summarized as follows for the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 893,456 $866,770 $613,600
Provision charged to income 530,000 390,000 315,000
Loans charged off (141,098) (400,684) (95,742)
Recoveries on loans previously charged off 59,470 37,370 33,912
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $1,341,828 $893,456 $866,770
====================================================================================================================================
</TABLE>
Information regarding impaired loans is as follows:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Average investment in impaired loans $1,790,147 $1,126,828
Interest income recognized on impaired loans including
interest income recognized on cash basis 186,119 105,397
Interest income recognized on impaired loans on cash basis 204,328 99,637
Information regarding allowance for loan losses allocated to impaired
loans at December 31, is as follows:
Balance of impaired loans $1,573,216 $ 945,107
Less portion for which no allowance for loan losses
is allocated 1,545,234 779,036
- ------------------------------------------------------------------------------------------------------------------------------------
Portion of impaired loan balance for which an allowance
for loan losses is allocated $ 27,982 $ 166,071
====================================================================================================================================
Portion of allowance for loan losses allocated to the
impaired loan balances $ 10,982 $ 92,542
====================================================================================================================================
</TABLE>
20
<PAGE>
3. Loans Receivable (Concluded)
Loans placed on nonaccrual status amounted to $2,090,266, $1,894,503, and
$1,645,262, at December 31, 1997, 1996 and 1995, respectively. Gross
interest income that would have been recorded under the original terms of
such loans and the interest income actually recognized for the years ended
December 31 are summarized below:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income that would have been recorded $205,906 $203,800 $198,247
Interest income recognized 89,041 135,178 129,730
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income foregone $116,865 $ 68,622 $ 68,517
====================================================================================================================================
</TABLE>
4. Loan Servicing
Mortgage loans serviced for others are not included in the accompanying
statement of financial condition. The unpaid principal balance of these
loans is $75,111,086 and $78,287,014 at December 31, 1997 and 1996,
respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing were $303,482 and $460,166 at December 31, 1997 and 1996,
respectively.
Mortgage servicing rights of $38,456 and $27,712 are capitalized at
December 31, 1997 and 1996, respectively, and are included in other
assets. The amortized cost approximates fair value at December 31, 1997
and 1996.
5. Premises and Equipment
Premises and equipment at December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land and improvements $ 310,889 $ 310,889
Bank buildings and leasehold improvements 1,643,639 1,552,031
Furniture and fixtures 2,592,222 2,187,846
- ------------------------------------------------------------------------------------------------------------------------------------
4,546,750 4,050,766
Less accumulated depreciation 2,232,452 1,846,351
- ------------------------------------------------------------------------------------------------------------------------------------
$2,314,298 $2,204,415
====================================================================================================================================
</TABLE>
Depreciation expense was $432,674, $368,556, and $375,994, in 1997, 1996,
and 1995, respectively.
The Bank is committed under a noncancellable operating lease with a term
greater than one year. Future minimum rental commitments under this
operating lease through the year 2000 are approximately $4,000 per year.
The related rent expense, net of sublease income, was $(1,587), $1,226,
and $21,025, in 1997, 1996, and 1995, respectively.
6. Branch Acquisitions
On March 10, 1995, the Bank acquired four western Maine branches of Fleet
Bank of Maine. The acquisition was accounted for under the purchase method
of accounting for business combinations. The Bank received net cash of
approximately $12,300,000 for deposits assumed, net of loans and bank
premises and equipment acquired.
Goodwill for branches acquired in 1995 and in prior years is being
amortized using the straight-line method over ten years. Amortization
charged to operations was $103,047, $103,047, and $101,240 in 1997, 1996,
and 1995, respectively.
21
<PAGE>
7. Deposits
At December 31, 1997, the scheduled maturities of time deposits are as
follows:
1998 $29,875,946
1999 10,442,172
2000 16,200,087
2001 890,664
2002 and thereafter 977,754
-----------
$58,386,623
===========
The aggregate amount of short-term jumbo certificates of deposit, each
with a minimum denomination of $100,000, was $6,742,758 and $6,644,804 at
December 31, 1997 and 1996, respectively.
8. Advances from Federal Home Loan Bank
Advances from Federal Home Loan Bank (FHLB) are summarized as follows:
<TABLE>
<CAPTION>
Interest Rates
at December 31, 1997 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed advances 5.63 -- 6.14% $25,889,000 $10,952,000
Variable advance 7.05% 2,330,000 2,234,000
- ------------------------------------------------------------------------------------------------------------------------------------
$28,219,000 $13,186,000
====================================================================================================================================
</TABLE>
Pursuant to collateral agreements with the FHLB, advances are
collateralized by all stock in the FHLB and qualifying first mortgage
loans. Advances at December 31, 1997, mature as follows:
1998 $24,767,000
1999 2,000,000
2000 1,452,000
The Bank also has $2,276,000 available on a line of credit with the FHLB.
9. Income Taxes
Actual tax expense differs from the expected tax expense computed at the
federal statutory tax rate for the following reasons:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Provision for income taxes at statutory rates (34%) $784,000 $621,100 $394,000
Add (deduct)
Pass-through tax credit from investment (82,700) (82,700) (82,700)
State income tax, net of federal taxes 18,600 15,400 12,120
Nontaxable income (16,100) (12,200) (16,700)
Nondeductible expenses 78,600 41,000 32,500
Deductible expense (29,000) -- --
Other 3,038 (147) (3,256)
- ------------------------------------------------------------------------------------------------------------------------------------
$756,438 $582,453 $335,964
====================================================================================================================================
</TABLE>
22
<PAGE>
9. Income Taxes (Concluded)
The components of income tax expense are:
<TABLE>
<CAPTION>
Federal State Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997
Current $988,587 $28,256 $1,016,843
Deferred (260,405) - (260,405)
- ------------------------------------------------------------------------------------------------------------------------------------
Total $728,182 $28,256 $ 756,438
====================================================================================================================================
1996
Current $ 580,994 $ 23,316 $ 604,310
Deferred (21,857) - (21,857)
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 559,137 $ 23,316 $ 582,453
====================================================================================================================================
1995
Current $ 408,639 $ 18,370 $ 427,009
Deferred (91,045) -- (91,045)
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 317,594 $ 18,370 $ 335,964
====================================================================================================================================
</TABLE>
The tax effect of temporary differences which give rise to the deferred
income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Asset Liability Asset Liability
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accrued liabilities and
unearned income $111,894 $-- $ 97,278 $ --
Allowance for possible
loan losses 456,222 39,504 303,775 65,790
Interest on nonaccrual loans 20,937 -- 21,260 --
Goodwill, amortization,
and depreciation 38,000 -- 17,600 815
Loans held for sale 10,055 -- 5,590 --
Change in method of
accounting for tax from
cash basis to accrual basis -- 37,054 -- 55,580
Unrealized loss on securities
available for sale -- 37,450 19,400 --
Other assets -- 33,477 -- 32,659
Other 23,991 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
$661,099 $147,485 $464,903 $154,844
====================================================================================================================================
</TABLE>
No valuation allowance is deemed necessary for the deferred tax asset.
Retained earnings include $222,000 representing an allocation for income
tax bad debt deductions prior to 1988, referred to as the base year
reserve. No income taxes have been provided for the base year reserve,
though it continues to be subject to provisions of present law that
require recapture in the case of certain excess distributions to
stockholders.
23
<PAGE>
10. Related Parties
The Bank has entered into transactions with its directors and principal
officers and their affiliates (related parties). All such loans were made
under terms that are consistent with the Bank's normal lending policies.
Loans to related parties at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Beginning balance $145,740 $179,889
New loans 221,574 19,652
Less repayments 17,653 53,801
- ------------------------------------------------------------------------------------------------------------------------------------
Ending balance $349,661 $145,740
====================================================================================================================================
</TABLE>
11. Employee Benefit Plans
Number of shares and per share conversion price have been restated for a
three-for-one stock split effected in the form of a 200% stock dividend
declared in 1997.
401(k) Plan
The Bank has a 401(k) defined contribution plan for employees meeting
certain service requirements. The Bank makes contributions based on wages
of the qualified employees. Total 401(k) contribution expense was $54,905,
$50,494, and $43,693, in 1997, 1996, and 1995, respectively.
Employee Stock Ownership Plan
The Bank established an Employee Stock Ownership Plan (ESOP) and trust for
employees meeting certain service requirements. The ESOP purchased 9.9% or
122,103 shares of the common stock issued during 1993 using funds loaned
by the Company. Interest earned on the loan amounted to $9,903, $13,114,
and $16,246 in 1997, 1996, and 1995, respectively.
The shares purchased by the ESOP are held in a suspense account and
released annually in an amount proportionate to the annual repayment of
the loan. Contributions to the ESOP and shares released from the suspense
account are allocated to eligible employees on the basis of compensation
in the year of allocation. The Bank's contributions to the ESOP are not
fixed, so benefits payable under the ESOP cannot be estimated. Commencing
January 1, 1994, ESOP expense is recognized using the average fair value
of the shares committed to be released during the period. The difference
between the average fair value and the cost of the shares is recorded to
additional paid-in capital. Total ESOP expense was $227,920, $121,653, and
$96,045 for 1997, 1996, and 1995, respectively.
As of December 31, 1997, 83,379 shares have been allocated and the
remaining 38,724 shares are suspense shares held by the ESOP. The fair
value of unearned ESOP shares at December 31, 1997, is $871,312. Dividends
paid on allocated shares are recorded against retained earnings.
Bank Recognition and Retention Plan
The Bank also established Bank Recognition and Retention Plans as a method
of providing officers and other employees of the Bank with a proprietary
interest in the Company. The Bank contributed funds to the recognition
plans to enable them to acquire, in aggregate, approximately 4.0% of the
shares of common stock (49,335 shares). The Bank recognizes expense
related to the plans based on the vesting schedule. Participants are
vested at a rate of 20% per year commencing one year from the date of the
award. Total expenses related to these plans was $28,644, $28,644 and
$32,664 for 1997, 1996, and 1995, respectively.
24
<PAGE>
11. Employee Benefit Plans (Continued)
A summary of the status of the Bank Recognition and Retention Plans is
presented below:
<TABLE>
<CAPTION>
1997 1996 1995
Number Number Number
of Shares of Shares of Shares
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at beginning of year 41,135 41,135 29,601
Granted during the year -- -- 11,534
Forfeited during the year 1,973 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
39,162 41,135 41,135
====================================================================================================================================
</TABLE>
Stock Option Plan
The Company has a fixed stock option plan for employees accounted for
under APB Opinion 25 and related interpretations. The plan allows the
Company to grant options to employees for up to 83,870 shares of common
stock. The options are vested 20% per year from the date of grant and
expire ten years from the date of grant. The exercise price of each option
equals the market price of the Company's stock on the date of grant.
Accordingly, no compensation cost has been recognized for the plan.
The Company also has a fixed stock option plan for directors accounted for
under APB Opinion 25 and related interpretations. The plan allows the
Company to grant options to directors for up to 39,600 shares of common
stock. The options are vested immediately upon grant and expire ten years
from the date of grant. The exercise price of each option equals the
market price of the Company's stock on the date of grant. Accordingly, no
compensation cost has been recognized for this plan.
Had compensation cost for the plans been determined based on the fair
value of the options at the grant dates consistent with the method of SFAS
No. 123, "Accounting for Stock Based Compensation," the Company's net
income and earnings per share would have been reduced to the pro forma
amounts indicated below.
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income As reported $1,549,405 $1,244,328
Pro forma 1,485,496 1,232,032
Basic earnings per share As reported $1.30 $1.07
Pro forma 1.25 1.06
Diluted earnings per share As reported $1.23 $1.01
Pro forma 1.18 1.00
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes options pricing model with the following
weighted-average assumptions used:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Dividend yield 0.44% 0.31%
Expected volatility 39.40 25.30
Risk-free interest rate 5.75 6.43
Expected life 10 years 10 years
</TABLE>
25
<PAGE>
11. Employee Benefit Plans (Concluded)
A summary of the status of the Company's fixed stock option plans for the
years ended December 31, 1997, 1996, and 1995 is presented below:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Number Weighted Average Number Weighted Average
of Shares Exercise Price of Shares Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 109,688 $ 3.20 105,188 $3.03
Granted during the year 12,000 7.67 4,500 7.08
Exercised during the year 18,691 3.03 -- --
Forfeited during the year 5,280 3.03 -- --
------- -------
Outstanding at end of year 97,717 3.79 109,688 3.20
======= =======
Exercisable at end of year 74,249 3.28 81,473 3.25
Weighted average grant-date fair value
of options granted during the year $17.67 $4.14
</TABLE>
No options were granted or exercised during 1995.
The following information applies to options outstanding at December 31,
1997:
Range of exercise prices $3.03 - $7.67
Weighted-average remaining contractual life 6.1 years
12. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income, as reported $1,549,405 $1,244,328 $ 822,963
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted-average shares outstanding $1,187,651 $1,166,371 $1,147,994
Effect of dilutive potential common shares
Stock options 69,262 64,055 40,281
- ------------------------------------------------------------------------------------------------------------------------------------
Adjusted weighted-average shares outstanding $1,256,913 $1,230,426 $1,188,275
====================================================================================================================================
Basic earnings per share $1.30 $1.07 $.72
Diluted earnings per share $1.23 $1.01 $.69
</TABLE>
13. Regulatory Matters
The Bank is subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could
have a direct material effect on the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I capital (as defined)
to average assets (as defined). Management believes, as of December 31,
1997, that the Bank meets all capital adequacy requirements to which it is
subject.
26
<PAGE>
13. Regulatory Matters (Concluded)
As of December 31, 1997, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the table. There are no conditions or events since that notification that
management believes have changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the
table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
- ------------------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital to Risk Weighted Assets
Consolidated $12,308,000 11.4% <179>$8,664,000 <179>8.0% N/A
Bank 12,066,000 11.1% <179> 8,668,480 <179>8.0% <179>$10,835,600 <179>10.0%
Tier I to Risk Weighted Assets
Consolidated 10,996,000 10.1% <179> 4,332,000 <179>4.0% N/A
Bank 10,724,000 9.9% <179> 4,334,240 <179>4.0% <179> 6,501,360 <179> 6.0%
Tier I Capital to Average Assets
Consolidated 10,996,000 7.2% <179> 6,123,360 <179>4.0% N/A
Bank 10,724,000 7.0% <179> 6,100,440 <179>4.0% <179> 7,625,550 <179> 5.0%
As of December 31, 1996:
Total Capital to Risk Weighted Assets
Consolidated $10,065,793 11.5% <179>$6,982,720 <179>8.0% N/A
Bank 9,851,000 11.3% <179> 6,982,720 <179>8.0% <179>$ 8,728,400 <179>10.0%
Tier I Capital to Risk Weighted Assets
Consolidated 9,172,337 10.4% <179> 3,491,360 <179>4.0% N/A
Bank 8,958,000 10.2% <179> 3,491,360 <179>4.0% <179> 5,237,040 <179> 6.0%
Tier I Capital to Average Assets
Consolidated 9,172,337 6.8% <179> 5,359,480 <179>4.0% N/A
Bank 8,958,000 6.7% <179> 5,359,480 <179>4.0% <179> 6,699,350 <179> 5.0%
</TABLE>
The ability of the Bank to pay dividends to the parent is also subject to
the minimum regulatory capital requirements. At December 31, 1997, the
amount available for dividends by the Bank was approximately $2,839,000.
On September 30, 1996, Federal legislation was passed relating to a
special deposit insurance assessment on deposits insured by the Savings
Association Insurance Fund (SAIF). Although deposits in the Bank are
insured by the Bank Insurance Fund, the Bank had acquired deposits in a
1994 branch acquisition which are still considered SAIF deposits. As a
result of the legislation, the Bank was charged approximately $175,000 for
the special assessment on SAIF deposits in 1996.
27
<PAGE>
14. Other Noninterest Expense
Other noninterest expense amounts are summarized as follows for the years
ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Printing, postage, stationery and supplies $ 228,806 $ 239,749 $ 264,209
Advertising and promotion 119,679 117,806 140,931
Data processing 152,614 145,324 169,682
Professional fees 176,446 136,556 194,597
Meetings and training 104,612 63,172 52,737
Insurance 21,414 24,872 26,480
Goodwill amortization 103,047 103,047 101,241
Loss on disposal of equipment 5,973 -- 33,250
Other 444,605 415,795 420,734
- ------------------------------------------------------------------------------------------------------------------------------------
$1,357,196 $1,246,321 $1,403,861
====================================================================================================================================
</TABLE>
15. Financial Instruments With Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments are commitments to originate loans,
interest rate swaps and floors. The instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
consolidated statement of financial condition. The Bank's exposure to
credit loss in the event of nonperformance by the other party for
commitments to extend credit is represented by the contractual notional
amount of those instruments. The Bank's exposure to credit loss in the
event of nonperformance by the other party to interest rate swaps and
floors is limited to the other party's obligation to pay the Bank interest
based on the notional amount of the instrument. The Bank follows the same
credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments, including requiring collateral or
other security to support financial instruments with credit risk.
Loan Commitments
Commitments to extend 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
evaluates each customer's creditworthiness on an individual basis. The
amount of collateral obtained is based on management's credit evaluation
of the borrower. Collateral held varies but may include accounts
receivable, inventory, property and equipment and income-producing
commercial properties.
Loan commitments on undisbursed loans and letters of credit to originate
loans at December 31, 1997, are as follows:
Real estate lines of credit $10,459,607
Commercial lines of credit 3,966,043
Construction loans 1,012,660
Consumer lines of credit 737,395
Commercial letters of credit 116,900
- --------------------------------------------------------------------------------
$16,292,605
================================================================================
28
<PAGE>
15. Financial Instruments With Off-Balance-Sheet Risk (Concluded)
Commitments to originate loans at December 31, 1997, are as follows:
First mortgage fixed rate loans $ 921,500
Variable rate commercial loans 1,809,200
- --------------------------------------------------------------------------------
$ 2,730,700
================================================================================
Interest Rate Swap
The Bank is party to an interest rate swap agreement with the Federal Home
Loan Bank in the notional amount of $5,000,000 on which it is obligated to
pay interest based on the three-month LIBOR rate, adjusted quarterly, and
receives a 6.63% fixed-rate payment. The contract is dated June 1996 and
matures June 1999. The variable rate was 5.91% at December 31, 1997. The
Bank has utilized interest rate swaps to partially protect its net
interest income stream against the effects of falling rates on prime-based
loans. The notional amount is a figure used to calculate settlement
payments and does not represent exposure to credit loss.
Interest is paid to the Bank on the interest rate swap and the Bank pays
interest quarterly. The Bank is exposed to loss of net interest receivable
should the counter-party default. Net interest income earned on the swaps
was $28,332 and $9,047 in 1997 and 1996, respectively. Net interest
expense on the swaps was $24,822 in 1995.
Interest Rate Floor
The Company has an interest rate floor contract in the notional amount of
$5,000,000 on which it receives the excess of the strike rate, 6%, over
the three-month LIBOR rate, adjusted quarterly. The floor matures in June
1998. The Company received $15,774 of interest income in 1997.
Interest Rate Cap
The Company has an interest rate cap in the notional amount of $10,000,000
on which it receives the excess of the three-month LIBOR rate, adjusted
quarterly, over 6.50%. The cap matures June 1999. No interest income was
received in 1997.
Other
The Bank services approximately $43.4 million of Federal Home Loan
Mortgage Corporation (FHLMC) loans. The Bank is liable to FHLMC for any
interest which becomes delinquent.
16. Significant Group Concentrations of Credit Risk
Most of the Bank's business activity is in rural areas of Maine, where the
resort and logging industries predominate. Accordingly, the Bank is
dependent on the health of these industries for continued profitable
operations. However, the Bank has diversified into the central Maine
regions. In addition, the Bank services approximately $75 million of loans
previously originated and sold by the Bank.
The Bank's policy for requiring collateral is to obtain security in excess
of the amount borrowed. The amount of collateral obtained is based on
management's credit evaluation of the borrower. The Bank requires
appraisals of real property held as collateral. For consumer loans, the
Bank will accept security which has a title certificate. Collateral held
for commercial loans may include accounts receivable, inventory, property
and equipment and income-producing properties.
The contractual amounts of credit-related financial instruments such as
commitments to extend credit and letters of credit represent the amounts
of potential accounting loss should the contract be fully drawn upon, the
customer default, and the value of any existing collateral become
worthless.
29
<PAGE>
17. Fair Value Disclosures of Financial Instruments
The following disclosures are made in accordance with the provisions of
SFAS No. 107 "Disclosures About Fair Value of Financial Instruments,"
which requires the disclosure of fair value information about both on- and
off-balance sheet financial instruments where it is practicable to
estimate that value. Fair value is defined in SFAS No. 107 as the amount
at which an instrument could be exchanged in a current transaction between
willing parties, other than in a forced or liquidation sale.
In accordance with the provisions of SFAS No. 107, the estimated fair
values of deposits, credit card loans and residential real estate mortgage
loans do not take into account the fair values of long-term relationships,
which are integral parts of the related financial instruments. The
disclosed estimated fair values of such instruments would increase
significantly if the fair values of the long-term relationships were
considered. The use of different assumptions (e.g., discount rates and
cash flow estimates) and estimation methods could also have a significant
effect on fair value amounts. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts the Company could realize in
a current market exchange. Because SFAS No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure
requirements, any aggregation of the fair value amounts presented would
not represent the underlying value of the Company.
A summary of the carrying values of the Company's significant on-balance
sheet financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C> <C> <C>
Cash and due from banks(1) $ 3,239,316 $ 3,239,316 $ 2,480,923 $ 2,480,923
Securities available for sale(1) 9,260,779 9,260,779 7,452,341 7,452,341
Securities to be held to maturity(2) 14,170,856 14,425,808 18,516,750 18,587,246
Loans receivable, net of allowance
and discounts(3) 116,849,995 118,769,000 97,376,787 98,631,000
Loans held for sale(2) 2,007,110 2,036,685 1,819,209 1,835,648
Federal Home Loan Bank stock(1) 1,537,650 1,537,650 1,320,550 1,320,550
Accrued interest receivable(1) 826,582 826,582 767,602 767,602
Liabilities
Deposits(4) 110,708,569 111,276,088 109,362,559 109,879,022
Advances from Federal Home
Loan Bank(5) 28,219,000 28,219,000 13,186,000 13,161,429
Escrows and trustee accounts for
sold loans(1) 1,013,894 1,013,894 919,254 919,254
Accrued interest payable(1) 111,253 111,253 62,518 62,518
</TABLE>
Valuation Methods and Assumptions
(1) Fair value equals or approximates carrying value.
(2) Based on quoted market prices of similar instruments.
(3) Fair values of commercial term loans were estimated using a discounted cash
flow model. Certain residential real estate loans were valued based on
quoted market prices of similar loans, with adjustments for differences in
loan characteristics. For consumer loans, whose current weighted - average
coupons and remaining term to maturity approximate the current market
conditions, carrying values were used as an approximation of fair value.
For loans with interest rates which change within six months (such as,
lines of credit and time notes), carrying values were used as an
approximation of fair values.
(4) Fair values of certificates of deposit were estimated based on discounted
cash flows using current rates for certificates of similar remaining
maturity. For all other deposits, carrying values were used as an
approximation of their fair values.
(5) Fair values of advances were estimated based on discounted cash flows using
current rates for advances of similar remaining maturity.
30
<PAGE>
17. Fair Value Disclosures of Financial Instruments (Concluded)
The Company's off-balance sheet instruments include interest rate swaps, a
floor and a cap and loan commitments. Fair values for loan commitments
have not been presented as the future revenue derived from such financial
instruments is not significant. Fair values for the interest rate swaps,
floor and cap are based on quoted market prices as follows:
<TABLE>
<CAPTION>
Notional Maturity Fair
Principal Contract Date Date Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Rate Swaps
December 31, 1997
-----------------
$ 5,000,000 June 21, 1996 June 21, 1999 $45,705
=========== =======
December 31, 1996
-----------------
$ 2,000,000 November 15, 1993 November 15, 1997 $(16,254)
5,000,000 June 21, 1996 June 21, 1999 55,600
----------- -------
$ 7,000,000 $39,346
=========== =======
December 31, 1995
-----------------
$ 2,000,000 November 15, 1993 November 15, 1997 $(21,623)
=========== =======
Interest Rate Floor
December 31, 1997
-----------------
$ 5,000,000 June 20, 1996 June 24, 1998 $ 4,310
=========== =======
December 31, 1996
-----------------
$ 5,000,000 June 20, 1996 June 24, 1998 $ 30,828
=========== =======
Interest Rate Cap
December 31, 1997
-----------------
$10,000,000 July 21, 1997 July 21, 1999 $ 9,707
=========== =======
</TABLE>
18. Subsequent Event
The Bank has signed a purchase agreement with Key Bank to acquire a branch
in Madison, Maine, in March 1998. The Bank will receive approximately
$14,500,000 in cash and $16,700,000 in deposit accounts, in addition to
acquiring some loans, fixed assets and goodwill.
31
<PAGE>
Information
Board of Directors
Winfield F. Robinson, Chairman
Vice President of United Timber Corp.
John C. Witherspoon
President/CEO
Kingfield Bank
William P. Dubord
Attorney
G. Norton Luce
Retired Gas Company Owner
Roger G. Spear
CFO, University of Maine at Farmington
Theodore C. Johanson
President, Falcon Shoe Company
Annual Meeting
The Annual Meeting is scheduled for Wednesday, May 13, 1998, 5:30 p.m., at the
Winter's Inn, Kingfield, Maine.
Stock Listing
The common stock is traded over-the-counter on the NASDAQ National Market System
under the ticker symbol KSBK. Stock price quotations can be found in The Wall
Street Journal and local daily newspapers as well as on the internet under
NASDAQ.
Officers of the Holding Company and Bank
John C. Witherspoon, President/CEO
John E. Thien, Vice President/CFO/Treasurer
Officers of the Bank
Gordon A. Flint, Vice President
Robert D. Stone, Vice President
Gerard Belanger, Vice President
<PAGE>
Price Range of Stock
Set forth below is the quarterly high and low price for the common stock since
the beginning of the year, restated for a three-for-one stock split effected in
the form of a 200% stock dividend in 1997 and a 10% stock dividend in 1996.
Quarter Ending 1997 1996
- --------------------------------------------------------------------------------
March 31 High: 11.33 Low: 8.67 High: 6.29 Low: 5.49
June 30 High: 16.33 Low: 9.00 High: 5.74 Low: 6.29
September 30 High: 16.50 Low: 12.50 High: 7.33 Low: 6.82
December 31 High: 22.50 Low: 12.63 High: 8.67 Low: 7.08
Dividends declared in 1996 and 1997 were $0.064 and $0.073 per share,
respectively, restated for a 10% stock dividend in 1996 and a three-for-one
stock split effected in the form of a 200% stock dividend in 1997.
Number of Shares Outstanding and Shareholders
At March 1, 1998, KSB Bancorp, Inc. had 1,258,954 shares
of $.01 par value common stock outstanding, owned by approximately 340
shareholders of record, including brokerage firms, banks and registered clearing
agencies acting as nominees for an indeterminate number of beneficial owners.
KSB Bancorp, Inc. pays a semi-annual cash dividend of $.05 per share.
Inquiries
Shareholder Information
Attn: Jennifer L. Piekart
KSB Bancorp, Inc.
P.O. Box 105
Kingfield, ME 04947
207-265-2181
The Annual Report on Form 10-KSB, filed with the Securities and Exchange
Commission, is available to shareholders without charge upon written request.
Auditors
Berry, Dunn, McNeil & Parker
P.O. Box 1100, Portland, ME 04101
Transfer Agent & Registrar
Registrar and Transfer Company
10 Commerce Drive, Cranford, NJ 07016
Corporate Securities Counsel
John J. Gorman, Esq.
Luse Lehman Gorman Pomerenk & Schick
5335 Wisconsin Avenue, N.W., Suite 400
Washington, DC 20015
32
<PAGE>
The Board of Directors would like to thank
the employees of Kingfield Bank
for their commitment to building the long-term value of the Bank.
Kingfield Office Operations
Shelly Abbott Katherine Dumont
Donna Chase Janet Enos
Jennifer Kruger Jacqueline Garey
Brenda Thompson Linda Miller
Michelle Mason
Stratton Office Jeannine McGraw
Debora Dudley Pauline Nadeau
Donna Pelletier Karen Stewart
Linda Shane Robert Stone
Wendy Wyman Timothy Thompson
Rangeley Office Administration/Finance
M. Rachel Lee Mark Brooks
Wendy Marquis Linda Manning
Constance St. Cyr Karen Moore
Sheila Waldeck Jennifer Piekart
Cindy Spencer
Phillips Office John Thien
Elizabeth Cram Gillian Trapp
Dawn Field John Witherspoon
Kelly Hader
Linda Toothaker Retail/Commercial Lending
Carla Allen
Farmington Office Justine Ameraul
Susan Haines Gerard Belanger
Laurie Marble Michael Bonsey
Kathleen Mason Jenni Brown
Nancy Richardson Susan Crowley
Sally Dwyer
Lewiston Office Gordon Flint
Nancy Brown Patricia Haggan
Katherine Fales Wendy Hinkley
Cynthia Hoyt Cynthia Gilmore
Elizabeth Lyons Shelly Lowell
Melissa Saucier Marcelle Labbe
Todd Marlowe
Bingham Office Mary Miller
Kathleen Barrett Laurie Nile
Mary Brown Nancy Richard
Phebe Durgin
Tricia LeHay
Strong Office
Rhonda Bartholomew
Sandy Cavanagh
Lynn Vashaw
<PAGE>
Kingfield Bank Locations
Bingham 207-672-5541
Farmington 207-778-0302
Kingfield 207-265-2181
Lewiston 207-784-7376
Madison 207-696-3376
Phillips 207-639-2851
Rangeley 207-864-3321
Stratton 207-246-2181
Strong 207-684-5501
1-800-962-0070
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,233
<INT-BEARING-DEPOSITS> 6
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,261
<INVESTMENTS-CARRYING> 14,171
<INVESTMENTS-MARKET> 14,426
<LOANS> 118,192
<ALLOWANCE> 1,342
<TOTAL-ASSETS> 152,752
<DEPOSITS> 111,722
<SHORT-TERM> 24,767
<LIABILITIES-OTHER> 1,256
<LONG-TERM> 3,452
0
0
<COMMON> 12
<OTHER-SE> 11,543
<TOTAL-LIABILITIES-AND-EQUITY> 152,752
<INTEREST-LOAN> 10,133
<INTEREST-INVEST> 1,871
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 12,004
<INTEREST-DEPOSIT> 4,378
<INTEREST-EXPENSE> 5,752
<INTEREST-INCOME-NET> 6,252
<LOAN-LOSSES> 530
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,602
<INCOME-PRETAX> 2,306
<INCOME-PRE-EXTRAORDINARY> 2,306
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,549
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 1.23
<YIELD-ACTUAL> 4.46
<LOANS-NON> 2,090
<LOANS-PAST> 0
<LOANS-TROUBLED> 50
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 893
<CHARGE-OFFS> 140
<RECOVERIES> 59
<ALLOWANCE-CLOSE> 1,342
<ALLOWANCE-DOMESTIC> 1,342
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
