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, 1998
Commission file number: 0-21500
KSB Bancorp, Inc.
(Name of small business issuer in its charter)
Delaware 04-3189069
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Main Street
Kingfield, Maine 04947
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(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 24, 1999 was approximately
$19,045,020 The number of shares outstanding of the registrant's Common Stock,
the registrant's only class of outstanding capital stock, as of March 24, 1999,
was 1,269,668
Issuer's revenues for the year ended December 31, 1998: $ 14,545,745
<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. 1998 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 1998 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....................................... 1
Item 2. Description of Property....................................... 33
Item 3. Legal Proceedings............................................. 34
Item 4. Submission of Matters to a Vote of Security Holders........... 34
PART II
Item 5. Market for Common Equity and Related Stockholder Matters...... 34
Item 6. Management's Discussion and Analysis or Plan of Operation..... 34
Item 7. Financial Statements.......................................... 34
Item 8. Change In and Disagreements With Accountants on
Accounting and Financial Disclosure........................... 34
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act.... 34
Item 10. Executive Compensation........................................ 35
Item 11. Security Ownership of Certain Beneficial Owners and Management 35
Item 12. Certain Relationships and Related Transactions................ 35
PART IV
Item 13. Exhibits and Reports on Form 8-K.............................. 35-36
Signature page ...................................................... 37
<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, 1998, the Company had total assets of $171.3 million, total net
loans of $129.2 million, deposits of $131.8 million and tangible
stockholders' equity of $12.3 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, 1998,
the Bank had $58.4 million of loans (including loans held for sale), or 45.2% of
total net loans receivable (including loans held for sale), secured by
one-to-four family, residential real property. An additional $45.3 million of
loans, or 35.0% of total net loans receivable (there were no commercial loans
held for sale) were commercial business loans secured by real estate. At
December 31, 1998, the Bank's mortgage-backed securities portfolio totaled $30.2
million, or 17.6% of total assets at such date.
Pages 8 and 9 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
<PAGE>
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.
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<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,
------------------------------------------------------------------------------------------------
1998 1997 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>
Assets: (2)
Interest-earning assets:
Residential mortgage loans $ 58,852 $ 4,913 8.35% $ 53,494 $ 4,595 8.59% $ 50,396 $ 4,346 8.62%
Commercial loans (3) 51,138 4,952 9.68 40,970 4,077 9.95 33,144 3,309 9.98
Consumer loans 18,355 1,705 9.29 15,105 1,386 9.18 9,992 1,020 10.21
Investments Available for Sale 8,926 605 6.78 10,257 670 6.53 7,915 467 5.90
Investments to be Held to Maturity 13,358 883 6.61 17,775 1,160 6.53 21,808 1,412 6.47
Interest-bearing deposits 556 37 6.65 213 15 7.04 1,076 61 5.67
-------- -------- ---- -------- ------- ---- --------- ------ -----
Total interest-earning assets 151,185 13,095 8.66 137,814 11,903 8.64 124,331 10,615 8.54
Noninterest-earning assets 8,143 6,644 6,411
-------- -------- --------
Total assets 159,328 144,458 $130,742
-------- -------- --------
Interest-bearing liabilities:
Regular Savings $23,260 644 2.77 $ 21,567 599 2.78 $ 22,258 626 2.81
NOW accounts 18,956 423 2.23 13,678 245 1.79 13,144 216 1.64
Money market accounts 8,115 301 3.71 5,691 217 3.81 5,681 211 3.71
Time deposits 61,959 3,430 5.54 58,396 3,317 5.68 58,873 3,431 5.83
Borrowings 20,904 1,172 5.61 23,390 1,374 5.87 11,624 682 5.87
-------- -------- ---- -------- ------ ---- -------- ----- -----
Total interest-bearing liabilities 133,194 5,970 4.48% 122,722 5,752 4.69% 111,580 5,166 4.63%
-----
Noninterest-bearing liabilities 13,563 11,124 10,028
Stockholders equity 12,571 10,612 9,134
-------- -------- --------
Total liabilities and
stockholders' Equity $159,328 $144,458 $130,742
Net interest income 7,125 6,151 $5,449
-------- ------ ------
Net interest rate spread (4) 4.18% 3.95% 3.91%
---- ---- -----
Net interest margin (5) 4.71% 4.46% 4.38%
---- ---- ----
Ratio of average interest- 1.11x
earning assets to average
interest-bearing liabilities 1.14x 1.12x
----- -----
</TABLE>
<PAGE>
(1) Interest for purpose of yield calculations excludes $96, $75, and $80 of
loan fees in 1998, 1997 and 1996, respectively, and $ 27, $26 and $9 of net
interest rate swap income in 1998, 1997 and 1996, respectively.
(2) Loan balances include non-performing loans of $2,369, $2,090 and $1,895 in
1998, 1997 and 1996, respectively.
(3) Includes $ 42.2 million at December 31, 1998 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.
-2-
<PAGE>
<TABLE>
<CAPTION>
Actual Balance Sheet
At December 31,
----------------------
1998
----------------------
Actual Yield/
Balance Cost
------- ----
(Dollars in Thousands)
<S> <C> <C>
Assets: (1)
Interest-earning assets:
Residential mortgage loans ............. $ 58,378 8.18%
Commercial loans (2) ................... 54,043 9.37
Consumer Loans ......................... 18,562 8.95
Investments Available for Sale ......... 20,967 6.58
Investments to be Held to Maturity ..... 9,271 6.76
Interest-bearing deposits .............. 3 4.88
-------- ----
Total interest-earning assets ........ 161,224 8.38
Other noninterest-earning assets ......... 10,105
--------
Total assets ......................... $171,329
========
Interest-bearing liabilities
Regular savings and clubs (5) .......... 24,635 2.74
NOW accounts (6) ....................... 23,807 2.19
Money market accounts .................. 8,895 3.35
Time deposits .......................... 62,877 5.49
Borrowings ............................. 23,524 5.13
-------- ----
Total int.-bearing liabilities ....... 143,738 4.28
Noninterest-bearing liabilities .......... 13,904
Stockholders equity ...................... 13,687
--------
Total liabilities and
Stockholders equity ................ $171,329
========
Interest rate spread (3) ................. 4.10%
Net interest margin (4) .................. 4.56%
Ratio of actual interest-earning
assets to actual interest-bearing
liabilities ............................ 1.12x
</TABLE>
(1) Loan balances include non-performing loans of $2,369, $2,090 and $1,895 in
1998, 1997 and 1996, respectively.
(2) Includes $ 45.3 million at December 31, 1998 of loans for commercial
business purposes secured by real estate.
(3) Interest rate spread represents the difference between the weighted average
actual rate on interest-earning assets and the weighted-average actual 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.
(5) Rate changes effective 1/1/99 would result in weighted aggregate of 2.55%
for this category.
(6) Rate changes effective 1/1/99 would result in weighted aggregate of 1.99%
for this category.
-3-
<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. Interest incomefor purpose of this table excludes $96, $75, and $80
of loan fees in 1998, 1997 and1996, respectively, and $ 27, $26 and $9 of
net interest rate swap income in 1998, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
1998 vs. 1997 1997 vs. 1996
---------------------------------- ---------------------------------
Increase/(Decrease) Total Increase/(Decrease) Total
Due to Increase/ Due to Increase/
------------------- --------- ------------------ ----------
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Residential mortgage loans, (net) $ 460 $ (142) $ 318 $ 267 $ (18) $ 249
Commercial loans ................. 1,012 (137) 875 781 (13) 768
Consumer loans ................... 298 21 319 522 (156) 366
Investments Available for Sale ... (87) 22 (65) 138 65 203
Investment to be Held to Maturity (288) 11 (277) (261) 9 (252)
Interest-bearing deposits ........ 24 (2) 22 (49) 3 (46)
------- ------- ------- ------- ------- -------
Total interest-earning assets . 1,419 (227) 1,192 1,398 (110) 1,288
------- ------- ------- ------- ------- -------
Interest expense:
Deposits ......................... 571 (151) 420 (28) (78) (106)
Borrowings ....................... (146) (56) (202) 690 2 692
------- ------- ------- ------- ------- -------
Total int.-bearing liabilities . 425 (207) 218 662 (76) 586
------- ------- ------- ------- ------- -------
Change in net interest income...... 994 $ (20) $ 974 $ 736 $ (34) $ 702
------- ------- ------- ------- ------- -------
</TABLE>
-4-
<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
not secured by real estate in an aggregate amount not in excess of 40% of its
assets.
Maine law also imposes various limitations 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 $129.2 million at December 31, 1998 (including
loans held for sale). As of December 31, 1998, 45.2% 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 ($45.3
million or 35.0%), commercial business loans secured by collateral other than
real estate (e.g. equipment) ($8.7 million or 6.8%), and consumer loans ($18.6
million or 14.4%), consisting of home equity loans, student loans, automobile
loans, and other collateralized and unsecured loans. At December 31, 1998, the
Bank had loans held for sale of $8.2 million or 6.4% 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. In December, 1998 the Bank converted $9.0
million in short-term fixed rate residential mortgages into mortgage-backed
securities through the Federal Home Loan Mortgage Corporation. The securities
were placed into the Bank's Available For Sale portfolio. The Bank had $30.2
million, or 17.6% of its assets at December 31, 1998, invested in
mortgage-backed securities.
-5-
<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,
----------------------------------------------------------------------------
1998 1997 1996
----------------------- ---------------------- ----------------------
(Dollars in Thousand)
<S> <C> <C> <C> <C> <C> <C>
Residential mortgage loans:
One- to four-family (1) ........... $ 48,680 37.7% $ 51,014 42.9% $ 49,666 50.1%
Loans to be sold .................. 8,228 6.4 2,007 1.7 1,819 1.8
Construction ...................... 1,470 1.1 1,696 1.4 1,208 1.2
--------- ----- --------- ----- --------- -----
Total residential mortgage loans .. 58,378 45.2 54,717 46.0 52,693 53.1
--------- ----- --------- ----- --------- -----
Commercial loans :
Commercial real estate ............ 45,310 35.0 38,826 32.7 29,902 30.2
Other commercial .................. 8,733 6.8 8,474 7.1 6,751 6.8
--------- ----- --------- ----- --------- -----
Total commercial loans ............ 54,043 41.8 47,300 39.8 36,653 37.0
--------- ----- --------- ----- --------- -----
Consumer:
Home equity lines of credit ....... 13,657 10.6 13,718 11.5 6,042 6.1
Collateral loans .................. 4,594 3.6 4,255 3.6 4,401 4.4
Other ............................. 311 0.2 411 0.4 510 0.5
--------- ----- --------- ----- --------- -----
Total consumer loans .............. 18,562 14.4 18,384 15.5 10,953 11.0
--------- ----- --------- ----- --------- -----
Less:
Deferred loan fees and loan premium (224) (0.2) (203) (0.2) (209) (0.2)
Allowance for loan losses ......... (1,580) (1.2) (1,342) (1.1) (893) (0.9)
--------- ----- --------- ----- --------- -----
Loans receivable, net ............. $ 129,179 100.0% $ 118,856 100.0% $ 99,197 100.0%
========= ===== ========= ===== ========= =====
</TABLE>
(1)Includes second mortgage loans of $3,204,000, $3,552,000 and $3,247,000 at
December 31, 1998, 1997 and 1996, respectively.
-6-
<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,
----------------------------------
1998 1997 1996
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Mortgage loans (gross):
At beginning of period (1) ........... $ 93,543 $ 82,595 $ 71,352
Mortgage loans originated: (2)
One- to four-family ........... 29,701 15,836 19,242
Commercial real estate ........ 14,554 14,274 18,881
Construction .................. 1,502 1,756 937
-------- -------- --------
Total mortgage loans originated 45,757 31,866 39,060
-------- -------- --------
Less:
Transfer of mortgage loans to
foreclosed real estate ...... 463 159 117
Principal repayments .......... 21,081 16,299 22,500
Sales of loans (3) ............ 14,068 4,460 5,200
-------- -------- --------
At end of period (2) ............ $103,688 $ 93,543 $ 82,595
======== ======== ========
Other loans (gross):
At beginning of period .......... $ 26,858 $ 17,704 $ 15,591
Other loans originated ........ 16,772 18,002 11,574
Principal repayments .......... 17,134 8,848 9,461
Other loans purchased (4) ..... 799 0 0
-------- -------- --------
At end of period ................ $ 27,295 $ 26,858 $ 17,704
======== ======== ========
</TABLE>
- ------------------------
(1) Includes loans held for sale at beginning of 1998, 1997 and 1996 of $2.0
million, $1.8 million and $1.1 million, respectively.
(2) Includes loans held for sale at end of 1998, 1997 and 1996 of $8.2 million,
$2.0 million and $1.8 million, respectively.
(3) Includes $9.0 million converted to Federal Home Loan Mortgage Corp.
securities in 1998.
(4) Includes loans acquired through branch acquisition.
-7-
<PAGE>
Loan Maturity
- -------------
The following table shows the maturity of the Bank's loan portfolio at December
31, 1998. The table does not include prepayments or scheduled principal
amortization. Prepayments and scheduled principal amortization on mortgage loans
totaled $21.1 million, 16.3 million and $22.5 million for the years ended
December 31, 1998,1997 and1996, respectively.
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------------------------------------------
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 ................... $ 14 $ 8,460 $ 1,470 $ 1,325 $ 1,110 $ 12,379
--------- --------- --------- --------- --------- ---------
After 1 year:
1 to 3 years .................. 335 4,176 0 2,421 3,887 10,819
3 to 5 years .................. 1,129 4,216 0 3,172 13,131 21,648
5 to 10 ....................... 6,865 5,135 0 1,052 399 13,451
10 to 20 years ................ 25,394 22,976 0 763 35 49,168
Over 20 years ................. 23,171 347 0 0 0 23,518
--------- --------- --------- --------- --------- ---------
Total due after 1 year ........ 56,894 36,850 0 7,408 17,452 118,604
--------- --------- --------- --------- --------- ---------
Total amounts due ............. 56,908 45,310 1,470 8,733 18,562 130,983
Plus (Less):
Unearned discounts, premiums and
deferred loan fees, net ....... 0 0 0 0 0 (224)
Allowance for possible loan
losses ........................ 0 0 0 0 0 (1,580)
--------- --------- --------- --------- --------- ---------
Loans receivable, net ........... $ 56,908 $ 45,310 $ 1,470 $ 8,733 $ 18,562 $ 129,179
========= ========= ========= ========= ========= =========
</TABLE>
- -----------
(1)Includes loans held for sale of $8.2 million.
-8-
<PAGE>
The following table sets forth at December 31, 1998 the dollar amount of all
loans contractually due after December 31, 1999, and whether such loans have
fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
Contractually Due After December 31, 1999
-----------------------------------------------
Fixed Adjustable Total
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
Mortgage loans:.................
One- to four-family (1)......... $40,453 $16,441 $56,894
Commercial real estate.......... 11,124 25,726 36,850
Commercial loans................ 5,986 1,422 7,408
Consumer loans.................. 4,353 13,099 17,452
--------- --------- ---------
Total loans receivable......... $61,916 $56,688 $118,604
========= ========= =========
</TABLE>
- --------------
(1)Includes loans held for sale of $8.2 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 sold or 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 may be 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.
-9-
<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, but may be fixed initially for a period of up to three years.
-10-
<PAGE>
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.
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 except for portions of loans which are
guaranteed by FHA, VA, SBA or the Finance Authority of Maine (FAME). 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
-11-
<PAGE>
classifies problem assets as "loss," it is required either to establish a
specific allowance for losses equal to 100% of the amount of the asset so
classified or to charge-off such amount. An institution'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, 1998 the Bank had total classified and special mention
assets of $4.8 million, of which $1.6 million were classified "substandard" and
$0.1 million were classified "doubtful" or "loss". Special mention assets
totaled $3.1 million at December 31, 1998, which included $2.3 million of
commercial real estate loans and $0.7 million of commercial business loans and
$0.1 million of other loans.
-12-
<PAGE>
At December 31, 1998,1997 and 1996, delinquencies in the Bank's portfolio
were as follows:
<TABLE>
<CAPTION>
At December 31, 1998 At December 31, 1997
------------------------------------------ ------------------------------------------
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 .......... 4 $ 121 4 $ 148 5 $ 175 9 $ 497
Construction ................. 0 0 0 0 0 0 0 0
Commercial ................... 6 513 9 1,055 3 228 8 229
----------------------------------------------------------------------------------------
Total mortgage loans .......... 10 634 13 1,203 8 403 17 726
Other commercial .............. 1 32 2 87 3 150 3 102
Consumer ...................... 11 28 11 135 27 83 52 73
----------------------------------------------------------------------------------------
Total all loans ............... 22 $ 694 26 $1,425 38 $ 636 72 $ 901
=========================================================================================
Delinquent loans to total loans 0.53% 1.09% 0.53% 0.75%
<CAPTION>
At December 31,1996
----------------------------------------
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 .......... 6 $ 343 9 $ 301
Construction ................. 0 0 0 0
Commercial ................... 3 261 3 424
------------------------------------
Total mortgage loans .......... 9 604 12 725
Other commercial .............. 2 5 0 0
Consumer ...................... 20 31 9 18
------------------------------------
Total all loans ............... 31 $ 640 21 743
====================================
Delinquent loans to total loans 0.64% 0.74%
</TABLE>
-13-
<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, 1998 would have been $232,924. Interest income
on loans that were non-accruing at December 31, 1998 that was included in income
during 1998 was $115,235.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------
1998 1997 1996
----- --- ---
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accruing mortgage loans delinquent
more than 90 days............................. $1,144 $1,080 $1,341
Non-accruing other loans delinquent more
than 90 days.................................. 104 134 53
Non-accruing loans other than loans
90 days or more delinquent.................... 1,121 876 501
----- --- ---
Total non-performing loans.................... 2,369 2,090 1,895
Total foreclosed real estate, net of
related allowance for losses.................. 147 159 117
--- --- ---
Total non-performing assets.................... $2,516 $2,249 $2,012
====== ======= ======
Non-performing loans to net loans.............. 1.83% 1.76% 1.91%
Total non-performing assets to total assets.... 1.47% 1.47% 1.50%
</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.
-14-
<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,
--------------------------------------
1998 1997 1996
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period ....... $ 1,342 $ 893 $ 867
Gross charge-offs:
Commercial business ................. (167) (24) (94)
Commercial real estate .............. (49) (19) (223)
Residential mortgage ................ (151) (25) (19)
Consumer ............................ (139) (72) (65)
------- ------- -------
Total charge-offs ................. (506) (140) (401)
------- ------- -------
Gross recoveries:
Commercial business ................. 5 0 0
Commercial real estate .............. 17 49 27
Residential mortgage ................ 26 0 0
Consumer ............................ 16 10 10
------- ------- -------
Total recoveries .................. 64 59 37
------- ------- -------
Net charge-offs ...................... (442) (81) (364)
------- ------- -------
Provision for loan losses ............ 680 530 390
------- ------- -------
Balance at end of year ............... $ 1,580 $ 1,342 $ 893
======= ======= =======
Ratio of net charge-offs during the
period to average loans outstanding
during the period ................... 0.34% 0.07% 0.39%
Ratio of allowance for loan losses to
gross loans receivable at the end
of period ........................... 1.21% 1.12% 0.89%
Ratio of allowance for loan losses to
non-performing loans at end of
period .............................. 66.69% 64.21% 47.12%
</TABLE>
-15-
<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,
------------------------------------------------------------------------------
1998 1997 1996
---------------------- --------------------- ---------------------
% 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 .................. $ 252 6.7% $ 195 7.0% $ 161 6.7%
Commercial real estate ............... 969 34.6 798 32.3 488 29.9
Residential mortgage ................. 294 44.6 274 45.5 207 52.5
Consumer ............................. 65 14.1 75 15.2 37 10.9
------ ----- ------ ----- ------ -----
Total allowance for loan losses ...... $1,580 100.0% $1,342 100.0% $ 893 100.0%
====== ===== ====== ===== ====== =====
</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 and consumer loans. The
standards are applied to loans categorized as commercial and real estate
commercial.
Impaired Loans: December 31, 1998
---------------------------------
Commercial $ 740,779 Based on fair value of collateral
R/E Commercial 2,558,509 Based on fair value of collateral
----------
Total $3,299,288
==========
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
-16-
<PAGE>
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, 1998, $190,719 of the allowance for loan losses allocated to impaired loans.
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.
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
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, 1998, 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 $30.4 million as of December
31, 1998, and the recorded book value was $30.2 million.
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."
-17-
<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,
---------------------------------------------------------------------
1998 1997 1996
-------------------- ------------------ --------------------
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 ..................... 3 3 6 6 $ 2 2
------- ------- ------- ------- ------- -------
Total interest-bearing deposits 3 3 6 6 $ 2 2
======= ======= ======= ======= ======= =======
Investment securities:
Available for sale .................. $20,967 $20,967 $ 9,261 $ 9,261 $ 7,452 $ 7,452
To be Held to Maturity (1) .......... 10,912 11,085 15,709 15,964 19,837 $19,908
------- ------- ------- ------- ------- -------
Total investment securities ... $31,879 $32,052 $24,970 $25,225 $27,289 $27,360
======= ======= ======= ======= ======= =======
</TABLE>
- --------------
(1) Includes stock in the FHLB of Boston of $1,641,350, $1,537,650 and
$1,320,550 at December 31, 1998,1997 and 1996, 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, 1998.
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 .......... 1,372 1,372 6.24
Due from five to ten years .......... 549 549 6.25
Due after 10 years .................. $19,046 19,046 6.61
------- ------- ----
Total ............................... $20,967 $20,967 6.58%
======= ======= ====
</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 ................ $ 0 $ 0 0.00%
Due from one to five years ............. 3,250 3,299 6.36
Due from five to ten years ............. 3,422 3,513 7.29
Due after ten years .................... 2,316 2,354 6.54
------- ------- ----
Total .................................. $ 8,988 $ 9,166 6.76%
------- ------- ----
Other
Due in one year or less (1) ............ $ 1,641 $ 1,641 6.40%
Due from one to five years ............. 0 0 0.00
Due from five to ten years ............. 283 278 5.16
Due after ten years .................... 0 0 0.00
------- ------- ----
Total .................................. $ 1,924 $ 1,919 6.22%
------- ------- ----
Total Investment securities
to be Held to Maturity ............. $10,912 $11,085 6.66%
======= ======= ====
</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, 1998.
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.
-19-
<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>
1998 1997 1996
------------------------------ --------------------------- -----------------------------
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>
Savings and transaction accounts:
Commercial NOW ............. $ 11,929 9.0% 3.24% $ 6,074 5.4% 3.16% $ 5,693 5.2% 2.64%
NOW ........................ 11,878 8.9 1.13 7,840 7.0 1.16 8,382 7.6 1.15
Regular Savings (1) ........ 24,635 18.5 2.74 20,765 18.6 2.78 21,802 19.8 2.77
Money market ............... 8,895 6.7 3.35 6,211 5.6 3.96 5,701 5.2 3.78
Demand deposits (1) ........ 12,766 9.6 12,445 11.1 9,367 8.4
-------- ----- -------- ----- -------- -----
Total ............. 70,103 52.7 2.61 53,335 47.7 2.71 50,945 46.2 2.57
-------- ----- -------- ----- -------- -----
Certificate accounts:
Three month ................ 1,335 1.0 4.53 1,084 1.0 4.72 944 0.9 4.30
Six month .................. 7,412 5.6 4.74 5,571 5.0 4.97 10,710 9.7 4.81
Twelve month ............... 13,155 9.9 4.97 14,453 13.0 5.26 12,166 11.0 5.09
Eighteen month ............. 0 0 0.00 256 0.2 5.57 3,765 3.4 5.59
Two to five years .......... 23,240 17.5 5.66 19,807 17.7 5.76 13,728 12.5 6.36
IRA ........................ 17,735 13.3 6.04 17,216 15.4 6.13 18,024 16.3 6.29
-------- ----- -------- ----- -------- -----
Total ............. 62,877 47.3 5.49 58,387 52.3 5.65 59,337 53.8 5.73
-------- ----- -------- ----- -------- -----
Total deposits (1) .............. $132,980 100.0% 4.12% $111,722 100.0% 4.44% $110,282 100.0% 4.43%
======== ===== ======== ===== ======== =====
</TABLE>
(1) Includes escrow and trustee accounts on sold loans.
-21-
<PAGE>
At December 31, 1998, the Bank had outstanding $7.2 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.............................................. $2,390
Over three through six months..................................... 668
Over six through 12 months........................................ 1,357
Over 12 months.................................................... 2,813
------
Total............................................................. $7,228
======
</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.
The following table sets forth certain information regarding borrowed funds for
the dates indicated:
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
-------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Total borrowings:
Average balance outstanding ............... $20,904 $23,390 $11,624
Maximum amount outstanding at any
month-end during the period ............. 29,635 28,952 13,186
Balance outstanding at end of period ...... 23,524 28,219 13,186
Weighted average interest rate during
the period .............................. 5.61% 5.87% 5.87%
Weighted average interest rate at end
of period ............................... 5.13% 5.94% 5.99%
</TABLE>
-22-
<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.
-23-
<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.
-24-
<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", "undercapitalized", "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."
-25-
<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 or 1998. 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 1998 was $30.0 million and for 1999 is $30.9
million. In 1999, 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 1998 the Bank paid
$28,896 in FICO assessments on its BIF and SAIF-attributed deposits.
-26-
<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, 1998, 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, 1998, the Bank's ratio of core capital to total assets
equalled 7.1%, 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, 1998, the Bank's total risk-based capital to risk-weighted
assets was 11.7%, which exceeded the FDIC risk-based capital requirements.
-27-
<PAGE>
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.
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 $46.5 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 $46.5 million. The first $4.9 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.
-28-
<PAGE>
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.
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.
-29-
<PAGE>
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."
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 based on the Bank's actual loss
experience.
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
-30-
<PAGE>
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. 31,1998, regarding
the senior officers of the Bank who are not also Directors.
Name Age Positions Held With the Bank
---- --- ----------------------------
John E. Thien 49 Vice President and Treasurer
Gordon A. Flint 52 Regional Vice President
Robert D. Stone 50 Vice President-Operations
Gerard R. Belanger 54 Regional Vice President
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.
-31-
<PAGE>
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.
-32-
<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 12/31/98 Owned Expiration
- -------- ----------- ----- ----------
Main Street
Administrative Offices
Kingfield, ME $ 313,879 Owned
Depot Street
Kingfield, ME 259,748 Owned
Main Street
Stratton, ME 63,411 Owned
Main Street
Phillips, ME 74,639 Owned
Main Street
Rangeley, ME 182,066 Owned
Routes 2&4
Farmington, ME 135,319 Leased 2/28/03
Route 201
Bingham, ME 137,262 Owned
Main Street
Strong, ME 81,116 Owned
Main Street
Madison, ME 152,383 Owned
110 Canal Street
Lewiston, ME 378,183 Owned
Total Net Book
----------
Value $1,778,006
==========
-33-
<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 1998 Annual Report to Stockholders
is herein incorporated by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
- -----------------------------------------------------------------------
Pages 2 through 9 of the Company's 1998 Annual Report to Stockholders is
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 12, 1999, a copy of which will be filed not later than 120 days after the
close of the fiscal year.
-34-
<PAGE>
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 12, 1999, a copy of which will be filed not
later than 120 days after the close of the fiscal year.
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 12,
1999, 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 12, 1999, 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 the 1998 Annual Report to
Stockholders.
PAGE
----
Independent Auditors' Report............................................ 10
Consolidated Statements of Financial Condition as of
December 31, 1998 and 1997.............................................. 11
Consolidated Statements of Income for the Years Ended
December 31, 1998,1997 and 1996......................................... 13
Consolidated Statements of Stockholders' Equity for
the Years Ended December 31, 1998,1997, and 1996........................ 14
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1998,1997 and 1996................................... 17
Notes to Consolidated Financial Statements.............................. 19
-35-
<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 Notes 1 and 13 to the Consolidated Financial
Statements on pages 22 and 30, respectively, of the 1998
Annual Report to Stockholders attached hereto as Exhibit
13.
13.0 1998 Annual Report to Stockholders (filed herewith).
21.0 Subsidiary information is incorporated herein by reference
to "Part I - Subsidiaries."
23.0 Consent of Berry, Dunn, McNeil and Parker, Certified
Public Accountants
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
-36-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, duly authorized on the date indicated.
KSB BANCORP, INC.
(Registrant)
By: /s/ John C. Witherspoon 3/31/99
-----------------------------------
President/CEO (date)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ John C. Witherspoon 3/31/99 /s/ John E. Thien 3/31/99
- ---------------------------------- -----------------------------
President/CEO (date) Vice President/CFO (date)
Winfield F. Robinson 3/31/99 /s/ G. Norton Luce 3/31/99
- ---------------------------------- -----------------------------
Chairman of the Board (date) Director (date)
/s/ Roger G. Spear 3/31/99 /s/ William P. Dubord 3/31/99
- ---------------------------------- -----------------------------
Director (date) Director (date)
/s/ Theodore C. Johanson 3/31/99
- ----------------------------------
Director
-37-
ANNUAL
REPORT
1998
<PAGE>
LETTER TO STOCKHOLDERS
Dear Stockholder,
I am pleased to report to you the results of operations of KSB Bancorp, Inc
("the Company") and Kingfield Bank ("the Bank") for 1998. This past year was
another record year in terms of earnings and asset growth. The Company's
earnings grew by 16.6% from $1,549,000, or $1.30 basic earnings per share, in
1997 to $1,806,000, or $1.47 basic earnings per share, in 1998. The record
earnings are a result of a continuation of the Bank's strategy to pursue
profitable growth.
Total assets of KSB Bancorp, Inc. reached $171 million in 1998 -- a 12% increase
over 1997.
Contributing to the Bank's growth in 1998 was the opening of our second branch
in Somerset County in March, when we completed the purchase of the Madison, ME
branch of Key Bank. This branch has exceeded our expectations for deposit
growth, bringing over $16 million in new deposits into the Bank.
Stockholders were rewarded for the increase in earnings with an increase in the
Company's February, 1999 dividend to an annualized rate of $0.16 per share. This
is the fifth consecutive increase in the semiannual dividend and further
represents management's commitment to continually improve the long term value of
the Company for our stockholders.
Unfortunately for us as stockholders, the stock market has not rewarded the
earnings growth the Bank has enjoyed. At the end of 1997, the Company's stock
price reached an all-time high of $22.50 per share. This represented a multiple
of 17 times the $1.30 basic earnings per share reported in 1997. During the
summer of 1998 with the threat of a recession and deflation facing the worldwide
financial markets, stock prices for small bank stocks in general fell sharply.
At the end of 1998, the market value of KSB Bancorp, Inc. stock was at $15.50
per share, or a multiple of just over 10 and 1/2 times our reported $1.47 basic
earnings per share. In essence, the earnings per share of the company grew by
13% while the market value of the stock fell by 30%. In spite of this apparent
paradoxical market behavior, the management of your Bank will continue to follow
strategies which we believe will lead to continued growth in earnings. We
believe that ultimately this will lead to building long term value to you, our
stockholders.
While the world continues to focus its attention on the potential challenges
facing it due to possible limitations in computer systems at the start of the
new millennium, the Board and management of Kingfield Bank have been attending
to this issue for well over a year. We have identified and tested all of our
mission critical systems for compliance with Year 2000 requirements. Along with
the rest of the country's banking system, we have also been under the ongoing
audit of our regulators as to Year 2000 compliance.
As we approach the new millennium, Kingfield Bank is positioned well to continue
to provide personalized, profitable financial products to our customers. We
envision a new century of banking in which we will continue to build upon our
customer relationships by providing a full menu of financial products through a
variety of delivery channels, with the added value of always providing access to
high-quality personalized service.
The long term value of Kingfield Bank and KSB Bancorp, Inc. continues to grow
through the efforts of our extremely dedicated, hardworking staff along with the
support of our customers and you, our stockholders. All of us at Kingfield Bank
thank you for your continued support.
Sincerely,
/s/John C. Witherspoon
John C. Witherspoon
President/CEO
-1-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
This Management's Discussion and Analysis of Financial Condition and Results of
Operations presents a review of the material changes in the financial condition
of the Company from December 31, 1997 to December 31, 1998, and the results of
operations for the twelve month period ended December 31, 1998. This discussion
and analysis is intended to assist in understanding the financial condition and
results of operations of the Company. Accordingly, this section should be read
in conjunction with the condensed consolidated financial statements and the
related notes contained herein.
Certain statements contained herein are not based on historical facts and are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, such as statements relating to financial
condition and future prospects, loan loss reserve adequacy, Year 2000 readiness,
simulation of changes in interest rates, prospective results of operations,
capital spending and financing sources, and revenue sources. Forward-looking
statements, which are based on various assumptions (some of which are beyond the
Company's control), may be identified by reference to a future period or
periods, or by the use of forward-looking terminology; such as "may", "will",
"believe", "expect", "estimate", "anticipate", "continue", or similar terms or
variations on those terms, or the negative of those terms. Such forward-looking
statements reflect the current view of management and are based on information
currently available to them, and upon current expectations, estimates, and
projections regarding the Company and its industry, management's belief with
respect thereto, and certain assumptions made by management. These
forward-looking statements are not guarantees of future performance and are
subject to risks, uncertainties, and other factors. Accordingly, actual results
could differ materially from those set forth in forward-looking statements due
to a variety of factors, including, but not limited to, those related to the
economic environment, particularly in the market areas in which the Company
operates, competitive products and pricing, fiscal and monetary policies of the
U.S.Government, changes in government regulations affecting financial
institutions, including regulatory fees and capital requirements, changes in
prevailing interest rates, acquisitions and the integration of acquired
businesses, credit risk management, asset/liability management, changes in
technology, changes in the securities markets, and the availability of and the
costs associated with sources of liquidity.
KSB Bancorp, Inc's wholly-owned subsidiary, "Kingfield Bank", is a community
Bank providing quality, personalized banking services to individuals and
businesses. In 1998, 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 using
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 acquired an additional $16.2 million dollars
in deposits and $0.5 million of reverse repurchase agreements 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 capital of the
Bank. 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 the Bank's growth in deposits without a corresponding loan
growth put pressure on its margins, the Bank has pursued a strategy of building
loan volumes in order to increase the margins. In 1998, the Bank originated
approximately $62.5 million in new loans, which resulted in an increase of $10.3
million in net loan balances including loans available for sale. In December
1998, the Bank made a decision as part of it's Asset / Liability management
strategies to convert $9.0 million of mortgage loans into mortgage-backed
securities, thus lowering the year end loan balance. The loan growth experienced
in 1998 helped the continued growth of the net interest margin of the Bank from
a low of 3.99% in 1994 to 4.71% in 1998.
In addition to the growth strategies implemented, the Bank has focused on
reducing operating expenses and gaining efficiencies and productivity. An
example of this is the decision in the fall of 1998 to convert two full time
branches in
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<PAGE>
neighboring towns to half time branches managed by the same staff. The result is
an annual cost saving of approximately $100,000 while continuing banking
services to both communities. The Bank's operating expense to average asset
ratio over the past 5 years has dropped from a high of 4.59% in 1994 to 3.10% in
1998. The Bank's efficiency ratio (ratio of operating expenses to gross income)
dropped from 67% in 1996 to 62% for 1997 and further to 60% in 1998. In 1999,
the Bank will continue to pursue a strategy of profitable growth by implementing
a stronger sales effort throughout the Bank. Plans for 1999 include the addition
of a senior level sales manager to manage this effort, as well as additional
loan officers.
MORTGAGE BANKING ACTIVITIES
Mortgage banking activities involve the origination of mortgage loans for sale,
either for cash as whole loans, or by packaging them into securities through the
Federal Home Loan Mortgage Corporation (FHLMC) or Federal National Mortgage
Association (FNMA). For the years ended December 31, 1998 and December 31, 1997,
the Bank originated $29.7 and $15.8 million, respectively, of one to four-family
mortgage loans. Of these amounts $14.1 million in 1998 and $4.5 million in 1997
were sold. The 1998 sales figure includes $9.0 million converted to FHLMC
securities.
The Bank recognizes fees related to the origination and sale of mortgage loans.
These fees totaled $84,000 for 1997 and $97,000 for 1998. The 1998 figure
includes $14,000 of gains recognized under Statements of Financial Accounting
Standard No. 125 (SFAS 125) representing the present value of future mortgage
servicing rights on loans sold. The 1997 figure includes $11,000 of SFAS 125
gain.
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, 1998, $76.0 million
in loans were serviced for others, which generated $268,000 in fee income. At
December 31, 1997, $75.1 million in loans were serviced for others, earning
$297,000. The small change in the servicing portfolio is due, in part, to the
Bank's past decision to keep many saleable residential loans in its portfolio
along with customers' prepayments of their serviced loans.
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 commercial loan portfolio of the Bank continued to grow in 1998. The Bank
originated $21.3 million in commercial loans in the year ending December 31,
1998 resulting in an increase in commercial loan volumes of $6.2 million or 13%
over the levels at year-end 1997. The Bank continues to be recognized for its
commitment to the small business market. In 1998, the Finance Authority of Maine
recognized Gordon Flint, Regional Vice President of Kingfield Bank, for an
unprecedented fourth year as one of Maine's outstanding commercial lenders of
the year. Small business lending will continue to be a focus of Kingfield Bank
in the future. The Bank has plans for hiring additional loan officers to meet
the demands of the market and increase the Bank's market share in Androscoggin,
Somerset and southern Franklin County. The commercial loans of the Bank are a
combination of adjustable rate loans (based on the Wall Street Journal Prime
Rate) and fixed rate loans in keeping with the asset/liability management
strategies of the Bank. 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
-3-
<PAGE>
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,
consequently, 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 Bank's simulation model as of December 31, 1998, the Bank would expect a
decrease in net interest income of $117,000 or 1.6% if rates gradually decrease
by 200 basis points over a 12-month period, and a decrease in net interest
income of $9,000 or 0.1% if interest rates gradually increase from current rates
by 200 basis points over a 12-month period. These results are both within
Board-set tolerance limits of 7.5%. Based on the results of the simulation model
as of December 31, 1997, the Bank would have expected a decrease in net interest
income of $21,000 or 0.3% if rates gradually decreased by 200 basis points over
a 12-month period, and a decrease in net interest income of $112,000 or 1.7% if
interest rates gradually increased by 200 basis points over the ensuing 12-month
period. The change in results reflects the Bank's increased exposure to falling
rates in the current interest rate environment compared to the rate environment
at December 31, 1997 due to the volume of low-rate deposits (NOWand Savings
Accounts) whose rates cannot reasonably be lowered by 200 basis points from
their current levels. Management has under consideration actions which will
mitigate the risk of decrease in net interest income, if short-term rates should
fall while at the same time not inordinately increase the risk of a loss in
interest income should rates rise.
RESULTS OF OPERATIONS
Net income for 1998 was $1,806,000, or $1.47 basic earnings per share
($1.41diluted earnings per share) compared to $1,549,000 in 1997, or $1.30 basic
earnings per share ($1.23 diluted earnings per share). 1998's 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 $18.5 million, or 12.2%, from $152.8 million at December 31, 1997 to
$171.3 million at December 31, 1998. Net portfolio loans increased by $4.1
million, or 3.5%, over December 31, 1997. The increase would have been $13.1
million or 11.2%, but $9.0 million of mortgages were converted to FHLMC
securities and placed into the investment portfolio. The loan and investment
portfolio growth contributed to an increase in the Bank's margin from 4.46% at
December 31, 1997 to 4.71% at December 31, 1998 which resulted in a 15.9%, or
$997,000, increase in net interest income before provision for loan losses.
Noninterest income increased by $142,000, or 12.0% in 1998. Fee income from
origination and sale of mortgage loans (included in "other" income) was up
$12,000 from $85,000 in 1997 to $97,000 in 1998. The small increase is due in
part to the Bank's decision to keep in it's investment portfolio the $9.0
million of loans sold to FHLMC and converted to securities, thus decreasing the
income derived from cash loan sales but increasing interest income. Service
charges increased 19.3% from $705,000 to $841,000 due to the acquisition of the
Madison branch and it's deposit account base and increased fee income on
closings of residential mortgage loans. The increase of $35,000 in Other Income
includes a $22,000 increase in ATM activity fees as a result of the Bank
expanding it's ATM network to include ATM's at all of its branch locations and
two non-branch sites.
Noninterest expense increased by $527,000 from the 1997 level. 1998 expenses
include a total of $279,000 attributed to the operation of the new Madison
branch since March, 1998, including $91,000 of goodwill expense. Included in
1998's noninterest expense is a salary and benefit expense of $231,000 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
higher annualized average stock value in 1998 compared to 1997, this adjustment
was $54,000 higher in 1998 than in 1997. Expenses also include $194,000 in
expense associated with the amortization of goodwill. This is $91,000 greater
than 1997 due to amortization of goodwill associated with the Madison
acquisition. Neither the ESOP market value adjustment nor goodwill expense
impact the net tangible capital of the Bank. The remainder of the increase in
expenses is primarily in Salaries and Benefits resulting from non-Madison
staffing increases and general pay increases. The total salary and benefits
increase not attributable to the Madison branch or the ESOP market value
adjustment is $174,000.
-4-
<PAGE>
FINANCIAL CONDITION
Total assets of the Bank grew by $18.5 million or 12.2% from December 31, 1997
to December 31, 1998. Of the asset growth, $4.1 million was in portfolio loans
while investments grew by $6.8 million, including the addition of $9.0 million
of residential mortgages converted to FHLMC securities. Without the conversion
of the $9.0 million in mortgages, growth in the residential portfolio would have
been $6.5 million or 12.2%. Commercial loans grew by $6.2 million and other
loans grew by $0.7 million. Allowance for loan losses increased $238,000, the
net result of $680,000 in provision for loan losses and net charge-offs of
$442,000.
Total deposits grew by $21.1 million or 19.1% during 1998, including $16.2
million in deposits acquired in the purchase of the Madison branch. Borrowings
from the Federal Home Loan Bank of Boston (FHLB) decreased by $5.6 million --
the net result of the paydown of $14.2 million of borrowings from $14.6 million
in cash received in the Madison acquisition and the funding needs created by
loan demand. The borrowings of the Bank consist of advances of various
maturities from the Federal Home Loan Bank and relatively small portfolio
($877,000 at December 31, 1998) of daily reverse-repurchase agreements with
commercial customers.
The Bank's non-accrual loans increased from $ 2,090,000, or 1.76% of total loans
at December 31, 1997 to $2,369,000, or 1.83% of total loans at December 31,
1998. The increase can be attributed to the overall increase in loan volumes in
1998. During 1998, the Bank incurred net loan charge-offs of $442,000. In
response to the charge-offs and increased loan volumes, the Bank provided
$680,000 in loan loss reserves during 1998 resulting in an increase in the
reserve balance from $1,342,000 at December 31, 1997 to $1,580,000 at December
31, 1998. In determining the Allowance for Loan Losses, management uses internal
evaluations of loan characteristics to determine loan classifications for
individual loans and calculates reserves based on risk percentages assigned to
each loan classification. General reserves are calculated for different types of
loans using percentages based on risk factors and loss experience associated
with those loan types. Management also employs an outside firm to perform its
loan review function, relying on the firm to provide objective criteria in
evaluating the loan portfolio and adequacy of the Allowance for Loan Losses.
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, which consists 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 1998 grew by
over $21.1 million. As mentioned earlier, loans grew by $4.1 million and
investments by $6.8 million. While the Bank's past growth has been funded partly
by principal paydowns on loans and mortgage-backed securities and partly through
deposit growth, much of the growth has been funded from time to time by
borrowings from the Federal Home Loan Bank of Boston. While total borrowings
(including reverse repurchase agreements) decreased $4.7 million due to the
$14.2 million paydown from cash received in the Madison branch acquisition,
borrowings remain an important source of funding for the Bank. The Bank also has
a borrowing arrangement available through the discount window at the Federal
Reserve Bank of Boston, which the Bank will use in emergencies necessitated by
unusual outflows of cash from its branches.
The Bank's primary approach to measuring liquidity is using 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, 1998, the 30-day ratio was 11.8% (23.1% including funds available
from the Federal Home Loan Bank of Boston).
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<PAGE>
Regulatory standards for Bank capital adequacy requires that capital be at least
8% of risk-adjusted assets. KSB Bancorp, Inc.'s total capital ratio of 12.0%
exceeds the guidelines. In dollars, this means that the Company has the ability
to pay dividends subject to the minimum capital requirement. On January 19,
1999, the Board of Directors voted to increase the semiannual cash dividend to
$0.08 per share.
The Company's profitable year in 1998 resulted in an increase in stockholders'
equity of $2,132,000 for the year ended December 31, 1998. Included in the
increase is $231,000, which represents the increased market price on ESOP shares
released during 1998 and which, under generally accepted accounting principles,
is included in salaries and benefits expense.
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's 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
The Financial Accounting Standards Board issued the following Statements of
Financial Accounting Standards (SFAS) during 1997 and 1998:
SFAS No. 130 Reporting Comprehensive Income
SFAS No. 131 Disclosures about Segments of an Enterprise and
Related Information
SFAS No. 132 Employer's Disclosure about Pension and Other
Post-Retirement Benefits
SFAS No. 133 Accounting for Derivative Instruments and Hedging
Activities
SFAS No. 134 Accounting for Mortgage-backed Securities Retained
after the Securitization of Mortgage Loans Held for
Sale by a Mortgage Banking Enterprise
SFAS No. 130 is effective for periods beginning after December 15,
1997. The Company implemented SFAS No. 130 in 1998, and its required
disclosures are included in the consolidated statements of changes in
stockholders' equity.
SFAS No. 131 is effective for periods beginning after December 15,
1997. The Company's operations include only banking activities. Therefore,
SFAS No. 131 imposed no additional disclosure requirements. SFAS No. 132,
which revised employers' disclosures about pension and other
post-retirement benefits, is effective for years beginning after December
31, 1997. The Company is not affected by SFAS No. 132 as it does not have
pension and post-retirement plans.
SFAS No. 133, which establishes accounting and reporting standards for
derivative instruments and for hedging activity, is effective for fiscal
years beginning after June 15, 1999. The Company has not measured the
impact of SFAS No. 133 on its financial condition and results of
operations.
SFAS No. 134 is effective for the first fiscal quarter beginning after
December 15, 1998, with earlier application encouraged. The Company
applied SFAS No. 134 in 1998 with the securitization of mortgage-backed
securities. Those securities are classified as available for sale.
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<PAGE>
YEAR 2000 READINESS
The Year 2000 (`Y2K') issue is the result of computer programs using a two-digit
format, as opposed to four digits, to indicate the year. Such computer systems
may be unable to properly interpret dates beyond the year 1999, which could
cause a system failure or other computer errors, leading to disruptions in
operations. In 1997, Kingfield Bank developed a five-phase methodology for Y2K
systems compliance.
Phase I, or Awareness, consisted of defining the Y2K issue at Kingfield Bank;
informing the Board of Directors, management and key customers of the issue; and
developing a strategy of addressing the issue in all areas of the Company. This
phase has been completed.
Phase II, or Assessment, consists of identifying all software, hardware and
customer/vendor interdependencies affected by the Y2K issue. This phase is
essentially complete, but management realizes that additional issues might arise
that may require additional assessment.
Phase III, or Renovation, includes various upgrades to hardware and software to
ensure Y2K compliance. This phase is expected to be completed by March 31, 1999.
In September 1998, the Bank installed new mainframe hardware. The Y2K issue was
not the overall reason for the addition. The new hardware is Y2K compliant and
facilitates software testing (the software is also certified compliant, but will
be tested as part of Phase IV Validation). The overriding motivation for
purchase of the hardware was to provide better, faster customer service by
speeding up processing and backup time for the Bank's application processes. The
hardware and software are certified by the vendors as Y2K compliant. The
purchased hardware and associated software are being capitalized in accordance
with normal policy. The costs associated with new software or upgraded hardware
would have been incurred in the normal course of operations regardless of the
Y2K issue.
Phase IV, or Validation, consists of testing all hardware and software in use by
the Company as well as testing the interfaces between Company and external
systems. Systems in use by critical suppliers of services will be monitored for
testing progress by management. The Company plans having the Validation phase
completed by March 31, 1999. The Bank uses a nationally recognized third party
service provider who provides software to over 3,500 financial institutions to
provide application software to process its most mission-critical data
processing related to its loans, deposits, general ledger and other financial
applications. The service provider has informed the Bank that its software is
Y2K compliant (and has been since 1988). Testing of the third party provider's
programs has commenced and is expected to be completed by March 31, 1999.
Phase V, or Implementation, will be completed by June 30, 1999 and will result
in the certification of all hardware and software as Y2K compliant. Contingency
plans have been developed for all mission critical systems and will be executed
if any systems fail to meet certification criteria. The Company is in the
process of assessing these plans in light of the possible impact of Y2K failures
and will modify plans as more becomes known about evolving scenarios. The
Company's reasonably most likely worst-case Y2K scenarios may include the
failure of a vendor or third party provider, which is beyond the Company's
control. In the event a failure occurs, the Company expects to be able to
implement contingency systems. The Bank has in place stand-by liquidity
available to it in the event unusual levels of deposit outflows occur as a
result of customers' fear of system failures.
Management believes the Company is adequately addressing the Y2K issue and that
the current preparations and testing being conducted all seek to minimize any
potential adverse effect on the Bank or its customers. The commercial and
residential loan portfolios, as well as the significant depositor list, are
currently being analyzed by our Y2K team for material exposure to the Y2K issue.
No material exposure is expected due to the diverse nature of our loan and
deposit portfolios. It is estimated that the Company's cost of remediation
during 1998 was under $5,000 direct expenses and fewer than 1,500 total hours
spent by management and staff. 1999 expenses are expected to be under $20,000,
including $10,000 for computer software, $5,000 for customer awareness efforts
and $5,000 miscellaneous.
The Company's regulatory agency, the Federal Deposit Insurance Corporation
(`FDIC'), has been monitoring, and plans to continue monitoring, the Company's
progress in addressing the Y2K issue. The FDIC has provided substantial guidance
to the Bank concerning the Y2K issue.
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<TABLE>
<CAPTION>
Selected Consolidated Financial and Other Data of the Bank
($ in 000's)
Selected Financial Data: 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets 171,329 152,752 134,357 125,233 113,003
Loans receivable, net (1) 129,178 118,857 99,197 85,889 68,634
Investment securities available for sale (2) 20,967 9,261 7,452 8,377 0
Investment securities to be held to maturity 9,271 14,171 18,517 19,102 36,207
Goodwill 1,411 517 620 723 716
Deposits (3)(4) 132,980 111,723 110,282 104,702 81,040
Borrowed funds 23,524 28,219 13,186 10,952 23,367
Total equity, substantially restricted 13,687 11,555 9,792 8,498 7,621
AVERAGE INTEREST EARNING ASSETS 151,185 137,814 124,331 116,915 88,884
AVERAGE ASSETS 159,328 144,458 130,742 122,899 92,459
AVERAGE INTEREST BEARING LIABILITIES 133,194 122,722 111,580 106,129 79,337
AVERAGE EQUITY 12,571 10,612 9,134 7,961 7,502
Selected Operating Data:
Interest and dividend income 13,218 12,003 10,705 9,955 6,942
Interest expense 5,970 5,752 5,166 5,025 3,267
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income 7,248 6,251 5,539 4,930 3,675
Less provision for loan losses 680 530 390 315 140
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 6,568 5,721 5,149 4,615 3,535
Noninterest income
Net security gains (losses) 0 0 (47) 32 0
Mortgage servicing 268 297 321 328 306
Service charges and fees 841 705 700 568 440
Other 219 184 165 194 211
- -----------------------------------------------------------------------------------------------------------------------------
Total non-interest income 1,328 1,186 1,139 1,122 957
- -----------------------------------------------------------------------------------------------------------------------------
Noninterest expense
Salaries and benefits 2,540 2,206 2,051 2,100 2,015
Occupancy 316 281 299 312 270
Equipment 775 730 629 625 634
BIF premium 29 28 236 137 151
Other 1,469 1,357 1,246 1,404 1,178
- -----------------------------------------------------------------------------------------------------------------------------
Total non-interest expense 5,129 4,602 4,461 4,578 4,248
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,767 2,305 1,827 1,159 244
Income tax expense 961 756 583 336 22
- -----------------------------------------------------------------------------------------------------------------------------
Net income 1,806 1,549 1,244 823 222
=============================================================================================================================
</TABLE>
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<TABLE>
<CAPTION>
Selected Consolidated Financial and Other Data of the Bank
Selected Financial Data: 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on average assets % 1.13% 1.07% 0.95% 0.67% 0.24%
Return on average equity 14.37 14.60 13.62 10.34 2.95
Average equity to average assets 7.89 7.35 6.99 6.48 8.11
Equity to total assets 7.99 7.56 7.29 6.79 6.74
Tangible equity to tangible assets 7.22 7.25 6.86 6.24 6.15
Interest rate spread during period 4.18 3.95 3.91 3.70 3.54
Net interest margin (5) 4.71 4.46 4.38 4.14 3.99
Operating expenses to average assets (6) 3.10 3.11 3.33 3.73 4.59
Non-accruing loans to total loans (1) (7) 1.83 1.76 1.91 1.92 1.99
Non-performing assets to total assets (8) (7) 1.47 1.47 1.50 1.35 1.22
Allowance for loan losses to
non-performing loans 66.69 64.21 47.12 52.69 44.95
Allowance for loan losses to total loans (1) 1.21 1.12 0.89 1.00 0.89
Average interest-earning assets to
average interest-bearing liabilities 1.14 1.12 1.11 1.10 1.12
Basic Earnings per Share (9) $1.47 $1.30 $1.07 $0.72 $0.20
Diluted Earnings per Share (9) $1.41 $1.23 $1.01 $0.69 $0.19
</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. In March, 1998 the Bank acquired one branch with deposits of $16.2
million.
(5) Calculation is based upon net interest income excluding certain fees and
before provision for loan losses 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 $0, $50,000, $501,000, $765,000 and $672,000 at December 31,
1998,1997, 1996, 1995, and 1994, 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
-9-
<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, 1998 and 1997, 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, 1998.
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, 1998 and 1997, and the consolidated results of
their operations and their consolidated cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/Berry, Dunn, McNeil & Parker
Portland, Maine
January 21, 1999
-10-
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Financial Condition
DECEMBER 31, 1998 AND 1997
ASSETS 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 3,233,994 $ 3,233,478
Interest-bearing deposits with banks 2,833 5,838
Securities available for sale, at market value 20,967,448 9,260,779
Securities held to maturity (market value $9,444,467
and $14,425,808 at 1998 and 1997, respectively) 9,271,046 14,170,856
Loans held for sale 8,228,153 2,007,110
Loans receivable
Real estate mortgage 50,150,567 52,710,292
Home equity 13,657,144 13,718,409
Installment 4,594,097 4,255,099
Commercial 53,277,542 47,056,531
Other 1,075,589 654,300
Deferred loan origination fees (224,447) (202,808)
- ----------------------------------------------------------------------------------------------
122,530,492 118,191,823
Less allowance for possible loan losses (1,580,233) (1,341,828)
- ----------------------------------------------------------------------------------------------
Total loans receivable, net 120,950,259 116,849,995
- ----------------------------------------------------------------------------------------------
Accrued interest receivable 851,868 826,582
Other real estate owned 146,705 158,554
Federal Home Loan Bank stock, at cost 1,641,350 1,537,650
Premises and equipment, net 2,563,083 2,314,298
Goodwill 1,411,119 516,778
Deferred tax asset 781,433 661,099
Cash surrender value of life insurance 638,567 588,217
Other assets 641,020 620,866
- ----------------------------------------------------------------------------------------------
$171,328,878 $152,752,100
==============================================================================================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-11-
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Financial Condition (concluded)
LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities
Deposit accounts
Demand $ 12,385,129 $ 12,140,898
Regular savings 23,875,002 20,055,303
NOW accounts 23,807,239 13,914,421
Money market accounts 8,895,048 6,211,324
Time 62,877,090 58,386,623
- ----------------------------------------------------------------------------------------------------
Total deposits 131,839,508 110,708,569
Advances from Federal Home Loan Bank 22,647,000 28,219,000
Other borrowed funds 877,387 --
Escrows and trustee accounts for sold loans 1,140,712 1,013,894
Accrued expenses and other liabilities 1,137,742 1,255,534
- ----------------------------------------------------------------------------------------------------
Total liabilities 157,642,349 141,196,997
- ----------------------------------------------------------------------------------------------------
Commitments and contingency (Notes 10, 12, 14, and 16)
Stockholders' equity
Preferred stock, authorized 200,000 shares -- --
Common stock, par value $.01; authorized 2,400,000
shares, issued 1,269,411 shares in 1998 and 1,246,950
shares in 1997 12,695 12,470
Additional paid-in capital 4,842,369 4,543,655
Retained earnings 8,796,056 7,171,531
Net unrealized gain on securities available for sale,
net of deferred taxes 210,571 72,698
- ----------------------------------------------------------------------------------------------------
13,861,691 11,800,354
Less remaining obligation under:
Employee Stock Ownership Plan (68,453) (117,348)
Bank Recognition and Retention Plan (29,724) (50,918)
Treasury stock, at cost (7,964 shares in 1998 and 1997) (76,985) (76,985)
- ----------------------------------------------------------------------------------------------------
Total stockholders' equity 13,686,529 11,555,103
- ----------------------------------------------------------------------------------------------------
$171,328,878 $152,752,100
====================================================================================================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-12-
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and dividend income
Interest and fees on loans $11,666,663 $10,133,178 $ 8,756,148
Interest on securities available for sale 604,522 669,865 466,560
Interest on securities held to maturity 841,636 1,108,105 1,397,322
Dividends 104,762 92,682 84,501
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 13,217,583 12,003,830 10,704,531
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense
Interest on deposits 4,797,856 4,378,125 4,483,138
Interest on borrowed funds 1,171,888 1,374,125 682,469
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 5,969,744 5,752,250 5,165,607
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income 7,247,839 6,251,580 5,538,924
Provision for loan losses 680,000 530,000 390,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 6,567,839 5,721,580 5,148,924
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest income
Gain (loss) on disposition of securities -- -- (46,617)
Mortgage servicing fees 268,462 296,579 320,522
Service charges and fees 840,852 705,160 699,747
Other 218,848 184,346 165,268
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 1,328,162 1,186,085 1,138,920
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest expense
Salaries and benefits 2,540,418 2,205,609 2,050,381
Occupancy 315,963 280,699 298,835
Equipment 775,143 729,862 629,391
BIF Premium 28,896 28,456 236,135
Other 1,468,543 1,357,196 1,246,321
- ------------------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 5,128,963 4,601,822 4,461,063
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,767,038 2,305,843 1,826,781
Income tax expense 961,042 756,438 582,453
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,805,996 $ 1,549,405 $ 1,244,328
====================================================================================================================================
Per Share Data
Basic earnings per common share $ 1.47 $ 1.30 $ 1.07
====================================================================================================================================
Diluted earnings per common share $ 1.41 $ 1.23 $ 1.01
====================================================================================================================================
Weighted-average shares outstanding 1,227,009 1,187,651 1,166,371
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-13-
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Stockholders' Equity
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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, 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
Change in net unrealized loss
on securities available for
sale, net of deferred taxes
of $14,400 -- -- -- -- -- (28,228) -- (28,228)
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- 1,244,328 -- -- (28,228) -- 1,216,100
Cash dividends declared
($.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
- ------------------------------------------------------------------------------------------------------------------------------------
Balances,
December 31, 1996 $4,111 $4,325,499 $5,748,714 $(168,840) $ (79,562) $ (37,760) $ -- $9,792,162
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-14-
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Stockholders' Equity (continued)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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, 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
Change in net unrealized
gain (loss) on securities
available for sale, net
of deferred taxes of
$56,850 -- -- -- -- -- 110,458 -- 110,458
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive
income -- -- 1,549,405 -- -- 110,458 -- 1,659,863
Cash dividends declared
($.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 effected
in the form of a
200% dividend 8,313 -- (8,313) -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balances,
December 31, 1997 $12,470 $ 4,543,655 $ 7,171,531 $(117,348) $(50,918) $ 72,698 $ (76,985) $11,555,103
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-15-
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Stockholders' Equity (continued)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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, 1997 $12,470 $4,543,655 $7,171,531 $(117,348) $(50,918) $72,698 $(76,985) $11,555,103
- ------------------------------------------------------------------------------------------------------------------------------------
Net income -- -- 1,805,996 -- -- -- -- 1,805,996
Change in net unrealized
gain on securities
available for sale, net
of deferred taxes
of $71,025 -- -- -- -- -- 137,873 -- 137,873
- ------------------------------------------------------------------------------------------------------------------------------------
Total comprehensive
income -- -- 1,805,996 -- -- 137,873 -- 1,943,869
Cash dividends
declared ($.011 per
share, net of dividends
on ESOP shares) -- -- (113,411) -- -- -- --(113,411)
Payment of obligation
under Employee Stock
Ownership Plan -- 230,875 -- 48,895 -- -- -- 279,770
Bank Recognition and
Retention Plan -- -- -- -- 21,194 -- -- 21,194
26,879 shares issued under
Stock Option Plans 269 81,183 -- -- -- -- -- 81,452
Purchase of 4,418 shares of
treasury stock -- -- -- -- -- -- (81,448)(81,448)
Retire 4,418 shares of
treasury stock (44) (13,344) (68,060) -- -- -- 81,448 --
- ------------------------------------------------------------------------------------------------------------------------------------
Balances,
December 31, 1998 $12,695 $4,842,369 $8,796,056 $(68,453) $(29,724) $210,571 $(76,985) $13,686,529
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-16-
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,805,996 $ 1,549,405 $ 1,244,328
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation and amortization 772,932 748,677 745,294
Decrease in obligation under ESOP and BRP 300,964 256,564 150,297
Provision for loan losses 680,000 530,000 390,000
Deferred income taxes (138,288) (260,405) (21,857)
Net gain on sale of loans held for sale (89,892) (63,226) (49,738)
Net loss on default of security held to maturity -- -- 46,617
Net loss on disposal of equipment 3,207 5,973 --
Loss on sale of other real estate owned 28,143 -- 14,204
Originations of loans held for sale (15,473,626) (6,625,287) (5,842,269)
Proceeds from loans held for sale 5,054,251 4,083,405 5,199,250
Decrease (increase) in
Interest receivable (26,585) (62,914) 48,726
Other receivables and prepaid expense (92,637) (57,018) 9,119
Cash surrender value of life insurance (50,350) (34,121) (60,337)
Increase (decrease) in
Accrued income taxes payable (39,853) (1,175) (15,690)
Deferred origination fees 21,639 (6,356) 22,846
Accrued expenses and other liabilities (94,243) 167,109 37,745
- ------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities (7,338,342) 230,631 1,918,535
- ------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Net decrease (increase) in interest-bearing deposits
with banks 3,005 (4,282) 2,458,977
Proceeds from maturities and principal payments on
securities held to maturity 4,807,090 4,195,590 5,730,367
Purchase of securities held to maturity -- -- (5,364,445)
Proceeds from maturities and principal payments on
securities available for sale 2,535,797 5,355,874 860,627
Purchase of securities available for sale (5,045,490) (7,018,176) --
Net increase in loans (9,192,461) (17,738,199) (13,142,669)
Capital expenditures (530,614) (548,528) (318,563)
Purchase of FHLB stock (103,700) (217,100) --
Net decrease in other assets 9,500 61,638 68,330
Proceeds from sale of other real estate owned 446,952 116,500 26,973
- ------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (7,069,921) (15,796,683) (9,680,403)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-17-
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows (Continued)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities
Cash received through branch acquisition $14,632,259 $ -- $--
Net increase (decrease) in time deposit accounts (1,836,978) (950,065) 3,820,457
Net increase (decrease) in other deposit accounts 6,815,858 2,296,074 1,856,448
Net increase (decrease) in FHLB advances (5,215,771) 15,033,000 2,234,000
Net increase (decrease) in escrow accounts 126,818 94,640 (97,000)
Proceeds from stock issuance under option plan 81,452 54,000 --
Purchase of treasury stock issued (81,448) (124,405) --
Proceeds from reissuance of treasury stock under
option plan -- 2,640 --
Cash dividends paid (113,411) (85,721) (72,466)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 14,408,779 16,320,163 7,741,439
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 516 754,111 (20,429)
Cash and cash equivalents, beginning of year 3,233,478 2,479,367 2,499,796
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 3,233,994 $ 3,233,478 $2,479,367
====================================================================================================================================
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 5,979,379 $ 5,703,515 $5,200,515
====================================================================================================================================
Income taxes, net of refunds $ 1,107,184 $ 1,018,019 $ 620,000
====================================================================================================================================
The Company had the following noncash transactions
Net increase (decrease) required by Statement of
Financial Accounting Standards No. 115
Unrealized (gain) loss on securities
available for sale $ (208,898) $ (167,309) $ 42,629
Deferred income tax asset (71,025) (56,851) 14,400
Net unrealized (gain) loss on securities
available for sale (137,873) (110,458) 28,229
Net transfer from loans to other real estate owned 463,246 158,554 116,500
Securitization of mortgage loans 9,014,129 -- --
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
-18-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
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
Operating Segments
The Financial Accounting Standards Board issued Statements of Financial
Accounting Standards (SFAS) No. 131, "Disclosures About Segments of an
Enterprise and Related Information," effective January 1, 1998. The
Company's operations are comprised of a single operating segment;
therefore, SFAS No. 131 imposes no additional disclosure requirements.
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 Bank has not experienced any losses in such accounts and
the Bank believes it is not exposed to any significant risk with respect
to these accounts. The Federal Reserve Board requires the Bank to maintain
a reserve balance. The amount of this reserve balance as of December 31,
1998 is $940,000.
Securities
The Bank's investment accounting policies are as follows:
-19-
<PAGE>
1. Summary of Significant Accounting Policies (Continued)
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.
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
Mortgage loans serviced for others are not included in the accompanying
balance sheet. 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.
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. 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.
-20-
<PAGE>
1. Summary of Significant Accounting Policies (Continued)
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.
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 reductions in loan
loss provision and decreases are reported as 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.
-21-
<PAGE>
1. Summary of Significant Accounting Policies (Concluded)
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.
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 and caps are contracts in which a floor or a cap is
established at a specified rate and for a specified 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 basic and diluted
earnings per share.
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.
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.
Comprehensive Income
The Company adopted SFAS No. 130, "Reporting Comprehensive Income,"
effective January 1, 1998. The required disclosures for all periods
presented are included in the consolidated statement of changes in
stockholders' equity. Comprehensive income includes both net income and
other comprehensive income. The only component of other comprehensive
income is net unrealized gains and losses on available for sale
securities, net of deferred taxes.
<PAGE>
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:
1998
Mortgage-backed securities $ 20,648,402 $ 320,402 $1,356 $ 20,967,448
==============================================================================================================================
1997
Mortgage-backed securities $ 9,150,630 $ 113,570 $ 3,421 $ 9,260,779
==============================================================================================================================
</TABLE>
-22-
<PAGE>
2. Securities (Concluded)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to Maturity:
1998
Mortgage-backed securities $ 8,288,487 $ 151,860 $ 9,144 $ 8,431,203
REMIC 982,559 30,705 -- 1,013,264
- ------------------------------------------------------------------------------------------------------------------------------
$ 9,271,046 $ 182,565 $ 9,144 $ 9,444,467
==============================================================================================================================
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
==============================================================================================================================
</TABLE>
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, 1998, 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 $ -- $ -- $ -- $ --
Due from one to five years 3,532,304 3,576,624 1,355,785 1,371,976
Due from five to ten years 3,421,588 3,513,373 543,497 548,767
Due after ten years 2,317,154 2,354,470 18,749,120 19,046,705
- --------------------------------------------------------------------------------------------------------------------------------
$9,271,046 $9,444,467 $20,648,402 $20,967,448
================================================================================================================================
</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. No securities available for sale were sold in 1996, 1997, or
1998. The Bank realized a loss of $46,617 on the default of a security
held to maturity in 1996. The Bank has pledged $7,501,000 of its FHLMC
mortgage-backed securities against public unit deposits.
<PAGE>
3. Loans Receivable
Activity in the allowance for loan losses is summarized as follows for the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $1,341,828 $ 893,456 $ 866,770
Provision charged to income 680,000 530,000 390,000
Loans charged off (506,023) (141,098) (400,684)
Recoveries on loans previously charged off 64,428 59,470 37,370
- -----------------------------------------------------------------------------------------------------------------
Balance at end of year $1,580,233 $1,341,828 $ 893,456
=================================================================================================================
</TABLE>
-23-
<PAGE>
3. Loans Receivable (Concluded)
Information regarding impaired loans is as follows:
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Average investment in impaired loans $3,147,210 $1,790,147
Interest income recognized on impaired loans including
interest income recognized on cash basis 425,649 186,119
Interest income recognized on impaired loans on cash basis 437,678 204,328
Information regarding allowance for loan losses allocated to impaired
loans at December 31, is as follows:
Balance of impaired loans $3,299,288 $1,573,216
Less portion for which no allowance for loan losses
is allocated 2,745,184 1,545,234
- -----------------------------------------------------------------------------------------------------------------
Portion of impaired loan balance for which an allowance
for loan losses is allocated $ 554,104 $27,982
=================================================================================================================
Portion of allowance for loan losses allocated to the
impaired loan balances $ 190,719 $10,982
=================================================================================================================
</TABLE>
Loans placed on nonaccrual status amounted to $2,368,521, $2,090,266, and
$1,894,503, at December 31, 1998, 1997, and 1996, 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>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income that would have been recorded $232,924 $205,906 $203,800
Interest income recognized 115,235 89,041 135,178
- -----------------------------------------------------------------------------------------------------------------
Interest income foregone $117,689 $116,865 $68,622
=================================================================================================================
</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 $75,950,532 and $75,111,086 at December 31, 1998 and 1997,
respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing were $380,811 and $303,482 at December 31, 1998 and 1997,
respectively.
Mortgage servicing rights of $45,571 and $38,456 are capitalized at
December 31, 1998 and 1997, respectively, and are included in other
assets. The amortized cost approximates fair value at December 31, 1998
and 1997.
<PAGE>
5. Premises and Equipment
Premises and equipment at December 31 consist of the following:
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land and improvements $ 326,114 $ 310,889
Bank buildings and leasehold improvements 1,967,003 1,643,639
Furniture and fixtures 2,880,911 2,592,222
- -----------------------------------------------------------------------------------------------------------------
5,174,028 4,546,750
Less accumulated depreciation 2,610,945 2,232,452
- -----------------------------------------------------------------------------------------------------------------
$2,563,083 $2,314,298
=================================================================================================================
</TABLE>
-24-
<PAGE>
5. Premises and Equipment (Concluded)
Depreciation expense was $446,833, $432,674, and $368,556, in 1998, 1997,
and 1996, 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 $5,000 per year.
The related rent expense, net of sublease income, was $688, $(1,587), and
$1,226, in 1998, 1997, and 1996, respectively.
6. Branch Acquisitions
On March 14, 1998, the Bank acquired the Madison, Maine branch of KeyBank
of Maine. The acquisition was accounted for under the purchase method of
accounting for business combinations. The Bank received net cash of
approximately $14,632,000 for deposits assumed, net of loans, bank
premises and equipment acquired and deposit premium (goodwill).
Goodwill for the Madison branch and branches acquired in prior years is
being amortized using the straight-line method over ten years.
Amortization charged to operations was $193,770, $103,047, and $103,047 in
1998, 1997, and 1996, respectively.
7. Deposits
At December 31, 1998, the scheduled maturities of time deposits are as
follows:
1999 $38,600,014
2000 19,867,007
2001 1,772,235
2002 923,328
2003 and thereafter 1,714,506
-----------
$62,877,090
===========
The aggregate amount of jumbo certificates of deposit, each with a minimum
denomination of $100,000, was $7,227,823 and $6,742,758 at December 31,
1998 and 1997, respectively.
<PAGE>
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, 1998 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed advances 4.71 - 6.10% $14,952,000 $25,889,000
Variable advances 5.06 - 5.40% 7,695,000 2,330,000
- ------------------------------------------------------------------------------------------
$22,647,000 $28,219,000
==========================================================================================
</TABLE>
Pursuant to collateral agreements with the FHLB, advances are
collateralized by all stock in the FHLB and qualifying first mortgage
loans and investments. Advances at December 31, 1998, mature as follows:
1999 $12,195,000
2000 5,452,000
2008 5,000,000
-----------
$22,647,000
===========
The Bank also has $3,108,000 available on a line of credit with the FHLB.
-25-
<PAGE>
9. Other Borrowed Funds
Other borrowed funds amounting to $877,387 at December 31, 1998 consist of
securities sold under agreements to repurchase, which generally mature
within one day from the transaction date. At December 31, 1998, securities
with a fair value of $968,000 were pledged to secure other borrowed funds.
10. Income Taxes
Actual tax expense differs from the expected tax expense computed at the
federal statutory tax rate for the following reasons:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for income taxes at statutory rates (34%) $940,800 $784,000 $621,100
Add (deduct)
Pass-through tax credit from investment (82,700) (82,700) (82,700)
State income tax, net of federal taxes 21,000 18,600 15,400
Nontaxable income (19,000) (16,100) (12,200)
Nondeductible expenses 98,400 78,600 41,000
Deductible expense -- (29,000) --
Other 2,542 3,038 (147)
- -----------------------------------------------------------------------------------------------------------------
$961,042 $756,438 $582,453
=================================================================================================================
</TABLE>
The components of income tax expense are:
<TABLE>
<CAPTION>
Federal State Total
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
1998
Current $1,067,486 $ 31,844 $ 1,099,330
Deferred (138,288) -- (138,288)
- -----------------------------------------------------------------------------
Total $ 929,198 $ 31,844 $ 961,042
=============================================================================
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
=============================================================================
</TABLE>
-26-
<PAGE>
10. Income Taxes (Concluded)
The tax effect of temporary differences which give rise to the deferred
income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Asset Liability Asset Liability
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accrued liabilities and
unearned income $120,966 $ - $111,894 $ -
Allowance for possible loan losses 537,280 35,593 456,222 39,504
Interest on nonaccrual loans 28,336 -- 20,937 -
Goodwill, amortization, and
depreciation 60,379 -- 38,000 -
Loans held for sale 34,472 -- 10,055 -
Change in method of accounting for
tax from cash basis to accrual basis -- 18,527 - 37,054
Unrealized gain on securities
available for sale -- 108,476 - 37,450
Other assets -- 37,960 - 33,477
Other -- -- 23,991 -
- ---------------------------------------------------------------------------------------------------------------------------
$781,433 $200,556 $661,099 $147,485
===========================================================================================================================
</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.
11. 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, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C>
Beginning balance $349,661 $145,740
New loans 181,313 221,574
Less repayments 201,147 17,653
- ---------------------------------------------------------------------------
Ending balance $329,827 $349,661
===========================================================================
</TABLE>
12. Employee Benefit Plans
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 $64,172,
$54,905, and $50,494, in 1998, 1997, and 1996, respectively.
-27-
<PAGE>
12. Employee Benefit Plans (Continued)
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 $6,193, $9,903,
and $13,114 in 1998, 1997, and 1996, 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 $279,770, $227,920, and $121,653 for 1998,
1997, and 1996, respectively. As of December 31, 1998, 99,512 shares have
been allocated and the remaining 22,591 shares are suspense shares held by
the ESOP. The fair value of unearned ESOP shares at December 31, 1998, is
$316,275. 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 $21,194, $28,644, and
$28,644 for 1998, 1997, and 1996, respectively.
<PAGE>
A summary of the status of the Bank Recognition and Retention Plans is
presented below:
<TABLE>
<CAPTION>
1998 1997 1996
Number Number Number
of Shares of Shares of Shares
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at beginning of year 39,162 41,135 41,135
Granted during the year 10,173 - -
Forfeited during the year -- 1,973 -
- -------------------------------------------------------------------------------------------------
49,335 39,162 41,135
=================================================================================================
</TABLE>
Stock Option Plan
The Company has two fixed stock option plans for employees accounted for
under APB Opinion 25 and related interpretations. The first plan,
established in 1993 ("1993 Plan") allows the Company to grant options to
employees for up to 83,738 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 second plan was established in 1998
("1998 Plan") and allows the Company to grant options to employees for up
to 58,000 shares. 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.
-28-
<PAGE>
12. Employee Benefit Plans (Continued)
The Company also has two fixed stock option plans for directors accounted
for under APB Opinion 25 and related interpretations. The first plan,
established in 1993, 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. The second plan established in 1998 allows the Company to grant
options to directors for up to 12,000 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>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income As reported $1,805,996 $1,549,405 $1,244,328
Pro forma 1,570,945 1,485,496 1,230,803
Basic earnings per share As reported $1.47 $1.30 $1.07
Pro forma 1.28 1.25 1.06
Diluted earnings per share As reported $1.41 $1.23 $1.01
Pro forma 1.23 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>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 0.63% 0.44% 0.31%
Expected volatility 41.50 39.40 25.30
Risk-free interest rate 4.75% 5.75% 6.43%
Expected life 10 years 10 years 10 years
</TABLE>
<PAGE>
A summary of the status of the Company's fixed stock option plans for the
years ended December 31, 1998, 1997, and 1996 is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of Shares Price of Shares Price of Shares Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 98,167 $ 3.80 110,138 $ 3.21 105,188 $3.03
Granted during the year 64,500 18.29 12,000 7.67 4,950 7.08
Exercised during the year 26,879 3.03 18,691 3.03 -- --
Reload options granted 4,418 18.44 -- -- -- --
Forfeited during the year 3,000 18.50 5,280 3.03 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 137,206 $10.91 98,167 $ 3.80 110,138 $3.21
====================================================================================================================================
Exercisable at end of year 78,106 $ 6.42 74,699 $ 3.30 81,923 $3.28
====================================================================================================================================
Weighted average grant-date
fair value of options granted
during the year $ 8.03 $17.67 $4.14
</TABLE>
-29-
<PAGE>
12. Employee Benefit Plans (Concluded)
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Number Weighted Average
Range of Outstanding at Remaining Weighted Average
Exercise Prices December 31, 1998 Contractual Life Exercise Price
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$3.03 - 7.67 71,288 5.3 years $ 4.09
$15.50 - 18.50 65,918 9.6 years 18.29
$3.03 - 18.50 137,206 7.4 years 10.91
</TABLE>
13. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income, as reported $1,805,996 $1,549,405 $1,244,328
=================================================================================================================
Weighted-average shares outstanding 1,227,009 1,187,651 1,166,371
Effect of dilutive potential common shares
Stock options 54,693 69,262 64,055
- -----------------------------------------------------------------------------------------------------------------
Adjusted weighted-average shares outstanding 1,281,702 1,256,913 1,230,426
=================================================================================================================
Basic earnings per share $1.47 $1.30 $1.07
Diluted earnings per share $1.41 $1.23 $1.01
</TABLE>
Options to purchase 65,918 shares of common stock at an average exercise
price of $18.29 per share were outstanding during 1998, but were not
included in the computation of diluted earnings per share because the
options' exercise price was greater than the average market price of the
common stock.
14. 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,
1998, that the Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 1998, 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.
-30-
<PAGE>
14. Regulatory Matters (Concluded)
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, 1998:
Total Capital to Risk Weighted Assets
Consolidated $13,466,000 12.0% <179>$8,988,000 <179>8.0% N/A
Bank 13,183,000 11.7% <179> 8,971,920 <179>8.0% <179>$11,214,900 <179>10.0%
Tier I to Risk Weighted Assets
Consolidated 12,060,000 10.7% <179> 4,494,000 <179>4.0% N/A
Bank 11,779,000 10.5% <179> 4,485,960 <179>4.0% <179> 6,728,940 <179> 6.0%
Tier I Capital to Average Assets
Consolidated 12,060,000 7.3% <179> 6,615,560 <179>4.0% N/A
Bank 11,779,000 7.1% <179> 6,615,560 <179>4.0% <179> 8,269,450 <179> 5.0%
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 Capital 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%
</TABLE>
The ability of the Bank to pay dividends to the parent is also subject to
the minimum regulatory capital requirements. At December 31, 1998, the
amount available for dividends by the Bank was approximately $2,583,000.
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.
-31-
<PAGE>
15. Other Noninterest Expense
Other noninterest expense amounts are summarized as follows for the years
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Printing, postage, stationery and supplies $ 259,162 $ 228,806 $ 239,749
Advertising and promotion 144,808 119,679 117,806
Data processing 176,816 152,614 145,324
Professional fees 150,931 176,446 136,556
Meetings and training 92,401 104,612 63,172
Bond and directors' and officers' insurance 18,998 21,414 24,872
Goodwill amortization 193,770 103,047 103,047
Loss on sale/disposal of equipment 5,230 5,973 --
Other 426,427 444,605 415,795
- ------------------------------------------------------------------------------------------------------------
$1,468,543 $1,357,196 $1,246,321
============================================================================================================
</TABLE>
16. 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 and to mitigate interest rate risk. These financial instruments
are commitments to originate loans and interest rate swaps, caps 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, caps 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, 1998, are as follows:
Real estate lines of credit $11,104,665
Commercial lines of credit 4,743,268
Construction loans 1,343,012
Consumer lines of credit 919,992
Commercial letters of credit 323,568
Commitments to originate loans at December 31, 1998, are as follows:
First mortgage fixed rate loans $ 759,940
Variable rate commercial loans 1,307,700
-32-
<PAGE>
16. Financial Instruments With Off-Balance-Sheet Risk (Concluded)
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 5.2209% at December 31, 1998. 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
$44,522 and $28,332 in 1998 and 1997, respectively.
Interest Rate Floor
The Company had an interest rate floor contract in the notional amount of
$5,000,000 on which it received the excess of the strike rate, 6%, over
the three-month LIBOR rate, adjusted quarterly. The floor matured in June
1998. The Company received $4,725 of interest income in 1998.
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 1998.
Other
The Bank services approximately $47 million of Federal Home Loan Mortgage
Corporation (FHLMC) loans. The Bank is liable to FHLMC for any interest
which becomes delinquent.
17. 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 $76 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.
-33-
<PAGE>
18. 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, 1998 December 31, 1997
- --------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- --------------------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C> <C> <C>
Cash and due from banks(1) $ 3,236,827 $ 3,236,827 $ 3,239,316 $ 3,339,316
Securities available for sale(1) 20,967,448 20,967,448 9,260,779 9,260,779
Securities to be held to maturity(2) 9,271,046 9,444,467 14,170,856 14,425,808
Loans receivable, net of allowance
and discounts(3) 120,950,259 123,405,000 116,849,995 118,769,000
Loans held for sale(2) 8,228,153 8,329,541 2,007,110 2,036,685
Federal Home Loan Bank stock(1) 1,641,350 1,641,350 1,537,650 1,537,650
Accrued interest receivable(1) 851,868 851,868 826,582 826,582
Liabilities
Deposits(4) 131,839,508 132,481,386 110,708,569 111,276,088
Advances from Federal Home
Loan Bank(5) 22,647,000 22,678,829 28,219,000 28,219,000
Other borrowed funds(1) 877,387 877,387 -- --
Escrows and trustee accounts for
sold loans1 1,140,712 1,140,712 1,013,894 1,013,894
Accrued interest payable(1) 101,618 101,618 111,253 111,253
</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 are estimated using a discounted cash
flow model. Certain residential real estate loans are 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 are 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 are used as an approximation of
fair values.
-34-
<PAGE>
18. Fair Value Disclosures of Financial Instruments (Concluded)
(4) Fair values of certificates of deposit are estimated based on discounted
cash flows using current rates for certificates of similar remaining
maturity. For all other deposits, carrying values are used as an
approximation of their fair values.
(5) Fair values of fixed rate advances are estimated based on discounted cash
flows using current rates for advances of similar remaining maturity. For
variable rate advances and advances with short-term call provisions,
carrying values were used as an approximation of their fair values.
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, 1998
- -----------------
$5,000,000 June 21, 1996 June 21, 1999 $ 34,282
========== ========
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
========== =========
<PAGE>
<CAPTION>
Notional Maturity Fair
Principal Contract Date Date Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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, 1998
- -----------------
$10,000,000 July 21, 1997 July 21, 1999 $ --
=========== ==========
December 31, 1997
- -----------------
$10,000,000 July 21, 1997 July 21, 1999 $ 9,707
=========== ========
</TABLE>
-35-
<PAGE>
Information
Board of Directors
Winfield F. Robinson, Chairman
President
Timber Resource Group LLC
John C. Witherspoon
President/CEO
Kingfield Bank
William P. Dubord
Attorney, Marden,DuBord, Bernier &Stevens
G. Norton Luce
Retired Gas Company Owner
Roger G. Spear
CFO, University of Maine at Farmington
Theodore C. Johanson
President of Falcon Shoe Company
Annual Meeting
The Annual Meeting is scheduled for Wednesday, May 12, 1999, 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 R. Belanger, Vice President
Cindy A. Spencer, Assistant Vice President
<PAGE>
Price Range of Stock
Set forth below are the quarterly high and low prices for the common stock for
1998 and 1997.
Quarter Ending 1998 1997
- -----------------------------------------------------------------------
March 31 High: $22.00 Low: $18.00 High:$11.33 Low: $ 8.67
June 30 High: 19.38 Low: 17.00 High: 16.33 Low: 9.00
September 30 High: 18.38 Low: 15.50 High: 16.50 Low: 12.50
December 31 High: 18.38 Low: 12.00 High: 22.50 Low: 12.63
Dividends declared in 1997 and 1998 were $0.073 and $0.11 per share,
respectively.
Number of Shares Outstanding and Shareholders
At March 1, 1999, KSB Bancorp, Inc. had 1,269,668 shares of $.01 par value
common stock outstanding, owned by approximately 332 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 $.08 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 or
on the Internet at www.edgar-online.com
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
Luse, Lehman, Gorman, Pomerenk & Schick
Attn: John J. Gorman, Esq.
5335 Wisconsin Avenue, NW, Suite 400
Washington, DC 20015
<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
Barbara Chadbourne
Donna Chase
Susan Froehlich
Cynthia Gilmore
Angela Stone
Brenda Thompson
Stratton Office
Debbie Dudley
Melissa Perry
Linda Shane
Wendy Wyman
Phillips/Strong Offices
Shelly Abbott
Elizabeth Cram
Dawn Field
Rangeley Office
Leslie Ferguson
Stacy Jordan
Wendy Marquis
Dora Sargent
Sheila Waldeck
Farmington Office
Lynn Brennick
Jack Ellrich
Tracy Goldsmith
Michelle Guillaume
Susan Haines
Laurie Marble
Nancy Richard
Amy Lynn Smith
Nancy Richardson
Elvira Weidmann
Dassie Withee
Lewiston Office
Gerard Belanger
Nancy Brown
Christine Dutil
Katherine Fales
John Farrell
Cynthia Hoyt
Melissa Saucier
Rebecca Sirois
Bingham Office
Kathleen Barrett
Phebe Durgin
Tricia LeHay
Brenda Washburn
<PAGE>
Madison Office
Gary Allain
Mary Knight
Bernadette LeBlanc
Patricia Magoon
Robin Melancon-Quimby
Cheryl Philpot
Administration and Finance
Elizabeth Lyons
Linda Manning
Donna Pelletier
Jennifer Piekart
John Thien
Gillian Trapp
John Witherspoon
Operations
Mark Brooks
Jacqueline Garey
Stacey Gilks
Michelle Mason
Jeannine McGraw
Pauline Nadeau
Robert Stone
Timothy Thompson
Retail/Commercial Lending
Carla Allen
Justine Amerault
Kim Blais
Jenni Brown
Sandy Cavanagh
Gordon Flint
Patty Haggan
Wendy Hinkley
Marcelle Labbe
Rachel Lee
Shelly Lowell
Todd Marlowe
Laurie Nile
Gary Poulin
Cindy Spencer
Lynn Vashaw
<PAGE>
Kingfield Bank
Branch Locations
Bingham Branch
Main Street o PO Box 625
Bingham, ME 04920 o 207-672-5541
Farmington Branch
Routes 2 & 4 o PO Box 947
Farmington, ME 04938 o 207-778-0302
Kingfield Branch
Depot Street o POBox 105
Kingfield, ME 04947 o 207-265-2181
Lewiston Branch
110 Canal Street o POBox 1378
Lewiston, ME 04240 o 207-784-7376
Madison Branch
53 Main Street
Madison, ME 04950 o 207-696-3376
Phillips Branch
Main Street o PO Box E
Phillips, ME 04966 o 207-639-2851
Rangeley Branch
Main Street o PO Box 548
Rangeley, ME 04970 o 207-864-3321
Stratton Branch
Main Street o PO Box 157
Stratton, ME 04982 o 207-246-2181
Strong Branch
Main Street o PO Box 51
Strong, ME 04983 o 207-684-5501
1-800-962-0070
www.kingfield.com
Exhibit 23
Consent of Independent Auditors
[Letterhead of BERRY, DUNN, MCNEIL AND PARKER, CERTIFIED PUBLIC
ACCOUNTANTS]
CONSENT OF INDEPENDENT AUDITORS
We have issued our report dated January 21, 1999, accompanying the consolidated
financial statements of KSB Bancorp, Inc. and Subsidiary included in the Annual
Report on Form 10-KSB for the year ending December 31, 1998. We consent to the
incorporation by reference of said report in the Registration Statement of KSB
Bancorp, Inc. on Form S-8, (File No. 333-22021, effective February 18, 1997).
/s/ BERRY, DUNN, MCNEIL AND PARKER
- ----------------------------------
BERRY, DUNN, MCNEIL AND PARKER
Portland, Maine
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,234
<INT-BEARING-DEPOSITS> 3
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 20,967
<INVESTMENTS-CARRYING> 9,271
<INVESTMENTS-MARKET> 9,444
<LOANS> 122,530
<ALLOWANCE> 1,580
<TOTAL-ASSETS> 171,329
<DEPOSITS> 132,980
<SHORT-TERM> 13,072
<LIABILITIES-OTHER> 1,138
<LONG-TERM> 10,452
0
0
<COMMON> 13
<OTHER-SE> 13,673
<TOTAL-LIABILITIES-AND-EQUITY> 13,686
<INTEREST-LOAN> 11,667
<INTEREST-INVEST> 1,551
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 13,218
<INTEREST-DEPOSIT> 4,798
<INTEREST-EXPENSE> 5,970
<INTEREST-INCOME-NET> 7,248
<LOAN-LOSSES> 680
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,129
<INCOME-PRETAX> 2,767
<INCOME-PRE-EXTRAORDINARY> 2,767
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,806
<EPS-PRIMARY> 1.47
<EPS-DILUTED> 1.41
<YIELD-ACTUAL> 4.71
<LOANS-NON> 2,369
<LOANS-PAST> 333
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,342
<CHARGE-OFFS> 506
<RECOVERIES> 64
<ALLOWANCE-CLOSE> 1,580
<ALLOWANCE-DOMESTIC> 1,580
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
