The Company provides a full range of banking services to individual and business customers in Down East Maine. The Company is subject to the regulations of certain federal agencies and undergoes periodic examinations by those regulatory authorities.
The accounting and reporting policies of FNB Bankshares and Subsidiary conform to generally accepted accounting principles and to general practice within the banking industry. The following is a description of the significant policies.
The consolidated financial statements include the accounts of FNB Bankshares (the Company) and its wholly-owned subsidiary, First National Bank of Bar Harbor (the Bank). All significant intercompany balances have been eliminated in consolidation.
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information," requires a company to disclose certain income statement and balance sheet information by operating segment. Since the Company's operations include only its banking and financing activities, no additional disclosures are required by the Statement.
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 disclosures of contingent assets and liabilities as of 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.
Securities available for sale consist primarily of debt securities that the Company anticipates could be 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. Unrealized holding gains and losses for these assets are reported as a net amount in a separate component of shareholders' equity, net of deferred income taxes. When a decline in fair 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.
Securities to be held to maturity consist of debt securities that the Company has the positive intent and ability to hold until maturity. These securities are carried at amortized cost. When a decline in fair 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.
Other Investment Securities
Other investment securities consist of Federal Home Loan Bank (FHLB) stock and Federal Reserve Bank stock. These securities are carried at cost.
Premiums and Discounts
Premiums are amortized and discounts are accreted using methods approximating the interest method. |
Loans Held for Sale
Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income.
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 adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans.
Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan.
Interest on loans is accrued and credited to income based on the principal amount outstanding. Loans 30 days or more past due are considered delinquent. The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income, unless management is satisfied the loan is well secured and the accrued interest is collectible. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
The allowance for loan losses is increased by charges to income and decreased by charge-offs, net of recoveries. Loans deemed uncollectible are charged to the allowance. 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.
A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Loan Servicing
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 loan type, investor type and interest rate. The amount of impairment recognized is the amount by which the capitalized mortgage servicing rights for a stratum exceed their fair value. Mortgage servicing rights are not material to the financial statements.
Foreclosed Real Estate
Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Revenue and
7
expenses from operations and changes in the valuation allowance are included in loss on foreclosed real estate. The historical average holding period for such properties is six months.
Income Taxes
Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Premises and Equipment
Land is carried at cost. Bank premises, furniture and equipment, and leasehold improvements are carried at cost, less accumulated depreciation and amortization computed principally by the straight-line method over the estimated useful lives of the assets.
Stock Options
The Company established a stock option plan in 2001. Under the plan, the Company may grant options to its employees, directors and others for up to 162,924 shares of common stock on a post-split basis. Both incentive stock options and non-qualified stock options may be granted under the plan. The exercise price of each option is determined by the Board of Directors, but shall in no instance be less than the fair market value on the date of grant. An option's maximum term is ten years.
The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for the stock option plan. Accordingly, no compensation cost has been recognized. The following table illustrates the effect on net income if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
| Years ended December 31 |
| 2004 | 2003 | 2002 |
Net income, as reported | $2,450,000 | 2,019,000 | 1,477,000 |
Less total stock-based employee compensation expense determined under fair value based method of all awards, net of related tax effects | (22,000) | (15,000) | (13,000) |
Pro forma net income | $2,428,000 | 2,004,000 | 1,464,000 |
The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield of 3%, risk-free interest rate of 5% and expected lives of 2.5 years. There were no options granted in 2004.
Treasury Stock
A revision to the Maine Business Corporation Act requires that stock reacquired by a corporation be classified as "authorized but unissued", effectively eliminating a corporation's ability to hold treasury stock. In order to recognize the effect of the revision, the Company retired its treasury stock as of June 30, 2004. The 78,403 shares so retired are available for reissuance as authorized, but unissued shares.
Off-Balance-Sheet Financial Instruments
In the ordinary course of business the Company has entered into off-balance-sheet financial instruments consisting of commitments to extend credit. Such financial instruments are recorded in the consolidated financial statements when they are funded.
Earnings per Share
Basic earnings per share data are based on the weighted average number of common shares outstanding during each year. Diluted earnings per share gives effect to the stock options outstanding, determined by the treasury stock method. The Company declared a 3-for-1 split of outstanding common stock in March 2004, effected in the form of a dividend. Earnings and cash dividends per share and information regarding shares outstanding have been retroactively restated to reflect the stock split.
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Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in estimating fair values of financial instruments as disclosed herein:
Cash and cash equivalents. The carrying amounts of cash and cash equivalents approximate their fair value.
Investment securities. Fair values for securities, excluding restricted equity securities, are based on quoted market prices. The carrying values of other investment securities approximate fair values.
Mortgage loans held for sale. Fair values of mortgage loans held for sale are based on commitments on hand from investors or prevailing market prices.
Loans receivable. For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. Fair values for other loans receivable are estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings.
Accrued interest. The carrying amounts of accrued interest approximate their fair values.
Life insurance contracts. The fair value of life insurance contracts is equal to their contractual cash surrender values.
Mortgage servicing rights. The fair value of mortgage servicing rights is based on market quotes for comparable instruments.
Deposit liabilities. The fair values disclosed for demand, savings and NOW deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed-term money-market accounts and certificates of deposit (CDs) approximate their fair values at the reporting date. Fair values for fixed-rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Short-term borrowings. The carrying amounts of borrowings under repurchase agreements maturing within 90 days approximate their fair values.
Other borrowed funds. The fair values of other borrowed funds are estimated using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.
Off-balance-sheet instruments. The Company's off-balance-sheet instruments consist of loan commitments. Fair values for loan commitments have not been presented as the future revenue derived from such financial instruments is not significant.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year's presentation. |
NOTE 2. | Cash and Due from Banks |
The Federal Reserve Board requires the Company to maintain a target reserve balance. The amount of this reserve balance as of December 31, 2004 was $100,000. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant risk with respect to these accounts.
NOTE 3. | Investment in Securities |
Debt securities have been classified in the consolidated balance sheets according to management's intent. The carrying amounts of securities and their approximate fair values at December 31 were as follows:
| | Gross | Gross | Approximate |
| Amortized | Unrealized | Unrealized | Fair |
December 31, 2004 | Cost | Gains | Losses | Value |
Securities available for sale | | | | |
U.S. Treasury and government agency securities | $6,605,000 | 1,000 | (12,000) | 6,594,000 |
Collateralized mortgage obligations and other mortgage-backed securities | 10,480,000 | 97,000 | (38,000) | 10,539,000 |
Obligations of states and political subdivisions | 6,936,000 | 413,000 | (9,000) | 7,340,000 |
| $24,021,000 | 511,000 | (59,000) | 24,473,000 |
Securities to be held to maturity | | | | |
Obligations of states and political subdivisions | $ 415,000 | 3,000 | - | 418,000 |
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| | Gross | Gross | Approximate |
| Amortized | Unrealized | Unrealized | Fair |
December 31, 2003 | Cost | Gains | Losses | Value |
Securities available for sale | | | | |
U.S. Treasury and government agency securities | $12,517,000 | 15,000 | (12,000) | 12,520,000 |
Collateralized mortgage obligations and other mortgage-backed securities | 13,080,000 | 141,000 | (47,000) | 13,174,000 |
Obligations of states and political subdivisions | 6,958,000 | 305,000 | (17,000) | 7,246,000 |
| $32,555,000 | 461,000 | (76,000) | 32,940,000 |
Securities to be held to maturity | | | | |
Obligations of states and political subdivisions | $ 480,000 | 3,000 | | 483,000 |
The scheduled maturities of debt securities at December 31, 2004 were as follows: |
| Securities | Securities |
| available for sale | to be held to maturity |
| Amortized | Fair | Amortized | Fair |
| Cost | Value | Cost | Value |
Due in 1 to 5 years | $ - | - | 60,000 | 60,000 |
Due in 5 to 10 years | 6,144,000 | 6,182,000 | 355,000 | 358,000 |
Due in more than 10 years | 7,397,000 | 7,751,000 | - | - |
Collateralized mortgage obligations and other mortgage-backed securities | 10,480,000 | 10,539,000 | | |
| $24,021,000 | 24,472,000 | 415,000 | 418,000 |
Some securities have provisions whereby they may be called prior to their scheduled maturity dates. |
Unrealized losses relate to available for sale securities and are all considered to be temporary. Classification of securities with unrealized losses based on the length of time they have been in a continual loss position as of December 31, 2004 is as follows:
| Less than 12 months | 12 months or longer | Total |
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized |
| Value | Losses | Value | Losses | Value | Losses |
U.S. Treasury and government agency securities | $4,588,000 | (12,000) | - | - | 4,588,000 | (12,000) |
Collateralized mortgage obligations and other mortgage-backed securities | 2,919,000 | (9,000) | 2,137,000 | (29,000) | 5,056,000 | (38,000) |
Obligations of states and political subdivisions | 282,000 | (1,000) | 292,000 | (8,000) | 574,000 | (9,000) |
| $7,789,000 | (22,000) | 2,429,000 | (37,000) | 10,218,000 | (59,000) |
Securities carried at approximately $21,651,000 and $20,255,000 at December 31, 2004 and 2003, respectively, were pledged to secure public funds, trust deposits and securities sold under agreements to repurchase, and for other purposes required or permitted by law.
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The components of loans in the consolidated balance sheets were as follows: |
| 2004 | 2003 |
Commercial | $ 28,700,000 | 28,819,000 |
Real estate construction | 9,941,000 | 9,272,000 |
Commercial real estate | 89,290,000 | 75,531,000 |
Residential real estate | 49,532,000 | 39,578,000 |
Consumer loans | 8,083,000 | 7,865,000 |
Subtotal | 185,546,000 | 161,065,000 |
Net deferred loan costs | 91,000 | 62,000 |
Allowance for loan losses | (2,005,000) | (1,989,000) |
| $ 183,632,000 | 159,138,000 |
An analysis of the change in the allowance for loan losses follows: |
| 2004 | 2003 | 2002 |
Balance at beginning of year | $1,989,000 | 1,700,000 | 1,655,000 |
Loans charged off | (324,000) | (107,000) | (945,000) |
Recoveries on loans | 160,000 | 36,000 | 268,000 |
Net loans charged off | (164,000) | (71,000) | (677,000) |
Provision for loan losses | 180,000 | 360,000 | 722,000 |
Balance at end of year | $2,005,000 | 1,989,000 | 1,700,000 |
The following is a summary of information pertaining to impaired loans: |
| 2004 | 2003 | 2002 |
Impaired loans without a valuation allowance | $ 387,000 | 705,000 | 704,000 |
Impaired loans with a valuation allowance | 165,000 | 142,000 | 431,000 |
Total impaired loans | $ 552,000 | 847,000 | 1,135,000 |
Valuation allowance related to impaired loans | $ 165,000 | 29,000 | 60,000 |
Average investment in impaired loans | $ 966,000 | 801,000 | 2,385,000 |
Interest income recognized on impaired loans | $7,000 | 7,000 | 31,000 |
Interest income recognized on a cash basis on impaired loans | $6,000 | 2,000 | 14,000 |
No additional funds are committed to be advanced in connection with impaired loans. | |
At December 31, loans 90 days or more past due and still accruing, and loans on nonaccrual status, were as follows: |
| 2004 | 2003 |
| Past due 90 days | | Past due 90 days | |
| or more and | | or more and | |
| still accruing | Nonaccrual | still accruing | Nonaccrual |
Real estate - All other loans secured by 1-4 family residential properties | $ 38,000 | 85,000 | 38,000 | 215,000 |
Installment | 42,000 | 15,000 | - | - |
Student | 247,000 | - | 257,000 | - |
Commercial (time and demand) and all other loans | 21,000 | 287,000 | 29,000 | 490,000 |
| $ 348,000 | 387,000 | 324,000 | 705,000 |
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The Company's lending activities are conducted primarily in northeastern coastal Maine. The Company grants single family and multi-family residential loans, commercial real estate loans, commercial loans, and a variety of consumer loans. In addition, the Company grants loans for the construction of residential homes, multi-family properties and commercial real estate properties. Most loans granted by the Company are either collateralized by real estate or guaranteed by federal and local governmental authorities. The ability and willingness of the single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the borrowers' geographical areas and real estate values. The ability and willingness of commercial real estate, commercial and construction loan borrowers to honor their repayment commitments is generally dependent on the health of the real estate economic sector of the borrowers' geographical areas and general economy.
A substantial portion of the Company's loan portfolio is comprised of loans made to borrowers in tourist-related industries. Thus, the ultimate collectibility of these loans could be dependent on the state of the industry. Loans outstanding to borrowers in tourist-related industries amounted to approximately $28,381,000 and $24,437,000 at December 31, 2004 and 2003, respectively.
Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage loans serviced for others was $71,215,000, $58,200,000 and $35,250,000 at December 31, 2004, 2003 and 2002, respectively.
Net gains on sales of loans were $284,000 for 2004, $413,000 for 2003 and $157,000 for 2002. |
NOTE 6. | Premises and Equipment |
Components of premises and equipment included in the consolidated balance sheets at December 31, 2004 and 2003 were as follows:
| 2004 | 2003 |
Cost | | |
Land | $515,000 | 250,000 |
Bank premises | 4,903,000 | 3,323,000 |
Construction in progress | - | 568,000 |
Furniture and equipment | 4,325,000 | 3,864,000 |
Leasehold improvements | 83,000 | 128,000 |
Total cost | 9,826,000 | 8,133,000 |
Less accumulated depreciation | 5,069,000 | 4,737,000 |
| $ 4,757,000 | 3,396,000 |
Certain Bank facilities and equipment are leased under various operating leases. Rental expense was $132,000 in 2004, $140,000 in 2003, and $138,000 in 2002.
Future minimum rental commitments under non-cancelable leases are: |
2005 | $114,000 |
2006 | 117,000 |
2007 | 120,000 |
2008 | 100,000 |
Thereafter | 113,000 |
| $564,000 |
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The aggregate amount of certificates of deposit, each with a minimum denomination of $100,000, was $10,079,000 and $9,057,000 at December 31, 2004 and 2003, respectively. At December 31, 2004, the scheduled maturities of certificates of deposit are as follows:
2005 | $25,867,000 |
2006 | 11,217,000 |
2007 | 9,510,000 |
2008 | 1,465,000 |
2009 | 2,434,000 |
2010 | - |
2011 | 118,000 |
Total | $50,611,000 |
Securities sold under agreements to repurchase generally mature within one to four days from the transaction date. All repurchase agreements are fully collateralized by government-backed securities. Other borrowed funds consist of Federal Home Loan Bank (FHLB) advances and treasury, tax and loan deposits. Treasury, tax and loan deposits, which total $500,000 at December 31, 2004 and $50,000 at December 31, 2003, generally are repaid upon notification by the U.S. Treasury.
Information concerning securities sold under agreements to repurchase is summarized as follows. |
| 2004 | 2003 |
Average balance during the year | $10,309,000 | $ 9,392,000 |
Average interest rate during the year | 1.01% | 1.20% |
Maximum month-end balance during the year | 13,229,000 | 14,057,000 |
At December 31, 2004 and 2003, the Bank had credit lines available of $5,000,000 and $2,000,000 from FHLB and Key Bank, respectively.
The Company is required to own stock of FHLB in order to borrow from FHLB. FHLB advances are collateralized by a pledge of certain mortgage and other loans with a carrying value of $31,534,000 at December 31, 2004 and a lien on the Company's FHLB stock of $1,896,000 at December 31, 2004, which is included in other investment securities in the consolidated balance sheets.
A summary of borrowings from FHLB at December 31, 2004 and 2003 is as follows: |
| Interest Rate | Amount |
December 31, 2004 fixed advances | 4.98% - 6.54% | $2,500,000 |
December 31, 2003 fixed advances | 4.98% - 6.54% | $2,500,000 |
Maturities of FHLB borrowings are as follows:
2005 | | $ 500,000 |
2009 | | 2,000,000 |
| | 2,500,000 |
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NOTE 9. | Other Operating Income and Expense |
Amounts included in other operating income and expense that individually exceed 1% of total interest and noninterest income are as follows:
| 2004 | 2003 | 2002 |
Other operating income | | | |
Merchant card processing fees | $ 1,170,000 | 1,070,000 | 976,000 |
Other operating expense | | | |
Credit card interchange and other expenses | 1,316,000 | 1,102,000 | 949,000 |
Item processing fees | 260,000 | 266,000 | 269,000 |
Publicity and advertising | 284,000 | 216,000 | 131,000 |
The provision for income taxes consisted of the following for the years ended December 31: |
| 2004 | 2003 | 2002 |
Current tax provision | | | |
Federal | $758,000 | 688,000 | 360,000 |
State | 43,000 | 40,000 | 31,000 |
| 801,000 | 728,000 | 391,000 |
Deferred federal | 66,000 | - | 104,000 |
| $867,000 | 728,000 | 495,000 |
The actual tax expense differs from the expected tax expense (computed by applying the applicable U.S. Federal corporate income tax rate to income before income taxes) as follows:
| 2004 | 2003 | 2002 |
Expected tax expense | $1,128,000 | 934,000 | 671,000 |
Non-taxable income | (257,000) | (231,000) | (223,000) |
State income taxes, net | 28,000 | 25,000 | 20,000 |
Other | (32,000) | - | 27,000 |
| $867,000 | 728,000 | 495,000 |
Management expects the Company will realize all deferred income tax benefits to offset the income tax liabilities arising from the reversal of taxable temporary differences and taxable income generated in future years. Accordingly, the Company has not established a valuation allowance for deferred income tax benefits.
Items that give rise to the deferred income tax assets and liabilities and the tax effect of each at December 31, 2004 and 2003 are as follows:
| 2004 | 2003 |
Allowance for loan losses | $609,000 | 571,000 |
Deferred loan fees | (56,000) | (51,000) |
Post-retirement benefits | 390,000 | 387,000 |
Accelerated tax depreciation | (244,000) | (183,000) |
Unrealized gain on securities available for sale | (154,000) | (131,000) |
Accrued interest on nonperforming loans | 9,000 | 15,000 |
Other assets | 1,000 | 4,000 |
Other liabilities | (120,000) | (203,000) |
Net deferred income tax asset | $435,000 | 409,000 |
These amounts are included in other assets on the consolidated balance sheets. |
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NOTE 11. | Pension and Other Postretirement Benefits |
The Company has a defined contribution pension plan for its employees. Contributions under the Plan totaled $124,000, $155,000 and $149,000 for 2004, 2003 and 2002, respectively.
In addition to providing pension benefits, the Company provides certain life insurance and health insurance benefits on an unfunded basis for certain retired employees.
Components of the net periodic benefit cost of this plan were as follows: |
For the years ended December 31, | 2004 | 2003 | 2002 |
Service cost | $ 9,000 | 9,000 | 8,000 |
Interest cost | 90,000 | 90,000 | 85,000 |
Net amortization | 17,000 | 17,000 | (6,000) |
Net periodic benefit cost | $ 116,000 | 116,000 | 87,000 |
Other information regarding this plan is as follows: | | | |
Employer contribution | $ 106,000 | 106,000 | 83,000 |
Weighted average assumptions as of December 31: | | | |
Discount rate used to determine benefit obligation | 6.75% | 6.75% | 7.25% |
Discount rate used to determine benefit cost | 6.75% | 7.25% | 7.25% |
The following table sets forth the accumulated postretirement benefit obligation and net periodic pension cost: |
At December 31, | 2004 | 2003 |
Change in benefit obligation | | |
Benefit obligation, beginning of year | $ 1,386,000 | 1,380,000 |
Service cost | 9,000 | 9,000 |
Interest cost | 90,000 | 90,000 |
Benefits paid | (106,000) | (106,000) |
Actuarial loss | 13,000 | 13,000 |
Accumulated benefit obligation, end of year | 1,392,000 | 1,386,000 |
Unrecognized net loss | (246,000) | (249,000) |
Accrued postretirement benefit cost | $ 1,146,000 | 1,137,000 |
The health care cost trend rate assumption for the 2004 valuation decreased gradually from 7.5% for 2005 to 4.5% by 2013. A one-percentage-point change (increase and decrease) in assumed health care cost trend rates would have the following effects:
| Increase | Decrease |
Effect on total of service and interest cost components | $ 7,000 | (6,000) |
Effect on postretirement benefit obligation | 101,000 | (88,000) |
In 2002, the Plan was substantially curtailed. Eligibility was limited to participants who were retired as of July 1, 1996 and active employees age 50 and over in 1996.
In December 2003, the President signed the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) into law. The Act includes the following two new features to Medicare (Medicare Part D) that could affect the measurement of the accumulated postretirement benefit obligation (APBO) and net periodic postretirement benefit cost for the Plan:
-- A subsidy to plan sponsors that is based on 28% of an individual beneficiary's annual prescription drug costs |
| between $250 and $5,000 | |
-- The opportunity for a retiree to obtain a prescription drug benefit under Medicare | |
| | | |
During 2004, the Financial Accounting Standards Board (FASB) Staff issued FASB Staff Position (FSP) FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003.” The FSP addresses employers’ accounting for the effects of the Act and was effective for the Company in 2004. The accounting for the Act will depend on the Company’s assessment as to whether the prescription drug benefits available under its plan are actuarially equivalent to Medicare Part D, among other factors. Currently, due to the lack of clarifying regulations related to the Act, the Company cannot determine if the benefit it
15
provides would be considered actuarially equivalent to the benefit provided under the Act and, accordingly, the potential impact of applying the FSP is not known.
The Company has granted loans to its officers and directors and related borrowers in the normal course of business. Such loans aggregated $6,466,000 and $5,557,000 at December 31, 2004 and 2003, respectively. Included in the 2004 total are loans amounting to $3,537,000 to two of the Company's officers, directors, and related entities which exceed 5% of total shareholders' equity. Included in the 2003 total are loans amounting to $3,080,000 to two of the Company's officers, directors and related entities which exceed 5% of total hareholders' equity. Deposits from officers and directors and related entities were $1,235,000 and $1,454,000 at December 31, 2004 and 2003, respectively.
A summary of loans to directors and executive officers, which in the aggregate exceed $60,000, is as follows: |
Balance at January 1, 2004 | $4,167,000 |
New loans | 2,203,000 |
Repayments | (282,000) |
Balance at December 31, 2004 | $6,088,000 |
NOTE 13. | Financial Instruments |
The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the consolidated statements of financial condition. The contract or notional amounts of those instruments reflect the extent of the Bank's involvement in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial institution for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Unless noted otherwise, the Bank does not require collateral or other security to support financial instruments with credit risk.
The estimated fair values of financial instruments were as follows: |
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| December 31, 2004 | December 31, 2003 |
| Carrying amount | Estimated fair value | Carrying amount | Estimated fair value |
Financial assets | | | | |
Cash and cash equivalents | $ 8,007,000 | 8,007,000 | 15,211,000 | 15,211,000 |
Securities available for sale | 24,473,000 | 24,473,000 | 32,940,000 | 32,940,000 |
Securities to be held to maturity | 415,000 | 418,000 | 480,000 | 483,000 |
Other investment securities | 1,936,000 | 1,936,000 | 1,936,000 | 1,936,000 |
Loans held for sale | 179,000 | 179,000 | 1,061,000 | 1,072,000 |
Loans (net of allowance for loan losses) | 183,632,000 | 184,129,000 | 159,138,000 | 158,241,000 |
Accrued interest receivable | 1,189,000 | 1,189,000 | 1,252,000 | 1,252,000 |
Life insurance contracts | 3,136,000 | 3,136,000 | 3,014,000 | 3,014,000 |
Mortgage servicing rights | 546,000 | 741,000 | 454,000 | 614,000 |
Financial liabilities | | | | |
Deposits | $(189,160,000) | (189,655,000) | (185,712,000) | (186,566,000) |
Short-term borrowings | (18,429,000) | (18,429,000) | (14,057,000) | (14,057,000) |
Other borrowed funds | (2,500,000) | (2,597,000) | (2,550,000) | (3,027,000) |
Accrued interest payable | (146,000) | (146,000) | (128,000) | (128,000) |
A summary of the notional amounts of the Bank's financial instruments with off-balance-sheet risk follows: |
| 2004 | 2003 |
Commitments to extend credit | $ 9,401,491 | 17,486,000 |
Unadvanced portions of construction loans | 1,615,000 | 10,528,000 |
Unadvanced commitments on lines of credit | 6,730,244 | 9,764,000 |
Standby letters of credit | 1,197,000 | 1,230,000 |
Overdraft protection accounts | 3,118,000 | 2,042,000 |
Commitments to originate loans 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 Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the borrower.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
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NOTE 14. | Stock Compensation Plan |
The following table sets forth the status of the plan as of December 31, 2004, 2003 and 2002, and changes during the years then ended:
| Number of | Weighted Average |
| Shares | Exercise Price |
Balance at December 31, 2001 | 95,250 | $ 8.93 |
Granted during the year | 3,750 | 10.25 |
Exercised during the year | (3,036) | 8.93 |
Balance at December 31, 2002 | 95,964 | 8.98 |
Granted during the year | 42,450 | 15.02 |
Exercised during the year | (5,256) | 8.97 |
Forfeited during the year | (4,500) | 8.93 |
Balance at December 31, 2003 | 128,658 | 10.97 |
Granted during the year | - | - |
Exercised during the year | (2,450) | 8.93 |
Balance at December 31, 2004 | 126,208 | $ 11.01 |
The number and weighted average exercise price of exercisable options was 80,550 and $9.76 at December 31, 2004, 40,272 and $8.95 at December 31, 2003, and 20,778 and $8.93 at December 31, 2002, respectively. There were no option grants in 2004.
The following information applies to options outstanding at December 31, 2004: |
Exercise Price | Number Outstanding | Weighted Average Remaining Contractual Life | Number of Shares Exercisable |
$ 8.93 | 80,196 | 6.6 | 68,063 |
10.25 | 3,562 | 7.8 | 1,875 |
15.02 | 42,450 | 8.9 | 10,613 |
$11.01 | 126,208 | 7.4 | 80,550 |
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NOTE 15. Earnings Per Share
The following tables provide detail for basic earnings per share (EPS) and diluted earnings per share for the years ended December 31, 2004, 2003 and 2002:
For the Year Ended December 31, 2004 | Income (Numerator) | Shares (Denominator) | Per-Share Amount |
Net income as reported | $2,450,000 | | |
Basic EPS: Income available to common shareholders | $2,450,000 | 1,046,434 | $ 2.34 |
Effect of dilutive securities: incentive stock options | | 78,083 | |
Diluted EPS: Income available to common shareholders plus assumed conversions | $2,450,000 | 1,124,517 | $ 2.18 |
| | | |
For the Year Ended December 31, 2003 | Income (Numerator) | Shares (Denominator) | Per-Share Amount |
Net income as reported | $2,019,000 | | |
Basic EPS: Income available to common shareholders | $2,019,000 | 1,050,145 | $ 1.92 |
Effect of dilutive securities: incentive stock options | | 35,965 | |
Diluted EPS: Income available to common shareholders plus assumed conversions | $2,019,000 | 1,086,110 | $ 1.86 |
| | | |
For the Year Ended December 31, 2002 | Income (Numerator) | Shares (Denominator) | Per-Share Amount |
Net income as reported | $1,477,000 | | |
Basic EPS: Income available to common shareholders | $1,477,000 | 1,052,618 | $ 1.40 |
Effect of dilutive securities: incentive stock options | | 22,762 | |
Diluted EPS: Income available to common shareholders plus assumed conversions | $1,477,000 | 1,075,380 | $ 1.37 |
All earnings per share calculations have been made using the weighted average number of shares outstanding for each year. All dilutive securities are incentive stock options granted to certain key members of Management. The dilutive number of shares has been calculated using the treasury method, assuming that all granted options were exercisable at each year end.
NOTE 16. | 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 adverse effect on the consolidated financial statements and the Bank's business. 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 classifications 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, 2004 that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2004, the most recent notification from the Office of the Comptroller of the Currency 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.
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The Bank's actual capital amounts and ratios are also presented in the table. No deduction was made from capital for interest-rate risk in 2004 or 2003. The Company's capital amounts and ratios do not differ materially from those of the Bank.
| Actual | For capital adequacy purposes | To be well-capitalized under prompt corrective action provisions |
As of December 31, 2004 | | | |
Tier 2 capital to | $18,830,000 | 14,090,000 | 17,613,000 |
risk-weighted assets | 10.70% | 8.00% | 10.00% |
Tier 1 capital to | $16,675,000 | 7,045,000 | 10,568,000 |
risk-weighted assets | 9.50% | 4.00% | 6.00% |
Tier 1 capital to | $16,675,000 | 9,406,000 | 11,757,000 |
average assets | 7.10% | 4.00% | 5.00% |
As of December 31, 2003 | | | |
Tier 2 capital to | $16,910,000 | 12,881,000 | 16,101,000 |
risk-weighted assets | 10.50% | 8.00% | 10.00% |
Tier 1 capital to | $14,896,000 | 6,440,000 | 9,661,000 |
risk-weighted assets | 9.30% | 4.00% | 6.00% |
Tier 1 capital to | $14,896,000 | 8,760,000 | 10,950,000 |
average assets | 6.80% | 4.00% | 5.00% |
NOTE 17. | Parent Company Financial Information |
The following is summarized statement of financial condition information for FNB Bankshares as of December 31, 2004 and 2003.
As of December 31, | 2004 | 2003 |
Assets | | |
Cash and cash equivalents | $ 170,000 | 128,000 |
Investment in First National Bank of Bar Harbor | 17,027,000 | 15,195,000 |
| $ 17,197,000 | 15,323,000 |
Stockholders' equity | | |
Common stock | $ 839,000 | 900,000 |
Additional paid-in capital | 456,000 | 813,000 |
Retained earnings | 15,604,000 | 14,514,000 |
Net unrealized gain on securities available for sale | 298,000 | 254,000 |
Less treasury stock | - | (1,158,000) |
| $ 17,197,000 | 15,323,000 |
FNB Bankshares had no material income or cash flow activity during 2004, 2003 or 2002 other than the income from investment in First National Bank of Bar Harbor and the capital transactions described in the consolidated statements of changes in stockholders' equity.
First National Bank of Bar Harbor paid dividends to FNB Bankshares amounting to $660,000 in 2004, $490,000 in 2003, and $386,000 in 2002.
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NOTE 18. Merger
On August 25, 2004, the Company entered into an agreement to merge into First National Lincoln Corporation (FNLC) of Damariscotta, Maine. The merger of the Company and the Bank into FNLC and its subsidiary, The First National Bank of Damariscotta, was completed on January 14, 2005. Management expects that the products and services available in the FNB Bankshares market area will be enhanced as a result of the combination of the two companies, and this will also provide a larger capacity to lend money and a stronger overall funding base. It is expected that the combined entity will realize cost savings from redundant expenses, such as regulatory fees, audit costs, legal costs, and outsourced costs.
As part of the merger, FNLC issued 2.35 shares of its common stock to the shareholders of the Company in exchange for each of the 1,048,814 shares of the common stock outstanding of the Company. Cash in lieu of fractional shares of FNLC's stock was paid at the rate of $17.87 per share, which was the average high/low price of FNLC's stock for the 30-day period ending January 9, 2005, under terms specified in the Merger Agreement. At the time of the merger, there were outstanding options to purchase 126,208 shares of the Company's common stock under the Company's Stock Option Plan. Of these, options to acquire 40,630 of the Company's shares were converted into options to acquire an aggregate of 95,479 common shares of the FNLC at a purchase price of $3.80 per share. Holders of unexercised options to purchase the Company's shares that were not converted were paid cash to retire their options at the rate of $42.00 for each share subject to the option, less the option exercise price per share. The total amount paid to retire the remaining options was approximately $2.6 million.
The total value of the transaction was $47,961,000, and all of the voting equity interest of the Company was acquired by FNLC in the transaction. FNLC assumed all outstanding liabilities of the Company, including liabilities under certain Employment Continuity Agreements and Split Dollar Agreements with executive officers of the Company. The merger was intended to qualify as a reorganization for federal income tax purposes and provide for a tax-free exchange of shares.
The transaction will be accounted for as a purchase and, accordingly, the operations of the Company will be included in the FNLC’s future consolidated financial statements from the date of acquisition. The purchase price will be allocated to assets acquired and liabilities assumed based on estimates of fair value at the date of acquisition. The excess of purchase price over the fair value of net tangible and intangible assets acquired will be recorded as goodwill, none of which is expected to be deductible for tax purposes. The core deposit intangible will be amortized over its expected economic life, and goodwill is evaluated annually for possible impairment under the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets." The final allocation will be determined upon FNLC's completion of its analysis of the value of assets acquired and liabilities assumed. The estimated fair value of these assets and liabilities to be recorded is shown in the following table:
Cash and cash equivalents | $ 6,963,000 |
Investments | 26,790,000 |
Loans held for sale | 591,000 |
Loans, net of allowance for loan losses | 183,434,000 |
Accrued interest receivable | 1,219,000 |
Premises and equipment | 7,927,000 |
Other assets | 4,205,000 |
Core deposit intangible | 2,834,000 |
Goodwill | 26,005,000 |
Deposits | (193,014,000) |
Borrowed funds | (17,035,000) |
Other liabilities | (1,958,000) |
| $ 47,961,000 |
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