Filed Pursuant to Rule 424(B)1
Registration Number 333-56197
600,000 Shares
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[Logo] Merrill Merchants Bancshares, Inc.
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Common Stock
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Merrill Merchants Bancshares, Inc. (the "Company"), a Maine corporation
and a one-bank holding company for Merrill Merchants Bank, a Maine chartered
bank, hereby offers (the "Offering") for sale 600,000 shares of its Common
Stock, par value $1.00 per share (the "Common Stock"). Prior to this Offering,
there has been no public market for the Common Stock of the Company. See
"Underwriting" for a discussion of the factors considered in determining the
Offering price.
Shares of Common Stock may be reserved for sale at the initial public
offering price to the Company's employees, directors and other persons with
direct business relationships with the Company. Such employees, directors and
other persons may purchase, in the aggregate, not more than 10% of the Common
Stock offered hereby. See "Underwriting".
Prior to this Offering, there has been no public market for the Common
Stock and no assurance can be given that any such market will develop or, if
developed, that it will be sustained. The Company has been approved for listing
of the Common Stock offered hereby on the National Association of Securities
Dealers Automated Quotation System National Market System ("NASDAQ-NMS"), under
the symbol "MERB."
See "Risk Factors" beginning on page 8 for certain considerations relevant
to an investment in the Common Stock.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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Underwriting Discounts and Proceeds to
Price to Public Commissions (1) Company (2)
Per Share ......... $ 12.75 $ 0.95625 $ 11.79375
Total (3) ......... $7,650,000 $ 573,750 $7,076,250
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(1) The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting offering expenses payable by the Company estimated at
$475,000.
(3) The Company has granted the Underwriter a 30-day option to purchase up to
90,000 additional shares of Common Stock, on the same terms and conditions
set forth above, solely to cover overallotments, if any. If such option is
exercised in full, the total Price to the Public, Underwriting Discounts
and Commissions, and Proceeds to the Company will be $8,797,500, $659,813,
and $8,137,687, respectively. The Underwriter will receive a supplemental
financial advisory fee of $25,000, payable upon consummation of the
Offering. See "Underwriting."
---------------
The shares of Common Stock are being offered by the Underwriter subject to
prior sale, when, as and if delivered to and accepted by the Underwriter. The
Underwriter reserves the right to withdraw, cancel, or modify this Offering
without notice and to reject any order in whole or in part. It is expected that
delivery of certificates representing the shares of Common Stock will be made
against payment therefore on or about August 14, 1998 at the offices of Advest,
Inc., New York, New York.
---------------
Advest, Inc.
The Date of this Prospectus is August 10, 1998.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
THE SECURITIES OFFERED BY THIS PROSPECTUS ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
BANK INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER
GOVERNMENTAL AGENCY.
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AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission" or the "SEC"), Washington, D.C., a Registration Statement on Form
SB-2 ("Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the Common Stock offered hereby. This
prospectus (the "Prospectus") does not contain all the information set forth in
the Registration Statement and the schedules and exhibits thereto, certain
parts of which have been omitted pursuant to the rules of the Commission.
Statements herein concerning the contents of any contract or other document are
summaries thereof, and each statement is qualified in its entirety by reference
to the copy of such contract or other document filed with the Commission as an
exhibit to the Registration Statement or otherwise. For further information
about the Company and such securities, reference is made to the Registration
Statement and the schedules and exhibits filed as part thereof. Upon the
completion of the Offering, the Company will become subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and the rules and regulations promulgated thereunder, and
in accordance therewith, intends to file reports and other information with the
Commission. The Registration Statement, together with schedules and exhibits,
and such reports and other information filed by the Company with the Commission
may be inspected and copied at the public reference facilities maintained by
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and its
regional offices may be inspected without charge, and copied at the principal
or regional offices of the Commission at the addresses indicated above. Copies
also may be obtained at prescribed rates from the public reference facilities
maintained by the Commission at its Washington, D.C. address. The Commission
also maintains an Internet web site that contains information, including
registration statements, of issuers who file electronically with the
Commission. The address of the web site is http://www.sec.gov.
The Company will furnish annual reports to its shareholders which will
contain audited financial statements certified by its independent public
accountants. The Company may distribute unaudited quarterly reports and other
interim reports to its shareholders as it deems appropriate.
ii
[Logo] Merrill Merchants Bancshares, Inc.
Service Area Map
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[Logo] Merrill Merchants Bancshares, Inc.
MAIN OFFICE
Bangor [bullet] 201 Main Street
(04401)
BRANCH OFFICES
Bangor [bullet] 920 Stillwater Avenue
(04401) [bullet] 992 Union Street
Brewer [bullet] 366 Wilson Street
(04412)
Orono [bullet] 69 Main Street
(04473)
Pittsfield [bullet] 27 Main Street
(04967)
Newport [bullet] Newport Plaza
(04953)
[Map of the state of Maine depicting certain geographical areas highlighting
the following:]
PISCATAQUIS COUNTY
KENNEBEC COUNTY
WALDO COUNTY
HANCOCK COUNTY
SOMERSET COUNTY
Pittsfield
PENOBSCOT COUNTY
Newport
Orono
Bangor
Brewer
iii
This Page Is Intentionally Left Blank
iv
PROSPECTUS SUMMARY
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in Risk Factors and elsewhere in this Prospectus. The
following summary is qualified in its entirety by the more detailed information
and Consolidated Financial Statements and the notes thereto appearing elsewhere
in this Prospectus.
Unless otherwise indicated, the information in this Prospectus (i)
reflects, following receipt of the requisite shareholder approvals and upon the
closing of the Offering, the filing of the Restated Articles of Incorporation
of the Company which, among other things, will authorize 4,000,000 shares of
Common Stock, 50,000 shares of Series A Preferred Stock, $1.00 par value per
share ("Series A Preferred Stock"), and 950,000 shares of Serial Preferred
Stock, $.01 par value per share ("Serial Preferred Stock"), and a 9:1 stock
split, effected as a stock dividend, to be completed prior to the closing of
the Offering (the "9:1 Stock Split") and (ii) assumes no exercise of the
Underwriter's overallotment option to purchase 90,000 shares of Common Stock.
The Company
Merrill Merchants Bancshares, Inc. (the "Company"), a Maine corporation
organized in March 1992, is a registered bank holding company under the Bank
Holding Company Act of 1956, as amended ("BHCA"). In October 1992, the Company
became the bank holding company for Merrill Merchants Bank (the "Bank") and
holds 100% of the Bank's outstanding common stock (the "Bank Stock"). The
Company, through its ownership of the Bank, is engaged in a general commercial
and retail banking business, along with trust and investment services.
The Company is an entity legally separate and distinct from the Bank. The
only sources of the Company's income and cash flow are any dividends paid on
the Bank Stock, tax benefits received by the Company and earnings from amounts
deposited by the Company in interest bearing accounts or investments. The
payment of dividends by the Bank, the payment of dividends by the Company and
many other aspects of the operations of the Company and the Bank are subject to
regulation and control by various regulatory agencies.
The Company has its principal executive offices at 201 Main Street,
Bangor, Maine 04401, telephone (207) 942-4800.
Merrill Merchants Bank
The Bank was established in 1992 to purchase certain assets and assume
certain liabilities of certain branch banking offices formerly held by a large
out of state bank. Merrill Merchants Bank is headquartered in Bangor, Maine,
which is located 76 miles north of Augusta, Maine, the State Capital.
Presently, the Bank maintains seven branch banking offices (collectively, the
"Branch Banks") in five area communities. The three Bangor offices provide
city-wide convenience and are complemented by: (i) an office in Brewer,
Bangor's sister city located on the eastern shore of the Penobscot River; (ii)
a branch in Orono, home of the University of Maine, the State's flagship
campus; (iii) a branch in Pittsfield, a small rural town of 4,000 people
located about 30 miles southwest of Bangor; and (iv) a new supermarket branch
in Newport, a small town neighboring Pittsfield, approximately 25 miles
southwest of Bangor. The Newport Branch is located at the juncture of
Interstate 95 and Route 2, which is the main travel route to the winter and
summer tourist area of the Moosehead Lake Region. In addition to the Branch
Banks, the Bank has seven ATM locations in its primary market area.
The Bank conducts a general commercial and retail banking business that
includes the acceptance of deposits from the general public and the application
of those funds to the origination of a variety of commercial loans, commercial
and residential real estate loans and consumer loans. The Bank also provides
trust and investment services. As of March 31, 1998, the Company had total
assets of $175.8 million, loans net of allowances of $118 million, total
deposits of $140.4 million and shareholders' equity of $11.5 million. Unless
the context otherwise requires, references herein to the Company shall include
the Company and the Bank, on a consolidated basis after October, 1992.
The Bank's loan portfolio has grown over the last two years, while
nonperforming loans as a percentage of total loans were at .20% and .15% at
March 31, 1998 and December 31, 1997, respectively, both percentages being
1
below the Bank's national peer group average of .68%. The Bank has also
established a Trust and Investment Services Department, which has grown since
inception in April 1994 to $98.5 million in assets under management as of March
31, 1998. The Bank offers its customers the option of conducting many of their
transactions via an automated telephone banking system and through the use of
the customer's personal computer.
The Bank's income is derived principally from interest and fees earned in
connection with its lending and trust department activities, interest and
dividends on investment securities, short-term investments and other services.
Its main expenses are the interest paid on deposits and operating expenses. The
Bank's deposits are insured up to the applicable limits by the Federal Deposit
Insurance Corporation ("FDIC").
Market Area
The Bank's primary market area, Greater Bangor, is at the center of
commercial activity for the northeastern and central region of the State of
Maine. Nearly 100,000 people live in the Bank's primary market area. The Bank
is part of a strategic link to Canada as Bangor is the closest U.S.
metropolitan area to Eastern Quebec and the Canadian Maritime Provinces. Many
regional and national companies site their operations in the Bangor area.
Services, trades, manufacturing and government are the four largest categories
of employment in the metropolitan Bangor region. Bangor is also a health care
center for central, eastern and northern Maine. The City is a regional
financial center and is also serviced by several statewide and regional
accounting firms, law firms, insurance companies and security and investment
firms. Bangor is also a hub for government services, with many local, State and
Federal offices located within the City. Bangor is accessible by multiple exits
from Interstate 95, a major interstate highway which transits the Eastern
Seaboard of the United States. Major routes to all regions of the State bisect
Bangor from various directions. Bangor International Airport provides domestic
and international passenger and cargo service for a significant portion of the
State.
Strategy
The Bank was formed by a group of local business people who, after
observing a series of large bank acquisitions in the region, believed that the
remaining banks were no longer effectively servicing the needs of the
community. The Bank founders identified the need for a customer-service
oriented, independent community bank serving Bangor and central Maine. To serve
this need, the Bank has worked to position itself as a service-oriented,
community bank. The Bank is staffed by experienced management personnel, most
of whom reside in the area, know the Bank's customers and are able to provide
personalized service for these customers. The Bank's strategy has been
deliberately developed and implemented at a time when consolidation within the
industry and in the region has resulted in an increasing depersonalization
among the larger institutions. The Bank has focused on fostering banking
relationships with customers which include providing multiple financial
services that range from basic checking to investment management accounts.
The Bank has also attracted local business people to serve on its Board of
Directors, each of whom promote the Bank in the community. In addition, the
Bank has obtained additional investments in and support for the Bank from local
investors in an effort to broaden the community's awareness of the Bank and
attract new business. By continuing to follow the original goal to have a
customer-service oriented, independent community bank, the Bank has experienced
growth since inception. Management intends to continue the Bank's community
banking strategy while at the same time attempting to increase its market
share.
2
The Offering
Common Stock Offered ................................ 600,000 shares (l)
Common Stock Outstanding after the Offering ......... 2,255,640 shares (1)(2)(3)
Estimated Net Proceeds .............................. $6,601,250(1)(4)
Use of Proceeds ..................................... Working capital and general corporate purposes,
including investments in the Bank, possible market
expansion in banking and businesses closely related
to banking and possible repayment of borrowings.
See "Use of Proceeds."
Risk Factors ........................................ Prospective investors in the Common Stock should
consider the information discussed under the
heading "Risk Factors."
NASDAQ-NMS Symbol ................................... "MERB"
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(1) Assumes no exercise of the Underwriter's overallotment option to purchase
90,000 shares of Common Stock. See "Underwriting."
(2) Based on the number of shares of Common Stock outstanding on March 31,
1998. Excludes 540,027 shares of Common Stock issuable upon exercise of
stock options outstanding at March 31, 1998 with a weighted average
exercise price of $5.15 per share. See "Capitalization",
"Management -- Stock Option Plan", "Description of Securities" and Note 19
of Notes to Consolidated Financial Statements.
(3) Does not include 66,654 shares of Common Stock issuable upon conversion of
the Company's outstanding Mandatory Convertible Debentures ("Debentures")
and 199,935 shares of Common Stock issuable upon conversion of the
outstanding Series A Preferred Stock. See "Capitalization", "Description
of Securities," and Notes 11 and 15 of Notes to Consolidated Financial
Statements.
(4) After deducting the underwriting commission and expenses of this Offering
payable by the Company, which expenses are estimated at $475,000.
3
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
MERRILL MERCHANTS BANCSHARES, INC.
(Dollars in thousands, except share data)
At or for the
Three Months Ended At or for the
March 31, Year Ended December 31,
--------------------------- ---------------------------
1998 1997 1997 1996
------------- ------------- ------------- -------------
(Unaudited)
Selected Financial Condition Data:
Total assets .............................................. $ 175,753 $ 160,034 $ 178,619 $ 158,425
Cash and cash equivalents ................................. 6,775 11,427 10,659 8,591
Investment securities ..................................... 45,579 37,411 44,826 41,014
Loans receivable, net (1) ................................. 118,036 106,416 117,679 104,320
Deposits .................................................. 140,398 126,856 146,312 126,704
Repurchase agreements ..................................... 13,554 12,268 11,897 12,164
Other borrowed funds ...................................... 5,856 6,000 5,144 2,832
Long-term debt ............................................ 2,745 3,695 2,895 3,695
Mandatory convertible debentures .......................... 300 300 300 300
Shareholders' equity ...................................... 11,506 9,809 10,967 9,671
Income Statement Data:
Interest and dividend income .............................. $ 3,510 $ 3,074 $ 13,215 $ 11,826
Interest expense .......................................... 1,613 1,409 6,060 5,383
Net interest income ....................................... 1,897 1,665 7,155 6,443
Provision for loan losses ................................. 90 75 355 360
Net interest income after provision for loan losses ....... 1,807 1,590 6,800 6,083
Non-interest income ....................................... 481 404 1,724 1,489
Non-interest expense ...................................... 1,695 1,553 6,357 5,813
Income before income taxes ................................ 593 441 2,167 1,759
Income tax expense ........................................ 213 161 765 639
Net income ................................................ 380 280 1,402 1,120
Per Share Data:
Earnings per share-basic (2) .............................. .22 .16 .82 .65
Earnings per share-diluted (2) ............................ .19 .14 .71 .58
Cash dividends on Common Stock (2) ........................ .03 -- .03 --
Book value (2)(3) ......................................... 6.92 6.14 6.77 5.98
Weighted average shares outstanding (2) ................... 1,641,969 1,619,226 1,619,226 1,619,226
Selected Financial Ratios and Other Data:
Return on average assets (4) .............................. 0.89% 0.74% 0.86% 0.78%
Return on average equity (3)(4) ........................... 13.69% 11.57% 13.63% 12.28%
Net interest margin (4)(5) ................................ 4.59% 4.59% 4.67% 4.72%
Net interest spread (4) ................................... 3.87% 3.90% 3.97% 3.97%
Non-performing assets to total assets (6) ................. 0.13% 0.37% 0.13% 0.45%
Non-performing loans to total loans (6) ................... 0.20% 0.21% 0.15% 0.36%
Allowance for loan losses to total loans .................. 1.50% 1.41% 1.44% 1.37%
Allowance for loan losses to non-performing loans (6) ..... 768.80% 674.67% 933.15% 384.62%
Net loan charge-offs to average loans (4) ................. .03% .03% 0.08% 0.04%
Efficiency ratio (7) ...................................... 71.28% 75.06% 71.60% 73.29%
Capital Ratios:
Tier 1 risk-based capital (8) ............................. 10.25% 9.66% 9.77% 9.53%
Total risk-based capital (8) .............................. 11.78% 11.22% 11.30% 11.10%
Leverage ratio (8)(9) ..................................... 6.38% 6.19% 6.06% 5.98%
4
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(1) Includes loans held for sale.
(2) Adjusted to reflect the 9:1 Stock Split, 5% stock dividends in each of 1998
and 1997 and a 3% stock dividend in 1996.
(3) Excludes unrealized gain or loss on securities available for sale net of
taxes.
(4) Information is annualized for the periods ended March 31, 1998 and 1997.
(5) Represents net interest income as a percentage of average interest earning
assets. Calculation is shown tax-effected for tax exempt interest income
assuming a Federal tax rate of 34%.
(6) Non-performing assets consist of non-performing loans and other real estate
owned. Non-performing loans consist of non-accrual loans and accruing
loans 90 days or more past due while other real estate owned consists of
real estate acquired through foreclosure and real estate acquired by
acceptance of a deed-in-lieu of foreclosure.
(7) Non-interest expense divided by the sum of net interest income plus
non-interest income.
(8) The minimum regulatory capital ratios in order for the Company to be
adequately capitalized are: Tier 1 capital -- 4.00%; total risk-based
capital -- 8.00%; and leverage ratio -- 4.00%.
(9) The leverage ratio is defined as the ratio of Tier 1 capital to average
total assets.
5
Recent Developments
The following is a summary of the Company's results of operations for the
three and six month periods ended June 30, 1998 and 1997, and its financial
condition as of June 30, 1998 and December 31, 1997.
At or for the Three
Months At or for the Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(Unaudited)
(Dollars in thousands, except per share data)
Interest and dividend income ...................... $ 3,581 $ 3,199 $ 7,091 $ 6,273
Interest expense .................................. 1,645 1,458 3,258 2,867
-------- -------- -------- --------
Net interest and dividend income .................. 1,936 1,741 3,833 3,406
Provision for loan losses ......................... 90 75 180 150
-------- -------- -------- --------
Net interest income after provision for loan losses 1,846 1,666 3,653 3,256
Non-interest income ............................... 510 397 991 801
Non-interest expense .............................. 1,665 1,543 3,360 3,096
-------- -------- -------- --------
Income before income taxes ........................ 691 520 1,284 961
Income tax expense ................................ 240 191 453 352
-------- -------- -------- --------
Net income ........................................ $ 451 $ 329 $ 831 $ 609
======== ======== ======== ========
Earnings per share-basic (1) ...................... $ .26 $ .19 $ .48 $ .35
======== ======== ======== ========
Earnings per share-diluted (1) .................... .22 $ .17 .41 $ .31
======== ======== ======== ========
Selected Ratios:
Return on average assets (2) ...................... 1.02% 0.85% 0.95% 0.80%
Return on average equity (2) (3) .................. 15.47% 13.07% 14.60% 12.33%
Net interest margin (2) ........................... 4.59% 4.66% 4.59% 4.63%
Non-performing assets to total assets ............. 0.14% 0.35% 0.14% 0.35%
Allowance for loan losses to total loans .......... 1.53% 1.42% 1.53% 1.42%
Leverage ratio .................................... 6.50% 6.26% 6.50% 6.26%
June 30, December 31,
1998 1997
------------ -------------
(Unaudited)
(Dollars in thousands)
Cash and cash equivalents .............................. $ 13,325 $ 10,659
Investment securities .................................. 41,654 44,826
Loans receivable, net (4) .............................. 121,292 117,679
Properties and equipment, net .......................... 2,877 2,806
Other assets ........................................... 4,585 2,649
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Total assets ........................................... $183,733 $178,619
======== ========
Deposits ............................................... $148,815 $146,312
Securities sold under agreements to repurchase ......... 11,730 11,897
Other borrowed funds ................................... 7,126 5,144
Other liabilities ...................................... 1,065 1,104
Long-term debt ......................................... 2,745 2,895
Mandatory convertible debentures ....................... 300 300
Shareholders' equity ................................... 11,952 10,967
-------- --------
Total liabilities and shareholders' equity ............. $183,733 $178,619
======== ========
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(1) Adjusted to reflect the 9:1 Stock Split, and a 5% stock dividend in 1998.
(2) Information is annualized.
(3) Excludes unrealized gain or loss on securities available for sale net of
taxes.
(4) Includes loans held for sale.
6
Results of Operations
Comparison of Three Months Ended June 30, 1998 and 1997
The Company's net income was $451,000 for the three months ended June 30,
1998 as compared to $329,000 for the comparable prior year period. Net interest
income increased by $195,000 or 11.2% due to a growth in average earnings
assets of $19.6 million. Non-interest income increased by $113,000 or 28.5% due
to an increase of gain on sale of mortgage loans of $55,000 and increases in
trust fees of $37,000. Non-interest expense increased by $122,000 or 7.9%
primarily due to an increase in salary and employee benefits associated with
the addition of employees at the Newport Branch established in April 1997.
Comparison of Six Months Ended June 30, 1998 and 1997
The Company's net income increased to $831,000 for the six months ended
June 30, 1998 as compared to $609,000 for the comparable prior year period. Net
interest income increased by $427,000 due primarily to a growth in average
earning assets of $20.1 million. Non-interest income increased by $190,000 due
to increases in gain on mortgage loan sales of $84,000 and trust fees of
$69,000. Non-interest expense increased $264,000 due to increases of salary and
employee benefits of $209,000 and data processing fees of $33,000.
Financial Condition
The Company's total assets were $183.7 million at June 30, 1998, an
increase of $5.1 million from $178.6 million at December 31, 1997. At June 30,
1998, the loan portfolio net of allowance was $121.3 million as compared to
$117.7 million at December 31, 1997 with the growth concentrated in commercial
loans. Non-performing assets at June 30, 1998 amounted to $250,000 or .14% of
total assets. Cash and cash equivalents increased $2.7 million from December
31, 1997 as a result of increases in Federal Funds sold and interest-bearing
deposits with banks. Total deposits increased to $148.8 million at June 30,
1998 compared with $146.3 million at December 31, 1997. The net deposit growth
is attributable to increases in the savings and NOW account balances of $5.1
million and decreases in both demand deposit balances of $1.5 million and
certificates of deposit of $1.1 million. Shareholders' equity increased by
$985,000 primarily due to net income generated during the period, and as a
result of the issuance of additional Common Stock in connection with the
exercise of stock options.
7
RISK FACTORS
A prospective investor should review and consider carefully the following
factors, together with the other information contained in this Prospectus, in
evaluating an investment in the Common Stock. This discussion contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including, but not
limited to, those Risk Factors set forth below.
Risks Related to Competition
The banking business is highly competitive. The Bank, including its
branches, competes with other banks, savings banks, credit unions, and other
financial institutions in their local communities for loans and deposits. The
Bank also competes directly with regional and national financial institutions.
While the Company cannot predict the impact of interstate banking, it
anticipates that competition could intensify as local institutions increasingly
merge and become part of larger national organizations. In addition, the Bank
presently competes with non-bank institutions such as mortgage companies,
securities brokerage companies and insurance companies. Legislation pending in
the United States Congress would allow more competition from such sources. As
these changes occur, the banking environment will become more competitive with
the largest market shares going to the lowest cost provider that has an
efficient product delivery system. The Bank hopes to take advantage of the
opportunity currently being created by the large commercial banks as they
de-emphasize personalized service, move loan and credit decisions from the
local areas, and move to consolidate trust services out of state, resulting in
less personalized service. If the Company and the Bank are unable to
successfully compete, however, the business and operations of the Company and
the Bank could be adversely affected. See "Business -- Competition."
Dependence on Economic Conditions
Every bank is affected by the economic conditions beyond its control in
the area in which it operates. The main facility of the Bank and two of its
branches are located in Bangor, Maine, and the remaining four branches are
located in Newport, Orono, Pittsfield and Brewer, Maine. A depressed economy in
the early 1990's in the United States, and in particular, in New England,
caused financial hardship in the Bank's primary market area. However, the
central region of Maine has achieved modest growth over the past several years
as part of a general recovery of the whole Northeast region after such
recession. In addition, the Company believes that property values in the Bank's
market area have generally been more stable than in southern Maine and the New
England states as a whole. While management believes that the composition of
business in these communities is sufficiently diversified and not unduly
concentrated in any particular industry, there can be no assurance that future
adverse economic conditions will not have a negative impact upon the quality of
the Bank's loan portfolio and the Company's earnings. Therefore, the Bank and
the Company remain vulnerable to downturns in the economy of the areas in which
the Bank operates and particularly to downturns in the forestry, pulp, paper
and healthcare industries. See "Business -- Economic Environment."
Impact on Bank's Loan Portfolio Due to Changes in Real Estate Values
A significant portion of the Bank's loan portfolio consists of residential
mortgage loans and commercial real estate loans. At December 31, 1997, 39.5% of
the Bank's loans were secured by one-to-four family residential real estate,
34.3% were secured by commercial real estate and multifamily residential and
2.5% were real estate-secured construction loans. Further, a substantial
portion of the properties securing the Bank's loans are located in Maine,
primarily in Greater Bangor. Real estate values and real estate markets
generally are affected by, among other things, changes in national, regional or
local economic conditions, fluctuations in interest rates and the availability
of loans to potential purchasers, changes in the tax laws and other
governmental statutes, regulations and policies, demographic trends and acts of
nature. Any decline in real estate prices, particularly in Maine, could
significantly reduce the value of the real estate collateral securing the
Bank's loans, increase the level of the Bank's non-performing loans and have a
material adverse effect on the Bank's regulatory capital, business, financial
condition and results of operations. See "Management Discussion and Analysis of
Financial Condition and Results of Operations -- Lending Activities" and
"Business -- Lending Activities."
Risk of Foreclosure on Bank Stock by Marshall & Ilsley Bank
The Company pledged all of the Bank Stock as security for a $4 million
loan from Marshall & Ilsley Bank, ("M&I Bank"), pursuant to a loan agreement
dated October 16, 1992, as amended, ("M&I Loan"). As of March 31,
8
1998, the principal amount outstanding thereunder was approximately $2.7
million. If the Company were to default under the M&I Loan and such default
were not cured, M&I Bank would have the right to foreclose on and obtain
ownership of the Bank Stock. The Bank Stock is the Company's principal asset
and thus if the M&I Bank were to foreclose on the Bank Stock, investors could
lose their entire investment in the Company. In addition, there are certain
operating restrictions imposed by M&I Bank concerning the operations of the
Company. See "Business --Loan from Marshall & Ilsley Bank."
Sensitivity to Changes in Interest Rates
The operations and profitability of the Company and the Bank are largely
impacted by changes in interest rates and management's ability to control
interest rate sensitivity of the Bank's assets and liabilities. Since its
inception, the Bank has experienced a positive gap position which suggests that
the Bank's net yield on interest earning assets may decrease during periods of
declining interest rates. Management believes that its asset/liability strategy
reduces the Bank's risk exposure due to fluctuations in interest rates.
However, there can be no assurance that the Bank's asset/liability strategy
will be successful. Despite the implementation of strategies to achieve such
matching objectives and to reduce the Bank's exposure to fluctuating interest
rates during this period, the Bank's results of operations will remain subject
to the level and movement of interest rates. Decreases in interest rates may
continue to be reflected more quickly in decreases in the Bank's interest
income than in its cost of funds. In periods of declining interest rates, the
Bank may experience significant prepayment or refinancing of the mortgage loan
portfolio which would result in the investment of these funds at lower yields.
In addition, it is possible that net interest income could have been higher had
the Bank originated and retained fixed-rate mortgages preceding any decline in
market interest rates. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Interest Rate Risk."
Adequacy of Allowance for Loan Losses
The success of a bank depends to a significant extent upon the quality of
its assets, particularly loans. In the case of the Company, this is highlighted
by the fact that, as of March 31, 1998, net loans represented approximately 67%
of the Company's total assets. In originating loans, there is a substantial
likelihood that loan losses will be experienced. The risk of loss will vary
with, among other things, general economic conditions, the type of loan being
made, the creditworthiness of the borrower over the term of the loan and, in
the case of a collateralized loan, the quality of the collateral for the loan.
Management maintains an allowance for loan losses based on, among other things,
industry standards, management's experience, historical experience, an
evaluation of economic conditions and regular reviews of delinquencies and loan
portfolio quality. Based upon such factors, management makes various
assumptions and judgments about the ultimate collectability of the loan
portfolio and provides an allowance for loan losses based upon a percentage of
the outstanding balances and for specific loans when their ultimate
collectability is considered questionable. Since certain lending activities
involve greater risks, the percentage applied to specific loan types may vary.
As of December 31, 1997, the allowance for loan losses was $1.7 million,
which represented 1.44% of total loans and non-performing loans as a percentage
of total loans were at .15%. As of March 31, 1998, the allowance for loan
losses was $1.8 million, which represented 1.50% of total loans, and
nonperforming loans as a percentage of total loans were at .20%. The Bank
reviews its allowance for loan losses on a quarterly basis and provides
increases in the allowance, if necessary, based on the results of this review.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Allowance for Loan Losses."
The Bank actively manages its past due and non-performing loans in an
effort to minimize loan losses and monitors its asset quality to maintain an
adequate loan loss allowance. Although management believes that its allowance
for loan losses should be adequate, there can be no assurance that the
allowance will prove sufficient to cover future loan losses. Further, although
management believes that it uses the best information available to make
determinations with respect to the allowance for loan losses, future
adjustments may be necessary if economic conditions differ substantially from
the assumptions used or adverse developments arise with respect to the Bank's
non-performing or performing loans. Accordingly, there can be no assurance that
the allowance for loan losses will be adequate to cover loan losses or that
significant increases to the allowance will not be required in the future if
economic conditions should worsen. Material additions to the Bank's allowance
for loan losses would result in a decrease of the Bank's net income and capital
of the Company and the Bank and could result in the inability to pay dividends,
among other adverse consequences. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Allowance for Loan Losses."
9
Dependence on Key Personnel
The success of the business of the Company and the Bank is substantially
dependent upon the continuing services of William C. Bullock, Jr., Edwin N.
Clift, Deborah A. Jordan, William P. Lucy and George H. Moore, all of whom are
executive officers and/or directors of the Company and the Bank. The loss of
the services of any of these individuals could be detrimental to the business
and financial results of the Company and the Bank. See "Management."
Risks Related to Use of Name; Trademarks
On January 5, 1993, the Bank filed a trademark application with the United
States Patent and Trademark Office (the "Trademark Office") for the use of the
Merrill "Pine Tree" symbol, both used alone and in combination with the name
"Merrill Merchants Bank." On April 29, 1993, the Trademark Office preliminarily
refused registration of the application because, in the opinion of the
Trademark Office, the Bank's application for federal trademark protection of
the name "Merrill Merchants Bank" was confusingly similar to certain other
previously filed registrations. The Bank chose not to appeal this decision. The
Bank did, however, previously register the logo and the name "Merrill Merchants
Bank" with the State of Maine, which registration was filed October 15, 1992.
The Bank has established goodwill in its name and its logo. In the event that
the Bank's use of the Merrill Merchants name and logo in the State of Maine is
successfully challenged, the Bank would be forced to explore other
alternatives, such as using a similar name or changing the name, each of which
could have a material adverse impact on the Company and the Bank. See
"Business -- Service Marks and Trade Names."
Absence of Trading Market
Prior to this Offering, there has been no public market for the Company's
Common Stock. The Offering price of the Common Stock has been determined by
negotiations between the Company and the Underwriters based upon several
factors and does not necessarily bear any relationship to the Company's assets,
book value, results of operations, net worth, or any other generally accepted
criteria of value and should not be considered as indicative of the actual
value of the Company. See "Underwriting."
Although the Company has been approved for quotation of the Common Stock
on the NASDAQ-NMS, there can be no assurance that any market will develop.
Further, if a market does develop, it may be limited and there can be no
assurance that it will be sustained. To the extent that a public market does
develop, factors such as quarterly variations in the Company's financial
results, announcements by the Company or others or certain regulatory
pronouncements may cause the market price of the Common Stock to fluctuate
substantially. See "Market for Common Stock."
Supervision and Regulation
Bank holding companies and banks operate in a highly regulated environment
and are subject to the supervision and examination by several federal and state
regulatory agencies. The Company is subject to the BHCA and to regulation and
supervision by the Federal Reserve Board (the "Federal Reserve") and the Maine
Bureau of Banking (the "Bureau"). The Bank, as a state chartered member bank of
the Federal Reserve System, is subject to the regulation and supervision of the
Federal Reserve, the Bureau, and the FDIC. These laws and regulations govern
matters ranging from the regulation of certain debt obligations, changes in the
control of bank holding companies and the maintenance of adequate capital to
the general business operations and financial condition of the Bank, including
permissible types, amounts and terms of loans and investments, the amount of
reserves against deposits, restrictions on dividends, establishment of branch
offices and the maximum rate of interest that may be charged by law. The
Federal Reserve, the Bureau and the FDIC also possess cease and desist powers
over bank holding companies and banks to prevent or remedy unsafe or unsound
practices or violations of law. These and other restrictions limit the manner
in which the Company and the Bank may conduct their business and obtain
financing. Furthermore, the commercial banking business is affected not only by
general economic conditions, but also by the monetary policies of the Federal
Reserve. These monetary policies have had and are expected to continue to have
significant effects on the operating results of commercial banks. Changes in
monetary or legislative policies may affect the ability of the Bank to attract
deposits and make loans. See "Supervision and Regulation."
10
Restrictions on Payment of Dividends by the Bank to the Company
The only sources of income and cash flow to the Company are any dividends
paid on the Bank Stock, the tax benefits received by the Company resulting from
the Company filing consolidated federal income and state franchise tax returns
with the Bank and the interest received from any amounts deposited by the
Company in interest bearing accounts or investments. Therefore, the ability of
the Company to pay cash dividends on the Common Stock depends to a large degree
upon the amount of cash dividends paid by the Bank to the Company. The payment
of dividends by the Bank is subject to certain financial and regulatory
requirements. In some cases, the appropriate federal or state banking agency
could take the position that it has the power to prohibit the Bank from paying
dividends if, in its view, such payments will constitute unsafe or unsound
banking practices. In addition, whether dividends are paid and their frequency
and amount will depend on the financial condition and performance, and the
discretion of management, of the Bank. These restrictions on dividends paid by
the Bank may limit the Company's ability to obtain funds from such dividends
for its cash needs, including funds for payment of operating expenses, cash
dividends on shares of Common Stock and Series A Preferred Stock, M&I Loan
repayment and interest on the Debentures. Even if the Bank is successful, if it
is unable to pay dividends for any reason, the success of the Company and any
returns received from an investment in the Company could be adversely affected.
See "Dividends" and "Supervision and Regulation."
Restrictions on Payment of Dividends by the Company
The only sources of income and cash flow to the Company are any dividends
paid on the Bank Stock, the tax benefits received by the Company resulting from
the Company filing consolidated federal income and state franchise tax returns
with the Bank, and the interest received from any amounts deposited by the
Company in interest bearing accounts or investments. Even if funds become
available to the Company, the Company must first satisfy the obligations under
the M&I Loan, the Debentures and the accumulated dividends due to holders of
the Series A Preferred Stock. See "Certain Transactions" and "Descriptions of
Securities." Moreover, the payment of dividends by the Company to the holders
of the Common Stock is restricted by the requirement imposed on the Company to
maintain adequate capital pursuant to the capital adequacy guidelines issued by
the Federal Reserve Board and also will be subject to the discretion of the
Company's Board of Directors. These limitations could adversely affect the
ability of the Company to pay dividends to holders of Common Stock. See
"Dividends," "Business -- Loan from Marshall & Ilsley Bank" and "Supervision
and Regulation."
No Assurance of Acquisitions
The net proceeds from this Offering will be used for general corporate
purposes, which may include the possible funding of future acquisitions.
Acquisitions of financial institutions such as bank holding companies, banks,
thrifts or companies conducting businesses deemed closely related to banking or
managing or controlling banks or thrifts are subject to a number of conditions
including availability, price and regulatory approvals. There can be no
assurance that potential acquisitions that meet the Company's investment
criteria will be available or that the required regulatory approvals of any
such acquisitions will be obtained. The Company currently has no plans,
understandings, arrangements or agreements, written or oral, with respect to
any specific acquisition prospect, and is not presently negotiating with any
party with respect thereto. See "Supervision and Regulation."
Risks Related to Anti-Takeover Effects of Certain Provisions of Maine Law
The Company is subject to several provisions under Maine law which may
deter or frustrate unsolicited attempts to acquire certain Maine corporations.
These provisions, commonly referred to as the "Fair Price Provisions," apply to
all public corporations organized in Maine. The Fair Price Provisions generally
require that certain change of control transactions between a public
corporation and an affiliate must be approved by at least a majority of the
disinterested directors or shareholders (not including those shares
beneficially owned by an "interested shareholder"). The Fair Price Provisions
are also included in the Articles of Incorporation but approval of 80%, rather
than a majority, of the disinterested directors and shareholders, is required
in connection with a change of control transaction. These anti-takeover
provisions of Maine law and the Articles of Incorporation could result in the
Company being less attractive to a potential acquiror and/or result in
shareholders receiving less for their shares than otherwise might be available
in the event of an unsolicited takeover attempt.
11
Deregulation of the Banking Industry
There have been significant changes in the banking industry in recent
years. Many of the changes have resulted from federal legislation intended to
deregulate the banking industry. This legislation has, among other things,
eliminated interest rate restrictions on deposits and increased the power of
non-banks to expand into traditional banking services. Future changes in the
banking industry may include some modification of prohibitions on the type of
businesses in which bank holding companies may engage. In addition, other types
of financial institutions, including securities brokerage companies, insurance
companies, and investment banking firms, have been given and may continue to be
given powers to engage in activities which traditionally have been engaged in
only by commercial banks. Such changes would tend to place the Company and the
Bank in more direct competition with other non-bank financial institutions. See
"Supervision and Regulation."
Interest Rates and Usury Laws
Except to the extent that interest rates may be limited by common law
principles, Maine has no usury laws which would limit the rate of interest that
may be charged by the Bank, except for limitations imposed by the Maine Uniform
Consumer Credit Code with respect to certain consumer loans. It is not
anticipated that these limitations will have a material effect on the Bank's
operations. However, such limitations could affect its operations in the future
if market interest rates exceed those permissible under Maine law or if new
interest rate limitations are enacted.
Lack of Diversification
The sole business activity of the Company consists of its ownership of the
capital stock of the Bank Stock. As a result, the Company lacks diversification
as to business activities and market area, and any event affecting the Bank
will have a direct impact on the Company. See "Business."
Shares Eligible for Future Sale
As of March 31, 1998, the executive officers, directors, shareholders of
the Company and the Bank owning 5% or more of the Common Stock and their
affiliates collectively hold 802,593 shares of Common Stock, plus 266,589
shares of Common Stock issuable upon the conversion of Series A Preferred Stock
and Debentures, for an aggregate total of 1,069,182 shares of Common Stock on a
fully converted basis. The directors and executive officers are expected to
agree not to sell, contract to sell or otherwise dispose of any Common Stock
for a period of 180 days after the consummation of this Offering without the
prior consent of the Underwriter. In addition, approximately 853,047 shares of
Common Stock held by existing shareholders of the Company as of March 31, 1998,
who are not executive officers or directors of the Company or the Bank, will be
immediately eligible for sale in the public market, without restriction,
provided such persons are not otherwise affiliates of the Company at such time.
The sale of a substantial number of shares could adversely affect the market
price of the Common Stock. See "Description of Securities", "Market for Common
Stock" and "Shares Eligible for Future Sale."
Common Stock of the Company held by shareholders who may be deemed to
control, to be controlled by or to be under common control with the Company,
including the Company's executive officers and directors, cannot be resold by
such persons unless such shares are registered for resale under the Securities
Act or an exemption from the registration requirements of that Act is
available.
Dilution
Purchasers of Common Stock pursuant to this Offering will incur immediate
and substantial dilution in the net tangible book value of the Common Stock of
$5.66 per share ($5.50 per share if the Underwriter's overallotment option is
exercised in full), including Common Stock equivalents. Dilution represents the
difference between the public offering price and the net tangible book value
per share after the Offering. See "Dilution."
Control by Principal Shareholders, Officers and Directors
Upon the closing of the Offering, the executive officers, directors,
shareholders of the Company owning 5% or more of the Common Stock and their
affiliates will beneficially own approximately 50.1% of the outstanding Common
Stock (48.6% if the Underwriter's overallotment option is exercised in full),
assuming the conversion of all the Series A Preferred Stock and Debentures and
the exercise of all options to purchase Common Stock held by such officers,
directors and shareholders. As a result, these shareholders will be able to
exercise control over
12
most matters requiring shareholder approval, including the election of
directors. This concentration of ownership may have the effect of delaying or
preventing a change in control of the Company. See "Securities Ownership of
Certain Beneficial Owners and Management."
Risks Related to Year 2000 Compliance
The Company and the Bank use a significant number of computer software
programs to conduct their businesses. Most all of such programs and systems
were purchased and are maintained by outside vendors. It is anticipated that
some level of modification or replacement will be necessary to ensure that the
systems of the Company and the Bank are "Year 2000 Compliant." The Company does
not believe that the costs associated with Year 2000 compliance efforts will
have a significant impact on ongoing results of operations, although there can
be no assurance in this regard. To the extent the Company and the Bank rely on
software vendors, Year 2000 compliance matters will not be under its direct
control. Moreover, the Company and the Bank have relationships with vendors,
customers and third parties that rely on computer software that may not be Year
2000 Compliant. There can be no assurance that Year 2000 compliance failures by
such third parties will not have a material adverse effect on the Company's
consolidated results of operations. See "Management's Discussion and Analysis
of Financial Conditions and Results of Operations -- Year 2000 Risk Assessment
and Action Plan."
13
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of the Common
Stock offered hereby are estimated to be approximately $6,601,250 ($7,662,687
if the Underwriter's overallotment option is exercised in full), after
deducting the underwriting commission and estimated offering expenses to be
paid by the Company.
The net proceeds of the Offering will be used for working capital and
general corporate purposes, including capital contributions to the Bank, the
financing of acquisitions of banks and businesses closely related to banking
and possible repayment of borrowings. The Company currently has no plans,
understandings, arrangements or agreements, written or oral, with respect to
any specific acquisition prospect, and is not presently negotiating with any
party with respect thereto. See "Risk Factors -- No Assurance of Acquisitions."
The Company may determine to repay the M&I Loan in whole or in part with
the Proceeds of this Offering. As of March 31, 1998, the principal amount
thereunder was approximately $2.7 million. The Company has the option of
selecting one of the following annual interest rates: (i) Prime Rate; (ii) the
six-month Treasury Rate plus 1.75% and (iii) LIBOR plus 1.5%. Presently,
interest payments on the unpaid principal are due quarterly at the six-month
Treasury Rate plus 1.75%. The remaining unpaid loan balance is due on October
16, 2000. See "Business -- Loan from Marshall & Ilsley Bank."
After the consummation of this Offering and pending the application of
proceeds in the manner set forth above, the net proceeds may be invested by the
Company in short-term interest-bearing securities or certificates of deposits.
Although the Company does not currently anticipate significant changes in the
allocation of net proceeds described above, the allocation may vary as
necessary to respond to changing circumstances. Accordingly, the Company's
management will have broad discretion in the application of the net proceeds.
MARKET FOR COMMON STOCK
Prior to this Offering, there has been no public market for the Common
Stock. The Company has, however, been approved to have its Common Stock listed
for quotation on the NASDAQ-NMS under the symbol "MERB." See "Risk Factors --
Absence of Trading Market." As of March 31, 1998, there were outstanding
1,655,640 shares of Common Stock which were held by approximately 55
shareholders of record.
14
DIVIDENDS
Holders of the shares of the Company's Common Stock are entitled to
receive cash dividends when and if declared by the Company's Board of Directors
out of funds legally available therefor. The Company paid cash dividends on its
Common Stock in March 1998 of $.02778 per share and in December 1997 of $.02778
per share (each adjusted to reflect the 9:1 Stock Split). The Company also
issued stock dividends as follows: a 3% stock dividend, a 5% stock dividend and
a 5% stock dividend on its Common Stock during 1996, 1997 and 1998,
respectively.
The source of dividends to the Company's shareholders in the future, if
any, will depend primarily upon the earnings of the Bank and its ability to pay
dividends to the Company, as to which there can be no assurance. The payment of
dividends by the Bank is subject to a determination by the Bank's Board of
Directors and will depend upon a number of factors, including capital
requirements, regulatory limitations, the Bank's results of operations and
financial condition, tax considerations and general economic conditions. Maine
state laws and Bureau regulations regulate and restrict the ability of the Bank
to pay dividends to the Company. The Federal Reserve and the Bureau, which
regulate the Bank, not only have established certain financial and capital
requirements that affect the ability of the Bank to pay dividends, but they
also have the general authority to prohibit the Bank from engaging in an unsafe
or unsound practice in conducting its business. Depending upon the financial
condition of the Bank, the payment of cash dividends could be deemed to
constitute such an unsafe or unsound practice. See "Supervision and
Regulation -- Payment of Dividends."
Before any dividends may be paid to the holders of the shares of the
Common Stock, the Company must first satisfy its interest and principal payment
obligations under the Debentures and the accumulated dividends due to holders
of the Series A Preferred Stock. See "Certain Transactions" and "Description of
Securities." As such, even if the Company is profitable, there can be no
assurance that the Company will be able to declare or pay dividends to holders
of Common Stock. Under Federal law and Federal Reserve policy, a bank holding
company such as the Company is required to serve as a source of financial
strength to each of its subsidiary banks and to commit resources to support
each such bank. Consistent with this requirement, the Federal Reserve has
stated that, as a matter of prudent banking, a bank holding company generally
should not maintain a rate of cash dividends unless the available net income of
the bank holding company is sufficient to fully fund the dividends, and the
prospective rate of earnings retention appears to be consistent with the
company's capital needs, asset quality, and overall financial condition. See
"Risk Factors -- Restrictions on Payment of Dividends by the Company" and
"Supervision and Regulation -- Payment of Dividends."
The ability of the Bank and the Company to pay cash dividends in the
future could be further influenced by bank regulatory policies or agreements
and capital guidelines. See "Risk Factors -- Restrictions on Payment of
Dividends by the Bank to the Company."
15
CAPITALIZATION
The following table sets forth, as of March 31, 1998, after giving effect
to the 9:1 Stock Split, the actual capitalization of the Company as adjusted to
reflect receipt of the estimated net proceeds from the sale by the Company of
600,000 shares of Common Stock, net of estimated expenses of this Offering.
This information should be read in conjunction with the Company's Consolidated
Financial Statements and the related notes thereto appearing elsewhere in this
Prospectus.
March 31, 1998
------------------------------
Actual(1) As Adjusted(1)(2)
----------- ------------------
(Dollars in thousands except
per share data)
Capitalization and Shareholders' Equity:
Debentures, includes 66,654 shares of Common Stock issuable upon
the conversion of such Debentures; no shares issued and outstanding
on an actual or adjusted basis .......................................... $ 300 $ 300
Shareholders' Equity:
Series A Preferred Stock, $1.00 par value, 50,000 authorized shares;
issued and outstanding 19,566 shares, on an actual and adjusted
basis ................................................................... 20 20
Serial Preferred Stock, $0.01 par value, 950,000 shares authorized;
no shares issued and outstanding on an actual or adjusted basis ......... -- --
Common Stock, $1.00 par value, 4,000,000 shares authorized;
1,655,640 shares issued and outstanding on an actual basis;
2,255,640 shares issued and outstanding on an adjusted basis (3) ........ 1,656 2,256
Additional paid-in capital ............................................... 8,387 14,388
Retained earnings ........................................................ 1,394 1,394
Net unrealized gain on securities designated as available for sale ....... 49 49
------- -------
Total shareholders' equity ............................................. $11,506 $18,107
======= =======
Total capitalization ................................................... $11,806 $18,407
======= =======
- ----------
(1) Adjusted for 9:1 Stock Split.
(2) Assumes no exercise of the Underwriter's overallotment option to purchase
90,000 shares. See "Underwriting."
(3) Does not include (a) 540,027 shares of Common Stock issuable upon exercise
of stock options outstanding at March 31, 1998 with a weighted average
exercise price of $5.15 per share, of which options to purchase 540,027
shares were then exercisable and (b) 9,288 shares (69,288 shares upon
completion of the Offering) that are reserved and available for issuance
under the Company's Stock Option Plan. See "Management -- Stock Option
Plan", "Description of Securities" and Note 19 to Consolidated Financial
Statements.
The following table sets forth capital ratios required by the Federal
Reserve to be maintained by the Company in order for the Company to be
adequately capitalized, and the Company's actual and pro forma ratios of
capital to total regulatory or risk-weighted assets, as applicable, at March
31, 1998.
Company Company Company
Regulatory Actual at Adjusted at
Minimum March 31, 1998 March 31, 1998(1)(2)(3)
------------ ---------------- ------------------------
Tier 1 capital ................... 4.00% 10.25% 16.16%
Total risk-based capital ......... 8.00% 11.78% 17.69%
- ----------
(1) Assumes that the net proceeds of this Offering were invested in assets that
have a risk-weight equivalent to investment securities, assigned to the
20% category at March 31, 1998.
(2) Assumes that the net proceeds of this Offering were received on March 31,
1998.
(3) Assumes no exercise of the Underwriter's overallotment option to purchase
90,000 shares.
16
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1998,
after giving effect to the 9:1 Stock Split and the conversion of the Company's
Series A Preferred Stock and the Debentures into 266,589 shares of Common
Stock, was $11.8 million or $5.87 per share of Common Stock. Giving effect to
the sale by the Company of 600,000 shares of Common Stock, and assuming that
the underwriting commission and expenses of the Offering to be paid by the
Company aggregate approximately 13.7% of gross proceeds, the pro forma net
tangible book value of the Company at March 31, 1998 would have been $18.4
million or $7.09 per share of Common Stock, representing an immediate increase
in net tangible book value of $1.22 per share to present shareholders and an
immediate dilution of $5.66 per share to new investors purchasing shares. The
following table illustrates this per share dilution:
Assumed initial public offering price per share(l) ......................... $ 12.75
Net tangible book value before the Offering(2) (3) ......................... 5.87
Increase attributable to payment for shares purchased by new investors ..... 1.22
Pro forma net tangible book value after the Offering(2) (3) (4) ............ 7.09
Dilution to new investors(4) ............................................... 5.66
- ----------
(1) Does not take into account the underwriting commission and offering
expenses to be paid by the Company.
(2) Pro forma net tangible book value per share is determined by dividing the
number of outstanding shares of Common Stock, including shares of Common
Stock issuable upon conversion of the Series A Preferred Stock and the
Debentures, into the net tangible book value of the Company.
(3) Excludes (a) 540,027 shares of Common Stock issuable upon the exercise of
stock options outstanding at March 31, 1998, with a weighted average
exercise price of $5.15 per share, of which options to purchase 540,027
shares were then exercisable, and (b) 9,288 shares (69,288 shares upon
completion of the Offering) that are reserved and available for issuance
under the Company's Stock Option Plan. Assuming the exercise of the
options to purchase 540,027 shares then exercisable, the diluted price per
share would be $6.75 per share rather than $7.09 per share. See
"Management -- Stock Option Plan", "Description of Securities" and Note 19
of Notes to Consolidated Financial Statements.
(4) Assumes no exercise of the Underwriter's overallotment option to purchase
90,000 shares.
The following table summarizes, on a pro forma basis as of March 31, 1998 after
giving effect to the 9:1 Stock Split and the conversion of the Series A
Preferred Stock and Debentures, the difference between the number of shares
purchased from the Company, the total consideration paid, and the average price
per share paid by existing shareholders since October 1992 and by the new
investors purchasing Common Stock from the Company pursuant to this Offering:
Average
Shares Percent of Total Percent Price
Purchased Total Shares Consideration of Total Consideration Per Share
----------- -------------- --------------- ------------------------ ----------
Existing Shareholders (1) ......... 1,922,229 76.2% $ 9,204,879 54.6% $ 4.79
New Investors (2) ................. 600,000 23.8% $ 7,650,000 45.4% $ 12.75
--------- ----- ----------- -----
Total ........................... 2,522,229 100.0% $16,854,879 100.0%
========= ===== =========== =====
- ----------
(1) Excludes (a) 540,027 shares of Common Stock issuable upon the exercise of
stock options outstanding at March 31, 1998, with a weighted average
exercise price of $5.15 per share, of which options to purchase 540,027
shares were then exercisable, and (b) 9,288 shares (69,288 shares upon
completion of the Offering) that are reserved and available for issuance
under the Company's Stock Option Plan. See "Management -- Stock Option
Plan", "Description of Securities" and Note 19 of Notes to Consolidated
Financial Statements.
(2) Assumes no exercise of the Underwriter's overallotment option to purchase
90,000 shares.
17
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share data)
The following table presents selected consolidated financial data for the
Company. The data for the fiscal years ended December 31, 1997, 1996, 1995,
1994 and 1993 are derived from audited consolidated financial statements of the
Company. The data for the three month periods ended March 31, 1998 and 1997 are
derived from unaudited financial statements of the Company which, in the
opinion of management, contain normal, recurring adjustments necessary for the
fair presentation of the results of such periods. Operating results for the
three months ended March 31, 1998 are not necessarily indicative of results
that may be expected for the full fiscal year ending December 31, 1998. The
selected financial data should be read in conjunction with, and is qualified in
its entirety by, the Consolidated Financial Statements and Notes thereto, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere herein.
At or for the
Three Months Ended
March 31,
---------------------------
1998 1997
------------- -------------
(Unaudited)
Financial Condition Data:
Total assets ...................................... $ 175,753 $ 160,034
Cash and cash equivalents ......................... 6,775 11,427
Investment securities ............................. 45,579 37,411
Loans receivable, net (1) ......................... 118,036 106,416
Deposits .......................................... 140,398 126,856
Repurchase agreements ............................. 13,554 12,268
Other borrowed funds .............................. 5,856 6,000
Long-term debt .................................... 2,745 3,695
Mandatory convertible debentures .................. 300 300
Shareholders' equity .............................. 11,506 9,809
Income Statement Data:
Interest and dividend income ...................... $ 3,510 $ 3,074
Interest expense .................................. 1,613 1,409
Net interest income ............................... 1,897 1,665
Provision for loan losses ......................... 90 75
Net interest income after provision for
loan losses ...................................... 1,807 1,590
Non-interest income ............................... 481 404
Non-interest expense .............................. 1,695 1,553
Income (loss) before income taxes ................. 593 441
Income tax expense (benefit) ...................... 213 161
Net income (loss) ................................. 380 280
Per Share Data:
Earnings per share-basic (2) ...................... .22 .16
Earnings per share-diluted (2) .................... .19 .14
Cash dividends on Common Stock (2) ................ .03 --
Book value (2)(3) ................................. 6.92 6.14
Weighted average shares outstanding (2) ........... 1,641,969 1,619,226
Selected Financial Ratios and Other Data:
Return on average assets (4) ...................... 0.89% 0.74%
Return on average equity (3)(4) ................... 13.69% 11.57%
Net interest margin (4)(5) ........................ 4.59% 4.59%
Net interest spread (4) ........................... 3.87% 3.90%
Non-performing assets to total assets (6) ......... 0.13% 0.37%
Non-performing loans to total loans (6) ........... 0.20% 0.21%
Allowance for loan losses to total loans .......... 1.50% 1.41%
Allowance for loan losses to non-performing
loans (6) ........................................ 768.80% 674.67%
Net loan charge-offs to average loans (4) ......... .03% .03%
Efficiency ratio (7) .............................. 71.28% 75.06%
Capital Ratios:
Tier 1 risk-based capital (8) ..................... 10.25% 9.66%
Total risk-based capital (8) ...................... 11.78% 11.22%
Leverage ratio (8)(9) ............................. 6.38% 6.19%
At or for the Year Ended December 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
Financial Condition Data:
Total assets ...................................... $ 178,619 $ 158,425 $ 135,744 $ 113,231 $ 91,090
Cash and cash equivalents ......................... 10,659 8,591 6,723 6,683 6,104
Investment securities ............................. 44,826 41,014 30,257 21,692 25,876
Loans receivable, net (1) ......................... 117,679 104,320 95,256 81,137 55,805
Deposits .......................................... 146,312 126,704 111,340 91,812 72,108
Repurchase agreements ............................. 11,897 12,164 10,173 7,827 4,703
Other borrowed funds .............................. 5,144 2,832 192 1,000 1,990
Long-term debt .................................... 2,895 3,695 4,000 4,000 4,000
Mandatory convertible debentures .................. 300 300 300 300 300
Shareholders' equity .............................. 10,967 9,671 8,761 7,675 7,439
Income Statement Data:
Interest and dividend income ...................... $ 13,215 $ 11,826 $ 10,349 $ 7,445 $ 5,164
Interest expense .................................. 6,060 5,383 4,371 2,774 2,124
Net interest income ............................... 7,155 6,443 5,978 4,671 3,040
Provision for loan losses ......................... 355 360 355 150 385
Net interest income after provision for
loan losses ...................................... 6,800 6,083 5,623 4,521 2,655
Non-interest income ............................... 1,724 1,489 1,302 911 1,015
Non-interest expense .............................. 6,357 5,813 5,407 4,840 4,667
Income (loss) before income taxes ................. 2,167 1,759 1,518 592 (997)
Income tax expense (benefit) ...................... 765 639 551 219 (332)
Net income (loss) ................................. 1,402 1,120 967 373 (665)
Per Share Data:
Earnings per share-basic (2) ...................... .82 .65 .55 .19 ( .57)
Earnings per share-diluted (2) .................... .71 .58 .52 .19 ( .57)
Cash dividends on Common Stock (2) ................ .03 -- -- -- --
Book value (2)(3) ................................. 6.77 5.98 5.33 4.79 4.59
Weighted average shares outstanding (2) ........... 1,619,226 1,619,226 1,619,226 1,619,226 1,261,620
Selected Financial Ratios and Other Data:
Return on average assets (4) ...................... 0.86% 0.78% 0.80% 0.37% -0.80%
Return on average equity (3)(4) ................... 13.63% 12.28% 11.83% 4.95% -11.67%
Net interest margin (4)(5) ........................ 4.67% 4.72% 5.25% 4.99% 3.94%
Net interest spread (4) ........................... 3.97% 3.97% 4.48% 4.34% 3.32%
Non-performing assets to total assets (6) ......... 0.13% 0.45% 0.33% 0.63% 0.07%
Non-performing loans to total loans (6) ........... 0.15% 0.36% 0.15% 0.87% 0.07%
Allowance for loan losses to total loans .......... 1.44% 1.37% 1.18% 1.17% 1.45%
Allowance for loan losses to non-performing
loans (6) ........................................ 933.15% 384.62% 760.40% 133.80% 2002.44%
Net loan charge-offs to average loans (4) ......... 0.08% 0.04% 0.21% 0.02% 0.05%
Efficiency ratio (7) .............................. 71.60% 73.29% 74.27% 86.71% 115.09%
Capital Ratios:
Tier 1 risk-based capital (8) ..................... 9.77% 9.53% 9.03% 8.83% 10.79%
Total risk-based capital (8) ...................... 11.30% 11.10% 10.63% 10.46% 12.57%
Leverage ratio (8)(9) ............................. 6.06% 5.98% 5.84% 6.31% 7.07%
18
- ----------
(1) Includes loans held for sale.
(2) Adjusted to reflect the 9:1 Stock Split, 5% stock dividends in 1998 and
1997 and a 3% stock dividend in 1996.
(3) Excludes unrealized gain or loss on securities available for sale net of
taxes.
(4) Information is annualized for the periods ended March 31, 1998 and 1997.
(5) Represents net interest income as a percentage of average interest earning
assets. Calculation is shown tax-effected for tax exempt interest income
assuming a federal tax rate of 34%.
(6) Non-performing assets consist of non-performing loans and other real estate
owned. Non-performing loans consist of non-accrual loans and accruing
loans 90 days or more past due while other real estate owned consists of
real estate acquired through foreclosure and real estate acquired by
acceptance of a deed-in-lieu of foreclosure.
(7) Non-interest expense divided by the sum of net interest income plus
non-interest income.
(8) The minimum regulatory capital ratios in order for the Company to be
adequately capitalized are: Tier 1 capital -- 4.00%; total risk-based
capital -- 8.00%; and leverage ratio -- 4.00%
(9) The leverage ratio is defined as the ratio of Tier 1 capital to average
total assets.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and the related Notes thereto included elsewhere in this
Prospectus. This discussion contains forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including, but not limited to, those set forth under "Risk
Factors" and elsewhere in this Prospectus.
General
Per share information has been adjusted to reflect the 9:1 Stock Split and
assumes the conversion of the Series A Preferred Stock and Debentures into
266,589 shares of Common Stock.
The Company's principal asset is its ownership of the Bank. Accordingly,
the Company's results of operations are primarily dependent upon the results of
operations of the Bank. The Bank conducts a general commercial and retail
banking business which consists of attracting deposits from the general public
and applying those funds to the origination of commercial loans, commercial and
residential real estate loans and consumer loans. The Bank also provides trust
and investment services. The Bank's profitability depends primarily on net
interest income, which is the difference between interest income generated from
interest-earning assets (i.e., loans and investments) less the interest expense
incurred on interest-bearing liabilities (i.e., customer deposits and borrowed
funds). Net interest income is affected by the relative amounts of
interest-earning assets and interest-bearing liabilities, and the interest
rates earned and paid on these balances. Net interest income is dependent upon
the Bank's interest rate spread, which is the difference between the average
yield earned on its interest-bearing assets and the average rate paid on its
interest-bearing liabilities. When interest-earning assets approximate or
exceed interest-bearing liabilities, any positive interest rate spread will
generate net interest income. The interest rate spread is impacted by interest
rates, deposit flows, and loan demand. See "Risk Factors -- Sensitivity to
Changes in Interest Rates" and "Management's Discussion and
Analysis -- Interest Rate Risk."
The Bank enjoys a positive reputation in its market and strives for
quality customer service. The Bank operates seven banking locations, including
the headquarters office at 201 Main Street in Bangor. The remaining offices
include two other full service branches in Bangor plus full service offices in
Brewer, Orono and Pittsfield, and a full service supermarket office in Newport.
The Bank began offering trust and investment services in 1994 and, as of
March 31, 1998, had $98.5 million in assets under management. The Trust and
Investment Services Department provides a variety of services to assist
individuals, businesses, municipalities and non-profit organizations in
achieving their investment goals. Among the services offered are: investment
management accounts; custody of assets; personal trusts; retirement plans;
individual retirement accounts; estate and tax planning assistance; estate
settlement services and financial planning.
In addition to the Trust and Investment Services Department, the Bank
pursues commercial, commercial and residential real estate, and consumer
lending within its local market. See "Business -- Lending Activities" and
"Management's Discussion and Analysis -- Loan Portfolio Composition."
This Management's Discussion and Analysis of Financial Condition and
Results of Operations discusses material changes in the financial condition of
the Company from January 1, 1996 to December 31, 1997, and material changes in
the results of operations with respect to the three month period ending March
31, 1997 compared to the three month period ending March 31, 1998, and the year
ending December 31, 1997 compared to the year ending December 31, 1996. Results
of operations for the three month period ending March 31, 1998 may not be
indicative of the results for the entire year ending December 31, 1998. This
discussion and analysis is intended to assist the reader in understanding the
financial condition and results of operations of the Company. This commentary
should be read in conjunction with the financial statements and the related
notes and the other statistical information contained herein.
20
Results of Operations
Comparison of Three Months Ended March 31, 1998 and 1997
The Company's net income was $380,000 for the three months ended March 31,
1998, compared to net income of $280,000 for the three months ended March 31,
1997, yielding an annualized return on average assets ("ROA") of .89% compared
to .74% for those same periods. Return on average shareholders' equity ("ROE")
on an annualized basis for the same 1998 and 1997 three month periods were
13.69% and 11.57%, respectively. The increase in earnings between the periods
is due to an increase in net interest income resulting from growth in loans and
securities and a 19% increase in non-interest income.
Total assets were $175.8 million at March 31, 1998, an increase of $15.8
million or 9.9% from $160 million at March 31, 1997. Total average earning
assets were $164.9 million for the three months ended March 31, 1998, compared
to $144.3 million for the three months ended March 31, 1997. The increase in
average loans of $12.2 million and the increase in average investment
securities of $8.2 million during the three month period in 1998 compared to
the same period in 1997 were funded through an increase in average
interest-bearing liabilities of $16.6 million and an increase in average
non-interest bearing liabilities of $3.2 million.
Comparison of Years Ended December 31, 1997 and 1996
For the year ended December 31, 1997, the Company reported net income of
$1.4 million or $.82 per share, as compared to net income of $1.1 million or
$.65 per share for 1996. From 1996 to 1997, net interest income before
provision for loan losses increased by $712,000, an 11% increase, and
non-interest income increased by $235,000 or 15.8% . Other expenses increased
$544,000 or 9.4% from 1996 to 1997 which includes the impact of the start-up
costs associated with the new branch office established in Newport during 1997.
The Company's total assets at December 31, 1997 were $178.6 million, an
increase of $20.2 million from December 31, 1996. The Bank's loans net of
allowances at December 31, 1997 totaled $117.7 million, up from $104 million or
13.2% at December 31, 1996. Deposits increased 15.5% from $126.7 million to
$146.3 million for the years ended December 31, 1996 and 1997, respectively.
Net Interest Income
Net interest income is interest earned on interest-earning assets less
interest accrued on interest-bearing liabilities. Interest-earning assets are
categorized as loans, investment securities and other earning assets, which
include Federal Funds sold and certificates of deposit issued from other
financial institutions. Interest-bearing liabilities are categorized as
customer deposits, time and savings deposits and borrowings including
repurchase agreements, short-term borrowings and long-term debt. Net interest
income depends on the volume of average interest-earning assets and average
interest-bearing liabilities and the interest rates earned or paid on them.
The growth in the loan and investment portfolios resulted in an increase
in net interest income during the first three months of 1998 compared with the
same period in 1997. Interest income for the three month periods ended March
31, 1998 and 1997 was $3.5 million and $3.1 million, respectively, on a $164.9
million and $144.3 million average balance of interest-earning assets. The
average yield on interest-earning assets, on an annualized basis, remained
stable at 8.56% and 8.55% for the periods ended March 31, 1998 and 1997,
respectively. Total interest expense for the three month period in 1998 was
$1.6 million on average outstanding balances of interest-bearing liabilities of
$139.4 million, compared to an expense of $1.4 million on average outstanding
balances of interest-bearing liabilities of $122.9 million for the same period
in 1997. The average cost of interest-bearing liabilities for the three months
of 1998 and 1997 was 4.69% and 4.65%, respectively, on an annualized basis. The
increase in average cost of interest-bearing liabilities is primarily due to a
savings deposit campaign launched in 1997. See "-- Deposit Activities." The
Company maintained a constant net interest margin of 4.59% for the three months
ended March 31, 1998 and 1997.
Net interest income before provision for loans losses for the period
December 31, 1997 amounted to $7.2 million on a $153.2 million average
outstanding balance of interest-earning assets, an increase of $712,000 over
the $6.4 million recorded in 1996 on an average outstanding balance of
interest-earning assets of $136.4 million. The average yield on interest
earning assets decreased from 8.67% in 1996 to 8.63% in 1997 resulting in a
decrease in the net interest margin from 4.72% to 4.67% for 1996 and 1997,
respectively.
21
Comparative Average Balances, Yields and Rates
The following table presents the Company's average balances, interest
earned or accrued, and the related yields and rates on major categories of the
Company's interest-earning assets and interest-bearing liabilities for the
periods indicated:
March 31,
-------------------------------------------------------------------
1998 1997
--------------------------------- ---------------------------------
Average Average
Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid (1) Balance Expense Paid (1)
----------- ---------- ---------- ----------- ---------- ----------
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans (2) .................... $118,562 $ 2,827 9.57% $106,355 $ 2,497 9.42%
Investment securities (3)..... 44,858 666 5.98% 36,661 560 6.16%
Other earning assets ......... 1,492 21 5.63% 1,290 17 5.27%
-------- ------- ------ -------- ------- ------
Total interest-earning
assets ...................... 164,912 3,514 8.56% 144,306 3,074 8.55%
Non-interest-earning
assets ...................... 9,081 8,410
-------- --------
Total assets ................. $173,993 $152,716
======== ========
Liabilities and
Shareholders' Equity:
Interest-bearing
liabilities:
Savings deposits and
interest-bearing
checking .................... 63,749 580 3.69% 51,681 440 3.45%
Certificates of deposit ...... 55,997 784 5.68% 53,647 750 5.67%
Securities sold under
agreement to
repurchase .................. 13,033 141 4.39% 11,013 116 4.27%
Short-term borrowings ........ 2,291 31 5.49% 2,525 30 4.82%
Long-term
borrowings (4) .............. 4,368 77 7.15% 4,012 73 7.38%
-------- ------- ------ -------- ------- ------
Total interest-bearing
liabilities ................. 139,438 1,613 4.69% 122,878 1,409 4.65%
Non-interest-bearing
liabilities ................. 23,243 20,071
Shareholders' equity ......... 11,312 9,767
-------- --------
Total liabilities and
shareholders' equity ........ $173,993 $152,716
======== ========
Net interest income (3) ...... $ 1,901 $ 1,665
======= =======
Net interest spread (5) ...... 3.87% 3.90%
====== ======
Net interest margin (6) ...... 4.59% 4.59%
====== ======
Ratio of interest-earning
assets to interest-
bearing liabilities ......... 118.27% 117.44%
====== ======
December 31,
--------------------------------------------------------------------
1997 1996
---------------------------------- ---------------------------------
Average Average
Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
----------- ---------- ----------- ----------- ---------- ----------
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans (2) .................... $111,006 $ 10,669 9.61% $100,677 $ 9,683 9.62%
Investment securities (3)..... 39,050 2,378 6.09% 32,663 1,983 6.07%
Other earning assets ......... 3,187 171 5.37% 3,093 160 5.17%
-------- -------- ------ -------- ------- ------
Total interest-earning
assets ...................... 153,243 13,218 8.63% 136,433 11,826 8.67%
Non-interest-earning
assets ...................... 9,062 7,595
-------- --------
Total assets ................. $162,305 $144,028
======== ========
Liabilities and
Shareholders' Equity:
Interest-bearing
liabilities:
Savings deposits and
interest-bearing
checking .................... 56,511 1,983 3.51% 43,886 1,358 3.09%
Certificates of deposit ...... 55,306 3,143 5.68% 53,094 3,070 5.78%
Securities sold under
agreement to
repurchase .................. 11,931 511 4.28% 11,770 520 4.42%
Short-term borrowings ........ 2,364 124 5.25% 1,773 89 5.02%
Long-term
borrowings (4) .............. 4,109 299 7.28% 4,083 346 8.47%
-------- -------- ------ -------- ------- ------
Total interest-bearing
liabilities ................. 130,221 6,060 4.65% 114,606 5,383 4.70%
Non-interest-bearing
liabilities ................. 21,836 20,285
Shareholders' equity ......... 10,248 9,137
-------- --------
Total liabilities and
shareholders' equity ........ $162,305 $144,028
======== ========
Net interest income (3) ...... $ 7,158 $ 6,443
======== =======
Net interest spread (5) ...... 3.97% 3.97%
====== ======
Net interest margin (6) ...... 4.67% 4.72%
====== ======
Ratio of interest-earning
assets to interest-
bearing liabilities ......... 117.68% 119.05%
====== ======
- ----------
(1) Annualized for comparability with full year data.
(2) Non-accruing loans included in computation of average balance.
(3) Income from investment securities and net interest income is presented on a
fully taxable equivalent basis by adjusting income and yields earned on
tax-exempt securities assuming a federal tax of 34%.
(4) Includes M&I Loan, FHLB borrowings and Debentures.
(5) Net interest spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(6) Net interest margin is the net interest income divided by average
interest-earning assets.
22
Rate/Volume Interest Analysis
The following table presents the components of the Company's net interest
income as attributed to volume and rate on a tax-equivalent basis assuming a
Federal tax rate of 34%. The net change attributable to the combined impact of
volume and rate has been solely allocated to the change in volume:
Three Months Ended Year Ended
March 31, 1998 December 31, 1997
Compared to 1997 Compared to 1996
increase (decrease) increase (decrease)
due to change in: due to change in:
------------------------------- -------------------------------
Average Average Total Average Average Total
Volume Rate Change Volume Rate Change
--------- ------------ -------- --------- --------- -----------
(Dollars in thousands)
Interest income:
Loans (1) ............................... $290 $ 40 $ 330 $ 993 $ (7) $ 986
Investment securities ................... 122 (16) 106 389 6 395
Other earning assets .................... 3 1 4 5 6 11
----- ----- ----- ------ ------ -----
Total interest income .................. 415 25 440 1,387 5 1,392
----- ----- ----- ------ ------ -----
Interest expense:
Savings deposits and interest-bearing
liabilities ............................ 109 31 140 443 182 625
Certificates of deposit ................. 33 1 34 126 (53) 73
Securities sold under agreement to
repurchase ............................. 22 3 25 7 (16) (9)
Short-term borrowings ................... (3) 4 1 31 4 35
Long-term borrowings .................... 6 (2) 4 2 (49) (47)
----- -------- ----- ------ ------ -------
Total interest expense ................. 167 37 204 609 68 677
----- ------- ----- ------ ------ -------
Change in net interest income ............ $248 $ (12) $ 236 $ 778 $ (63) $ 715
===== ======= ===== ====== ====== =======
Year Ended
December 31, 1996
Compared to 1995
increase (decrease)
due to change in:
-------------------------------
Average Average Total
Volume Rate Change
--------- ----------- ---------
(Dollars in thousands)
Interest income:
Loans (1) ............................... $1,249 $ (319) $ 930
Investment securities ................... 556 (16) 540
Other earning assets .................... 21 (14) 7
------ ------- ------
Total interest income .................. 1,826 (349) 1,477
------ ------- ------
Interest expense:
Savings deposits and interest-bearing
liabilities ............................ 272 182 454
Certificates of deposit ................. 495 48 543
Securities sold under agreement to
repurchase ............................. 139 (29) 110
Short-term borrowings ................... (26) (19) (45)
Long-term borrowings .................... (18) (32) (50)
------ ------- ------
Total interest expense ................. 862 150 1,012
------ ------- ------
Change in net interest income ............ $ 964 $ (499) $ 465
====== ======= ======
- ----------
(1) Non-accruing loans included in the computation of average balance.
Provision for Loan Losses
The targeted level of loan loss allowance is based on management's review
of the loan portfolio. Management reviews the loans by type and nature of
collateral and establishes an appropriate provision for loan losses based upon
industry standards, management's experience, historical charge-off experience,
the present and prospective financial condition of specific borrowers, industry
concentrations within the loan portfolio, size of credit, existence and quality
of any collateral, profitability and general economic conditions. The Bank has
experienced relatively low delinquency and default rates in its portfolio, due
in part to adherence to established underwriting guidelines. Management reviews
the allowance for loan losses on a quarterly basis and increases the allowance,
if necessary, based on the results of this review. Management believes the
allowance for loan losses should be adequate based on management's assessment
of the risks of loan defaults.
The ratio of non-performing loans to total assets was .20%, .15% and .36%
as of March 31, 1998 and December 31, 1997 and 1996, respectively. For the
three months ended March 31, 1998, the Bank had net charge-offs of $9,000 or
.03% (annualized) of total average loans outstanding. For the years ended
December 31, 1997 and 1996, net charge-offs were $88,000 and $43,000,
respectively, representing .08% and .04% of average loans outstanding,
respectively.
Although management believes that it uses the best information available
to make determinations with respect to the allowance for loan losses, future
adjustments may be necessary if economic conditions differ substantially from
the assumptions used or adverse developments arise with respect to the Bank's
loan portfolio. See "Management's Discussion and Analysis -- Allowance for Loan
Losses."
Non-Interest Income
Non-interest income for the three months ended March 31, 1998 and 1997
totaled $481,000 and $404,000, respectively, an increase of approximately 19%.
The increase is primarily due to an increase in trust fees of $32,000 and an
increase in gain on sale of mortgage loans of $29,000.
23
Non-interest income was $1.7 million and $1.5 million in 1997 and 1996,
respectively, an increase of approximately 16%. The growth of non-interest
income is primarily due to an increase in (i) other service charges and fees,
(ii) trust fees and (iii) increases in net gain on sale of mortgage loans. The
increase in other service charges and fees is attributable to (i) instituting
an ATM fee to non-customers of the Bank and (ii) increases in merchant credit
card processing fees, which are due to an increase in volume. The increase in
trust fees is attributable to the growth in trust assets under management from
$66 million in 1996 to $90 million at the end of 1997, a 36% increase.
The following table presents the components of the Company's non-interest
income for the periods indicated:
Three Months Ended Year Ended
March 31, December 31,
----------------------- -------------------------
1998 1997 1997 1996
---------- ---------- ----------- -----------
(Dollars in thousands)
Service charges on deposit accounts ......... $ 120 $ 118 $ 476 $ 486
Other service charges and fees .............. 115 111 485 381
Trust fees .................................. 151 119 534 439
Net gain on sale of mortgage loans .......... 50 21 91 69
Other non-interest income ................... 45 35 138 114
------- ------- ------- -------
Total non-interest income .................. $ 481 $ 404 $ 1,724 $ 1,489
======= ======= ======= =======
Non-interest income as a percentage of
average total assets (interim periods
annualized) ................................ 1.12% 1.07% 1.06% 1.03%
======= ======= ======= =======
Non-Interest Expense
Non-interest expense increased by $142,000, an increase of 9.1%, for the
three months ended March 31, 1998, as compared to the same period in 1997. This
increase is primarily due to the addition of employees at the Newport Branch
established in April 1997. In addition, data processing fees increased as a
result of increases in both loan and deposit volume.
Non-interest expense for 1997 increased $544,000 or 9.4% over the year
ended December 31, 1996. The increase is a result of several factors. Salaries
and employee benefits expenses increased $216,000 primarily due to the addition
of employees at the Newport Branch. Occupancy and equipment expenses increased
from a total of $988,000 in 1996 to $1.2 million due to the Newport Branch and
the renovation and relocation of the Bank's headquarters. See "Business -- Bank
Premises."
The following table presents the components of the Company's non-interest
expense for the periods indicated:
Three Months Ended Year Ended
March 31, December 31,
------------------------- -------------------------
1998 1997 1997 1996
----------- ----------- ----------- -----------
(Dollars in thousands)
Salary and employee benefits ......................... $ 852 $ 760 $ 3,121 $ 2,905
Occupancy expense .................................... 166 163 626 526
Equipment expense .................................... 123 118 524 462
Data processing expense .............................. 160 149 605 577
Professional fees .................................... 50 51 215 217
Printing, postage, stationery and supplies ........... 58 54 189 180
Advertising and promotion ............................ 50 39 191 155
Merchants and credit card processing expense ......... 55 39 191 145
Other ................................................ 181 180 695 646
-------- -------- -------- --------
Total non-interest expense .......................... $ 1,695 $ 1,553 $ 6,357 $ 5,813
======== ======== ======== ========
Efficiency Ratio(1) .................................. 71.28% 75.06% 71.60% 73.29%
======== ======== ======== ========
- ----------
(1) Non-interest expense divided by the sum of net interest income plus
non-interest income.
24
Income Tax Expense
For the three month period ended March 31, 1998, an income tax provision
totaling $213,000 was recorded, compared to $161,000 for the same three months
of 1997 as a result of increased earnings during the 1998 period.
For the year ended December 31, 1997, the Company recorded an income tax
provision totaling $765,000, compared to $639,000 for the year ended 1996.
Market Risk
Market risk is the risk of loss in a financial instrument arising from
adverse changes in market rates/prices such as interest rates, foreign currency
exchange rates, commodity prices and equity prices. The Company's primary
market risk exposure is interest rate risk. The ongoing monitoring and
management of this risk is an important component of the Company's
asset/liability management process which is governed by policies established by
its Board of Directors that are reviewed and approved annually. The Board of
Directors delegates responsibility for carrying out the asset/liability
management policies to its Asset/Liability Committee ("ALCO"). In this
capacity, ALCO develops guidelines and strategies impacting the Company's
asset/liability management process based upon estimated market risk
sensitivity, policy limits and overall market interest rate levels/trends.
Interest Rate Risk
Interest rate risk represents the sensitivity of earnings to changes in
market interest rates. As interest rates change, the interest income and
expense streams associated with the Company's financial instruments also change
thereby impacting net interest income ("NII"), the primary component of the
Company's earnings. ALCO utilizes the results of a detailed and dynamic
simulation model to quantify the estimated exposure of NII to sustained
interest rate changes. While ALCO routinely monitors simulated NII sensitivity
over a rolling two-year horizon, it also utilizes additional tools to monitor
potential longer-term interest rate risk.
The simulation model captures the impact of changing interest rates on the
interest income received and interest expense paid on all assets and
liabilities reflected on the Company's balance sheet. This sensitivity analysis
is compared to ALCO policy limits which specify a maximum tolerance level for
NII exposure over a one year horizon, assuming no balance sheet growth, given
both a 200 basis point (bp) upward and downward shift in interest rates. A
parallel and pro rata shift in rates over a 12 month period is assumed. The
following reflects the Company's NII sensitivity analysis as of December 31,
1997.
Rate Change Estimated NII Sensitivity
- ------------- --------------------------
+ 200 bp 2.17%
- 200 bp (1.03%)
The preceding sensitivity analysis does not represent a Company forecast
and should not be relied upon as being indicative of expected operating
results. These hypothetical estimates are based upon numerous assumptions
including: the nature and timing of interest rate levels including yield curve
shape, prepayments on loans and securities, deposit decay rates, pricing
decisions on loans and deposits, reinvestment/replacement of asset and
liability cashflows and others. While assumptions are developed based upon
current economic and local market conditions, the Company cannot make any
assurances as to the predictive nature of these assumptions including how
customer preferences or competitor influences might change.
Also, as market conditions vary from those assumed in the sensitivity
analysis, actual results will also differ due to prepayment/refinancing levels
likely deviating from those assumed the varying impact of interest rate change
caps or floors on adjustable rate assets, the potential effect of changing debt
service levels on customers with adjustable rate loans, depositor early
withdrawals and product preference changes and other internal/external
variables. Furthermore, the sensitivity analysis does not reflect actions that
ALCO might make in responding to or anticipating changes in interest rates.
Financial Condition
Cash and Cash Equivalents
Total cash and cash equivalents were $6.8 million at March 31, 1998
compared to $10.7 million at December 31, 1997. Cash and cash equivalent
balances were higher at December 31, 1997 due to a temporary seasonal high in
deposit balances. Demand deposit balances have decreased approximately $5
million from December 31, 1997
25
to March 31, 1998 thus resulting in decreases in Federal Funds Sold and cash
items in process of collection. In the past, deposit balances typically reach
their lowest levels during the first quarter of each year and continually trend
upward to their highest level during the fourth quarter. The Bank anticipates
these deposit trends and has instituted appropriate liquidity contingency
plans.
Lending Activities
The Bank offers a broad range of personal and business loans and products.
Total loans, including loans held for sale, were at $119.8 million at March 31,
1998 compared to $119.4 million, at December 31, 1997. With interest rates at
attractive levels nationally, secondary market mortgage lending for refinancing
and purchase money transactions has been exceptionally strong during the first
quarter of 1998. This has resulted in an increase in non-interest income and a
growing mortgage servicing portfolio. It has also resulted in a decline in
portfolio residential and home equity loan balances of $2.2 million since
December 31, 1997, as seasoned loans are refinanced and being sold on the
secondary market. Loans held for sale have increased to $2.1 million at March
31, 1998 compared to $508,000 at December 31, 1997. Commercial real estate loan
balances increased to $42.7 or 4.3% at March 31, 1998 compared to a December
31, 1997 balance of $41 million.
Total loans, including loans held for sale, increased to $119.4 million at
December 31, 1997, compared to $105.8 million at December 31, 1996,
representing a growth rate of 12.9%. The loan portfolio composition experienced
a slight shift into the real estate portfolio with real estate loans
representing 76% of the total loan portfolio at December 31, 1997 compared to
72% at December 31, 1996. See "Risk Factors -- Impact on Bank's Loan Portfolio
Due to Changes in Real Estate Values." The loan mix change is the result of net
loan growth of $14.4 million in the real estate portfolio for 1997 compared
with a decline in commercial loan balances of $1.3 million in 1997. As of March
31, 1998 and December 31, 1997, the Bank did not have any concentration of
loans in one particular industry that exceeded 10% of the total loan portfolio.
The following table summarizes the composition of the Bank's loan
portfolio by type of loan at the dates indicated:
Loan Portfolio Composition
At December 31,
-------------------------------------------------
At March 31, 1998 1997 1996
------------------------ ------------------------ ----------------------
Amount % Amount % Amount %
------------- -------- ------------- -------- ----------- --------
(Dollars in thousands)
Real Estate:
Commercial ............................ $ 42,746 36% $ 40,984 34% $ 34,908 33%
Construction .......................... 2,735 2% 3,012 3% 1,941 2%
Residential ........................... 24,827 21% 26,638 22% 23,827 22%
Home equity ........................... 19,685 16% 20,036 17% 15,726 15%
Loans held for sale ................... 2,127 2% 508 0% 341 0%
--------- -- --------- -- -------- --
Total real estate .................... 92,120 77% 91,178 76% 76,743 72%
Commercial ............................. 20,505 17% 20,757 18% 22,049 21%
Consumer ............................... 7,210 6% 7,461 6% 6,978 7%
--------- -- --------- -- -------- --
Total loans .......................... 119,835 100% 119,396 100% 105,770 100%
=== === ===
Less allowance for loan losses ......... (1,799) (1,717) (1,450)
--------- --------- --------
Total .................................. $ 118,036 $ 117,679 $104,320
========= ========= ========
The following table sets forth as of December 31, 1997, loans by scheduled
due date for the periods indicated. Loans maturing after one year are further
distinguished between those with predetermined interest rates and loans which
have floating or adjustable interest rates.
26
Loan Maturity Schedule
At December 31, 1997
-----------------------------------------------------------------------
Due in Due after 1 year Due
1 year or less but before 5 years after 5 years Total
---------------- -------------------- --------------- -----------
(Dollars in thousands)
Real estate .................................... $ 24,288 $ 28,391 $ 37,991 $ 90,670
Loans held for sale ............................ 508 -- -- 508
Commercial ..................................... 10,459 8,320 1,977 20,756
Consumer ....................................... 2,712 3,116 1,634 7,462
-------- -------- -------- --------
Total loans .................................... $ 37,967 $ 39,827 $ 41,602 $119,396
======== ======== ======== ========
Loans maturing after one year:
Predetermined interest rates .................. $ 42,953
Floating or adjustable interest rates ......... 38,476
--------
Total ......................................... $ 81,429
========
Asset Quality
Management seeks to maintain a high quality of assets through conservative
underwriting and sound lending practices. Approximately 30% of the Bank's loan
portfolio is collateralized by first liens on primarily owner-occupied
residential homes which have historically carried a relatively low credit risk.
The Bank also maintains a commercial real estate portfolio comprised primarily
of owner-occupied commercial businesses. The Bank has experienced low
delinquency and default rates since opening in 1992. As of March 31, 1998,
non-accrual loans amounted to $234,000 or .20% of total loans. In addition, the
Bank has no real estate owned by means of foreclosure.
The Bank participates in government guaranteed loan programs including the
Small Business Administration ("SBA"), Rural Development ("RD") and the Finance
Authority of Maine ("FAME"). At March 31, 1998, total loans under these
programs totaled $10.7 million of which $8.3 million, or 7% of the total loan
portfolio outstanding, is guaranteed by the various federal and state
government entities.
While there is no assurance that the Bank will not suffer losses on its
construction loans or its commercial real estate loans, management believes
that it has reduced the risks associated therewith because, among other things,
primarily all such loans relate to owner-occupied projects where the borrower
has demonstrated to the Bank's management that its business will generate
sufficient income to repay the loan. The Bank primarily enters into agreements
with individuals who are familiar to Bank personnel, are residents of the
Bank's primary market area and are believed by management to be good credit
risks.
In an effort to maintain the quality of the loan portfolio, management
seeks to minimize higher risk types of lending. To the extent risks are
identified, additional precautions are taken in order to reduce the Bank's risk
of loss. Commercial loans entail certain additional risks because repayment of
such loans is usually dependent upon the successful operation of the commercial
enterprise, which in turn is subject to adverse conditions in the economy.
Commercial loans are generally riskier than residential loans because they are
typically underwritten on the basis of the ability to repay from the cash flow
of a business rather than on the ability of the borrower or guarantor to repay.
Further, the collateral underlying commercial loans may be subject to greater
fluctuations in market value over time than residential real estate, and may
fluctuate in value based on the success of the business.
The Board of Directors of the Bank and senior management have placed
emphasis on loan review and underwriting procedures. The Bank utilizes the
services of a consultant, M&M Consulting, LLC, to perform periodic loan review
and documentation review. See "Business -- M&M Joint Venture." Management has
established a risk rating and review process with the objective of quickly
identifying, evaluating and initiating necessary corrective action for all
commercial and commercial real estate loans. The goal of the risk rating
process is to address the watch list, substandard and non-performing loans as
early as possible. These components of risk management are integral elements of
the Bank's loan program which have contributed to the loan portfolio
performance to date. Nonetheless, management maintains a cautious outlook in
attempting to anticipate the potential effects of uncertain economic conditions
(both locally and nationally).
Loans are placed on non-accrual status when, in the judgment of
management, principal repayment is doubtful, whether current or past due. When
a loan is placed on non-accrual status, previously accrued but unpaid interest
27
is deducted from interest income. As a matter of policy, interest is generally
not accrued on loans past due 90 days or more. The Bank considers
non-performing assets to include all non-accrual loans, other loans past due 90
days or more as to principal and interest, restructured loans and other real
estate owned ("OREO"). The Bank does not return a loan to accrual status until
it is brought current with respect to both principal and interest, future
payments are no longer in doubt and the loan has been performing for at least
six months.
The following is a summary of non-performing assets at March 31, 1998 and
December 31, 1997 and 1996:
Non-Performing Assets
At At December 31,
March 31, --------------------------
1998 1997 1996
---------- ---------- ----------
(Dollars in thousands)
Loans:
Non-accrual loans ............................................ $ 234 $ 181 $ 250
Loans 90 days or more past due but still accruing ............ -- 3 127
Restructured loans ........................................... -- -- --
------- ------- -------
Non-performing loans ......................................... 234 184 377
OREO .......................................................... -- 43 340
------- ------- -------
Non-performing assets ........................................ $ 234 $ 227 $ 717
======= ======= =======
Non-performing loans as a percentage of total loans ........... 0.20% 0.15% 0.36%
Non-performing assets as a percentage of total assets ......... 0.13% 0.13% 0.45%
Non-performing assets as a percentage of total loans and
OREO ......................................................... 0.20% 0.19% 0.68%
At December 31, 1997, loans on non-accrual status totaled $181,000.
Interest income not recognized on non-accrual loans was $18,000 in 1997.
Adversely Classified Assets
The Bank's management adversely classifies certain assets as
"substandard," "doubtful" or "loss" based on criteria established under banking
regulations. An asset is considered substandard if inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. Substandard assets include those characterized by the
"distinct possibility" that the insured institution will sustain "some loss" if
existing deficiencies are not corrected. Assets classified as doubtful have all
the weaknesses inherent in those classified substandard with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values,
"highly questionable and improbable." Assets classified as loss are those
considered "uncollectible" and of such little value that their continuance as
assets without the establishment of a specific loss reserve is not warranted.
At March 31, 1998, the Bank had $2.6 million of loans that were classified
as substandard and $438,000 classified as doubtful. This compares to $2.2
million and $307,000 of loans that were classified as substandard and doubtful
at December 31, 1997. The Bank had no loans which were classified as loss at
either date. Delinquent loans may or may not be adversely classified depending
upon management's judgment with respect to each individual loan. As of March
31, 1998 and December 31, 1997, the portion of loans guaranteed by either the
SBA, RD or FAME amounted to approximately 48% and 44% of the total loan
balances adversely classified, respectively. At March 31, 1998, included in the
$3 million of loans that were classified as substandard and doubtful were $2.8
million of performing loans. This compares to $2.3 million of adversely
classified performing loans as of December 31, 1997. These amounts constitute
loans that, in the opinion of management, could potentially migrate to
non-performing or loss status.
Allowance for Loan Losses
In originating loans, the Bank recognizes that loan losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan and, in the case of collateralized loans, the quality of the
collateral for the loan as well as general economic conditions. It is
management's policy to attempt to maintain an adequate allowance for loan
losses based on, among other things, industry standards, management's
experience, the Bank's historical loan loss experience, evaluation of economic
conditions and regular reviews of delinquencies and loan portfolio quality.
28
Management continues to actively monitor the Bank's asset quality and to
charge off loans against the allowance for loan losses when appropriate or to
provide specific loan allowances when necessary. Although management believes
it uses the best information available to make determinations with respect to
the allowance for loan losses, future adjustments may be necessary if economic
conditions differ from the economic conditions in the assumptions used in
making the final determinations. See "Risk Factors -- Adequacy of Allowance for
Loan Losses."
The Bank's allowance for loan losses amounted to $1.8 million at March 31,
1998 (1.50% of total loans), an increase of $82,000 over the Bank's $1.7
million allowance for loan losses at December 31, 1997.
The following table sets forth activity in the Bank's allowance for loan
losses during the periods indicated:
Summary of Loan Loss Experience
Three Months
Ended Year Ended December 31,
March 31, -------------------------------
1998 1997 1996
------------- -------------- -----------
(Dollars in thousands)
Total net loans outstanding at the end of period (1) ........... $118,036 $117,679 $104,320
Average net loans outstanding during the period (1) ............ $116,806 $109,427 $ 99,381
Allowance for loan losses, beginning of period ................. $ 1,717 $ 1,450 $ 1,133
Loans charged off during the period:
Real estate:
Commercial ................................................... 0 (6) 0
Residential .................................................. 0 (16) 0
Home equity .................................................. 0 0 0
Loans held for sale .......................................... 0 0 0
Commercial .................................................... (7) (23) (16)
Consumer ...................................................... (7) (55) (32)
---------- --------- --------
Total ...................................................... (14) (100) (48)
========= ========= ========
Recoveries of loans previously charged off:
Real estate:
Commercial ................................................... 0 0 0
Residential .................................................. 6 12 0
Home equity .................................................. 0 0 0
Loans held for sale .......................................... 0 0 0
Commercial .................................................... 0 0 2
Consumer ...................................................... 0 0 3
--------- --------- --------
Total ...................................................... 6 12 5
--------- --------- --------
Net loans charged off during the period ........................ (9) (88) (43)
---------- --------- --------
Provision charged to operations ................................ 90 355 360
--------- --------- --------
Allowance for loan losses, end of period ....................... $ 1,799 $ 1,717 $ 1,450
========= ========= ========
Ratios:
Net charge-offs to average loans outstanding (2) ............... .03% 0.08% 0.04%
Net charge-offs to loans, end of period (2) .................... .03% 0.07% 0.04%
Allowance for loan losses to average loans outstanding ......... 1.54% 1.57% 1.46%
Allowance for loan losses to loans, end of period .............. 1.50% 1.44% 1.37%
Allowance for loan losses to non-performing loans .............. 768.80% 933.15% 384.62%
- ----------
(1) Includes loans held for sale.
(2) Information is annualized for the period ended March 31, 1998.
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the periods indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of an allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses
in any other category.
29
Allocation of the Allowance for Loan Losses
At December 31,
------------------------------------------------
At March 31, 1998 1997 1996
------------------------ ------------------------ -----------------------
% of Loans to % of Loans to % of Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
-------- --------------- -------- --------------- -------- --------------
(Dollars in thousands)
Commercial and Commercial
Real Estate (1) ...................... $1,111 53% $ 989 52% $ 696 54%
Construction .......................... 14 2% 15 3% 10 1%
Residential ........................... 132 21% 134 22% 123 23%
Home equity ........................... 200 16% 199 17% 157 15%
Loans held for sale (2) ............... -- 2% -- 0% -- 0%
Consumer .............................. 162 6% 200 6% 161 7%
Unallocated ........................... 180 -- 180 -- 303 --
------ -- ------ -- ------ --
Total allowance for loan losses..... $1,799 100% $1,717 100% $1,450 100%
====== === ====== === ====== ===
- ----------
(1) Commercial and commercial real estate loans have been combined in
allocating the allowance for loan losses as the Bank utilizes an internal
risk rating system for these loans on a consolidated basis.
(2) No allowance has been allocated to loans held for sale as these loans are
sold without recourse within approximately ten days after the loan closing
resulting in minimal loan loss risk to the Bank.
Investment Activities
The Company's investment portfolio serves three important functions:
first, it enables the adjustment of the balance sheet's sensitivity to changes
in interest rate movements; second, it provides an outlet for investing excess
funds; and third, it provides liquidity. The investment portfolio is structured
to maximize the return on invested funds within conservative risk guidelines.
The composition of the investment portfolio as of March 31, 1998 was 54.3%
U.S. Treasury notes and U.S. Government agencies and corporations, 40.1%
mortgage-backed securities and collateralized mortgage obligations and 5.6%
other securities. The comparable distributions for December 31, 1997 and 1996
were 54.9% and 47.5% U.S. Treasury notes and U.S. Government agencies and
corporations, 39.7% and 34.6% mortgage-backed securities and collateralized
mortgage obligations and 5.4% and 17.9% other securities, for the respective
periods.
The following table sets forth the composition of the Company's investment
portfolio at the dates indicated:
Investment Securities Portfolio Composition
At December 31,
-------------------------
At March 31,
1998 1997 1996
------------- ----------- -----------
(Dollars in thousands)
Securities held to maturity (1):
Mortgage-backed securities and collateralized mortgage obligations ...... $ 1,740 $ 1,962 $ 3,123
======== ======== ========
Securities available for sale (2):
U.S. Treasury securities ................................................ $ 22,134 $ 21,043 $ 18,991
U.S. Government agencies and corporations ............................... 2,606 3,579 497
Mortgage-backed securities and collateralized mortgage obligations ...... 16,522 15,851 11,088
State and local government debt securities .............................. 1,402 1,402 --
U.S. Government and agency money market funds ........................... 285 166 6,548
Other securities (3) .................................................... 890 823 767
-------- -------- --------
Total ................................................................. $ 43,839 $ 42,864 $ 37,891
======== ======== ========
- ----------
(1) Carried at amortized cost.
(2) Carried at estimated market value.
(3) Includes FHLB stock, Federal Reserve stock and FNMA stock.
30
Maturity Schedule of Securities Available for Sale
At December 31, 1997
(At Market Value)
One year Over one year
or less through 5 years
---------------------- ----------------------
Weighted Weighted
Amount Yield (1) Amount Yield (1)
---------- ----------- ---------- -----------
(Dollars in thousands)
U.S. Treasury securities ....... $ 9,985 5.93% $11,058 6.04%
U.S. Government agencies
and corporations .............. 2,573 5.75% 1,006 5.89%
Mortgage-backed securities
and collateralized
mortgage obligations .......... -- -- 1,213 6.01%
States and local
government debt
securities .................... 1,300 5.50% -- --
U.S. Government and
agency money market
funds ......................... 166 5.47% -- --
Other securities ............... 823 6.29% -- --
------- ---- ------- ----
Total ........................ $14,847 5.87% $13,277 6.03%
======= ==== ======= ====
Over 5 years
through 10 years Over 10 years Total
-------------------- -------------------- ---------------------
Weighted Weighted Weighted
Amount Yield (1) Amount Yield (1) Amount Yield (1)
-------- ----------- -------- ----------- ---------- ----------
(Dollars in thousands)
U.S. Treasury securities ....... -- -- -- -- $21,043 5.99%
U.S. Government agencies
and corporations .............. -- -- -- -- 3,579 5.79%
Mortgage-backed securities
and collateralized
mortgage obligations .......... 5,670 6.30% 8,968 6.32% 15,851 6.29%
States and local
government debt
securities .................... 102 5.50% -- -- 1,402 5.50%
U.S. Government and
agency money market
funds ......................... -- -- -- -- 166 5.47%
Other securities ............... -- -- -- -- 823 6.29%
----- ---- ----- ---- ------- ----
Total ........................ $5,772 6.28% $8,968 6.32% $42,864 6.07%
====== ==== ====== ==== ======= ====
- ----------
(1) Yield is adjusted for the effect of tax-exempt securities assuming a
Federal tax rate of 34%.
Maturity Schedule of Securities Held to Maturity
At December 31, 1997
(At Amortized Cost)
One year Over one year Over 5 years
or less through 5 years through 10 years Over 10 years Total
------------------- ------------------- ------------------- ------------------- ------------------
Weighted Weighted Weighted Weighted Weighted
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- ---------- -------- ---------- -------- ---------- -------- ---------- -------- ---------
(Dollars in thousands)
Mortgage-backed securities
and collateralized
mortgage obligations ......... $866 6.00% -- -- $1,000 5.91% $96 6.00% $1,962 5.94%
Deposit Activities
Deposits are the major source of the Bank's funds for lending, investing
and for other general business purposes. In addition to deposits, the Bank
derives funds from interest payments, loan principal payments, loan sales and
funds from operations. Scheduled loan repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments are
significantly influenced by general market interest rates and economic
conditions. Borrowings are also used on a short-term basis to compensate for
reductions in the availability of other sources of funds, or borrowings may be
used on a longer term basis to support expanded lending or investment
activities.
Deposits are attracted principally from within the Bank's primary market
area through the offering of a broad variety of deposit products, including
checking accounts, money market accounts, savings accounts, certificates of
deposit (including jumbo certificates in denominations of $100,000 or more) and
retirement savings plans. The Company has not sought brokered deposits and does
not intend to do so in the future.
Maturity terms, service fees and withdrawal penalties are established by
the Bank and reviewed on a periodic basis. The determination of rates and terms
is predicated on funds acquisition and liquidity requirements, rates paid by
competitors, growth goals and federal regulations.
Total average deposits were $141.7 million for the three months ended
March 31, 1998, compared to $132.4 million for December 31, 1997 and $116.3
million in December 31, 1996, representing increases of $9.3 million or 7% in
1998
31
and $16.1 million or 13.8% in 1997. The increase in deposits is primarily due
to the growth in savings accounts. Savings accounts represent 28%, 25% and 18%
of the total deposits for the periods ended March 31, 1998, December 31, 1997
and 1996, respectively. The Bank introduced a passbook savings product at a
premium interest rate in 1997. The Bank continues to market this product
aggressively. The introduction of new products and the continued focus on
quality customer service contributed to strong deposit growth. The Bank
continues to develop consumer and commercial deposit relationships through
referrals and additional contacts within its market area.
The following table sets forth the average balances and weighted average
rates for the Bank's categories of deposits for the periods indicated:
Average Deposit Balances and Rates
Year Ended December 31,
--------------------------------
Three Months Ended
March 31, 1998 1997
-------------------------------- --------------------------------
% of % of
Average Average Total Average Average Total
Balance Rate Deposits Balance Rate Deposits
----------- --------- ---------- ----------- --------- ----------
(Dollars in thousands)
Non-interest checking ...................... $ 21,974 -- 16% $ 20,631 -- 15%
Interest checking and money market ......... 23,346 2.29% 16% 23,794 2.29% 18%
Savings .................................... 40,403 4.51% 28% 32,717 4.40% 25%
Certificates of deposit .................... 55,997 5.68% 40% 55,306 5.68% 42%
-------- -- -------- --
Total .................................... $141,720 100% $132,448 100%
======== === ======== ===
Year Ended December 31,
-------------------------------
1996
-------------------------------
% of
Average Average Total
Balance Rate Deposits
----------- --------- ---------
(Dollars in thousands)
Non-interest checking ...................... $ 19,274 -- 16%
Interest checking and money market ......... 22,796 2.18% 20%
Savings .................................... 21,090 4.08% 18%
Certificates of deposit .................... 53,094 5.78% 46%
-------- --
Total .................................... $116,254 100%
======== ===
The Bank does not have a concentration of deposits from any one source,
the loss of which would have a material adverse effect on the business of the
Bank. Management believes that substantially all the Bank's depositors are
residents in its primary market area.
The following table summarizes at March 31, 1998 and December 31, 1997 the
Bank's certificates of deposit of $100,000 or more by time remaining until
maturity:
March 31, 1998 December 31, 1997
---------------- ------------------
(Dollars in thousands)
Maturity Period:
Less than three months ........................ $2,796 $ 3,447
Over three months through six months .......... 1,665 2,454
Over six months through twelve months ......... 2,844 1,738
Over twelve months ............................ 2,427 2,883
------ -------
Total ....................................... $9,732 $10,522
====== =======
Return on Equity and Assets
The following table sets forth the Company's performance ratios for the
periods indicated:
At December 31,
-----------------------
At March 31,
1998 (1) 1997 1996
------------- ---------- ----------
Return on average assets ..................... 0.89% 0.86% 0.78%
Return on average equity (2) ................. 13.69% 13.63% 12.28%
Dividend payout ratio (Common Stock) ......... 12.73% 3.23% --
Average equity to average assets (2) ......... 6.47% 6.34% 6.33%
- ----------
(1) Annualized.
(2) Excludes unrealized gain or loss on securities available for sale net of
taxes.
Short-Term Borrowings
The borrowings utilized by the Bank primarily have been securities sold
under agreements to repurchase. Other short-term borrowings generally include
federal funds purchased, FHLB advances, treasury, tax and loan deposits and
interest-bearing demand notes due to the U.S. Treasury, which are repaid upon
notification by the U.S. Treasury.
32
The following table sets forth certain information regarding securities
sold under agreement to repurchase for the dates indicated:
At or for the
At or for the Year Ended December 31,
Three Months Ended -------------------------------
March 31, 1998 1997 1996
------------------- ------------ -------------
Average balances outstanding .................... $ 13,033 $ 11,931 $ 11,770
Maximum amount outstanding at any month-end
during the period .............................. $ 13,554 $ 12,991 $ 14,070
Balance outstanding at end of period ............ $ 13,554 $ 11,897 $ 12,164
Weighted average rate during the period ......... 4.39% 4.28% 4.42%
Weighted average rate at end of period .......... 4.46% 4.30% 4.29%
Capital and Liquidity
The Company and the Bank actively monitor their compliance with regulatory
capital requirements. The elements of capital adequacy standards include strict
definitions of core capital and total assets, which include off-balance sheet
items such as commitments to extend credit. Under the risk-based capital method
of capital measurement, the ratio computed is dependent on the amount and
composition of assets recorded on the balance sheet and the amount and
composition of off-balance sheet items, in addition to the level of capital.
Shareholders' equity was $11.5 million at March 31, 1998 or 6.55% of total
assets compared to $11 million or 6.14% of total assets at December 31, 1997.
At March 31, 1998, the Tier 1 leverage ratio was 6.38%, the Tier 1 risk-based
capital ratio was 10.25% and the total risk-based capital ratio was 11.78%, all
in excess of regulatory guidelines for a "well capitalized" financial
institution.
Liquidity defines the ability of the Company and the Bank to generate
funds to support asset growth, meet deposit withdrawals and other funds
reductions. The Bank's liquidity needs are met primarily by Federal Funds sold,
short-term investments, deposits and the generally predictable cash (primarily
loan amortization and prepayments) from the Bank's assets. The Bank also has
the ability to borrow from the FHLB and correspondent banks to supplement its
liquidity needs. The Company's liquidity needs and funding are provided through
cash dividends and tax payments from the Bank. The Company has agreed not to
increase its borrowings without approval from the Federal Reserve.
Accounting and Financial Reporting Issues
In 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) No. 98-5, "Reporting on the Costs of Start-Up
Activities." The SOP requires costs of start-up activities to be expensed as
incurred. The SOP is effective for years beginning after December 15, 1998.
Adoption of the SOP is expected to have no effect on net income for 1999.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is effective for years beginning after December 31, 1997. This
statement requires a company to disclose certain income statement and balance
sheet information by operating segment. Since the Company's operations include
only its banking activities, no additional disclosure standards will be imposed
on the Company.
Year 2000 Risk Assessment and Action Plan
It is anticipated that many computer applications will not operate as
intended beyond the year 1999 without modifications. This is due to the
practice of using only two digits instead of four digits to identify a year in
the date field, for example: "97" instead of "1997." On January 1, 2000, it is
possible that some systems with time sensitive software programs will recognize
the year as "00" and incorrectly interpret it as "1900."
The Federal Reserve Board has identified six risk categories of particular
concern to financial institutions. Of these six, emphasis is given to the areas
of operational risk, legal risk, and reputation risk. The Company has adopted a
plan to minimize the Year 2000 risk. The plan includes the formation of a Year
2000 Committee, which has been formed and charged with implementing a five
phase plan of awareness, assessment, renovation, validation and implementation
for all systems and equipment used in the day to day operations of the Company
and the Bank. The timeline for the Committee calls for completion of the
awareness, assessment and renovation phases by December 31, 1998; testing and
validation should be in process by that time as well.
33
Most of the data processing for the Company and the Bank is outsourced
pursuant to an agreement with M&I Data Services, a Division of Marshall &
Ilsley Corporation ("M&I Data"), a provider of data processing services to the
banking industry. In addition, item processing by the Company and the Bank is
performed by Financial Institution Services Corporation ("FISC"), a provider of
item processing to numerous Maine financial institutions. The Northern Trust
Company also processes data for the Bank's Trust and Investment Services
Department. M&I Data, FISC and the Northern Trust Company have each informed
the Company that each is implementing changes to accommodate systems for the
Year 2000. Although the Company will continue to monitor the progress of M&I
Data, the Northern Trust Company and FISC in addressing Year 2000 compliance
issues, there can be no assurance that these companies will be successful in
addressing such issues. Therefore, the potential liabilities and costs
associated with Year 2000 compliance cannot be estimated with certainty at this
time.
Regardless of the Company's systems, there can be no assurance that the
Company will not be adversely affected by the failure of others to become Year
2000 compliant. Such risks may include potential losses related to loans made
to third parties whose businesses are adversely affected by the Year 2000
issue, the contamination or inaccuracy of data provided by non-Year 2000
compliant third parties and business disruption caused by the failure of
service providers, such as security and data processing companies, to become
Year 2000 compliant. Because of these uncertainties, there can be no assurance
that the Year 2000 issue will not have a material financial impact in any
future period. See "Risk Factors -- Year 2000 Compliance"
Impact of Inflation and Changing Prices
The financial statements and related financial data concerning the Company
presented in this Prospectus have been prepared in accordance with generally
accepted accounting principles, with 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. The primary
impact of inflation on the operations of the Company is reflected in increased
operating costs. Unlike most industrial companies, virtually all of the assets
and liabilities of a financial institution are monetary in nature. As a result,
changes in interest rates have a more significant impact on the performance of
a financial institution than do the effects of changes in the general rate of
inflation and changes in prices. Interest rates do not necessarily move in the
same direction or in the same magnitude as the prices of goods and services.
34
BUSINESS
Organization and Operations
The Company
The Company, a Maine corporation organized in 1992, is a registered bank
holding company under the BHCA and is headquartered in Bangor, Maine. In
October 1992, the Company became the bank holding company for the Bank and
holds 100% of the outstanding Bank stock. The Company, through its ownership of
the Bank, is engaged in a general commercial and retail banking business, along
with trust and investment services.
The Company is an entity legally separate and distinct from the Bank. The
only sources of the Company's income and cash flow are any dividends paid on
the Bank Stock, tax benefits received by the Company and earnings from amounts
deposited by the Company in interest bearing accounts or investments. The
payment of dividends by the Bank, the payment of dividends by the Company and
many other aspects of the operations of the Company and the Bank are subject to
regulation and control by various regulatory agencies.
Merrill Merchants Bank
The Bank was established in 1992 to purchase certain assets and assume
certain liabilities of certain branch banking offices formerly held by a large
out-of-state bank. The Bank is headquartered in Bangor, Maine, which is located
76 miles north of Augusta, Maine, the State Capital. Presently, the Bank
maintains seven Branch Banks in five area communities. The three Bangor offices
provide citywide convenience and are complemented by: (i) an office in Brewer,
Bangor's sister city located on the eastern shore of the Penobscot River; (ii)
a branch in Orono, home of the University of Maine, the State's flagship
campus; (iii) a branch in Pittsfield, a small rural town of 4,000 people
located about 30 miles southwest of Bangor; and (iv) a new supermarket branch
in Newport, a small town neighboring Pittsfield, located at the juncture of
Interstate 95 and Route 2 approximately 25 miles southwest of Bangor. In
addition to the Branch Banks, the Bank has seven ATM locations in its primary
market area.
From its seven banking office locations, the Bank conducts a general
commercial and retail banking business which includes the acceptance of
deposits from the general public and the application of those funds to the
origination of a variety of commercial loans, commercial and residential real
estate loans, and consumer loans. The Bank also provides trust and investment
services. As of March 31, 1998, the Company had total assets of $175.8 million,
loans net of allowances of $118 million, total deposits of $140.4 million and
shareholders' equity of $11.5 million. Unless the context otherwise requires,
references herein to the Company shall include the Company and the Bank, on a
consolidated basis after October, 1992.
The Bank's loan portfolio has grown over the last two years, while non
performing loans as a percentage of total loans were at .20% and .15% at March
31, 1998 and December 31, 1997, respectively, both percentages being below the
Bank's national peer group average of .68%. The Bank has also established a
Trust and Investment Services Department, which has grown since inception in
April 1994 to $98.5 million in assets as of March 31, 1998. The Bank offers its
customers the option of conducting many of their banking transactions via an
automated telephone banking system and through the use of the customer's
personal computer.
The Bank's income is derived principally from interest and fees earned in
connection with its lending activities, interest and dividends on investment
securities, short-term investments, and other services. Its main expenses are
the interest paid on deposits and operating expenses. The Bank's deposits are
insured up to the applicable limits by the FDIC.
History
Merrill Merchants Bank was established in 1992 by a group of area business
people who recognized the need for a community bank in the Greater Bangor area.
Acquisitions and consolidations within the banking industry over the preceding
15 years had resulted in two very large out of state banks, a large Maine-based
stock savings bank, and a local, well established mutual savings bank, all
competing for market share in the Greater Bangor area. Management believed that
changes in management, the loss of local boards of directors, and the loss of
local decision-making had resulted in increased customer dissatisfaction and
limited local banking options.
When one of the large out of state banks was forced by banking regulators
to divest certain assets and liabilities in the Bangor market, the organizers
of Merrill Merchants Bank set a plan in motion to form a community bank. The
Bank drew its management team from among the ranks of local bankers formerly
associated with The Merrill
35
Trust Company and Merchants National Bank. These individuals had significant
banking experience, and shared a common vision with investors who wanted to
offer local decision-making and personal banking services. After acquiring the
divested assets and related liabilities, the Bank opened for business offering
consumer and commercial banking services on October 19, 1992.
Community Banking Strategy
The Bank was formed by a group of local business people who after
observing a series of large bank acquisitions in the region, believed that the
remaining banks were no longer servicing the needs of the Bangor and central
Maine area. To fill this need, the Bank has worked to position itself as a
service-oriented community bank. The Bank is staffed by experienced management
personnel, most of whom reside in the area and who know the Bank's customers
and are able to provide personalized service for these customers. This strategy
has been deliberately developed and implemented at a time when consolidation
within the industry has resulted in an increasing depersonalization among the
larger institutions. The Bank has focused on fostering banking relationships
with customers which include multiple financial services that range from basic
checking to investment management accounts.
As part of this strategy, each of the Company and the Bank has attracted
local business people to serve on its Board of Directors, each of whom actively
promote the Bank in the community. In addition, the Company has obtained
additional investments in and support for the Bank from local investors, in an
effort to broaden the community's awareness of the Bank and attract new
business. By continuing to follow the original goal to have a consumer service
oriented, locally based bank, the Bank has experienced growth since its
inception. Management intends to continue the Bank's community banking strategy
while at the same time attempting to increase its market share.
The Bank is active in small business lending and has earned the
designation "Preferred Lender" by the Small Business Administration. The Bank
is the only community bank in the State to have been awarded this distinction.
The Bank is also active in residential mortgage lending, and a number of
products, including government insured loan programs, are available to meet the
demands of both the consumer and the commercial market. The Company's
affiliations with M&I Data and FISC have enabled the Bank to deliver high
technology products such as banking by personal computer and check imaging
while maintaining a local, friendly flavor in its Branch Banks. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Risk Assessment and Action Plan." This same strategy
has been implemented by the Trust and Investment Services Department which is
also serving many clients who appreciate the personal attention and custom
service provided locally and the depository custody services and investment
advisory services provided by the Bank through its affiliation with The
Northern Trust Company, which supports those activities.
Market Area
The Bank's primary market area, Greater Bangor, is at the center of
commercial activity for the northeastern and central region of the State of
Maine. Nearly 100,000 people live in the Bank's primary market area. The Bank
is part of a strategic link to Canada as Bangor is the closest U.S.
metropolitan area to Eastern Quebec and the Canadian Maritime Provinces. Many
regional and national companies site their operations in the Bangor area.
Services, trades, manufacturing, and government are the four largest categories
of employment in the metropolitan Bangor region. Bangor is also a healthcare
center for central, eastern and northern Maine. The City is a regional
financial center and is also serviced by several statewide and regional
accounting firms, law firms, insurance companies and security and investment
firms. Bangor is also a hub for government services, with many local, State and
Federal offices located within the City. Bangor is accessible by multiple exits
from Interstate 95, a major interstate highway which transits the Eastern
Seaboard of the United States. Major routes to all regions of the State bisect
Bangor from various directions. Bangor International Airport provides domestic
and international passenger and cargo service for a significant portion of the
State. The Bank has targeted this same area as its focus for possible expansion
of the franchise. Any such expansion would occur with carefully selected de
novo branching or taking advantage of opportunities created as the large
regional banks consolidate and sell or close branches.
36
Lending Activities
The Bank has experienced loan growth since it was established in October
1992. One of the primary factors has been an experienced local lending group.
Many commercial lending relationships have been developed by the Bank as a
result of long standing business associations over many years. Many of the
Bank's officers have held lending positions with Bangor area banks for in
excess of fifteen years. Management believes that these relationships have been
not only instrumental in loan growth but in developing quality customers.
The Company strives to provide a full range of financial products and
services to small and medium-sized businesses and consumers. The Bank has an
established Officer Loan Committee which meets weekly to review and approve
credits and a Director Loan Committee which meets monthly, or as necessary, to
approve credits in excess of $250,000. The Bank's loan mix is subject to the
discretion of its Board of Directors and the demands of the local marketplace.
Management has established relationships with local area legal and accounting
professionals to cultivate referrals by hosting informational meetings at the
Bank. Asset quality is a top priority for the Bank and a significant
consideration in business development efforts.
Commercial and Commercial Real Estate Lending
Loans in this category principally include loans to service, retail,
medical, wholesale and light manufacturing businesses. Commercial loans are
made based on the management, financial strength and repayment ability of the
borrower. As of March 31, 1998, commercial and commercial real estate loans
represented the largest class of loans at $63.3 million or 53% of total loans.
See "Risk Factors -- Impact on Bank's Loan Portfolio Due to Changes in Real
Estate Values." The Bank participates in government guaranteed lending
including programs with FAME and RD, and as of March 31, 1998, had originated
the second highest number of SBA loans in the State of Maine for their current
fiscal year. The Bank was recognized by the Coleman Report as being one of the
top 500 SBA 7(a) lenders in the country for 1997. The Bank is the only
community bank in the state to have been awarded designation as a Preferred
Lender by the SBA.
The Bank's commercial real estate loans are ordinarily made at variable
rates of interest, and amortized up to fifteen years, although some loans are
originated for terms of five years or less at fixed rates of interest. A broad
range of short-to-medium term commercial loans, both collateralized and
uncollateralized are made available to businesses for working capital
(including inventory and receivables), business expansion (including
acquisition and development of real estate and improvements) and the purchase
of equipment and machinery. The purpose of a particular loan generally
determines its structure. The commercial real estate loans are secured by a
variety of properties, including buildings occupied by small-to-medium sized
businesses, apartment complexes and non-owner/user office and retail business.
The Bank's commercial loans primarily are underwritten in the Bank's
primary market area on the basis of the borrowers' ability to service such debt
from income. Many of these loans involve lines of credit written at variable
rates of interest on a demand basis or for terms not exceeding one year, while
others are written on a term basis typically for up to five years, generally at
variable rates of interest. As a general practice, the Bank takes as collateral
a security interest in any available real estate, equipment or other chattel
although such loans may also be made on an uncollateralized basis.
Collateralized working capital loans are primarily collateralized by short term
assets whereas term loans are primarily collateralized by long term assets. As
additional security for commercial loans, the Bank normally requires the
personal guarantee of the principals and may require financial performance
covenants.
Commercial loans generally present a higher level of risk than one to four
family residences due to the concentration of principal in a limited number of
loans and borrowers, the effect of general economic considerations in
commercial properties and the increased difficulty of evaluating and monitoring
these types of loans. In addition, the repayment of loans secured by commercial
real estate is typically dependent on the successful operation of the related
business activities.
Residential Mortgage Lending
The Bank endeavors to meet the needs of its individual customers by making
residential mortgage loans. Residential loans include the origination of
conventional mortgages, residential lot loans and residential acquisition,
development and construction loans for the purchase of construction of
single-family housing or lots. The Bank offers fixed and adjustable rate
mortgages ("ARMs"). With these loans, the real estate normally constitutes the
primary collateral.
37
Loans in this category include both portfolio loans which are held by the
Bank until maturity and loans which are sold on the secondary market. In the
case of secondary market loans, all servicing rights are retained by the Bank
which maintains the service connection to the customer. The Bank participates
in government guaranteed programs and has also helped coordinate several
innovative programs including a partnership with Penquis Community Action
Program in their "Own Me" program which assists low income women in the
purchase of a home, and housing workshops for the hearing impaired.
As of March 31, 1998, residential loans accounted for a total of $27
million representing 22% of total loans. See "Risk Factors -- Impact on Bank's
Loan Portfolio Due to Changes in Real Estate Values." The Bank's secondary
market servicing portfolio stands at $40 million.
The Bank offers one-year ARMs with rate adjustments tied to the weekly
average rate of U.S. Treasury securities adjusted to a constant one-year
maturity with specified minimum and maximum interest rate adjustments. The
interest rates on a majority of these mortgages are adjusted yearly with
limitations on upward adjustments of 2% per adjustment period and 6% over the
life of the loan. The Bank generally charges a higher interest rate if the
property is not owner-occupied. It has been the Bank's experience that the
proportion of fixed-rate and adjustable-rate loan originations depends in large
part on the level of interest rates. As interest rates fall, there is generally
a reduced demand for ARMs and, as interest rates rise, there is generally an
increased demand for ARMs.
Fixed and adjustable rate mortgage loans collateralized by single family
residential real estate generally have been originated in amounts of no more
than 80% of appraised value. The Bank may, however, lend up to 95% of the value
of the property collateralizing the loan. In the case of certain mortgage
loans, the Bank will procure private mortgage insurance to reduce credit risk.
The Bank in most cases requires title, fire and extended casualty insurance to
be obtained by the borrower, and, where required by applicable regulations,
flood insurance. The Bank maintains its own errors and omissions insurance
policy to protect against loss in the event of failure of a mortgagor to pay
premiums on fire and other hazard insurance policies. Although the contractual
loan payment period for single family residential real estate loans is
generally for a 15 to 30 year period, such loans often remain outstanding for
significantly shorter periods than their contractual terms. The Bank charges no
penalty for prepayment of mortgage loans. Mortgage loans originated by the Bank
customarily include a "due on sale" clause giving the Bank the right to declare
a loan immediately due and payable in the event, among other matters, that the
borrower sells or otherwise disposes of the real property subject to a
mortgage. In general, the Bank enforces due on sale clauses.
Home Equity Lending
The Bank originates home equity loans on a fixed and variable interest
rate basis. At March 31, 1998, fixed rate loans totaled $10 million and
variable rate loans amounted to $9.7 million. Fixed rate loans are for terms of
5 to 10 years with monthly amortization required and interest rates ranging
from 8.5% to 12.5%. Interest rates on variable rate loans are 1.50% to 2.00%
over the prime interest rate. These home equity loans are generally secured by
a second mortgage on the principal residential property.
Consumer and Other Lending Activities
Consumer loans made by the Bank have included home improvement,
automobile, boat and recreation vehicle loans, credit cards and overdraft
protection accounts. The Bank's consumer loan portfolio consists primarily of
loans to individuals for various consumer purposes. A majority of these loans
are for terms of less than 60 months and although generally collateralized by
liens on various personal assets of the borrower may be made uncollateralized.
Consumer loans are made at fixed and variable interest rates.
Consumer loans are attractive to the Bank because they typically have a
shorter term and carry higher interest rates than that charged on other types
of loans. Consumer loans, however, do pose additional risks of collectability
when compared to traditional types of loans granted by commercial banks such as
residential mortgage loans. In many instances, the Bank is required to rely on
the borrower's ability to repay since the collateral may be of reduced value at
the time of collection. Accordingly, the initial determination of the
borrower's ability to repay is of primary importance in the underwriting of
consumer loans.
Consumer loans totaled approximately $7.2 million and represented 6% of
the Bank's loan portfolio at March 31, 1998. Such loans bear interest at fixed
rates ranging from 5.5% to 18%.
M&M Joint Venture
In 1996, the Bank and MSB Leasing, Inc. (a subsidiary of Machias Savings
Bank, a state chartered mutual savings bank) formed M&M Consulting Limited
Liability Company ("M&M"), a jointly owned subsidiary. M&M
38
was established to provide a review of various internal bank risk control
functions. M&M, which has a former FDIC examiner as one of its principals,
provides the Bank, Machias Savings Bank and approximately 17 other financial
institutions in Maine access to experienced individuals who are highly trained
in loan review, regulatory compliance, training and internal auditing in a
cost-efficient and timely manner.
Loan From Marshall & Ilsley Bank
In October 1992, the Company obtained the M&I Loan from M&I Bank. As of
March 31, 1998, the principal amount outstanding thereunder was approximately
$2.7 million. The Company has the option of selecting one of the following
annual interest rates every six months: (i) Prime Rate, (ii) the six-month
Treasury Rate plus 1.75% or (iii) LIBOR plus 1.5%. Interest payments on the
unpaid principal are due quarterly. The Company pledged all of the Bank Stock
as collateral for the M&I Loan. See "Risk Factors -- Risk of Foreclosure on
Bank Stock by Marshall and Ilsley Bank."
The M&I Loan documentation imposes significant restrictions on the
operations of the Company and the Bank. The Company may not engage in the
following actions without the written approval of M&I Bank:
[bullet] pay the principal of its Debentures (M&I Bank has also reserved the
right to prohibit interest payments on the Debentures);
[bullet] repurchase or redeem any of its Common Stock from its directors,
executives or other control group members;
[bullet] incur additional debt;
[bullet] make a guarantee or incur contingent liabilities;
[bullet] execute a merger or acquisition or a transfer of substantially all
of the assets of the Company or the Bank; or
[bullet] sell the Bank (or any interest therein) or acquire any banks or
other subsidiaries.
Economic Environment
General
The monetary policies of regulatory authorities, including the Federal
Reserve Board, have a significant effect on the operating results of bank
holding companies and their subsidiary banks, including the Company and the
Bank. The Federal Reserve Board regulates the national supply of bank credit.
Among the means available to the Federal Reserve Board to regulate such supply
are open market operations in U.S. government securities, changes in the
discount rate on depository institution borrowings and changes in reserve
requirements against depository institution deposits. These means are used in
varying combinations to influence growth and the distribution of bank loans,
investments and deposits, and their use may affect interest rates charged on
loans or paid for deposits.
Effect of Regional Economies
Every bank is affected by general economic conditions beyond its control,
such as inflation, recession, unemployment and other factors. A depressed
economy in the early 1990's in the United States, and in the northeastern
United States in particular, caused financial hardship in the region in which
the Bank's branches operate. However, this same region has achieved modest
growth over the past four years as part of the general recovery of the whole
Northeast region from its recession. In addition, the Company believes that
property values in the Bank's market area have generally been more stable than
in southern Maine and the New England states as a whole. Should an unfavorable
trend in real estate values reappear, the Company believes that the Bank's loan
portfolio should be sufficiently mature to provide adequate loan to value
margins and cash flow coverage. The Company and the Bank endeavor to service
the Bank's customers in a prudent and sound manner in light of regional and
national economic conditions. See "Risk Factors -- Dependence on Economic
Conditions."
Competition
The financial services landscape has changed considerably over the past
five years in the Bank's primary market area, Greater Bangor. Two large out of
state banks have continued to experience local change as a result of mergers
and acquisitions at the regional and national level. The State's largest
Maine-based bank, with a strong presence in the local market, has also
experienced considerable change as it has acquired greater market share through
acquisitions in-state and out-of-state. A large locally-based bank has recently
announced plans to expand its line
39
of financial services and to acquire an extensive branch network beyond the
local market. Credit unions have continued to expand their membership and the
scope of banking services offered. Non-banking entities such as brokerage
houses, mortgage companies and insurance companies are offering very
competitive products. Many of these entities and institutions have resources
substantially greater than those available to the Bank and are not subject to
the same regulatory restrictions as the Company and the Bank. Interstate
banking also could intensify competition if out of state institutions
increasingly take advantage of recent legislation liberalizing interstate
banking and branching opportunities in Maine. See "Risk Factors -- Risks
Related to Competition."
Competitive Strategy
The Bank's primary geographic market area is Northeastern and Central
Maine. In recent years, due to more liberal interstate banking laws, this area
has seen an increase in acquisitions of locally-owned Maine-based banks,
including Maine-based banks in the Bank's primary market area, by non-local
entities. It has been the observation of the Company's management that these
acquisitions often result in customer dissatisfaction as the decision-making on
loans, marketing, and other aspects of the acquired banks' businesses are
shifted from local bank management possessing independent decision-making power
to management operating under policies and guidelines from corporate
headquarters in other states. The Company believes that this shift often
results in delayed decision-making by management which is not familiar with the
needs of the acquired bank's customers or the communities they serve.
Individuals and small businesses are particularly sensitive to these changes
since they may not fit the product parameters established by the larger banks.
Thus, the Company believes that there will continue to be a need for a
bank in the Bank's primary market area with local management having
decision-making power and emphasizing loans to small and medium-sized
businesses and to individuals. The Bank has concentrated on extending business
loans to such customers in the Bank's primary market area and to extending
trust services to clients with accounts of all sizes. The Bank's management
also makes decisions based upon, among other things, the knowledge of the
Bank's employees regarding the communities and customers in the Bank's primary
market area. The individuals employed by the Bank, to a large extent, reside
near the Branch Banks and thus are generally familiar with the Branch Banks'
communities and customers, which is important in local decision-making and
allows the Bank to respond to customer questions and concerns on a timely basis
and fosters quality customer service.
The Trust and Investment Services Department of the Bank has taken
advantage of opportunities created as the larger banks have altered their
personal service commitment to clients not meeting established account
criteria. The Bank is able to offer a comprehensive array of trust and
investments services to individuals, businesses, non-profit and municipalities
of varying assets size and to provide the highest level of personal service.
The staff includes attorneys as well as investment and employee benefits
professionals with trust and banking experience.
The Bank has worked and will continue to work to position itself to be
competitive in its market area. The Bank's ability to make decisions close to
the marketplace, management's commitment to providing quality banking products,
the caliber of the professional staff, and the community involvement of the
Bank's employees are all factors affecting the Bank's ability to be
competitive. If the Company and the Bank are unable to compete successfully,
however, the business and operations could be adversely affected. See "Risk
Factors -- Risks Related to Competition."
Employees
As of March 31, 1998, the Bank had a total of 86 full-time equivalent
employees. None of the employees of the Bank are covered by a collective
bargaining agreement. The Bank believes that its employee relations are good
and has undertaken several programs to ensure staff development, including
education programs at various schools of banking. Other options available to
employees include tuition reimbursement for college and graduate school
programs, a college scholarship program for the children of employees and a
variety of programs designed to promote good health and overall well being.
The Bank believes that stock ownership by employees is important in
focusing the attention of employees on the enhancement of shareholder value. In
the past, the Company granted options under the Company's stock option plan to
purchase a total of 451,350 shares of Common Stock (adjusted to reflect the 9:1
Stock Split, the 3% stock dividend, the 5% stock dividend and the 5% stock
dividend in 1996, 1997 and 1998, respectively) to its officers and branch
managers. In January of 1998, the Company granted options to purchase an
aggregate of 27,405 shares of Common Stock under the Company's stock option
plan, of which options to purchase 13,230 shares were granted
40
to the Company's executive officers and options to purchase 14,175 shares were
granted to non-executive employees of the Company, all at an exercise price of
$6.77 per share (adjusted to reflect the 9:1 Stock Split and the 5% stock
dividend in 1998). On March 31, 1998, the Company granted options under the
Company's stock option plan to all Bank employees (excluding officers and
branch managers) at an exercise price of $6.87 per share (adjusted to reflect
the 9:1 Stock Split). For employees who had achieved two (2) years of
employment with the Bank by March 1, 1998, these options vest on March 2, 1999
and may not be exercised after May 26, 2003. For the remaining employees, the
options vest on March 2, 2000 and may not be exercised after May 26, 2003. Each
employee received an option to purchase 900 shares, for a total of 55,800
shares, each adjusted to reflect the 9:1 Stock Split.
All of these grants complement the 401(k) Plan which was instituted in
1994. See "Management -- Stock Option Plan."
Bank Premises
Over the past five and a half years, the Company has made improvements to
or relocated from nearly all of the properties it acquired in connection with
the Bank's formation. The most significant project being the 1997 two-story
expansion and renovation of its headquarters building at 201 Main Street. This
increased the size of the structure from 8,000 to a total of 17,000 square
feet, and includes a large branch, commercial, trust and administrative offices
as well as a board room and two conference rooms. The property is located at
the gateway to downtown Bangor and the enhancements to the site have
significantly improved the area. The site suits the Company's present needs and
further expansion is available on the premises if the needs of the Company
change in the future.
992 Union Street Branch, Bangor
The Bank's most recent project, completed in late 1997, was the relocation
of this office from a small, outdated facility at 559 Union Street to a new
branch at the Airport Plaza Mall located at 992 Union Street. This branch
includes a spacious lobby, three comfortable offices, a conference room and
kitchen. Adequate parking and convenient access to the multi-lane drive up and
ATM are added benefits.
920 Stillwater Avenue, Bangor
In 1994, the Bank relocated from an office within the Bangor Mall to a
spacious facility located in the CrossRoads Plaza. This office includes the
branch and the Residential Mortgage Department and its operational staff. This
location features a multi-lane drive up and ATM and provides service to another
ATM located inside the Bangor Mall.
366 Wilson Street, Brewer
In 1995, the Company sold the original Brewer branch building on North
Main Street and relocated to the present location. This is a leased facility
which had been recently renovated by another bank. It features a multi-lane
drive-up and ATM and is conveniently located at the center of the Brewer
business district.
69 Main Street, Orono
The Orono branch is also located near the center of town on the first
floor of a former bank building. The Company assumed this lease in 1992 and has
made some cosmetic improvements to the facility since that time. In 1998 an ATM
was installed at the site to complement the existing drive-up services.
27 Main Street, Pittsfield
The Pittsfield branch, which was acquired by the Bank as part of the
start-up, is a historic two story Main Street building with approximately
12,600 square feet of space.
Newport Plaza, Newport
In 1997, the Company opened its first branch in a locally owned
supermarket in Newport. This facility is unlike most supermarket banks in that
it includes a drive-up as well as in-store tellers and loan and customer
service personnel.
Legal Proceedings
The Company and the Bank are periodically parties to or otherwise involved
in legal proceedings arising in the normal course of business, such as claims
to enforce liens, claims involving the making and servicing of real property
loans and other issues incident to their business. Management does not believe
that there is any proceeding
41
threatened or pending against the Company or the Bank which, if determined
adversely, would have a material effect on the business or financial position
of the Company or the Bank.
Service Marks & Trade Names
The Company and the Bank submitted an application to register with the
Trademark Office, the Merrill "Pine Tree" symbol, both used alone and in
combination with the name "Merrill Merchants Bank" on January 5, 1993. On April
29, 1993, the Trademark Office preliminarily refused registration of the
application because, in the opinion of the Trademark Office, the Bank's
application for federal trademark protection of the name "Merrill Merchants
Bank" was confusingly similar to certain registrations. The Company chose not
to appeal this decision. The Bank did, however, previously register the logo
and the name "Merrill Merchants Bank" with the State of Maine, which
registration was filed October 15, 1992.
The Bank has established goodwill in its name and logo. In the event that
the Bank's use of its name and logo in the State of Maine were successfully
challenged, the Bank would be forced to pursue other alternatives, such as
using a similar name or changing the name altogether, each of which could have
a material adverse impact on the Company and the Bank. See "Risk
Factors -- Risks Related to Use of Name; Trademark."
Federal and State Taxation
General
The Company and the Bank file a consolidated federal income tax return on
a fiscal year basis. Consolidated returns have the effect of eliminating
intercompany distributions, including dividends, from the computation of
consolidated taxable income for the taxable year in which the distributions
occur. Banks and bank holding companies are subject to federal income taxes in
the same manner as other corporations. In accordance with an income tax sharing
agreement, income tax charges or credits will be allocated to the Company and
the Bank on the basis of their respective taxable income or loss included in
the consolidated income tax return.
Federal Income Taxation
Although the Bank's income tax liability is determined under provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), which is applicable
to all taxpayers or corporations, Sections 581 through 597 of the Code apply
specifically to financial institutions.
The two primary areas in which the treatment of financial institutions
differ from the treatment of other corporations under the Code are in the areas
of bond gains and losses and bad debt deductions. Bond gains and losses
generated from the sale or exchange of portfolio instruments are generally
treated for financial institutions as ordinary gains and losses as opposed to
capital gains and losses for other corporations, as the Code considers bond
portfolios held by banks to be inventory in a trade or business rather than
capital assets. Banks are allowed a statutory method for calculating a reserve
for bad debt deductions. Based on the asset size of the Bank, it is permitted
to maintain a bad debt reserve calculated on an experience method, based on
charge-offs for the current and preceding five years or a "grandfathered" base
year reserve, if larger.
State and Local Taxation
The Company on a consolidated basis is subject to a separate state
franchise tax in lieu of state corporate income tax. 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.
42
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the Company and Bank, their ages,
and positions with the Company and Bank are set forth below.
Name Age Position with Company Position with Bank
- --------------------------------------- ----- ------------------------- -----------------------------------
William C. Bullock, Jr. ............... 61 Chairman Chairman
Edwin N. Clift ........................ 58 Director, President, Director, President,
Chief Executive Officer Chief Executive Officer
John S. Bacon ......................... 67 None Director
Sara E. Carr .......................... 56 None Vice President,
Compliance Officer
Joseph H. Cyr ......................... 57 Director Director
John R. Graham III .................... 60 None Director
Perry B. Hansen ....................... 50 Director, Secretary Director
Charles W. Hart ....................... 57 None Secretary,
Senior Vice President
Joseph P. Irish ....................... 38 None Director
Deborah A. Jordan ..................... 32 Treasurer Senior Vice President,
Chief Financial Officer, Treasurer
Robert E. Knowles ..................... 64 None Director
William P. Lucy ....................... 39 None Senior Vice President
J. Donald Mackintosh .................. 67 None Director
Jane H. Madigan ....................... 51 None Senior Vice President
Leonard E. Minsky ..................... 70 Director Director
Norman Minsky ......................... 67 Clerk Director, Clerk
George H. Moore, Jr. .................. 52 None Senior Vice President
Frederick A. Oldenburg, Jr., M.D....... 50 None Director
Lloyd D. Robinson ..................... 62 None Director
Susan L. Rush ......................... 41 None Vice President
Joseph Sewall ......................... 76 Director None
Dennis L. Shubert, M.D. ............... 50 Director Director
Susan B. Singer ....................... 48 Director Director
Lynne A. Spooner ...................... 41 None Senior Vice President
Reginald C. Williams, Jr. ............. 53 None Senior Vice President
Harold S. Wright ...................... 74 Director Vice Chairman and Director
William C. Bullock, Jr. has served as Chairman of the Company and the Bank
since its inception. From 1988 to 1989, he was formerly chairman of
Merrill/Norstar Bank, which was a predecessor to Fleet Bank. Prior to the
merger of The Merrill Trust Company ("Merrill Bank") and Norstar Bank of Maine
in 1988, he served as chairman of the board and president of Merrill Bank,
Bangor, and was associated with that company in various capacities from 1969.
Mr. Bullock was also an executive vice president and director of Fleet/Norstar
Financial Group of Providence, Rhode Island, the holding company for
Merrill/Norstar Bank, from 1986 until 1988. Before joining Merrill Bank, Mr.
Bullock served in a number of officer positions for Morgan Guaranty Trust
Company of New York. He is a graduate of Yale University and attended the
graduate school of business at New York University. From 1987 to 1989, Mr.
Bullock was a Class A director of the Federal Reserve Bank of Boston. He
currently serves as a director of a number of Maine businesses including Bangor
Hydro-Electric Company, Bangor, Maine and Eastern Maine Healthcare, Bangor,
Maine.
43
Edwin N. Clift has served as President and Chief Executive Officer of the
Company and the Bank since its inception and he has been involved in
organizational activities for the Company and the Bank on a full-time basis
since April 1992. From 1991 to 1992, he was executive vice president of Machias
Savings Bank, a mutual savings bank in Machias, Maine, where he was responsible
for all functions within the bank as directed by the president and the board of
directors. He has also served as senior vice president and senior divisional
commercial officer at Key Bank, a publicly traded company, where he was
responsible for commercial lending and business development activities. Mr.
Clift began his banking career at The Merrill Trust Company where he was
employed for 24 years with various titles and responsibilities including,
senior vice president and senior administrative officer, responsible for the
overall administration of the bank's branch system. Mr. Clift is a graduate of
Strayer College in Washington, D.C. and the Williams College School of Banking,
and attended the University of Maine. He was recently elected to a three year
term as a Class A director of the Federal Reserve Bank of Boston. He serves as
president of the Independent Community Bankers Association of Maine and is a
director and second vice president of the Maine Bankers Association. Mr. Clift
is chairman of the St. Joseph Healthcare Foundation board of trustees and
public affairs officer for the Maine Committee for Employer Support for the
Guard and Reserve. He is a past president of the Bangor Area Breakfast Rotary
and has served many other economic, civic, and charitable organizations. He is
also a director of Seven Islands Land Company, a privately held company that
manages one million acres of certified forest in Maine.
John S. Bacon has served as a Director of the Bank since 1996. He is
President of Bacon Printing Company, a Bangor-based, family-owned printing
business with which he has been associated since 1948. Mr. Bacon was previously
a director of The Merrill Trust Company. He is a member of Bangor Rotary.
Sara E. Carr has served as Vice President and Compliance Officer of the
Bank since 1992. She was previously employed as the main office manager of
Maine National Bank and its predecessor Merchants National Bank, where she
worked for 26 years. She is a graduate of Williams College School of Banking.
Ms. Carr serves on the Family Self-Sufficiency Committee of the Bangor Housing
Authority.
Joseph H. Cyr has served as a Director of the Company and the Bank since
1992. He has been the owner of John T. Cyr & Sons, Inc., Old Town, Maine, a
privately held charter bus service, since 1967. Mr Cyr has been involved in
that business since 1962 and became the owner in 1967. He was formerly a
director of Norstar Bank in Bangor. He has been active in a number of civic and
charitable organizations including: trustee of Husson College; president of the
Bangor Area Chamber of Commerce; director of St. Joseph Hospital; and director
of the Maine Community Foundation.
John R. Graham III has served as a Director of the Bank since 1992. He has
been the owner and operator of Automatic Distributors, a privately held
wholesale distributor of recreation vehicle parts and accessories and JRG
Properties, which consists of various commercial and residential rental
projects, since 1967.
Perry B. Hansen has been a Director of the Company and the Bank since
1992. He is Chairman and Chief Executive Officer of The Rock Island Bank, Rock
Island, Illinois, and has held those positions since 1985. Prior to that time,
he was the Chief Operating Officer and a director of Brenton First National
Bank, Davenport, Iowa, which was a member of the sixteen bank Brenton Bank
Holding Company.
Charles W. Hart has served as a Senior Vice President and Head of Branch
Administration of the Bank since its inception. He has been involved with the
Company and the Bank since February 1992. From 1989 to 1991, he was vice
president and chief financial officer of Bean & Conquest, Motor Truck & Trailer
and Automotive Realty in Hermon, Maine, privately held related companies
engaged in the sales and service of heavy duty trucks and accessories. From May
1984 through June 1989, he was vice president of Merrill Bank, where he was in
charge of consumer loans at the Merrill Center branch. Mr Hart began his 30
year banking career with Merchants National Bank, which was a predecessor to
Maine National Bank. Mr. Hart is a graduate of St. Anselm College. He is a
former member of the Dedham School Board.
Joseph P. Irish has served as a Director of the Bank since 1992. He is the
owner and operator of the Troy General Store and Waldo County Oil, privately
held companies located in Troy, Maine. He has been associated with those
companies since 1987. Mr. Irish is a past president of Unity Rotary and a Boy
Scouts of America volunteer. He formerly served as a director of Border Trust
Company located in Jackman, Maine.
44
Deborah A. Jordan has served as Senior Vice President and Chief Financial
Officer of the Bank and Treasurer of the Company since 1993. From 1987 to 1992,
she was employed as an audit manager at Arthur Andersen LLP in Boston. She is a
graduate of Husson College and is a Certified Public Accountant. Ms. Jordan
serves as a director of Eastern Maine Technical College Foundation and OHI
(Opportunity Housing, Inc.).
Robert E. Knowles has served as a Director of the Bank since 1992. He has
been retired since 1984. From 1971 to 1984, he was the owner and president of
Maine X-Ray Equipment, Pittsfield, Maine, one of the largest distributors of
X-ray film and chemicals in New England. Mr. Knowles is a member of the Unity
Rotary.
William P. Lucy has served as Senior Vice President and Senior Loan
Officer of the Bank since 1992. Mr. Lucy began his banking career at Merrill
Trust Company in 1981, and he has both commercial lending and branch
administration experience. He is a graduate of the University of Maine and
Williams College School of Banking. Mr. Lucy is incoming president of the board
of the Y.M.C.A., a member of the pension committee of St. Joseph Healthcare
Foundation, on the board of New Hope Hospice, and the Action Committee of 50,
as well as an advisory board member for Beal College.
J. Donald Mackintosh has served as a Director of the Bank since 1992. He
is retired from the automobile industry where he worked for over 40 years, most
recently as the owner, president and general manager of Dow Motors, Inc., a
privately held automobile dealership in Ellsworth, Maine. Mr. Macintosh is a
graduate of General Motors Institute where he received a B.A. degree. He is
currently a member of the Aircraft Owners and Pilots Association.
Jane H. Madigan has served as Senior Vice President and Director of
Marketing and Human Resources for the Bank since 1992. She is a former educator
who began her banking career at Merrill Bank in 1986. She is a graduate of
Manhattanville College, has a master's degree from the University of Maine, and
is a graduate of the ABA School of Bank Marketing. She is a director of the New
England School of Banking, the Maine Human Resource Management Association, a
member of Bangor Rotary, a member of the steering committee of Bangor Region
Leadership, a former board member of the United Way of Eastern Maine, and
former president of the Abnaki Girl Scout Council.
Leonard E. Minsky has served as a Director of the Company and the Bank
since 1992. He is the retired president of Superior Paper Products, Inc., a
wholesale distributor of institutional and commercial paper and maintenance
products, with which he was associated for 42 years. Mr. Minsky is a graduate
of the University of Maine and is a former director of Northeast Bank of
Bangor. He is active in a number of community organizations including: member
of the Board of Visitors for the University of Maine; chairman of the
President's Council for University Development; chairman of the University of
Maine Patrons of the Arts, a director of Acadia Hospital, and a director of the
Maine Community Foundation. He and Norman Minsky are brothers.
Norman Minsky has been a Clerk of the Company and Director and Clerk of
the Bank since 1992. He was admitted to the Maine Bar in 1953 and is now of
counsel to the law firm of Gross, Minsky, Mogul & Singal, Bangor, Maine, with
which he was previously senior partner. Gross, Minsky, Mogul & Singal, P.A.
serves as general counsel to the Company and the Bank. Mr. Minsky received his
undergraduate and law degrees from Boston University. He has been active in a
number of charitable and professional organizations including: president of the
board of trustees of the Bangor Public Library; and president of the board of
the Bangor Symphony Orchestra. He and Leonard Minsky are brothers.
George H. Moore, Jr. serves as Senior Vice President and Senior Trust and
Investment Officer for the Bank. Mr. Moore, who has sixteen years of financial
planning, investment management and administrative experience, joined the Bank
in 1993 to organize the department. From 1992 to 1993, Mr. Moore served as
Trust and Investment Services Officer for Union Trust Company of Ellsworth,
Maine. Mr. Moore's other trust and investment banking experience includes
several years with The Merrill Trust Company. Mr. Moore is a graduate of the
University of Maine and the ABA's National Trust School. He serves on the
Planned Giving Committee of St. Joseph Healthcare; was a steering committee
member for the Heroes Breakfast, Pine Tree Chapter/American Red Cross; and is a
past board member of the Good Samaritan Agency.
Frederick A. Oldenburg, Jr., M.D. has served as a Director of the Bank
since 1996. Since 1973, he has been a practicing physician, and since 1993,
President and part owner of Penobscot Respiratory and also Director of
Respiratory Care at St. Joseph Hospital in Bangor. He is a graduate of
Dartmouth College and Case Western Reserve
45
University Medical School. Dr. Oldenburg is president of the National
Association for the Medical Direction of Respiratory Care.
Lloyd D. Robinson has served as a Director of the Bank since 1992. He has
been retired since 1985. From 1977 to 1985, he was the owner/operator of
McKay's R.V. Center, a privately held recreational equipment business. He also
has investments in real estate in the Bangor area. Mr. Robinson is a U.S. Air
Force veteran.
Susan L. Rush has served as Vice President of the Bank since 1992.
Formerly the internal auditor of the Bank, she has served as Systems
Administrator for the Bank since 1997. She has 18 years of banking experience
beginning at The Merrill Trust Company and including various responsibilities
in the areas of commercial loan, branch management and internal audit. Ms. Rush
is a graduate of the University of Maine and the Cannon Bank Audit School.
Joseph Sewall has served as a Director of the Company since 1992 and also
served as a Director of the Bank from 1992 to 1996. He is Chairman of James W.
Sewall Company, a forest management, surveying and aerial mapping company with
which he has been associated since 1945. He is a graduate of Bowdoin College.
Mr. Sewall served five terms as president of the Maine Senate. He is a former
director of Merchants National Bank and Merrill Bancshares, Inc. Mr. Sewall
serves as a trustee of the Maine Maritime Academy.
Dennis L. Shubert, M.D. has served as a Director of the Company since May
1998 and a Director of the Bank since 1992. He is a neurosurgeon and President
of Maine Neurosurgery of Bangor and Portland Maine. Dr. Shubert is a Bangor
native who graduated from Tufts University, received an M.D. from George
Washington University and a Ph.D. from the University of Minnesota. Dr. Shubert
has been active in a number of professional organizations including: president
of the Penobscot County Medical Association and president of the Maine
Neurosurgical Society.
Susan B. Singer has served as a Director of the Company since May 1998 and
as a Director of the Bank since 1992. She presently serves as Comptroller and
Vice President of Maine Trailer, a family-owned sales, rental and leasing
company located in Bangor, with which she has been associated for 18 years. Ms.
Singer is a current member of Congregational Beth Israel and a past board
member and treasurer. She serves on the board of directors of Eastern Maine
Medical Center Auxiliary. She was recently elected to the Y.W.C.A. board of
directors.
Lynne A. Spooner has served as Senior Vice President and Head of the
Residential Mortgage Department of the Bank since 1992. Ms. Spooner began her
banking career at Savings and Loan Association of Bangor in 1977 and brings
nearly 21 years of banking experience to her position. She is a graduate of
Eastern Maine Technical College. Ms. Spooner serves as first vice president of
St. Joseph Hospital Auxiliary, vice president of the board of the Warren Center
for Communication & Learning, on the loan review board of Penquis Community
Action Program, and is a member of the Zonta Club in Bangor.
Reginald C. Williams, Jr. has served as a Senior Vice President and Head
of Operations for the Bank since 1992. Mr. Williams began his banking career at
The Merrill Trust Company in 1968 and has experience in bank operations and
branch management. He is a graduate of the University of Maine, where he also
earned an M.B.A., and he is a graduate of the New England School of Banking. He
is actively involved with his church and the Penobscot/Piscataquis Jail
Ministry.
Harold S. Wright has served as a Director of the Company and Director and
Vice Chairman of the Bank since 1992. He retired as executive vice president of
The Merrill Trust Company in 1987 after a 35 year banking career. He is a
former Potentate of Anah Temple Shrine, and has served as a director of a
number of privately held Maine companies, including Sawyer Management Co.,
Sherman Lumber Company and Ward Log Homes.
Classes of Directors
As of May 7, 1998, the Board of Directors of the Company is divided into
three classes, each of whose members serves for a staggered three-year term.
Upon the expiration of the term of a class of directors, directors in such
class will be elected for three-year terms at the annual meeting of
shareholders in the year in which such term expires.
46
Executive Officers
Each of the executive officers of the Company is elected by the Board of
Directors on an annual basis and serves until the next annual meeting of the
Board of Directors or until his or her successor has been duly elected and
qualified.
Board Committees
The Bank has maintained an audit committee since October 1992. The
functions of the Bank's audit committee were shifted to the Company's audit
committee of its Board of Directors (the "Audit Committee") upon the formation
of the Audit Committee in June 1998. The Audit Committee reviews, acts on and
reports to the Board of Directors with respect to various auditing and
accounting matters, including the selection of the Company's auditors, the
scope of the annual audits, fees to be paid to the auditors, the performance of
the Company's independent auditors and the accounting practices of the Company.
The Compensation Committee of the Company's Board of Directors (the
"Compensation Committee") was established in October 1992 and determines the
salaries and incentive compensation of the officers of the Bank and provides
recommendations for the salaries and incentive compensation of the other
employees and the consultants of the Bank. The Compensation Committee also
administers the Company's various incentive compensation, stock and benefit
plans.
Compensation Committee Interlocks and Insider Participation
The Company's Compensation Committee consists of Messrs. L. Minsky, Cyr
and Hansen, Dr. Shubert and Ms. Singer, none of whom has been an officer or
employee of the Company or the Bank at any time since the Company's inception.
No executive officer of the Company serves as a member of the board of
directors or compensation committee of any entity that has one or more
executive officers serving as a member of the Company's Board of Directors or
Compensation Committee. Mr. Clift, the Company's Chief Executive Officer,
participated in all such discussions and decisions concerning the compensation
of executive officers of the Company, except that Mr. Clift was excluded from
discussions regarding his own compensation.
Director Compensation
Non-employee directors of the Company and the Bank receive $100 per month
for their attendance at monthly and any special meetings of the Board of
Directors. Non-employee committee members also receive $50 for each committee
meeting that is not held on the same day as the Board of Directors meetings. In
lieu of increasing director fees payable to non-employee directors, the Company
has granted stock options under the Company's Stock Option Plan to such
non-employee directors as follows (in each case after giving effect to the 9:1
Stock Split but without giving effect to the issuance of stock dividends): In
1993, the Company granted each non-employee director an option to purchase
1,800 shares of Common Stock (except that Perry Hansen received an option for
the purchase of 9,000 shares of Common Stock in recognition of additional
services) at an exercise price of $5.22 per share; in 1995, the Company granted
each non-employee director an option to purchase 900 shares of Common Stock at
an exercise price of $6.05 per share; and in 1997, the Company granted each
non-employee director an option to purchase 1,800 shares of Common Stock, at an
exercise price of $6.59 per share. The Company may grant additional stock
options in the future in lieu of an increase in the payment of director fees.
Director Deferred Compensation Plan
The Company has established a deferred compensation plan ("Director Plan")
for non-employee directors of the Company and Bank. A participating director
may defer up to 100% of his or her monthly board and committee fees. Amounts
deferred earn interest at the one year treasury rate. At retirement,
termination or death, the benefit under the Director Plan is payable in a lump
sum distribution.
47
Executive Compensation
The following table sets forth as of December 31, 1997, all cash
compensation paid during the Bank's last three fiscal years to the chief
executive officer who was the only executive officer whose aggregate cash
compensation exceeded $100,000 per year.
Long Term All Other
Compensation Compensation
Awards ($)
-------------- -----------------
Securities
Name and Underlying All Other
Principal Position Year Salary Bonus Options (2) Compensation (3)
- ------------------------------ ------ ----------- ---------- -------------- -----------------
Edwin N. Clift (1) ........... 1997 $110,000 $20,000 -- $1,279
President and Chief Executive 1996 105,000 15,000 -- --
Officer 1995 95,000 10,000 10,755 --
- ----------
(1) No other officer of the Company or the Bank received aggregate cash
compensation that exceeded $100,000 per year for the last three fiscal
years.
(2) Options are vested and exercisable at $5.33 per share adjusted to reflect
the 9:1 Stock Split and the 3% stock dividend, the 5% stock dividend and
the 5% stock dividend declared in 1996, 1997 and 1998, respectively.
(3) Includes benefits received as part of the Supplemental Executive Retirement
Plan.
Supplemental Executive Retirement Plan
The Bank has adopted a non-tax qualified retirement plan for certain of
its executives ("SERP") to supplement the benefit such executives can receive
under the Bank's 401(k) Plan. This plan was designed to provide the following
executives with annual retirement benefits initially equal to a minimum percent
of each executive's respective salary the year prior to retirement, payable for
life. The amount of each annual benefit is indexed to the financial performance
of an insurance policy owned by the Bank over the Bank's cost of funds expense.
Name of Executive Position with Bank
- ------------------------------------------------ -----------------------------------
Edwin N. Clift ............................... President, Chief Executive Officer
Sara E. Carr ................................. Vice President
Charles W. Hart .............................. Senior Vice President
Deborah A. Jordan ............................ Senior Vice President
William P. Lucy .............................. Senior Vice President
Jane H. Madigan .............................. Senior Vice President
George H. Moore, Jr. ......................... Senior Vice President
Susan L. Rush ................................ Vice President
Lynne A. Spooner ............................. Senior Vice President
Reginald C. Williams, Jr. .................... Senior Vice President
The plan is vested at the rate of 20% for each year of employment. The
Bank's obligations under this plan are unfunded; however the Bank has purchased
split-dollar life insurance policies on each insurable individual that are
actuarially designed to offset the annual expenses associated with the plan and
will, given reasonable actuarial assumptions, provide a complete recovery of
all plan cost.
The death benefit for each executive is an endorsement of 80% of the
net-at-risk life insurance portion of each of the life insurance policies
purchased to recover the retirement plan's costs.
The SERP had one participant at December 31, 1997, Edwin N. Clift. Under
this plan, the Bank paid $604,000 in premiums in 1997. The entire premium is
reflected in the consolidated statement of condition at December 31, 1997 as
cash surrender value of life insurance and is included with other assets.
Additional participants were added to the SERP in May 1998 requiring a premium
payment by the Bank totaling $1.8 million, which also is treated as cash
surrender value of life insurance and included with other assets.
Deferred Compensation Plan
The Bank has established a deferred compensation plan ("DC Plan") for
certain officers who are selected to participate in the DC Plan. The Bank
determines the amount deferred on an annual basis. Amounts deferred earn
interest at the rate equal to the one-year treasury rate plus one percent per
annum. At retirement, the benefit under
48
the DC Plan is payable in a lump sum distribution. The Bank's obligations under
this plan are unfunded. Presently, Mr. Charles Hart, Mr. Thomas Tilley and Ms.
Jane Madigan are participants in the DC Plan. At December 31, 1997, the
deferred compensation totaled $56,000 into the DC Plan.
Option Grants in Last Year
The Company did not grant any options to Mr. Clift during the year ended
December 31, 1997. The Company did grant Mr. Clift options to purchase 6,615
shares of Common Stock in January 1998 adjusted to reflect a 9:1 stock split
and a 5% stock dividend in 1998, at an exercise price of $6.77. The Company has
not granted any stock appreciation rights.
Aggregated Option Exercises and Year-End Values
The following table sets forth certain information concerning options to
purchase Common Stock exercised by Mr. Clift during 1997 and the number and
value of unexercised options held by him at December 31, 1997.
Aggregated Option Exercises in the Year Ended December 31, 1997
and Year-End Option Values
Number of
Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options
Shares December 31, 1997 (1) at December 31, 1997 (2)
Acquired Value ----------------------------- -----------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------------------ ------------- ---------- ------------- --------------- ------------- --------------
Edwin N. Clift ......... 0 0 68,859 0 $552,572 0
- ----------
(1) The figures above reflect the 9:1 Stock Split, a 3% stock dividend in 1996
and a 5% stock dividend in each of 1997 and 1998 which apply to options
granted before the dividend is declared. The numbers in this table include
such increase in the underlying shares on account of these dividends.
(2) There was no public trading market for the Common Stock as of December 31,
1997. Accordingly, these values have been calculated on the basis of the
public offering price of $12.75 per share, less the applicable exercise
price per share, multiplied by the number of shares underlying such
options (subject to the proportionate adjustments in the exercise price
and the number of shares underlying the options on account of the 9:1
Stock Split).
Stock Option Plan
The Company created a stock option plan in 1993 (the "Plan") and
subsequently amended the Plan on April 25, 1995 and April 24, 1997. The Plan
permits the granting of options to the Company's directors and employees. The
Plan's purpose is (i) to further the Company's interests by increasing the
personal involvement of the directors and employees; (ii) to enable the Company
to obtain and retain the services of employees; and (iii) to enable the Company
to attract and retain the services of qualified individuals to serve on the
Board of Directors.
A total of 585,900 shares of Common Stock has been authorized for issuance
under the Plan. This figure reflects the 9:1 Stock Split, and a 3% stock
dividend, a 5% stock dividend and a 5% stock dividend declared and issued by
the Company during 1996, 1997 and 1998, respectively. Upon completion of the
Offering, this figure will increase to 645,900 shares of Common Stock
authorized for issuance under the Plan pursuant to an amendment and restatement
of the Plan adopted by the Company and its shareholders in June 1998.
The Compensation Committee administers the Plan. Subject to the Plan's
express terms and conditions, the Compensation Committee has full power (i) to
construe the Plan; (ii) to prescribe, amend and rescind rules and regulations
relating to the Plan; and (iii) to make all other determinations necessary or
advisable for the Plan's administration.
As part of these powers, the Compensation Committee determines which
individuals are eligible to participate under the Plan and how many shares of
Common Stock a particular option covers. The Compensation Committee also
determines whether a particular grant of options to an employee satisfies all
of the qualifications of Section 422 of the Internal Revenue Code of 1986 with
respect to incentive stock options ("Qualified Stock Options"). The Plan
prohibits non-employee directors from receiving Qualified Stock Options. In
addition, the Compensation Committee determines the exercise price for the
shares of Common Stock underlying a particular option grant,
49
provided that (i) the exercise price of a Qualified Stock Option is the fair
market value of the underlying Common Stock which must be at least 100% of the
book value of the Company's Common Stock on the date the Qualified Stock Option
is granted; and (ii) the exercise price of any option granted to an employee or
director who owns at least 10% of the Company's stock must be equal to 110% of
the fair market value of the underlying Common Stock.
The terms and conditions of each option granted is evidenced by a Stock
Option Agreement executed by the Company. Upon vesting, the options granted
under the Plan become exercisable in such amounts prior to the expiration date
as determined by the Compensation Committee and as set forth in each stock
option agreement. If an option holder's employment with the Company or its
subsidiary terminates for any reason other than permanent and total disability
or death, the employee may exercise any vested options within the three (3)
months after termination. If termination is the result of permanent and total
disability, the holder has one (1) year to exercise any vested options. If the
holder dies while employed or serving on the Company's board or within three
(3) months after employment or board service, the successor in interest has one
(1) year after the date of death to exercise any vested options.
Subject to any provisions in the Company's Articles of Incorporation,
proportionate adjustments are made to the number of authorized shares which may
be granted under the Plan as a result of increases or decreases in the
Company's outstanding shares of Common Stock due to stock dividends, stock
splits, reverse stock splits, reclassifications or other types of
recapitalization. The Plan also adjusts the number of shares underlying any
unexercised option provided that a corresponding adjustment in the exercise
price also occurs so that the aggregate purchase price of the option remains
unchanged.
The Plan and options granted under the Plan will automatically terminate
upon (i) the dissolution or liquidation of the Company, (ii) a reorganization,
merger or consolidation of the Company with another corporation whereby the
Company does not survive or (iii) a sale of substantially all of the Company's
property or eighty percent (80%) of the Company's outstanding stock to another
corporation; unless such a transaction includes a written provision providing
for the continuation of the Plan or the options granted. If options are
terminated because of an event described in item (ii) or (iii), the Company
will pay the option holders an amount equal to the number of unvested,
underlying shares times the difference between the exercise price per share and
the fair market value of each share on the date of termination. This pay out is
subject to any restrictions in the Company's Articles of Incorporation or in
any financing agreement, indenture or other agreement which binds the Company.
The Board of Directors, upon the recommendation of the Compensation
Committee, may at any time, amend, suspend or terminate the Plan, however, such
action may not impair or alter the rights of any option holder under any
outstanding Stock Option Agreement. If no earlier termination occurs, the Plan
will expire on May 26, 2003. The term of any option granted under the Plan may
not exceed that date.
Employment Agreements
The Company has not entered into any employment agreements with its
executive officers.
50
CERTAIN TRANSACTIONS
Loan Transactions
The Bank has had, and expects to have in the future, various loan and
other banking transactions in the ordinary course of business with the
directors, executive officers, and principal shareholders of the Bank and the
Company (or an associate of such person). All such transactions: (i) have been
and will be made in the ordinary course of business; (ii) have been and will be
made on substantially the same terms, including interest rates and collateral
on loans, as those more prevailing at the time for comparable transactions with
unrelated persons; and (iii) in the opinion of management do not and will not
involve more than the normal risk of collectability or present other
unfavorable features. At March 31, 1998, the total dollar amount of extensions
of credit to directors, and executive officers identified in
"Management -- Directors and Executive Officers", and any of their associates
was approximately $8 million, which represented approximately 69.7% of total
shareholders' equity at March 31, 1998, and which is below the percentage
generally permitted under applicable Federal banking regulations.
Debentures
Messrs. William C. Bullock and Perry B. Hansen each own Debentures issued
by the Company in the original principal amount of $150,000, for a total
aggregate original principal amount of $300,000. The debt evidenced by the
Debentures is unsecured. Upon the liquidation, dissolution or winding up of the
Company, the debt evidenced by the Debentures, including interest earned
thereon, will be paid prior to any payments made to holders of Common Stock and
Series A Preferred Stock. See "Risk Factors -- Restrictions on Payments of
Dividends by the Company." Interest on the principal amount of debt evidenced
by the Debentures accrues at the rate of 1% per annum in excess of the prime
rate of interest of BankBoston, N.A., (prime rate was 8.5% as of March 31,
1998). Accrued interest is payable on March 31, June 30, September 30, and
December 31 of each year until the Debentures are paid in full or converted
into shares of Common Stock. On or prior to September 30, 2002, the holders of
the Debentures must convert the entire principal amount thereof into shares of
Common Stock of the Company at a conversion rate equal to $4.50 of principal
amount of the Debentures for one share of Common Stock (after giving effect to
the 9:1 Stock Split and a 3% stock dividend, a 5% stock dividend and a 5% stock
dividend in 1996, 1997 and 1998 respectively), subject to adjustment for any
further recapitalization of the Common Stock (such as a split or reverse split
of Common Stock). The payment of interest and any principal amount under the
Debentures is subordinated to the prior payment of the principal and interest
on all existing and future obligations of the Company for money borrowed from
any bank, trust company, insurance company, or other financial institution
engaged in the business of lending money, whether such senior indebtedness is
secured or unsecured or collateralized or not collateralized.
Other Transactions with Affiliates
The Company's general counsel is the law firm of Gross, Minsky, Mogul and
Singal, P.A. Norman Minsky, the clerk of the Company, a director of the Bank
and a shareholder of the Company, is of counsel within this firm. The firm also
represents the Bank in real estate and commercial loan closings, wherein the
Bank's borrower typically pays the legal fees and expenses.
The Company and the Bank have utilized Bacon Printing Company for certain
printing services and to purchase office supplies. John S. Bacon, a Director of
the Bank, is President of Bacon Printing Company. During the fiscal years ended
December 31, 1996 and December 31, 1997, the Company and the Bank paid to Bacon
Printing Company for services and office supplies a total of $76,000 and
$86,000, respectively.
51
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 1998, the ownership of the
Common Stock by (i) each person who is known by the Company to own of record or
beneficially own more than five percent (5%) of the Common Stock, (ii) each of
the directors and Named Executive Officers of the Company and the Bank named
under "Management -- Executive Compensation -- Summary Compensation Table", and
(iii) all directors and executive officers of the Company and the Bank as a
group. Except as otherwise indicated, to the Company's knowledge, the
shareholders listed in the table have sole voting and investment power with
respect to the shares indicated.
Percentage of Class (1)
-----------------------
Number of
Shares Before After
Name and Address of Beneficial Owner Beneficially Owned Offering Offering
- ------------------------------------------ -------------------- ---------- ---------
The Bullock Family Trust (2) (3) ......... 226,044 12.6% 9.4%
c/o William C. Bullock, Jr.
RR2, Box 121
Orrington, Maine 04474
William C. Bullock, Jr. (2) (3) .......... 226,044 12.6% 9.4%
RR2, Box 121
Orrington, Maine 04474
Perry B. Hansen (4) ...................... 181,224 10.2% 7.7%
4521 Shadowbrook Court
Bettendorf, Iowa 52922
Edwin N. Clift (5) ....................... 119,889 6.8% 5.1%
RR 3, Box 800
Holden, Maine 04429
Joseph P. Irish (6) ...................... 84,069 5.1% 3.7%
P.O. Box 2
Troy, Maine 04987
Leonard E. Minsky ........................ 71,370 4.3% 3.2%
114 Linden Street
Bangor, Maine 04401
Joseph H. Cyr (7) ........................ 70,200 4.2% 3.1%
25 South Brunswick Street
Old Town, Maine 04468
John S. Bacon (8) ........................ 69,417 4.2% 3.1%
1846 Ohio Street
Bangor, Maine 04401
Joseph Sewall (9) ........................ 58,401 3.5% 2.6%
c/o James W. Sewall Co.
147 Center Street
Old Town, Maine 04468
Dennis L. Shubert, M. D. (10) ............ 46,269 2.8% 2.1%
137 Balsam Drive
Bangor, Maine 04401
Harold S. Wright (11) .................... 44,811 2.7% 2.0%
43J Longrale Park
Bangor, Maine 04401
J. Donald Mackintosh (12) ................ 44,730 2.7% 2.0%
RFD #2, Box 266
Ellsworth, Maine 04605
52
Percentage of Class (1)
-----------------------
Number of
Shares Before After
Name and Address of Beneficial Owner Beneficially Owned Offering Offering
- ------------------------------------------ -------------------- ---------- ---------
Norman Minsky (13) ....................... 40,734 2.5% 1.8%
272 Kenduskeag Avenue
Bangor, ME 04401
Susan B. Singer (14) ..................... 38,853 2.3% 1.7%
109 Judson Boulevard
Bangor, Maine 04401
Robert E. Knowles (15) ................... 37,161 2.2% 1.6%
P.O. Box 164
Unity, Maine 04988
Lloyd D. Robinson (16) ................... 35,604 2.1% 1.6%
RR #2 Box 6935
Carmel, Maine 04419
John R. Graham, III (17) ................. 33,651 2.0% 1.5%
20 Dunning Boulevard
Bangor, Maine 04401
Frederick A. Oldenburg, Jr. (18) ......... 18,918 1.1% *
2487 Ohio Street
Bangor, Maine 04401
All Officers and Directors
as a Group (25 persons) (19) ............ 1,458,567 63.1% 50.1%
- ----------
* Denotes ownership of less than 1% of outstanding Common Stock.
(1) Pursuant to the rules of the Securities and Exchange Commission, shares of
Common Stock which an individual or group has a right to acquire within 60
days of the date of this Prospectus pursuant to the exercise of options or
warrants are deemed to be outstanding for the purpose of computing the
percentage ownership of such individual or group, but are not deemed to be
outstanding for the purpose of computing the percentage ownership of any
other person shown in the table.
(2) Includes 33,327 shares of Common Stock issuable upon the conversion of the
Debentures, 77,760 shares of Common Stock issuable upon the conversion of
the Series A Preferred Stock and 27,306 shares of Common Stock issuable
upon the exercise of stock options.
(3) Mr. Bullock is the trustee of The Bullock Family Trust. Mr. Bullock
disclaims any beneficial interest in the 17,154 shares of Common held by
the Scrooge and Marley Family Trust, of which Martha D. Bullock, the
daughter of Mr. Bullock, is the Trustee.
(4) Includes 33,327 shares of Common Stock issuable upon the conversion of the
Debentures, 66,645 shares of Common Stock issuable upon the conversion of
the Series A Preferred Stock and 13,122 shares of Common Stock issuable
upon the exercise of stock options.
(5) Includes 22,212 shares of Common Stock issued upon the conversion of the
Series A Preferred Stock and 75,474 shares of Common Stock issuable upon
the exercise of stock options.
(6) Includes 4,950 shares of Common Stock issuable upon the exercise of stock
options.
(7) Includes 4,950 shares of Common Stock issuable upon the exercise of stock
options. These shares are jointly owned with his spouse, Suzanne Cyr.
(8) Includes 1,890 shares of Common Stock issuable upon the exercise of stock
options.
(9) Includes 55,341 shares of Common Stock held in the name of James W. Sewall
Co., of which Mr. Sewall holds an ownership interest. Also includes 3,060
shares of Common Stock issuable to Mr. Sewall upon the exercise of stock
options.
53
(10) Includes 41,319 shares of Common Stock held by Walden Partnership, of
which Dr. Shubert holds a controlling interest. Also includes 4,950 shares
of Common Stock held in the name of Dr. Shubert.
(11) Includes 11,106 shares of Common Stock issuable upon the conversion of the
Series A Preferred Stock and 16,983 shares of Common Stock issuable upon
the exercise of stock options.
(12) Includes 30,897 shares of Common Stock held jointly with his spouse, Janet
Mackintosh, and 4,950 shares of Common Stock issuable to Mr. Mackintosh
upon the exercise of stock options.
(13) Includes 35,784 shares issued to GMM&S Associates, of which Norman Minsky
owns a controlling interest. Also includes 4,950 shares of Common Stock
held in the name of Norman Minsky.
(14) Includes 4,950 shares of Common Stock issuable upon the exercise of stock
options.
(15) Includes 32,211 shares of Common Stock held jointly with his spouse, Rae
Jean Knowles, and 4,950 shares of Common Stock issuable upon the exercise
of stock options.
(16) Includes 30,654 shares of Common Stock held jointly with his spouse,
Carlene Robinson, and 4,950 shares issuable upon the exercise of stock
options.
(17) Includes 4,950 shares of Common Stock issuable upon the exercise of stock
options.
(18) Includes 17,028 shares of Common Stock held under the name Penobscot
Respiratory PA FBO Frederick A. Oldenburg, Jr. and 1,890 shares of Common
Stock issuable upon the exercise of stock options.
(19) Includes 22,212 shares of Common Stock issuable upon the conversion of
Series A Preferred Stock held by, and 215,010 shares of Common Stock
issuable upon the exercise of stock options granted to, the executive
officers of the Bank. See Notes (1) through (18).
54
DESCRIPTION OF SECURITIES
The following description of the securities of the Company and certain
provisions of the Company's Articles of Incorporation (the "Articles"), and the
Bylaws, are summaries thereof and are qualified by reference to the Articles
and Bylaws, copies of which have been filed with the Commission as exhibits to
the Company's Registration Statement, of which this Prospectus forms a part.
The authorized capital stock of the Company consists of 4,000,000 shares of
Common Stock par value $1.00 per share, 50,000 shares of Series A Preferred
Stock, $1.00 par value per share and 950,000 shares of undesignated Serial
Preferred Stock, par value $.01 per share.
Common Stock
As of March 31, 1998 there were 1,655,640 shares of Common Stock
outstanding and held of record by 55 shareholders. Based upon the number of
shares outstanding as of that date and giving effect to the issuance of the
600,000 shares of Common Stock offered by the Company hereby, there will be
2,255,640 shares of Common Stock outstanding upon the closing of the Offering.
Holders of Common Stock are entitled to one vote for each share held on
all matters submitted to a vote of shareholders and do not have cumulative
voting rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights
of the Series A Preferred Stock and any other outstanding Serial Preferred
Stock. Upon the liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to receive ratably the net assets of the
Company available after the payment of all debts and other liabilities and
subject to the prior rights of the Series A Preferred Stock and any other
outstanding Preferred Stock. Holders of the Common Stock have no preemptive,
subscription, redemption or conversion rights. The outstanding shares of Common
Stock are, and the shares offered by the Company in the Offering will be, when
issued in consideration for payment thereof, fully paid and nonassessable. The
rights, preferences and privileges of holders of Common Stock are subject to,
and may be adversely affected by, the rights of the holders of shares of the
Series A Preferred Stock and any other Serial Preferred Stock which the Company
may designate and issue in the future. See "Risk Factors -- Restrictions on
Payment of Dividends by the Company." Upon the closing of the Offering, there
will be no shares of Serial Preferred Stock outstanding.
Serial Preferred Stock
The Board of Directors is authorized, without further shareholder
approval, to issue from time to time up to an aggregate of 950,000 shares of
Serial Preferred Stock in one or more series and to fix or alter the
designations, preferences, rights and qualifications, limitations or
restrictions of the shares of each such series thereof, including the dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption
(including sinking fund provisions), redemption price or prices, liquidation
preferences and the number of shares constituting any series or designations of
such series. The Company has no present plans to issue any such shares of
Serial Preferred Stock. See "--Anti-Takeover Effects of Certain Provisions of
Maine Law and the Company's Articles of Incorporation and Bylaws."
Series A Preferred Stock
The total number of shares of Series A Preferred Stock issued and
outstanding is 19,566 shares. The shares of Series A Preferred Stock are owned
by the following individuals or entities in the following amounts: The Bullock
Family Trust (7,609 shares), Perry B. Hansen (6,522 shares), Edwin N. Clift
(2,174 shares), Charles W. Hart (2,174 shares), and Harold S. Wright (1,087
shares).
Holders of Series A Preferred Stock are entitled to dividends calculated
on a per annum basis equal to the total stated value of the Series A Preferred
Stock held multiplied by the prime reference rate in effect from time to time
as announced by BankBoston, N.A. Dividends are to be declared quarterly on
March 31, June 30, September 30, and December 31 of each year. The dividends
payable on the Series A Preferred Stock will be cumulative, meaning that if
dividends are not paid when declared, they will accumulate and be payable in
full before any dividends are paid on the Common Stock. However, the payment of
any dividends on the redemption of the Series A Preferred Stock is subordinate
to the payment of any debt by the Company, including debt evidenced by the
Debentures and the M&I Loan. See "Risk Factors -- Restriction on Payment of
Dividends by the Company." The Series A Preferred Stock is non-voting.
55
Each share of Series A Preferred Stock is convertible into approximately
10.2 shares of Common Stock based upon a conversion price of approximately
$4.50 in stated value of Series A Preferred Stock for each share of Common
Stock, after giving effect to the 9:1 Stock Split and subject to further
adjustments to reflect other stock splits, stock dividends, recapitalizations
and other similar grants. Holders of Series A Preferred Stock have the right to
convert the Series A Preferred Stock into Common Stock at any time after
issuance of the Series A Preferred Stock and until October 1, 2002. If there
are cumulative dividends outstanding with respect to Series A Preferred Stock
to be converted into Common Stock, the Company is obligated to pay such
dividends before paying any dividends on the Common Stock. After October 1,
2002, and to the extent not previously converted into Common Stock, the Series
A Preferred Stock may be redeemed by the Company for a price equal to the sum
of its stated value plus unpaid and accrued dividends. However, the Series A
Preferred Stock may not be called or redeemed by the Company unless such
redemption is approved in advance by the Federal Reserve Bank of Boston.
In the event of a merger or the sale of a majority of the shares of Common
Stock of the Company, the holders of the Series A Preferred Stock are required
to have their Series A Preferred Stock redeemed or, at the option of the
holder, converted into shares of Common Stock at the rate described above.
Subject to the conversion and redemption rights described above, the Series A
Preferred Stock will remain outstanding indefinitely.
The holders of Series A Preferred Stock are not entitled to the benefits
of any sinking fund provision. Except as described above, shares of Series A
Preferred Stock are not convertible into any other security or other property
of the Company. No share of Series A Preferred Stock is subject to any further
call or assessment and all shares are fully paid and nonassessable.
Options
As of March 31, 1998, options to purchase a total of 540,027 shares
("Option Shares") of Common Stock were outstanding, approximately 389,385 of
which are subject to lock-up agreements entered into with the Underwriter.
Beginning 90 days after the date of this Prospectus, approximately 150,642
Options Shares which are not subject to lock-up agreements will be eligible for
sale in reliance on Rule 701 promulgated under the Securities Act, subject to
the vesting requirements for each option grant. The Company has 9,288 shares
(69,288 shares upon completion of the Offering) remaining and available to
grant as options in the future under the Stock Option Plan. In addition, the
Company may reallocate the number of shares with respect to options previously
granted under the Stock Option Plan that terminate without being exercised,
expire, are forfeited or canceled and the number of shares of Common Stock that
are surrendered in payment of any options or any tax withholding requirements.
See "Management -- Stock Option Plan" and "Shares Eligible for Future Sale."
Mandatory Convertible Debentures
The Company has issued the Debentures in the original principal amount of
$150,000, for a total aggregate original principal amount of $300,000. The debt
evidenced by the Debentures is unsecured. Upon the liquidation, dissolution, or
winding up of the Company, the debt evidenced by the Debentures, including
interest earned thereon, will be paid prior to any payments made to holders of
Common Stock and Series A Preferred Stock. The Debentures are convertible into
approximately 66,654 shares of Common Stock. See "Certain
Transactions -- Debentures."
Restrictions on Changes in Control
Under the Federal Change in Bank Control Act (the "Control Act"), a notice
must be submitted to the Federal Reserve if any person, or group acting in
concert, seeks to acquire 10% or more of any class of outstanding voting
securities of the Company, unless the Federal Reserve determines that the
acquisition will not result in a change of control of the Company. Under the
Control Act, the Federal Reserve has sixty (60) days within which to act on
such notice, taking into consideration certain factors, including the financial
and managerial resources of the acquiror, the convenience and needs of the
community served by the bank holding company and its subsidiary banks, and the
antitrust effects of the acquisition. Under the BHCA, a company is generally
required to obtain prior approval of the Federal Reserve before it may obtain
control of a bank holding company. Control is generally described to mean the
beneficial ownership of 25% or more of all outstanding voting securities of a
company. Likewise, under Maine law, the prior approval of the Superintendent of
the Bureau of Banking is required for the acquisition of control of the Company
by any person or company. Control is defined under Maine law by reference to
the BHCA and regulations issued thereunder.
56
Anti-Takeover Effects of Certain Provisions of Maine Law and the Company's
Articles of Incorporation and Bylaws
The Company is subject to several provisions under Maine law which may
deter or frustrate unsolicited attempts to acquire certain Maine corporations.
These provisions, commonly referred to as the "Fair Price Provisions", apply to
all public corporations organized in Maine. The Fair Price Provisions generally
require that certain change of control transactions between a public
corporation and an affiliate must be approved by at least a majority of the
disinterested directors or shareholders (not including those shares
beneficially owned by an "interested shareholder"). The Fair Price Provisions
are also included in the Articles of Incorporation but approval of 80%, rather
than a majority, of the disinterested directors and shareholders, is required
in connection with a change of control transaction. These anti-takeover
provisions of Maine law and the Articles of Incorporation could result in the
Company being less attractive to a potential acquiror and/or result in
shareholders receiving less for their shares than otherwise might be available
in the event of an unsolicited takeover attempt. See Risk Factors -- "Risks
Related to Anti-Takeover Effects of Certain Provisions of Maine Law."
In addition, certain of these provisions of the Articles of Incorporation
and Bylaws, which provisions are summarized in the following paragraphs, may be
deemed to have an anti-takeover effect and may delay, defer or prevent a tender
offer or takeover attempt that a shareholder might consider in its best
interest, including those attempts that might result in a premium over the
market price for the shares held by shareholders.
Classified Board of Directors
The Company has nine (9) directors. The Board of Directors may increase or
decrease the number of directors by affirmative vote of 67% of the directors in
office at the time of the vote. The minimum number of directors is three (3)
and the maximim number of directors is twenty-five (25). The Company's Board of
Directors is divided into three classes of directors serving staggered
three-year terms. As a result, approximately one-third of the Board of
Directors will be elected each year. These provisions, when coupled with the
provision of the Articles of Incorporation authorizing the Board of Directors
to fill vacant directorships, may deter a shareholder from removing incumbent
directors and simultaneously gaining control of the Board of Directors by
filling the vacancies created by such removal with its own nominees.
Advance Notice Requirements for Shareholder Proposals and Director
Nominations
The Bylaws provide that shareholders seeking to bring business before an
annual meeting of shareholders, or to nominate candidates for election as
directors at an annual meeting of shareholders, must provide timely notice
thereof in writing. To be timely, a shareholder's notice must be delivered to
or mailed and received at the principal executive offices of the Company not
less than 10 days nor more than 60 days prior to the Company's notice of annual
meeting of shareholders. The Bylaws also specify certain requirements as to the
form and content of a shareholder's notice. These provisions may preclude
shareholders from bringing matters before an annual meeting of shareholders or
from making nominations for directors at an annual meeting of shareholders.
Authorized But Unissued Shares
The authorized but unissued shares of Common Stock and Serial Preferred
Stock are available for future issuance without shareholder approval. These
additional shares may be utilized for a variety of corporate purposes,
including future public offerings to raise additional capital. The issuance of
additional shares of Common Stock and Serial Preferred Stock could render more
difficult or discourage an attempt to obtain control of the Company by means of
a proxy contest, tender offer, merger or otherwise.
The Maine Business Corporation Act ("MBCA") provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's articles of incorporation or bylaws, unless a
corporation's certificate of incorporation or bylaws, as the case may be,
requires a greater percentage.
Limitation of Liability and Indemnification Matters
The Articles of Incorporation provide that, except to the extent
prohibited by MBCA, the Company's directors shall not be personally liable to
the Company or its shareholders for monetary damages for any breach of
fiduciary duty as directors of the Company.
Section 19 of the MBCA empowers a corporation to purchase and maintain
insurance and indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding
(whether civil, criminal, administrative or investigative) by reason of the
fact that such person is or was
57
a director or officer of the Company, or is or was serving at the request of
the Company as a director or officer of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise, against expenses
(including attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding; provided however, that this provision shall not eliminate
or limit liability in the case where such person is found (i) not to have acted
honestly or on the reasonable belief that such person's action was in or not
opposed to the best interests of the corporation or its shareholders, or (ii)
with respect to criminal action, to have had reasonable cause to believe that
such person's conduct was unlawful. The MBCA provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under the
corporation's bylaws, any agreement, a vote of shareholders or otherwise. The
Articles of Incorporation eliminate the personal liability and provide
indemnification to the fullest extent permitted by Section 19 of the MBCA.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Articles of Incorporation. The Company is not
aware of any threatened litigation or proceeding that may result in a claim for
such indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or controlling persons pursuant to
the foregoing provisions, the Company has been informed that in the opinion of
the Commission such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.
Transfer Agent and Registrar
The Bank shall be the transfer agent and registrar for the Common Stock.
58
SUPERVISION AND REGULATION
Bank holding companies and state banks are extensively regulated under
both federal and state law. These laws and regulations are intended to protect
depositors, not shareholders. To the extent that the following information
describes statutory and regulatory provisions, it is qualified in its entirety
by reference to the particular statutory and regulatory provisions. Any change
in the applicable law or regulation may have a material effect on the business
and prospects of the Company and the Bank. See "Risk Factors -- Supervision and
Regulation."
General
As a bank holding company, the Company is subject to the regulation and
supervision of the Federal Reserve under the BHCA. The Company is also subject
to the regulation and supervision of the Bureau by virtue of provisions of
Maine law which govern financial institution holding companies such as the
Company. Under applicable federal law, the Company must obtain the approval of
the Federal Reserve Board before it acquires all or substantially all of the
assets of a bank or another bank holding company, merges or consolidates with
another bank holding company, or acquires direct or indirect ownership or
control of any voting shares of a bank or bank holding company if, after such
acquisition, it would own or control more than 5% of any class of voting shares
of such bank or bank holding company (unless it already owns or controls a
majority of such shares). Similarly, under applicable Maine law, the Company
must obtain the prior approval of the Maine Superintendent of the Bureau of
Banking before acquiring more than 5% of the voting shares of a Maine financial
institution or of any financial institution holding company which directly or
indirectly controls a Maine financial institution. Under certain circumstances,
the Company may be required to obtain Federal Reserve Board approval before
redeeming any of its equity securities in an amount in excess of 10% of its net
worth in any twelve-month period. Furthermore, under certain circumstances, any
redemptions, dividends, or distributions with respect to the Company's Common
Stock and Preferred Stock may be considered an unsafe or unsound practice by
the Federal Reserve Board.
Before any "company," as defined in the BHCA, may acquire "control," as
defined in the BHCA, over the Company, the prior approval of the Federal
Reserve Board generally is required. In addition, before any individual or
entity which is not required to seek prior approval from the Federal Reserve
Board may acquire control of the Company, prior notice to the Federal Reserve
Board generally is required. Similarly, notice to and approval by the Maine
Superintendent of the Bureau of Banking is required before any "financial
institution holding company," as defined in the Maine Banking Code, may acquire
more than 5% of a Maine financial institution or Maine financial institution
holding company.
Under the BHCA and the Maine Banking Code, the Company is permitted,
directly or through subsidiaries, to engage in a variety of financial
activities deemed by the Federal Reserve Board to be so closely related to
banking, or managing or controlling banks, as to be a proper incident thereto.
A bank holding company normally is not permitted, however, to acquire direct or
indirect control of any company which is not a bank or not engaged in
activities determined by the Federal Reserve Board to be closely related to
banking. Certain exemptions are available with respect to subsidiaries engaged
in activities that have been determined by regulation to be closely related to
banking such as making or servicing loans, underwriting credit life insurance,
performing certain data processing services, acting as an investment or
financial advisor, and providing securities brokerage services.
As a condition to the approval by the Federal Reserve of the Company's
application to become a bank holding company, the Federal Reserve imposed
additional requirements on the Company, including the following: (i) the
Company may not incur any debt in addition to that evidenced by the Debentures
and the M&I Loan without the prior approval of the Federal Reserve Bank of
Boston; and (ii) except with the prior approval of the Federal Reserve Bank of
Boston, the Company cannot repurchase any outstanding Common Stock while its
debt to equity ratio exceeds 30% or the proposed stock repurchase would cause
its debt to equity ratio to exceed 30%. The Federal Reserve Board possesses
cease and desist powers over bank holding companies to prevent or remedy unsafe
or unsound practices or violations of law. These and other restrictions limit
how the Company may conduct its business and obtain financing.
The Bank is also subject to continued regular supervision and examination
by applicable federal and state banking agencies. The Bank is a Maine
state-chartered bank that is a member of the Federal Reserve System. The
Federal Reserve exercises primary supervision over the Bank through periodic
examination. The Bank is also subject to regulation by the FDIC as well as the
Bureau. The FDIC has authority to terminate insurance for accounts pursuant to
procedures established for that purpose. The Bank must comply with various
requirements and
59
restrictions under federal and state law, including requirements to maintain
reserves against deposits, restrictions on the types and amounts of loans that
may be granted and the interest that may be charged thereon and limitations on
the types of investments that may be made and the types of services that may be
offered. Various consumer laws and regulations also affect the operations of
the Bank. In addition to the impact of regulation, commercial banks are
affected significantly by the actions of the Federal Reserve Board as it
attempts to control the money supply and credit availability in order to
influence the economy.
Payment of Dividends
The Company is a legal entity separate and distinct from the Bank. The
principal source of cash flow of the Company, including cash flow to pay
dividends on its stock or principal and interest on debt, if any, is dividends
from the Bank. There are statutory and regulatory limitations on the payment of
dividends by the Bank to the Company, as well as by the Company to its
shareholders. See "Risk Factors -- Restrictions on Payments of Dividends by the
Bank to the Company" and "Risk Factors -- Restrictions on Payment of Dividends
by the Company."
In addition to the statutory prohibition against the withdrawal of any
portion of the Bank's capital and certain statutory limitations on the payment
of dividends, under Maine law the Bank may not pay dividends if it is insolvent
or if the payment of such dividends would render the Bank insolvent. In
addition, Maine law generally requires that dividends may be paid only out of
either unreserved and unrestricted earned surplus or out of the unreserved and
unrestricted net earnings of the then current and preceding fiscal years. If
the dividends are to be paid only out of net earnings, shareholders must be
notified of the source of the dividend and of the fact that there was no earned
surplus from which to pay the dividend.
The payment of dividends by any state bank that is a member of the Federal
Reserve System is affected by the requirement to maintain adequate capital
pursuant to the capital adequacy guidelines issued by the Federal Reserve
Board. The objective of the guidelines is to place a constraint on the extent
to which a bank can leverage its equity capital base. The guidelines provide
for a minimum ratio of Tier 1 capital to total assets of 4% and for a minimum
ratio of total capital to risk-weighted assets of 8% using the Year-End 1992
standard, of which at least 4% should be in the form of Tier 1 capital. For
purposes of calculating these ratios, Tier 1 capital must represent at least
50% of qualifying total capital and generally consists of the sum of common
shareholders' equity, qualifying noncumulative perpetual preferred stock, and
minority interests in equity accounts of consolidated subsidiaries, minus
goodwill, other specified intangible assets that the Federal Reserve Board
deems appropriate, specified investments in unconsolidated banking or finance
subsidiaries, and certain other subsidiaries, determined on a case-by-case
basis ("Tier 1 Capital"). The Company's Common Stock and Series A Preferred
Stock qualify as Tier 1 Capital for those purposes. The Debentures do not
qualify as Tier 1 capital, but qualify as Tier 2 supplementary capital, as
described below.
The guidelines and regulations further provide that capital adequacy is to
be considered on a case-by-case basis in view of various qualitative factors
that affect a bank's overall financial condition. In the assessment of capital
adequacy of banks, total assets consist of the average of total assets required
to be included in a bank's Report of Condition and Income ("Call Report"),
minus goodwill, intangible assets and any other assets deducted in determining
Tier 1 capital. Total capital is determined by adding the sum of Tier 1 and
qualifying Tier 2 supplementary capital elements, such as allowance for loan
and lease losses, perpetual preferred stock, hybrid capital instruments, term
subordinated debt and intermediate-term preferred stock, less the same
deductions from capital as set forth above. Risk-weighted assets are also
calculated in accordance with applicable rules and regulations.
The above regulations and restrictions on dividends paid by the Bank may
limit the Company's ability to obtain funds from such dividends for its cash
needs, including funds for payment of operating expenses, and dividends on the
Common Stock.
If, in the opinion of the applicable federal bank regulatory authority, a
depository institution or holding company is engaged in or is about to engage
in an unsafe or unsound practice (which, depending on the financial condition
of the depository institution or holding company, could include the payment of
dividends), such authority may require, after notice and hearing (except in the
case of an emergency proceeding where there is no notice or hearing), that such
institution or holding company cease and desist from such practice. The federal
banking agencies have indicated that paying dividends that deplete a depository
institution's or holding company's capital base to an inadequate level would be
such an unsafe and unsound banking practice. Moreover, the Federal Reserve and
60
the FDIC have issued policy statements which provide that bank holding
companies and insured depository institutions generally should only pay
dividends out of current operating earnings. In addition, under the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), a
FDIC-insured depository institution may not pay any dividend if payment would
cause it to become undercapitalized or once it is undercapitalized. See
"FDICIA."
The payment of dividends by the Company and the Bank also may be affected
or limited by other factors, such as the requirement to maintain adequate
capital above regulatory guidelines.
Transactions With Affiliates and Insiders
The Bank is subject to Section 23A of the Federal Reserve Act, which
places limits on the amount of loans or extensions of credit to, or investments
in, or certain other transactions with, affiliates, including the Company. In
addition, limits are placed on the amount of advances to third parties
collateralized by the securities or obligations of affiliates. Most of these
loans and certain other transactions must be secured in prescribed amounts. The
Bank is also subject to Section 23B of the Federal Reserve Act, which, among
other things, prohibits an institution from engaging in transactions with
certain affiliates unless the transactions are on terms substantially the same,
or at least as favorable to such institution or its subsidiaries, as those
prevailing at the time for comparable transactions with non-affiliated
companies.
Capital Adequacy
The federal banking agencies have adopted risk-based capital guidelines
for banks and bank holding companies. The minimum guideline for the ratio of
total capital to risk-weighted assets ("Total Risk Based Capital" ratio) for
"adequately capitalized" institutions is 8%. The minimum adequate
capitalization guideline for the ratio of Tier 1 Capital to risk-weighted
assets ("Tier 1 Risk Based Capital" ratio) is 4%. At March 31, 1998, the
Company's Tier 1 Risk Based Capital and Total Risk Based Capital ratios were
10.25% and 11.78%, respectively.
In addition, the federal banking agencies have established minimum
leverage ratio guidelines for banks and bank holding companies. Their
guidelines provide for a minimum ratio of Tier 1 Capital to average assets,
less goodwill and certain other intangible assets (the "Leverage Ratio"), of 3%
for banks that meet certain specific criteria and 40% for other institutions.
The Company's Leverage Ratio at March 31, 1998 was 6.38%. Failure to meet
capital guidelines could subject a bank to a variety of enforcement remedies,
including the termination of deposit insurance by the FDIC, and to certain
restrictions on its business. See "FDICIA."
Holding Company Structure and Support of the Bank
Because the Company is the parent holding company of the Bank, its right
to participate in the assets of any subsidiary upon the Bank's liquidation or
reorganization will be subject to the prior claims of the subsidiary's
creditors (including depositors in the case of bank subsidiaries) except to the
extent that the Company may itself be a creditor with recognized claims against
the subsidiary.
Under the Federal Deposit Insurance Act (the "FDIA"), a depository
institution insured by the FDIC can be held liable for any loss incurred by, or
reasonably expected to be incurred by the FDIC in connection with (i) the
default of a commonly-controlled FDIC-insured depository institution or (ii)
any assistance provided by the FDIC to any commonly-controlled FDIC-insured
depository institution "in danger of default." "Default" is defined generally
as the appointment of a conservator or receiver and "in danger of default" is
defined generally as the existence of certain conditions indicating that a
default is likely to occur in the absence of regulatory assistance. The FDIC's
claim for damages is superior to claims of depositors, secured creditors and
holders of subordinated debt (other than affiliates) of the commonly controlled
insured depository institution. The Bank is subject to these cross-guarantee
provisions.
FDICIA
The FDICIA requires the federal banking regulators to take "prompt
corrective action" in respect of FDIC-insured depository institutions that do
not meet minimum capital requirements. FDICIA established five capital tiers:
"well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized." An
FDIC-insured depository institution is well capitalized if it maintains a
Leverage Ratio of at least 5%, a risk adjusted Tier 1 Capital Ratio of at least
6% and a Total Capital Ratio of at least 10% and is not
61
subject to a directive, order or written agreement to meet and maintain
specific capital levels. An insured depository institution is defined to be
adequately capitalized if it meets all of its minimum capital requirements as
described above. In addition, an insured depository institution will be
considered undercapitalized if it fails to meet any minimum required measure,
significantly undercapitalized if it is significantly below any such measure
and critically undercapitalized if it fails to maintain a level of tangible
equity equal to not less than 2% of total assets. An insured depository
institution may be deemed to be in a capitalization category that is lower than
is indicated by its actual capital position if it receives an unsatisfactory
examination rating.
The capital-based prompt corrective action provisions of FDICIA and their
implementing regulations apply to FDIC-insured depository institutions and are
not directly applicable to holding companies which control such institution.
However, the Federal Reserve Board has indicated that, in regulating bank
holding companies, it will take appropriate action at the holding company level
based on an assessment of the effectiveness of supervisory actions imposed upon
subsidiary depository institutions pursuant to such provisions and regulations.
FDICIA generally prohibits an FDIC-insured depository institution from
making any capital distribution (including payment of dividends) or paying any
management fee to its holding company if the depository institution would
thereafter be undercapitalized.
Undercapitalized depository institutions are subject to restrictions on
borrowing from the Federal Reserve. In addition, undercapitalized depository
institutions are subject to growth limitations and are required to submit
capital restoration plans. A depository institution's holding company must
guarantee the capital plan, up to an amount equal to the lesser of 5% of the
depository institution's assets at the time it becomes undercapitalized or the
amount of the capital deficiency when the institution fails to comply with the
plan. The federal banking agencies may not accept a capital plan without
determining, among other things, that the plan is based on realistic
assumptions and is likely to succeed in restoring the depository institution's
capital. If a depository institution fails to submit an acceptable plan, it is
treated as if it is significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject to a
number of requirements and restrictions, including orders to sell sufficient
voting stock to become adequately capitalized, requirements to reduce total
assets and cessation of receipt of deposits from correspondent banks.
Critically undercapitalized depository institutions are subject to appointment
of a receiver or conservator.
The Company and the Bank, at December 31, 1997 and March 31, 1998, were
"well capitalized" under the criteria discussed above.
FDIC Insurance Premiums
The Bank is required to pay semiannual FDIC deposit insurance assessments.
Each financial institution is assigned to one of three capital groups -- well
capitalized, adequately capitalized or undercapitalized -- and further assigned
to one of three subgroups within a capital group, on the basis of supervisory
evaluations by the institution's primary federal and, if applicable, state
supervisors and other information relevant to the institution's financial
condition and the risk posed to the FDIC deposit insurance fund. The actual
assessment rate applicable to a particular institution (and any applicable
refund) will, therefore, depend in part upon the risk assessment classification
so assigned to the institution by the FDIC. The FDIC is authorized by federal
law to raise insurance premiums in certain circumstances. Any increase in
premiums would have an adverse effect on the Bank and the Company's earnings.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe and unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by a federal bank
regulatory agency.
Interstate Banking
The acquisition by the Company of more than 5% of the outstanding voting
securities or substantially all of the assets of a bank located outside of the
State of Maine is regulated by the BHCA. Such acquisition is also subject to
the law of the state in which the bank to be acquired is located. Under certain
circumstances, the Company might not be permitted to acquire an interest in
another bank located outside Maine. Further, any company attempting to acquire
control of the Company or the Bank also may be subject to certain limitations
on interstate banking. Even assuming that the law of the state in which the
bank is located permits acquisition, the Maine Banking Code requires prior
approval of the Superintendent of the Bureau of Banking for certain
acquisitions of more than 5% of a financial institution having operations
conducted outside of Maine.
62
The status of interstate banking legislation adopted by individual states
has been in a constant state of change in recent years. While federal law has
substantially liberalized interstate banking, a number of states have adopted
some form of legislation which limits interstate banking by bank holding
companies.
Interstate Act
Subject to certain conditions and exceptions, the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 ("Interstate Act"), (i) permits
bank holding company acquisitions of banks of a minimum age of up to five years
as established by state law in any state, (ii) permits mergers of national and
state banks across state lines unless the state has opted out of the interstate
bank merger provisions, (iii) permits branching de novo by national and state
banks into other states and (iv) permits certain interstate bank agency
activities one year after enactment. Subject to certain limitations, Maine law
permits out of state financial institutions, federal associations and national
banks to establish de novo branches or to acquire branches in Maine.
Monetary Policy And Economic Control
The commercial banking business in which the Bank engages is affected not
only by general economic conditions, but also by the monetary policies of the
Federal Reserve. Changes in the discount rate on member bank borrowing,
availability of borrowing at the "discount window," open market operations, the
imposition of changes in reserve requirements against members banks' deposits
and assets of foreign branches and the imposition of and change in reserve
requirements against certain borrowings by banks and their affiliates are some
of the instruments of monetary policy available to the Federal Reserve. These
monetary policies are used in varying combinations to influence overall growth
and distributions of bank loans, investments and deposits, and this use may
affect interest rates charged on loans or paid on deposits. The monetary
policies of the Federal Reserve have had a significant effect on the operating
results of commercial banks and are expected to do so in the future.
Deregulation
There have been significant changes in the banking industry in past years.
Many of these changes have been effected by federal legislation intended to
deregulate the banking industry. This legislation has, among other things,
eliminated interest rate restrictions on time deposit accounts and increased
the power of nonbanks to expand into traditional banking services. Future
changes in the banking industry may include some modification of prohibitions
on the types of businesses in which bank holding companies may engage. In
addition, other types of financial institutions, including mutual funds,
securities brokerage companies, insurance companies and investment banking
firms, have been given, and may continue to be given, powers to engage in
activities which traditionally have been engaged in only by banks. Such changes
may place the Company and the Bank in more direct competition with other
financial institutions. See "Risk Factors -- Deregulation of the Banking
Industry."
Community Reinvestment Act
The Community Reinvestment Act requires that, in connection with
examinations of financial institutions within their jurisdiction, the Federal
Reserve, the FDIC, the Office of the Comptroller of the Currency and the Office
of Thrift Supervision evaluate the record of such financial institutions in
meeting the credit needs of their local communities, including low and moderate
income neighborhoods, consistent with the safe and sound operation of those
institutions. These factors are also considered in evaluating mergers,
acquisitions and applications to open a branch or facility.
Other Regulations
Interest and certain other charges collected or contracted for by banks
are subject to state usury laws and certain federal laws concerning interest
rates. The Bank's loan operations are also subject to certain federal laws
applicable to credit transactions, such as the federal Truth-In-Lending Act
governing disclosures of credit terms to consumer borrowers, the Home Mortgage
Disclosure Act of 1975 requiring financial institutions to provide information
to enable the public and public officials to determine whether a financial
institution is fulfilling its obligation to help meet the housing needs of the
community it serves, the Equal Credit Opportunity Act prohibiting
discrimination on the basis of race, creed or other prohibited factors in
extending credit, the Fair Credit Reporting Act of 1978 governing the use and
provision of information to credit reporting agencies, the Fair Debt Collection
Act governing the manner in which consumer debts may be collected by collection
agencies and the rules and regulations of the various federal agencies charged
with the responsibility of implementing such federal laws. The deposit
operations
63
of the Bank also are subject to the Right to Financial Privacy Act, which
imposes a duty to maintain confidentiality of consumer financial records and
prescribes procedures for complying with administrative subpoenas of financial
records, and the Electronic Funds Transfer Act and Regulation E issued by the
Federal Reserve Board to implement that act, which govern automatic deposits to
and withdrawals from deposit accounts and customers' rights and liabilities
arising from the use of automated teller machines and other electronic banking
services.
64
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement among
Advest, Inc., the sole underwriter in the Offering (the "Underwriter") and the
Company, the Underwriter has agreed to purchase from the Company, and the
Company has agreed to sell to the Underwriter 600,000 shares of Common Stock.
The Underwriter is committed to purchase and pay for all such shares if any are
purchased. The Underwriting Agreement provides that the obligations of the
Underwriter is subject to approval of certain matters by their counsel and to
various other conditions.
The Company has been advised that the Underwriter proposes to offer the
shares of Common Stock directly to the public at the Offering price set forth
on the cover page of this Prospectus and to certain selected dealers at such
price less a concession of $0.55 per share. The Underwriter may allow, and such
dealers may reallow, a concession not in excess of $0.10 per share to certain
other dealers. After the initial public offering of the shares, the public
offering price, concession and reallowance to dealers may be changed by the
Underwriter. In addition, the Company has agreed to pay a supplemental
financial advisory fee of $25,000 to Advest, Inc. payable upon consummation of
the public offering.
The Company has granted to the Underwriter an option exercisable during
the thirty (30) day period beginning on the effective date of the Registration
Statement, to purchase up to 90,000 additional shares of Common Stock, solely
to cover overallotments, if any, at the public offering price less the
underwriting discount, as set forth on the cover page of this Prospectus. If
purchased, such additional shares will be sold by the Underwriter on the same
terms as those on which the 600,000 shares are being sold.
The executive officers and directors of the Company and the Bank have
agreed that they will not publicly sell, contract to publicly sell, or
otherwise publicly dispose of, any shares of Common Stock for a period of 180
days from the date of this Prospectus, without the written consent of the
Underwriter.
Up to 10% of the shares of Common Stock offered hereby may be reserved for
sale to the Company's employees, directors and other persons with direct
business relationships with the Company. Sales of shares to such persons will
be at the initial public offering price. The number of shares available for
sale to the general public will be reduced to the extent such persons purchase
such reserved shares. Any reserved shares not so purchased will be offered by
the Underwriter to the general public on the same terms as the other shares
offered hereby.
The Company and the Underwriter have agreed to indemnify each other
against certain liabilities including liabilities under the Securities Act, or
to contribute to payments that the Underwriter or the Company may be required
to make in respect thereof.
The foregoing is a summary of the principal terms of the Underwriting
Agreement and does not purport to be complete. Reference is made to a copy of
the Underwriting Agreement which is on file as an exhibit to the Registration
Statement.
The Underwriter has informed the Company that the Underwriter may make
sales to accounts over which they exercise discretionary authority.
Prior to this Offering there has been no public market for the Common
Stock. The Offering price of the Common Stock was determined by negotiations
between the Company and the Underwriter. The factors considered in determining
such prices and terms, in addition to prevailing market conditions, included
the history of and the prospects for the industry in which the Company
competes, an assessment of the Company's management, the prospects of the
Company, an assessment of the Company's results of operations, its capital
structure and such other factors as were deemed relevant. See "Risk
Factors -- Absence of Trading Market."
In connection with the Offering, the Underwriter may purchase and sell
Common Stock in the open market. These transactions may include overallotment
and stabilizing transactions and purchases to cover syndicate short positions
created by the Underwriter in connection with the Offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of preventing
or retarding a decline in the market price of the Common Stock; and syndicate
short positions created by the Underwriter involves the sale by the Underwriter
of a greater number of shares of Common Stock than they are required to
purchase from the Company in the Offering. The Underwriter also may impose a
penalty bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the securities sold in the Offering for their
account may be reclaimed by the syndicate if such shares of Common Stock are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may
65
stabilize, maintain or otherwise affect the market price of the Common Stock,
which may be higher than the price that might otherwise prevail in the open
market. These transactions may be effected on the Nasdaq National Market, in
the over-the-counter market or otherwise, and these activities, if commenced,
may be discontinued at any time.
66
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of the Offering, the Company will have an aggregate of
2,255,640 shares of Common Stock outstanding, assuming no exercise of the
Underwriter's over-allotment option of 90,000 shares, no conversion of the
Debentures or Series A Preferred Stock and no exercise of outstanding options
to purchase Common Stock. Of these shares, the 600,000 shares of Common Stock
sold in the Offering will be freely tradable without restriction or further
registration under the Securities Act, except that any shares held by
"affiliates" of the Company, as that term is defined in Rule 144 promulgated
under the Securities Act, may generally only be sold in compliance with the
limitation described below.
The remaining 1,655,640 shares of outstanding Common Stock will be deemed
"restricted securities" as defined under Rule 144. Restricted securities may be
sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144, 144(k) or 701 promulgated under
the Securities Act, which rules are summarized below. Subject to the lock-up
agreements described below and the provisions of Rules 144, 144(k) and 701,
additional shares will be available for sale in the public market (subject in
the case of shares held by affiliates to compliance with certain volume
restrictions) as follows: (i) 853,047 shares will be eligible for sale 90 to
180 days after the date of this Prospectus, and (ii) 802,593 shares will be
eligible for sale upon the expiration of lock-up agreements 180 days after the
date of this Prospectus. In addition, there are approximately 266,589 shares of
Common Stock issuable upon conversion of the outstanding Series A Preferred
Stock and Debentures, which may be eligible for future sale, subject to the
above restrictions. There are also outstanding options to purchase 540,027
shares of Common Stock which will be eligible for sale in the public market
from time to time subject to vesting and, in the case of certain options, to
the expiration of lock-up agreements.
In general, under Rule 144, a person (or persons whose shares are
aggregated), including an affiliate, who has beneficially owned shares for at
least one year is entitled to sell, within any three-month period commencing 90
days after the date of this Prospectus, a number of shares that does not exceed
the greater of (i) 1% of the then outstanding shares of Common Stock
(approximately 22,600 shares immediately after the Offering) or (ii) the
average weekly trading volume in the Common Stock during the four calendar
weeks preceding the date on which notice of such sale is filed, subject to
certain restrictions. In addition, a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding a sale and
who has beneficially owned the shares proposed to be sold for at least two
years would be entitled to sell such shares under Rule 144(k) without regard to
the requirements described above. To the extent that shares were acquired from
an affiliate of the Company, such affiliate's holding period for the purpose of
effecting a sale under Rule 144 commences on the date of transfer from the
affiliate.
Rule 701 promulgated under the Securities Act provides that shares of
Common Stock acquired pursuant to written plans such as the Stock Option Plan
may be resold by persons other than affiliates, beginning 90 days after the
date of this Prospectus, subject only to the manner of sale provisions of Rule
144, and by affiliates, beginning 90 days after the date of this Prospectus,
subject to all provisions of Rule 144 except its one-year minimum holding
period.
After the date of this Prospectus, the Company intends to file a Form S-8
registration statement under the Securities Act to register all shares of
Common Stock issuable under the Stock Option Plan. Such registration statement
is expected to become effective immediately upon filing, and shares covered by
that registration statement will thereupon be eligible for sale in the public
markets, subject to certain lock-up agreements and Rule 144 limitations
applicable to affiliates. See "Management -- Director Compensation" and
"Management -- Stock Option Plan."
Prior to the Offering, there has not been any public market for the Common
Stock of the Company, and no prediction can be made as to the effect, if any,
that market sales of shares of Common Stock or the availability of shares for
sale will have on the market price of the Common Stock prevailing from time to
time. Nevertheless, sales of substantial amounts of Common Stock in the public
market could adversely affect the market price of the Common Stock and could
impair the Company's future ability to raise capital through the sale of its
equity securities.
All directors and executive officers and certain shareholders of the
Company (holding an aggregate of approximately 802,593 shares of Common Stock)
have agreed that they will not, without the prior written consent of the
representatives of the Underwriter, sell or otherwise dispose of any shares of
Common Stock or options to acquire shares of Common Stock during the 180-day
period following the date of this Prospectus. See "Underwriting."
67
The Company has agreed not to sell or otherwise dispose of any shares of
Common Stock during the 180-day period following the date of the Prospectus,
except the Company may issue and grant options to purchase shares of Common
Stock under the Stock Option Plan. In addition, the Company may issue shares of
Common Stock in connection with any acquisition of another company if the terms
of such issuance provide that such Common Stock shall not be resold prior to
the expiration of the 180-day period referenced in the preceding sentence. See
"Risk Factors -- Shares Eligible for Future Sale."
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Hutchins, Wheeler & Dittmar, A Professional
Corporation, Boston, Massachusetts. Certain legal matters will be passed upon
for the Underwriter by Tyler Cooper & Alcorn, LLP, Hartford, Connecticut.
EXPERTS
The balance sheets as of December 31, 1997 and 1996 and the statements of
income, shareholders' equity, and cash flows for each of the two years in the
period ended December 31, 1997, included in this Prospectus, have been included
herein in reliance on the report of Berry, Dunn, McNeil & Parker, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
68
MERRILL MERCHANTS BANCSHARES, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
WITH INDEPENDENT AUDITORS' REPORT
This Page Is Intentionally Left Blank
MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARY
TABLE OF CONTENTS
TO CONSOLIDATED FINANCIAL STATEMENTS
Page
-----------
Independent Auditors' Report .......................................................... F-2
Consolidated Statements of Financial Condition at
December 31, 1997 and 1996 ........................................................... F-3
Consolidated Statements of Income for the Years Ended December 31, 1997 and 1996 ...... F-4
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended
December 31, 1997 and 1996 ........................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996 ........................................................... F-6
Notes to Consolidated Financial Statements ............................................ F-7 - F-21
Consolidated Statements of Financial Condition at March 31, 1998 (Unaudited) .......... F-22
Consolidated Statements of Income for the Three Months Ended March 31, 1998 and 1997
(Unaudited) .......................................................................... F-23
Consolidated Statements of Changes in Shareholders' Equity for the Three Months Ended
March 31, 1998 and 1997 (Unaudited) .................................................. F-24
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1998 and
1997 (Unaudited) ..................................................................... F-25
Notes to Condensed Unaudited Consolidated Financial Statements ........................ F-26
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Merrill Merchants Bancshares, Inc.
We have audited the consolidated statements of financial condition of
Merrill Merchants Bancshares, Inc. and Subsidiary as of December 31, 1997 and
1996 and the related consolidated statements of income, changes in
shareholders' equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Merrill
Merchants Bancshares, Inc. and Subsidiary at December 31, 1997 and 1996 and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ Berry Dunn McNeil & Parker
-------------------------------
BERRY DUNN MCNEIL & PARKER
Bangor, Maine
January 16, 1998 (except for Note 15 and
Note 22, as to which date is July 20, 1998)
F-2
MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
(In Thousands, Except Number of Shares and per Share Data)
1997 1996
----------- -----------
ASSETS
Cash and due from banks ................................................... $ 7,486 $ 6,567
Interest-bearing deposits with banks ...................................... 523 24
Federal funds sold ........................................................ 2,650 2,000
-------- --------
Total cash and cash equivalents ....................................... 10,659 8,591
Investment securities
Available for sale ....................................................... 42,864 37,891
To be held to maturity ................................................... 1,962 3,123
Loans held for sale ....................................................... 508 341
Loans receivable .......................................................... 118,888 105,429
Less allowance for loan losses ........................................... 1,717 1,450
-------- --------
Net loans receivable .................................................. 117,171 103,979
Other real estate owned ................................................... 43 340
Properties and equipment, net ............................................. 2,806 2,267
Deferred income tax benefit ............................................... 129 146
Accrued income and other assets ........................................... 2,477 1,747
-------- --------
Total assets .......................................................... $178,619 $158,425
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits ........................................................... $ 25,018 $ 21,543
Savings and NOW deposits .................................................. 64,513 51,942
Certificates of deposit ................................................... 56,781 53,219
-------- --------
Total deposits ........................................................ 146,312 126,704
Securities sold under agreements to repurchase (term and demand) .......... 11,897 12,164
Other borrowed funds ...................................................... 5,144 2,832
Accrued expenses and other liabilities .................................... 1,104 3,059
Long-term debt ............................................................ 2,895 3,695
Mandatory convertible debentures .......................................... 300 300
-------- --------
Total liabilities ..................................................... 167,652 148,754
-------- --------
Commitments (Notes 6, 7, 14, 15, 17 and 19)
Shareholders' equity
Convertible cumulative preferred stock, par value $1; authorized
50,000 shares, issued and outstanding 19,566 shares .................... 20 20
Common stock, par value $1; authorized 4,000,000 shares, issued
and outstanding 1,542,123 and 1,468,953 shares in 1997 and
1996, respectively ..................................................... 1,542 1,469
Capital surplus .......................................................... 7,754 7,331
Retained earnings ........................................................ 1,647 861
Unrealized gain (loss) on securities available for sale, net of tax of
$2 and $(5) in 1997 and 1996, respectively.............................. 4 (10)
-------- --------
Total shareholders' equity ............................................ 10,967 9,671
-------- --------
Total liabilities and shareholders' equity ............................ $178,619 $158,425
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997 AND 1996
(In Thousands, Except Number of Shares and per Share Data)
1997 1996
------------ ------------
Interest and dividend income
Interest and fees on loans .................................... $ 10,669 $ 9,683
Interest on investment securities ............................. 2,184 1,788
Dividends on investment securities ............................ 191 197
Interest on federal funds sold ................................ 171 158
-------- --------
Total interest and dividend income .......................... 13,215 11,826
-------- --------
Interest expense
Interest on deposits .......................................... 5,126 4,428
Interest on borrowed funds .................................... 934 955
-------- --------
Total interest expense ...................................... 6,060 5,383
-------- --------
Net interest income ......................................... 7,155 6,443
Provision for loan losses ...................................... 355 360
-------- --------
Net interest income after provision for loan losses ......... 6,800 6,083
-------- --------
Other income
Service charges on deposit accounts ........................... 476 486
Other service charges and fees ................................ 485 381
Trust fees .................................................... 534 439
Other ......................................................... 138 114
Net gain on sale of mortgage loans ............................ 91 69
-------- --------
Total other income .......................................... 1,724 1,489
-------- --------
Other expense
Salaries and employee benefits ................................ 3,121 2,905
Occupancy expense ............................................. 626 526
Equipment expense ............................................. 524 462
Data processing ............................................... 605 577
Other ......................................................... 1,481 1,343
-------- --------
Total other expense ......................................... 6,357 5,813
-------- --------
Income before income taxes ..................................... 2,167 1,759
Income tax expense ............................................. 765 639
-------- --------
Net income .................................................. $ 1,402 $ 1,120
======== ========
Per share data
Basic earnings per common share ............................... $ 0.82 $ 0.65
======== ========
Diluted earnings per common share ............................. $ 0.71 $ 0.58
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
(In Thousands, Except Number of Shares and per Share Data)
Unrealized
Convertible Gain (Loss)
Cumulative on Securities Total
Preferred Common Capital Retained Available Shareholders'
Stock Stock Surplus Earnings for Sale Equity
------------- -------- --------- ---------- --------------- --------------
Balance at December 31, 1995 .............. $20 $1,426 $7,108 $ 82 $ 125 $ 8,761
Net income ................................ -- -- -- 1,120 -- 1,120
3% common stock dividend declared ......... -- 43 223 (267) -- (1)
Convertible cumulative preferred stock
dividends declared, $3.80 per share...... -- -- -- (74) -- (74)
Change in unrealized gain (loss) on
securities available for sale, net of
deferred income taxes of $69 ............ -- -- -- -- (135) (135)
--- ------ ------ ------ ------ --------
Balance at December 31, 1996 .............. 20 1,469 7,331 861 (10) 9,671
Net income ................................ -- -- -- 1,402 -- 1,402
5% common stock dividend declared ......... -- 73 423 (497) -- (1)
Common stock cash dividend declared,
$.03 per share........................... -- -- -- (43) -- (43)
Convertible cumulative preferred stock
dividends declared, $3.88 per share...... -- -- -- (76) -- (76)
Change in unrealized gain (loss) on
securities available for sale, net of
deferred income taxes of $7 ............. -- -- -- -- 14 14
--- ------ ------ ------ ------ --------
Balance at December 31, 1997 .............. $20 $1,542 $7,754 $1,647 $ 4 $10,967
=== ====== ====== ====== ====== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
(In Thousands)
1997 1996
----------- -----------
Cash flows from operating activities
Net income ............................................................................ $ 1,402 $ 1,120
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation ......................................................................... 379 290
Amortization ......................................................................... 83 107
Net accretion of discounts on investment securities .................................. (69) (28)
Deferred income taxes ................................................................ 18 (266)
Originations of loans held for sale .................................................. (7,173) (5,521)
Proceeds from sale of loans held for sale ............................................ 7,026 6,955
(Increase) decrease in accrued income and other assets ............................... (154) 64
Increase (decrease) in accrued expenses and other liabilities ........................ 140 (14)
Decrease in deferred loan fees, net .................................................. (33) (19)
Provision for loan losses ............................................................ 355 360
Net gain on sale of mortgage loans, investment securities, property and equipment .... (83) (51)
--------- ---------
Net cash provided by operating activities ........................................... 1,891 2,997
--------- ---------
Cash flows from investing activities
Net loans made to customers ........................................................... (13,405) (10,893)
Acquisition of premises and equipment ................................................. (927) (1,012)
Purchase of investment securities available for sale .................................. (39,510) (31,165)
Proceeds from sales and maturities of investment securities
Sales and maturities of available for sale securities ................................ 32,538 18,248
Maturities of held to maturity securities ............................................ 1,157 4,078
Proceeds from sale of other real estate owned ......................................... 190 --
Acquisition of life insurance policy .................................................. (599) --
--------- ---------
Net cash used in investing activities ............................................... (20,556) (20,744)
--------- ---------
Cash flows from financing activities
Net increase in demand, savings and NOW deposits ...................................... 16,046 15,667
Net increase (decrease) in certificates of deposit .................................... 3,562 (303)
Net increase (decrease) in securities sold under agreement to repurchase .............. (267) 1,991
Net increase in other borrowed funds .................................................. 2,312 2,640
Payment of long-term debt ............................................................. (800) (305)
Dividends paid on convertible cumulative preferred stock and common stock ............. (120) (75)
--------- ---------
Net cash provided by financing activities ........................................... 20,733 19,615
--------- ---------
Net increase in cash and cash equivalents .............................................. 2,068 1,868
Cash and cash equivalents, beginning of period ......................................... 8,591 6,723
--------- ---------
Cash and cash equivalents, end of period ............................................... $ 10,659 $ 8,591
========= =========
Supplemental disclosures of cash flow information
Cash paid for interest ................................................................ $ 6,058 $ 5,429
Transfers to other real estate owned .................................................. 70 49
Income tax paid ....................................................................... 773 855
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Presented in Thousands, Except As Noted)
1. Summary of Significant Accounting Policies
The accounting and reporting policies conform to generally accepted
accounting principles and to general practice within the banking industry. The
following is a summary of the significant accounting and reporting policies.
Nature of Business
Merrill Merchants Bancshares, Inc. is a one-bank holding company that owns
all of the common stock of Merrill Merchants Bank ("Bank"). The Bank operates
branches in Bangor (three offices), Orono, Pittsfield, and Brewer, Maine.
The Bank's lending activities are conducted principally in central Maine.
The Bank grants single family and multi-family residential loans, commercial
real estate loans, commercial loans, and a variety of consumer loans. In
addition, the Bank grants loans for the construction of residential homes,
multi-family properties and commercial real estate properties. Most loans
granted by the Bank 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' geographic 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 in the borrowers' geographic areas
and the general economy.
The Bank is under the supervision of the Board of Governors of the Federal
Reserve System and the Maine Bureau of Banking, and its deposits are insured by
the Federal Deposit Insurance Corporation (FDIC).
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.
Financial Statement Presentation
The accompanying consolidated financial statements include the accounts of
Merrill Merchants Bancshares, Inc. and its wholly-owned subsidiary, Merrill
Merchants Bank, a state-chartered bank. All intercompany accounts and
transactions have been eliminated in the consolidated financial statements.
Investment Securities
Investment debt securities that management has the ability and intent to
hold to maturity are classified as held to maturity and carried at amortized
cost. Other marketable securities are classified as available for sale and are
carried at fair value. Unrealized gains and losses on securities available for
sale, net of income taxes, are recognized as direct increases or decreases in
shareholders' equity. Cost of securities sold is recognized using the specific
identification method.
Premiums are amortized and discounts are accreted using methods
approximating the interest method.
Loans Held for Sale
Residential mortgage loans originated and intended for sale in the
secondary market are carried at the lower of aggregate cost or estimated market
value. Gains or losses on sales of loans are recognized at the time of sale and
are based upon the difference between the selling price and the carrying amount
of loans sold.
F-7
Other Real Estate Owned
Other real estate owned (OREO) includes real estate and repossessed
personal property held for sale which have been acquired principally through
foreclosure or a similar conveyance of title. Real estate may be considered to
be in-substance foreclosed and included in OREO, prior to the conveyance of
title when specific criteria are met. Both foreclosed and in-substance
foreclosed real estate, as well as repossessed personal property, are carried
at the lower of their recorded amounts or fair value less estimated costs of
disposal. Any write-downs at, or prior to, the dates of acquisition are charged
to the allowance for loan losses. Subsequent write-downs are recorded in
noninterest expense. Expenses incurred in connection with holding such assets
and gains and losses upon sale are included in other expenses or other 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.
Interest on loans is accrued and credited to income based on the principal
amount outstanding. The accrual of interest on loans is discontinued when, in
the opinion of management, there is an indication that the borrower may be
unable to meet payments as they become due. Upon such discontinuance, all
unpaid accrued interest is reversed. Interest income is subsequently recognized
only to the extent cash payments are received.
The allowance for loan losses is maintained at a level adequate to absorb
probable losses. Management determines the adequacy of the allowance based upon
reviews of individual credits, recent loss experience, current economic
conditions, the risk characteristics of the various categories of loans and
other pertinent factors. Loans deemed uncollectible are charged to the
allowance. Provisions for loan losses and recoveries on loans previously
charged off are added to the allowance.
Loans considered to be impaired are reduced to the present value of
expected future cash flows or to the fair value of collateral, by allocating a
portion of the allowance for loan losses to such loans. If these allocations
cause the allowance for loan losses to require an increase, such increase is
included in the provision for loan losses.
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. No rights were impaired at December 31, 1997 or 1996.
Properties and Equipment
Properties and equipment are stated at cost, less accumulated
depreciation. The provision for depreciation is computed principally by
accelerated methods.
Organization Costs and Goodwill
Organization costs and goodwill are being amortized using the
straight-line method over seven and fifteen years, respectively.
Loan Origination Fees and Costs
Loan origination fees and certain direct origination costs are capitalized
and recognized as an adjustment of the yield on the related loan.
Income Taxes
The Company records deferred tax assets and liabilities for future tax
consequences attributable to differences between the financial statement
carrying amounts of assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.
Off-Balance-Sheet Financial Instruments
In the ordinary course of business, the Bank has entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit and unadvanced commitments under commercial and home equity lines of
credit and overdraft protection accounts. Such financial instruments are
recorded in the consolidated financial statements when they become payable.
F-8
Cash and Cash Equivalents
For the purpose of presentation in the consolidated statements of cash
flows, cash and cash equivalents are defined as cash and due from banks,
interest-bearing deposits with banks and federal funds sold.
Earnings Per Share
The Company has 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.
Potential common stock is considered in the calculation of weighted-average
shares outstanding for diluted earnings per share.
The Company declared 5% and 3% stock dividends in 1997 and 1996. Earnings
and cash dividends per share and weighted-average shares outstanding have been
retroactively restated to reflect the stock dividends, as well as the stock
dividends in 1998 described in Note 22.
The Company adopted SFAS No. 129, "Disclosure of Information about Capital
Structure" in 1997. This statement has no effect on the Company's financial
statements as the capital disclosures meet the requirements of SFAS No. 129.
2. Cash and Due from Banks
The Federal Reserve Board requires the Company to maintain a rolling
average compensating balance of $400 in amounts on deposit.
3. Investment Securities
The carrying amounts of investment securities as shown in the consolidated
statements of financial condition and their approximate fair values at December
31, 1997 and 1996 were as follows:
Securities available for sale
------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------- ---------------- ----------
December 31, 1997
- ------------------------------------------------------
U.S. Treasury securities ............................. $ 20,973 $ 79 $ (9) $21,043
U.S. Government agencies and corporations ............ 3,581 2 (4) 3,579
Mortgage-backed securities and collateralized mortgage
obligations ......................................... 15,912 20 (81) 15,851
State and local government debt securities ........... 1,402 -- -- 1,402
U.S. Government and agency money market funds ........ 166 -- -- 166
Other securities ..................................... 823 -- -- 823
---------- ----------- ------------ -------
$ 42,857 $ 101 $ (94) $42,864
========== =========== ============ =======
Securitiesheld to maturity
------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ----------- ------------ -------
December 31, 1997
- -------------------------------------------------------
Mortgage-backed securities and collateralized mortgage
obligations ......................................... $ 1,962 $ -- $ (4) $ 1,958
========== ============ ============ =======
F-9
Securities available for sale
--------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- ------------------ ----------------- ----------
December 31, 1996
- ---------------------------------------------------
U.S. Treasury securities .......................... $ 18,907 $ 113 $ (29) $18,991
U.S. Government agencies and corporations ......... 496 1 -- 497
Mortgage-backed securities and collateralized
mortgage obligations ............................. 11,188 10 (110) 11,088
U.S. Government and agency money
market funds ..................................... 6,548 -- -- 6,548
Other securities .................................. 767 -- -- 767
---------- ----------- ----------- -------
$ 37,906 $ 124 $ (139) $37,891
========== =========== =========== =======
Securitiesheld to maturity
--------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- - -------------- ----------- -------
December 31, 1996
- ----------------------------------------------------
Mortgage-backed securities and collateralized
mortgage obligations ............................. $ 3,123 $ 3 $ (21) $ 3,105
========== =============== =========== =======
Investment securities with amortized cost and fair value of approximately
$30,629 and $21,780 at December 31, 1997 and 1996, respectively, were pledged
to secure public deposits, treasury tax and loan deposits and borrowings and
for other purposes required or permitted by law.
The amortized cost and fair value of debt securities at December 31, 1997
by contractual maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Securities available for Securities held to
sale maturity
------------------------ ----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ---------- ----------- --------
Due in one year or less ............ $13,852 $13,858 $ 866 $ 864
Due from one to five years ......... 13,220 13,277 -- --
Due from five to ten years ......... 5,804 5,772 1,000 999
Due after ten years ................ 8,991 8,968 96 95
------- ------- ------ ------
$41,867 $41,875 $1,962 $1,958
======= ======= ====== ======
Mortgage-backed securities and collateralized mortgage obligations are
allocated among the above maturity groupings based on their final maturity
dates.
During 1997 and 1996, the Company sold U.S. Government and agency money
market funds securities available for sale for total proceeds of $27,302 and
$15,104, respectively. The sales resulted in no gains or losses for 1997 and
1996.
4. Loans Receivable
The components of loans receivable were as follows:
1997 1996
----------- -----------
Commercial ....................... $ 20,819 $ 22,134
Commercial real estate ........... 40,984 34,908
Construction ..................... 3,012 1,941
Residential real estate .......... 26,638 23,827
Home equity ...................... 20,036 15,726
Consumer ......................... 7,461 6,978
Less deferred loan fees .......... (62) (85)
-------- --------
Total .......................... $118,888 $105,429
======== ========
F-10
The Bank services residential mortgage loans sold to investors under
nonrecourse agreements amounting to $38,301 and $36,425 at December 31, 1997
and 1996, respectively. Mortgage loan sales resulted in a net gain on loan
sales of $91 and $69 in 1997 and 1996, respectively.
Mortgage servicing rights of $69 and $74 were capitalized in 1997 and
1996, respectively. Amortization of mortgage servicing rights was $24 and $4 in
1997 and 1996, respectively.
Impaired loans recorded in conformity with SFAS No. 114, as amended by
SFAS No. 118, totaled $2,499 and $599 at December 31, 1997 and 1996,
respectively. The total allowance for loan losses related to these loans was
$486 and $165 at December 31, 1997 and 1996, respectively. The average balance
of outstanding impaired loans was $1,159 and $492 for 1997 and 1996,
respectively. Interest income recognized for cash payments on impaired loans
during 1997 and 1996 was not material to the consolidated financial statements.
5. Allowance for Loan Losses
An analysis of the allowance for loan losses at December 31, 1997 and 1996
is as follows:
1997 1996
--------- ---------
Balance at beginning of year ................... $1,450 $1,133
Add: Provision for loan losses ................. 355 360
Recoveries of previous charge-offs ..... 12 5
Less: Loans charged off ........................ (100) (48)
------ ------
Balance at end of year ......................... $1,717 $1,450
====== ======
6. Properties and Equipment
Properties and equipment are comprised of the following:
1997 1996
-------- ---------
Land ....................................... $ 245 $ 198
Bank premises .............................. 1,862 695
Furniture and equipment .................... 2,029 1,524
Leasehold improvements ..................... 195 103
Construction in progress ................... -- 897
------ ------
Total cost ............................. 4,331 3,417
Less accumulated depreciation .......... 1,525 1,150
------ ------
Net properties and equipment ........... $2,806 $2,267
====== ======
Certain Bank facilities and equipment are leased under various operating
leases. Rental expense was approximately $217 and $188 for 1997 and 1996,
respectively. Future minimum rental commitments under noncancelable leases at
December 31, 1997 are:
1998 ............... $ 434
1999 ............... 234
2000 ............... 244
2001 ............... 242
2002 ............... 187
Thereafter ......... 402
------
$1,743
======
The Bank has entered into an agreement to purchase a parcel of land for
$200.
F-11
7. Employee Benefit Plans
The Company has established a defined contribution pension plan under
Section 401(k) of the Internal Revenue Code. Plan participants, who consist of
all employees meeting minimum age and service requirements who elect to
participate, are permitted to contribute a percentage of their wages to the
plan on a pre-tax basis. The Company matches a portion of each employee's
contribution, resulting in an expense of $39 and $32 for 1997 and 1996,
respectively.
The Company has established nonqualified deferred compensation
arrangements for certain officers. Expense under these arrangements totaled $8
and $17 for 1997 and 1996, respectively.
Effective June 26, 1997, the Company adopted a nonqualified supplemental
executive retirement plan for the benefit of the key employees. A life
insurance policy was acquired for the purpose of serving as the primary funding
source. As of December 31, 1997, the cash value of this policy was $599.
8. Deposits
The aggregate amount of certificates of deposit with a minimum
denomination of $100 was $10,522 and $9,097 at December 31, 1997 and 1996,
respectively.
At December 31, 1997, the scheduled maturities of certificates of deposit
are as follows:
1998 ........................ $36,235
1999 ........................ 11,592
2000 ........................ 3,425
2001 ........................ 545
2002 and thereafter ......... 4,984
-------
$56,781
=======
9. Borrowed Funds
Securities sold under agreements to repurchase generally mature within one
to four days from the transaction date. Other borrowed funds consist of Federal
Home Loan Bank (FHLB) advances and treasury, tax and loan deposits. Treasury
tax and loan deposits are repaid upon notification by the U.S. Treasury.
Information concerning securities sold under agreements to repurchase is
summarized as follows:
1997 1996
------------ ------------
Average balance during the year .................... $ 11,931 $ 11,770
Average interest rate during the year .............. 4.28% 4.42%
Maximum month-end balance during the year .......... 12,991 14,070
The Bank is required to own stock of the FHLB in order to borrow from the
FHLB. FHLB advances are collateralized by a pledge of certain mortgage loans
and by a lien on the Bank's FHLB stock of $491 at December 31, 1997, which is
included in investment securities available for sale in the consolidated
statements of financial condition.
A summary of borrowing from the FHLB at December 31, 1997 is as follows:
Final Maturity Interest Rate
- ---------------------------- --------------
September 1999 .......... 5.79% $ 264
September 2002 .......... 6.18 287
September 2007 .......... 6.47 688
------
$1,239
======
F-12
10. Long-Term Debt
The Company has a $2,895 note payable collateralized by all of the stock
of the Bank. Annual principal payments of $362 and $396 are due in 1998 and
1999, respectively, with a remaining unpaid note balance due on October 16,
2000. Payments of interest are due quarterly at the six-month Treasury rate
plus 1.75% (7.10% at December 31, 1997). Prior to 1997, the interest rate was
equal to the lender's base rate; thereafter, the interest rate is reset every
six months. The note agreement contains certain restrictive covenants including
maintenance of certain net worth and equity levels, prior approval of dividend
payments, certain investments, fixed asset expenditures, debenture principal
reductions, stock issuance or redemption, debt incurrence, mergers or
management changes. The Company and Bank were in compliance with such covenants
at December 31, 1997 and 1996.
Maturities on long-term debt and FHLB borrowings (Note 9) are as follows:
Long-Term
FHLB Debt Total
--------- ---------- --------
1998 ............... $ 253 $ 362 $ 615
1999 ............... 229 396 625
2000 ............... 120 2,137 2,257
2001 ............... 128 -- 128
2002 ............... 119 -- 119
Thereafter ......... 390 -- 390
------ ------ ------
Total .......... $1,239 $2,895 $4,134
====== ====== ======
11. Mandatory Convertible Debentures
The Company issued $300 of mandatory convertible debentures which bear
interest at 1% per annum in excess of the prime rate of interest of the Bank of
Boston N.A. Interest is payable on March 31, June 30, September 30, and
December 31 of each year until the debentures are paid in full or converted
into shares of common stock. On or prior to September 30, 2002, the holders of
the debentures must convert the entire principal amount into shares of common
stock of Merrill Merchants Bancshares, Inc. at a conversion rate equal to $4.73
of principal amount of debentures for one share of common stock, subject to
adjustment for any recapitalization of common stock, such as a split or reverse
split of common stock.
The debentures are unsecured and any payment of interest or principal will
be subordinated to the timely payment of principal and interest on all existing
and future obligations of the Company for borrowed money from any bank trust
company, insurance company or other financial institution engaged in the
business of lending money.
12. Income Taxes
Income tax expense consists of:
Current Deferred Total
--------- ---------- ------
1997
- ----
Federal ......... $722 $ 18 $740
State ........... 25 -- 25
---- ------ ----
$747 $ 18 $765
==== ====== ====
1996
- -----
Federal ......... $880 $ (266) $614
State ........... 25 -- 25
---- ------ ----
$905 $ (266) $639
==== ====== ====
F-13
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:
1997 1996
------ -------
Computed tax expense .......................... $737 $598
Increase in income tax expense resulting from:
State taxes, net of federal benefit .......... 16 16
Other ........................................ 12 25
---- ----
$765 $639
==== ====
The tax effects of temporary differences that give rise to deferred income
tax assets and liabilities are as follows:
1997 1996
--------------------- --------------------
Asset Liability Asset Liability
------- ----------- ------- ----------
Allowance for loan losses ......... $153 $-- $124 $--
Start-up costs .................... -- 49 -- 33
Mortgage servicing rights ......... -- 39 -- 24
Deferred compensation ............. 29 -- 31 --
Other ............................. 35 -- 49 --
---- --- ---- ---
$217 $88 $204 $57
==== === ==== ===
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.
13. Related Parties
The Bank has entered into loan transactions with its directors, executive
officers, significant shareholders and their affiliates (related parties). Such
transactions were made in the ordinary course of business on substantially the
same terms and conditions, including interest rates and collateral, as those
prevailing at the same time for comparable transactions with other customers,
and did not, in the opinion of management, involve more than normal credit risk
or present other unfavorable features. The aggregate amounts of loans
outstanding to such related parties which exceed $60 in the aggregate at
December 31, 1997 and 1996 were $2,562 and $3,190, respectively. New loans to
such related parties totaled $77 in 1997 and $1,554 in 1996, and repayments
totaled $705 in 1997 and $556 in 1996. Commitments, as described in Note 14, to
related parties totaled $4,240 and $3,655 at December 31, 1997 and 1996,
respectively.
14. 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
which involve, to varying degrees, elements of credit risk in excess of the
amount recognized in the consolidated statements of financial condition. The
Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. 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.
F-14
The Bank's commitments at December 31, 1997 and 1996 are as follows:
1997 1996
--------- ---------
Commitments to extend credit ............ $ 4,392 $ 5,334
Letters of credit ....................... 804 522
Unadvanced commitments
Commercial lines of credit ............. 14,741 12,488
Construction lines of credit ........... 893 718
Home equity lines of credit ............ 10,421 9,464
Overdraft protection accounts .......... 1,397 1,353
Credit card lines ...................... 2,157 1,916
15. Shareholders' Equity
The Company is prohibited from repurchasing any of its outstanding common
stock while its debt-to-equity ratio exceeds 30% or the proposed stock
repurchase would cause its debt-to-equity ratio to exceed 30%. The Company's
debt-to-equity ratio at December 31, 1997 and 1996 was 29.1% and 41.3%,
respectively.
The shareholders of the Company have entered into an agreement whereby all
stock becoming available for sale or other transfer must first be offered to
the other shareholders and then to the Company under the same terms and
conditions. Shareholders who are officers also have the option under the
agreement to require the Company to purchase all of their stock at book value
(excluding goodwill) in certain circumstances. In 1998, the shareholders and
the Company agreed to terminate the agreement. The termination will have an
effective date concurrent with the effective date of the Form SB-2 registration
statement filed with the Securities and Exchange Commission.
Holders of preferred stock are entitled to dividends equal to the total
stated value of $42.53 per share multiplied by the prime rate in effect from
time to time as announced by Bank of Boston. The dividends payable on the
preferred stock are cumulative, meaning that if dividends are not paid when
declared, they will accumulate and be payable in full before any dividends are
paid on common stock. However, the payment of any dividends on or the
redemption of the preferred stock is subordinate to the payment of any debt by
the Company. The preferred stock is non-voting.
Each share of preferred stock is convertible into one share of common
stock, subject to appropriate adjustment upon a recapitalization of the common
stock (such as a split or reverse split). After October 1, 2002, and to the
extent not previously converted into common stock, the preferred stock may be
redeemed by the Company for a price equal to the sum of its stated value plus
unpaid and accrued dividends. However, the preferred stock may not be called or
redeemed by the Company unless approved in advance by the Federal Reserve Bank
of Boston.
16. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except for number of shares and per-share
data):
1997 1996
------------- -------------
Basic earnings per share
Net income, as reported ................................................. $ 1,402 $ 1,120
Preferred stock dividends declared ...................................... (76) (74)
---------- ----------
Income available to common shareholders ............................... $ 1,326 $ 1,046
========== ==========
Weighted-average shares outstanding ..................................... 1,542,123 1,542,123
Effect of subsequent stock dividend (Note 22) ........................... 77,103 77,103
---------- ----------
Restated weighted-average shares outstanding .......................... 1,619,226 1,619,226
========== ==========
Basic earnings per share ................................................ $ 0.82 $ 0.65
========== ==========
Diluted earnings per share
Net income, as reported ................................................. $ 1,402 $ 1,120
Interest on mandatory convertible debentures, net of tax ................ 19 19
---------- ----------
Income available to common shareholders ............................... $ 1,421 $ 1,139
========== ==========
Weighted-average shares outstanding ..................................... 1,542,123 1,542,123
Effect of stock options, net of assumed treasury stock purchases ........ 112,491 72,522
Effect of convertible preferred stock ................................... 190,440 190,440
Effect of mandatory convertible debentures .............................. 63,486 63,486
Effect of subsequent stock dividend (Note 22) ........................... 95,445 93,447
---------- ----------
Adjusted and restated weighted-average shares outstanding ............. 2,003,985 1,962,018
========== ==========
Diluted earnings per share .............................................. $ 0.71 $ 0.58
========== ==========
F-15
17. Regulatory Matters
The Company and Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory -- and possibly
additional discretionary -- actions by regulators that, if undertaken, could
have a direct material effect on the Company and Bank's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and Bank must meet specific capital
guidelines that involve quantitative measures of the Company's and Bank's
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's and 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 Company and Bank to maintain minimum amounts and ratios (set forth
in the table below) of total and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes as of December 31, 1997, that
the Company and Bank meet all capital adequacy requirements to which they are
subject.
As of December 31, 1997 and 1996, the most recent notification from the
Federal Reserve Bank categorized the Company and Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized well
capitalized, the Company and Bank must maintain minimum total risk-based, Tier
I risk-based, and Tier I leverage ratios as set forth in the table. There are
no conditions or events since that notification that management believes have
changed this category.
The Company's and Bank's actual capital amounts and ratios are also
presented in the table. No deduction was made from capital for interest-rate
risk in 1997 and 1996.
To be well
capitalized under
prompt
For capital corrective action
Actual adequacy purposes provisions
---------------------- ------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ----------- -------- ---------- ---------- -----------
As of December 31, 1997
Total capital (to risk weighted assets)
Consolidated .......................... $12,201 11.30% $8,635 8.00% N/A
Bank .................................. 14,974 13.88 8,632 8.00 $10,790 10.00%
Tier I capital (to risk weighted assets)
Consolidated .......................... 10,547 9.77 4,318 4.00 N/A
Bank .................................. 13,621 12.62 4,316 4.00 6,474 6.00
Tier I capital (to average assets)
Consolidated .......................... 10,547 6.06 6,981 4.00 N/A
Bank .................................. 13,621 7.85 6,960 4.00 8,700 5.00
As of December 31, 1996
Total capital (to risk weighted assets)
Consolidated .......................... 10,667 11.10 7,690 8.00 N/A
Bank .................................. 13,848 14.42 7,693 8.00 9,617 10.00
Tier I capital (to risk weighted assets)
Consolidated .......................... 9,162 9.53 3,845 4.00 N/A
Bank .................................. 12,645 13.17 3,832 4.00 5,748 6.00
Tier I capital (to average assets)
Consolidated .......................... 9,162 5.98 6,135 4.00 N/A
Bank .................................. 12,645 8.29 6,094 4.00 7,617 5.00
F-16
18. Other Expense
Other expense amounts are summarized as follows for 1997 and 1996:
1997 1996
--------- ---------
Professional fees ............................................. $ 215 $ 217
Other ......................................................... 211 198
Printing, postage, stationery and supplies .................... 189 180
Advertising and promotion ..................................... 191 155
Bankcard processing ........................................... 191 145
Amortization .................................................. 107 107
Travel, meetings, conventions and employee education .......... 101 102
Trust expense ................................................. 106 96
Telephone ..................................................... 86 73
Insurance ..................................................... 84 70
------ ------
Total ..................................................... $1,481 $1,343
====== ======
19. Stock Options
Under the Employee and Director Stock Option Plan, the incentive stock
option plan (ISO) for officers and key employees and the nonstatutory stock
option plan (Non-ISO) for directors provide for the issuance of up to 558,000
shares of common stock. The purchase price of the stock covered by each option
shall be its fair market value, which must be equal to at least 100% of the
book value of common stock, on the date such option is granted. All options are
granted subject to an initial vesting period which ended on December 31, 1997
after which options become exercisable until May 26, 2003.
The Company accounts for these options in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
The exercise price of each option equals the market price of the Company's
stock on the date of grant, no compensation cost has been recognized for the
plan. Had compensation cost for the plan been determined based on the fair
value of the options at the grant dates consistent with the method described in
SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's 1997 net
income and earnings per share would have been reduced to the pro forma amounts
indicated below. In 1996, no options were granted; thus, pro forma amounts are
the same as reported.
Earnings per Share
-----------------------
(In thousands except for per-share data) Net Income Basic Diluted
- ------------------------------------------ ------------ ---------- ----------
1997
- ----
As reported ........................... $1,402 $ 0.82 $ 0.71
Pro forma ............................. 1,392 0.81 0.70
1996
- ----
As reported ........................... $1,120 $ 0.65 $ 0.58
Pro forma ............................. 1,120 0.65 0.58
The fair value of each option is estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted-average
assumptions used for all grants in 1997: dividend yield of 0%, risk-free
interest rate of 6%, and expected lives of five years. No volatility was
assumed as it would not materially affect the fair value of the options.
F-17
A summary of the status of the plan as of December 31, 1997 and 1996, and
changes during the years then ended, is presented below.
1997 1996
------------------------------ -----------------------------
Weighted Weighted
Number Average Number Average
of Shares Exercise Price of Shares Exercise Price
----------- ---------------- ----------- ---------------
Outstanding at beginning of year ............ 421,218 $ 5.24 409,851 $ 5.36
Granted during the year ..................... 27,900 6.59 -- --
Expired during the year ..................... -- -- (927) --
Additional shares for which options are
exercisable due to stock dividends ......... 20,799 -- 12,294 --
------- ------- ------- ------
Outstanding at end of year .................. 469,917 $ 5.09 421,218 $ 5.24
======= =======
The following information applies to options outstanding at December 31,
1997:
Number outstanding .................................. 469,917
Range of exercise prices ............................ $4.82 - $6.59
Weighted-average exercise price ..................... $ 5.09
Weighted-average remaining contractual life ......... 6 years
20. Fair Value of Financial Instruments
Fair value estimates, methods and assumptions are set forth below for the
Company's financial instruments.
Cash and Due from Banks, Interest-Bearing Deposits with Banks and Federal
Funds Sold. The fair value of cash and due from banks, interest-bearing
deposits with banks and federal funds sold approximates their relative book
values at December 31, 1997, as these financial instruments have short
maturities.
Investment Securities. The fair values of investment securities are
estimated based on bid prices published in financial newspapers or bid
quotations received from securities dealers.
Loans Receivable. Fair values are estimated for portfolios of loans
receivable with similar financial characteristics. The fair values approximate
carrying value for all loans with variable interest rates.
The fair values of fixed rate loans are calculated by discounting
scheduled cash flows through the estimated maturity using estimated market
discount rates that reflect the risk inherent in the loan. The estimates of
maturity are based on the Bank's historical experience with repayments for each
loan classification, modified, as required, by an estimate of the effect of
current economic and lending conditions, and the effects of estimated
prepayments.
Management has made estimates of fair value using discount rates that it
believes to be reasonable. However, because there is no market for many of
these financial instruments, management has no basis to determine whether the
fair value presented below would be indicative of the value negotiated in the
actual sale.
Accrued Interest Receivable. The fair value approximates the carrying
value as this financial instrument has a short maturity. It is the Bank's
policy to stop accruing interest on loans for which it is probable that the
interest is not collectible. Therefore, the fair value of this financial
instrument has been adjusted to reflect credit risk.
Deposits. The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, savings, NOW accounts and money market
accounts, is equal to the amount payable on demand. The fair value of
certificates of deposit is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities.
The fair value estimates do not include the benefit that results from the
low-cost funding provided by the deposits compared to the cost of borrowing
funds in the market. If that value were considered, the fair value of the
Bank's net assets could increase.
Borrowed Funds. The fair value approximates the carrying value as these
financial instruments have short maturities, variable interest rates, or both.
F-18
Accrued Interest Payable. The fair value approximates the book value as
this financial instrument has a short maturity.
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.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These values do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial instruments include property and equipment and other real
estate owned. In addition, the tax ramifications related to the realization of
the unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of the estimates.
Summary
A summary of the estimated fair values for the Company's significant
financial instruments at December 31, 1997 and 1996 follows:
Estimate of
December 31, 1997 Carrying Value Fair Value
- ----------------- ---------------- ------------
Financial Assets
Cash and cash equivalents ................. $ 10,659 $ 10,659
Securities available for sale ............. 42,864 42,864
Securities to be held to maturity ......... 1,962 1,958
Loans held for sale ....................... 508 511
Loans receivable, net ..................... 117,171 117,372
Accrued interest receivable ............... 1,109 1,109
Financial Liabilities
Deposits .................................. 146,312 146,842
Accrued interest payable .................. 227 227
Borrowed funds ............................ 20,236 20,236
December 31, 1996
- -----------------
Financial Assets
Cash and cash equivalents ................. $ 8,591 $ 8,591
Securities available for sale ............. 37,891 37,891
Securities to be held to maturity ......... 3,123 3,105
Loans held for sale ....................... 341 341
Loans receivable, net ..................... 103,979 104,240
Accrued interest receivable ............... 947 947
Financial Liabilities
Deposits .................................. 126,704 127,394
Accrued interest payable .................. 160 160
Borrowed funds ............................ 18,991 18,991
F-19
21. Parent Company Financial Information
The following is summarized financial statement information for Merrill
Merchants Bancshares, Inc. as of December 31, 1997 and 1996 and for the years
then ended:
SUMMARIZED BALANCE SHEET INFORMATION
1997 1996
--------- -----------
ASSETS
Cash and cash equivalents ............................................ $ 1 $ 27
Investment securities (fair value of $166,000 and $548,000 at
December 31, 1997 and 1996, respectively) ........................... 166 548
Investment in Merrill Merchants Bank ................................. 14,041 13,154
Accrued income and other assets ...................................... 1 2
Deferred income tax benefit .......................................... 498 406
------- -------
Total assets ...................................................... $14,707 $14,137
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Accrued expenses and other liabilities .............................. $ 545 $ 471
Long-term debt ...................................................... 2,895 3,695
Mandatory convertible debentures .................................... 300 300
------- -------
Total liabilities ................................................. 3,740 4,466
------- -------
Shareholders' equity
Convertible cumulative preferred stock .............................. 20 20
Common stock ........................................................ 1,542 1,469
Capital surplus ..................................................... 7,754 7,331
Retained earnings ................................................... 1,647 861
Unrealized gain (loss) on securities available for sale ............. 4 (10)
------- -------
Total shareholders' equity ........................................ 10,967 9,671
------- -------
Total liabilities and shareholders' equity ........................ $14,707 $14,137
======= =======
SUMMARIZED STATEMENTS OF INCOME INFORMATION
Dividends from bank subsidiary ....................................... $ 701 $ --
Interest income on investments ....................................... 12 36
------- -------
Total income ...................................................... 713 36
------- -------
Interest expense on borrowed funds ................................... 270 346
Operating expenses ................................................... 5 2
------- -------
Total expenses .................................................... 275 348
------- -------
Income (loss) before income tax benefit .............................. 438 (312)
Income tax benefit ................................................... 91 96
------- -------
Income (loss) before equity in undistributed net income of subsidiary 529 (216)
Equity in undistributed net income of subsidiary ..................... 873 1,336
------- -------
Net income ........................................................ $ 1,402 $ 1,120
======= =======
F-20
1997 1996
--------- -------------
SUMMARIZED STATEMENTS OF CASH FLOWS INFORMATION
Cash flows from operating activities
Net income ....................................................... $1,402 $ 1,120
Adjustments to reconcile net income to net cash provided (used)
by operating activities
Deferred income tax benefit ...................................... (91) (96)
Equity in undistributed net income of subsidiary ................. (873) (1,336)
Decrease in accrued income and other assets ...................... 1 36
Increase in accrued expenses and other liabilities ............... 73 397
------ -------
Net cash provided by operating activities ...................... 512 121
------ -------
Cash flows from investing activities
Proceeds from sale of investment securities ...................... 602 654
Purchase of investment securities ................................ (220) (370)
------ -------
Net cash provided by investing activities ...................... 382 284
------ -------
Cash flows from financing activities
Dividends paid on convertible cumulative preferred stock ......... (76) (74)
Dividends paid on common stock ................................... (44) (1)
Payment of long-term debt ........................................ (800) (305)
------ ---------
Net cash used by financing activities .......................... (920) (380)
------ ---------
Net increase (decrease) in cash and cash equivalents .............. (26) 25
Cash and cash equivalents, beginning of year ...................... 27 2
------ ---------
Cash and cash equivalents, end of year ............................ $ 1 $ 27
====== =========
22. Subsequent Events
Common Stock Dividends
On February 28, 1998, the Company declared a 5% stock dividend on its
common stock. Earnings per share for 1997 and 1996 have been restated to
reflect this stock dividend.
In 1998, the Company increased the number of authorized shares of common
stock and declared a stock split effected in the form of an 800% stock
dividend, with an effective date of July 20, 1998. All share and per share
information presented in the accompanying consolidated financial statements has
been retroactively adjusted for the stock split.
Impact of Recently Issued Accounting Standards
SFAS No. 130, "Reporting Comprehensive Income," is effective for years
beginning after December 15, 1997. The Statement contains certain presentation
and disclosure requirements concerning the components of comprehensive income
and the changes therein. Adoption of the Statement will require certain changes
in the format of the consolidated statement of changes in shareholders' equity.
In 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) No. 98-5, "Reporting on the Costs of Start-Up
Activities." The SOP requires costs of start-up activities to be expensed as
incurred. The SOP is effective for years beginning after December 15, 1998.
Adoption of the SOP is expected to have no effect on net income for 1999.
F-21
MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 1998
(Unaudited)
(In Thousands, Except Number of Shares and per Share Data)
ASSETS
Cash and due from banks .................................................................. $ 5,959
Interest-bearing deposits with banks ..................................................... 816
--------
Total cash and cash equivalents ....................................................... 6,775
Investment securities
Available for sale ...................................................................... 43,839
To be held to maturity .................................................................. 1,740
Loans held for sale ...................................................................... 2,127
Loans receivable ......................................................................... 117,708
Less allowance for loan losses .......................................................... 1,799
--------
Net loans receivable .................................................................. 115,909
Properties and equipment, net ............................................................ 2,751
Deferred income tax benefit .............................................................. 128
Accrued income and other assets .......................................................... 2,484
--------
Total assets .......................................................................... $175,753
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits .......................................................................... $ 20,229
Savings and NOW deposits ................................................................. 64,214
Certificates of deposit .................................................................. 55,955
--------
Total deposits ........................................................................ 140,398
Securities sold under agreements to repurchase (term and demand) ......................... 13,554
Other borrowed funds ..................................................................... 5,856
Accrued expenses and other liabilities ................................................... 1,394
Long-term debt ........................................................................... 2,745
Mandatory convertible debentures ......................................................... 300
--------
Total liabilities ..................................................................... 164,247
--------
Shareholders' equity
Convertible cumulative preferred stock, par value $1; authorized 50,000 shares, issued and
outstanding 19,566 shares ............................................................... 20
Common stock, par value $1; authorized 4,000,000 shares, issued and outstanding
1,655,640 shares ........................................................................ 1,656
Capital surplus .......................................................................... 8,387
Retained earnings ........................................................................ 1,394
Unrealized gain on securities available for sale ......................................... 49
--------
Total shareholders' equity ............................................................ 11,506
--------
Total liabilities and shareholders' equity ............................................ $175,753
========
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
(In Thousands, Except Number of Shares and per Share Data)
1998 1997
----------- -----------
Interest and dividend income
Interest and fees on loans ........................................... $ 2,827 $ 2,497
Interest on investment securities .................................... 645 531
Dividends on investment securities ................................... 17 29
Interest on federal funds sold and interest-bearing deposits ......... 21 17
------- -------
Total interest and dividend income ................................. 3,510 3,074
Interest expense
Interest on deposits ................................................. 1,364 1,190
Interest on borrowed funds ........................................... 249 219
------- -------
Total interest expense ............................................. 1,613 1,409
------- -------
Net interest income ................................................ 1,897 1,665
Provision for loan losses ............................................. 90 75
------- -------
Net interest income after provision for loan losses ................ 1,807 1,590
------- -------
Other income
Service charges on deposit accounts .................................. 120 118
Other service charges and fees ....................................... 115 111
Trust fees ........................................................... 151 119
Other ................................................................ 45 35
Net gain on sale of mortgage loans ................................... 50 21
------- -------
Total other income ................................................. 481 404
------- -------
Other expense
Salaries and employee benefits ....................................... 852 760
Occupancy expense .................................................... 166 163
Equipment expense .................................................... 123 118
Data processing ...................................................... 160 149
Other ................................................................ 394 363
------- -------
Total other expense ................................................ 1,695 1,553
------- -------
Income before income taxes ............................................ 593 441
Income tax expense .................................................... 213 161
------- -------
Net income ......................................................... $ 380 $ 280
======= =======
Basic earnings per common share ....................................... $ 0.22 $ 0.16
======= =======
Diluted earnings per common share ..................................... $ 0.19 $ 0.14
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
(In Thousands, Except Number of Shares and per Share Data)
Unrealized
Gain (Loss)
Convertible on Securities Total
Cumulative Common Capital Retained Available Shareholders'
Preferred Stock Stock Surplus Earnings for Sale Equity
----------------- -------- --------- ---------- --------------- --------------
Balance at December 31, 1996 ................ $20 $1,469 $7,331 $ 861 $ (10) $ 9,671
Net income .................................. -- -- -- 280 -- 280
Change in unrealized gain (loss) on
securities available for sale, net of
deferred income taxes of $63................ -- -- -- -- (123) (123)
--- ------ ------ ------ ------ -------
Total comprehensive income ................ -- -- -- 280 (123) 157
Convertible cumulative preferred stock
dividends declared, $0.97 per share......... -- -- -- (19) -- (19)
--- ------ ------ ------ ------ -------
Balance at March 31, 1997 ................... $20 $1,469 $7,331 $1,122 $ (133) $ 9,809
=== ====== ====== ====== ====== =======
Balance at December 31, 1997 ................ $20 $1,542 $7,754 $1,647 $ 4 $10,967
Net income .................................. -- -- -- 380 -- 380
Change in unrealized gain (loss) on
securities available for sale, net of
deferred income taxes of $23................ -- -- -- -- 45 45
--- ------ ------ ------ ------ -------
Total comprehensive income .................. -- -- -- 380 45 425
Common stock options exercised .............. -- 35 145 -- -- 180
5% common stock dividend declared ........... -- 79 488 (568) -- (1)
Common stock cash dividend declared,
$.03 per share.............................. -- -- -- (46) -- (46)
Convertible cumulative preferred stock
dividends declared, $0.97 per share......... -- -- -- (19) -- (19)
--- ------ ------ ------ ------ --------
Balance at March 31, 1998 ................... $20 $1,656 $8,387 $1,394 $ 49 $11,506
=== ====== ====== ====== ====== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
(In Thousands)
1998 1997
------------- -------------
Cash flows from operating activities
Net income ....................................................................... $ 380 $ 280
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation .................................................................... 86 72
Amortization .................................................................... 34 30
Net accretion of discounts on investment securities ............................. (24) (14)
Deferred income taxes ........................................................... 5 4
Originations of loans held for sale ............................................. (6,447) (1,915)
Proceeds from sale of loans held for sale ....................................... 4,839 2,181
(Increase) decrease in accrued income and other assets .......................... (12) 22
Increase in accrued expenses and other liabilities .............................. 265 205
Decrease in deferred loan fees, net ............................................. (5) (4)
Provision for loan losses ....................................................... 90 75
Provision for losses on other real estate owned ................................. 5 --
Net gain on sale of mortgage loans .............................................. (50) (21)
Net loss on property and equipment .............................................. 1 9
--------- ---------
Net cash (used) provided by operating activities .............................. (833) 924
--------- ---------
Cash flows from investing activities
Net (increase) decrease in loans to customers .................................... 1,177 (2,458)
Acquisition of premises and equipment ............................................ (32) (356)
Purchase of investment securities available for sale ............................. (4,614) (6,211)
Proceeds from sales and maturities of investment securities ......................
Sales and maturities of available for sale securities ........................... 3,739 7,279
Maturities of held to maturity securities ....................................... 222 253
Proceeds from sale of other real estate owned .................................... 38 --
--------- ---------
Net cash provided (used) in investing activities .............................. 530 (1,493)
--------- ---------
Cash flows from financing activities
Net decrease in demand, savings and NOW deposits ................................. (5,088) (933)
Net increase (decrease) in certificates of deposit ............................... (826) 1,085
Net increase in securities sold under agreement to repurchase .................... 1,657 104
Net increase in other borrowed funds ............................................. 712 3,168
Payment of long-term debt ........................................................ (150) --
Dividends paid on convertible cumulative preferred stock and common stock ........ (66) (19)
Proceeds from stock issuance ..................................................... 180 --
--------- ---------
Net cash (used) provided by financing activities .............................. (3,581) 3,405
--------- ---------
Net (decrease) increase in cash and cash equivalents .............................. (3,884) 2,836
Cash and cash equivalents, beginning of period .................................... 10,659 8,591
--------- ---------
Cash and cash equivalents, end of period .......................................... $ 6,775 $11,427
========= =========
Supplemental disclosures of cash flow information
Cash paid for interest ........................................................... $ 1,602 $ 1,412
Transfers to other real estate owned ............................................. -- 28
Income tax paid .................................................................. 71 56
The accompanying notes are an integral part of these consolidated financial
statements.
F-25
MERRILL MERCHANTS BANCSHARES, INC. AND SUBSIDIARY
Notes to Condensed Unaudited Consolidated Financial Statements
March 31, 1998 and 1997
1. Financial Statement Presentation
The accompanying consolidated financial statements include the accounts of
Merrill Merchants Bancshares, Inc. and its wholly-owned subsidiary, Merrill
Merchants Bank, a state-chartered bank. All intercompany accounts and
transactions have been eliminated in the consolidated financial statements.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary (consisting
of only normal recurring adjustments) to present fairly the Company's
consolidated financial position as of March 31, 1998, and the consolidated
results of their operations and their consolidated cash flows for the three
months ended March 31, 1998 and 1997. The results of operations for the three
months ended March 31, 1998 are not necessarily indicative of the results to be
expected for the full year.
2. Impact of Recently Issued Accounting Standards
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income," in 1998. The Statement contains certain
presentation and disclosure requirements concerning the components of
comprehensive income and the changes therein. The consolidated statement of
changes in shareholders' equity has been presented in accordance with the
requirements of the Statement.
The statement requires comprehensive income to be reported for all periods
presented. Comprehensive income includes both net income and other
comprehensive income. Other comprehensive income consists of the change in
unrealized gains and losses on securities available for sale.
The Company has presented earnings per share data in accordance with SFAS
No. 128, "Earnings per Share." The Statement requires publicly traded entities
to present basic and diluted earnings per common share.
In 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) No. 98-5, "Reporting on the Costs of Start-Up
Activities." The SOP requires costs of start-up activities to be expensed as
incurred. The SOP is effective for years beginning after December 15, 1998.
Adoption of the SOP is expected to have no effect on net income for 1999.
3. Stock Options
A summary of the status of the Employee and Director Stock Option Plan as
of March 31, 1998, and changes during the three months then ended, is presented
below.
Weighted
Number Average
of Shares Exercise Price
----------- ---------------
Outstanding at beginning of period ............................. 469,917 $ 5.09
Granted during the period ...................................... 81,900 6.84
Exercised during the period .................................... (34,848) 5.16
Additional shares for which options are exercisable due to stock
dividends ..................................................... 23,058 --
------- -------
Outstanding at end of period ................................... 540,027 $ 5.15
=======
4. Common Stock Dividends
On February 28, 1998, the Company declared a 5% stock dividend on its
common stock. Earnings per share have been restated to reflect this stock
dividend.
In 1998, the Company increased the number of authorized shares of common
stock and declared a stock split effected in the form of an 800% stock
dividend, with an effective date of July 20, 1998. All share and per share
information presented in the accompanying consolidated financial statements has
been retroactively adjusted for the stock split.
F-26
5. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share for the three months then ended (in thousands, except for
number of shares and per-share data):
1998 1997
------------- -------------
Basic earnings per share
Net income, as reported ................................................. $ 380 $ 280
Preferred stock dividends declared ...................................... (19) (19)
---------- ----------
Income available to common shareholders ................................ $ 361 $ 261
========== ==========
Weighted-average shares outstanding ..................................... 1,641,969 1,619,226
========== ==========
Basic earnings per share ................................................ $ 0.22 $ 0.16
========== ==========
Diluted earnings per share
Net income, as reported ................................................. $ 380 $ 280
Interest on mandatory convertible debentures, net of tax ................ 5 5
---------- ----------
Income available to common shareholders ................................ $ 385 $ 285
========== ==========
Weighted-average shares outstanding ..................................... 1,641,969 1,619,226
Effect of stock options, net of assumed treasury stock purchases ........ 131,706 95,778
Effect of convertible preferred stock ................................... 66,654 66,654
Effect of mandatory convertible debentures .............................. 199,935 199,935
---------- ----------
Adjusted weighted-average shares outstanding ........................... 2,040,264 1,981,593
========== ==========
Diluted earnings per share .............................................. $ 0.19 $ 0.14
========== ==========
F-27
This Page Is Intentionally Left Blank
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or make any representations not contained in this Prospectus and,
if given or made, such information or representations must not be relied upon
as having been authorized by the Company or the Underwriter. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy to
any person in any jurisdiction in which such offer or solicitation is unlawful
or to any person to whom it is unlawful. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has been no change in the affairs of the Company
since the date hereof or that the information contained herein is correct as of
any time subsequent to the date hereof.
-------------------
TABLE OF CONTENTS
Page
Available Information ......................... ii
Prospectus Summary ............................ 1
The Company and the Bank ...................... 1
Risk Factors .................................. 8
Use of Proceeds ............................... 14
Market for Common Stock ....................... 14
Dividends ..................................... 15
Capitalization ................................ 16
Dilution ...................................... 17
Selected Consolidated Financial Data .......... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................. 20
Business ...................................... 35
Management .................................... 43
Certain Transactions .......................... 51
Security Ownership of Certain Beneficial
Owners and Management ...................... 52
Description of Securities ..................... 55
Supervision and Regulation .................... 59
Underwriting .................................. 65
Shares Eligible for Future Sale ............... 67
Legal Matters ................................. 68
Experts ....................................... 68
Financial Statements .......................... F-1
Until September 4, 1998 (25 days after the date of this Prospectus), all
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
600,000 Shares
[Logo] Merrill Merchants Bancshares, Inc.
Common Stock
--------------------
PROSPECTUS
--------------------
Advest, Inc.
August 10, 1998
================================================================================