-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NYvUWvvXZ/8e/+AX4M5NYPijI+g0qfJzez1/co3mUo/XxmcWwXEw8EVYxz91pslD NLtkxhQgbJnLPf84ATAlZA== 0000765207-98-000002.txt : 19980331 0000765207-98-000002.hdr.sgml : 19980331 ACCESSION NUMBER: 0000765207-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST NATIONAL LINCOLN CORP /ME/ CENTRAL INDEX KEY: 0000765207 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 010404322 STATE OF INCORPORATION: ME FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 002-96573 FILM NUMBER: 98577696 BUSINESS ADDRESS: STREET 1: P.O. BOX 940 STREET 2: MAIN STREET CITY: DAMARISCOTTA STATE: ME ZIP: 04543 BUSINESS PHONE: 2075633195 MAIL ADDRESS: STREET 1: P.O. BOX 940 CITY: DAMARISCOTTA STATE: ME ZIP: 04543 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the Fiscal Year ended December 31, 1997 Commission File Number 2-96573 FIRST NATIONAL LINCOLN CORPORATION (Exact name of Registrant as specified in its charter) MAINE 01-0404322 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) MAIN STREET, DAMARISCOTTA, MAINE 04543 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (207) 563-3195 Securities registered pursuant to Section 12(b) or Section 12(g) of the Securities Exchange Act of 1934 None Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[ ] State the aggregate market value of voting stock held by non-affiliates of the Registrant as of March 1, 1998: Common Stock, $.01 par value per share: $48,358,000 Indicate the number of shares outstanding of each of the issuer's class of common stock as of March 1, 1998: Common stock: 2,479,917 shares TABLE OF CONTENTS PART I ITEM 1. Discussion of Business ------------------------------------------- 1 ITEM 2. Properties ------------------------------------------------------- 3 ITEM 3. Legal Proceedings ------------------------------------------------ 4 ITEM 4. Submission of Matters to a Vote of Security Holders -------------- 5 PART II ITEM 5. Market for Registrant's Common Equity ---------------------------- 6 ITEM 6. Selected Financial Data ------------------------------------------ 7 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ---------------------------------------- 8 ITEM 7A.Quantitative and Qualitative Disclosures about Market Risk ------ 24 ITEM 8. Financial Statements and Supplementary Data ---------------------- 27 ITEM 9. Changes in and/or Disagreements with Accountants ----------------- 61 PART III ITEM 10. Directors and Executive Officers of the Registrant -------------- 62 ITEM 11. Executive Compensation ------------------------------------------ 66 ITEM 12. Security Ownership of Certain Beneficial Owners and Management -- 74 ITEM 13. Certain Relationships and Related Transactions ------------------ 75 PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8K-- 76 Signatures --------------------------------------------------------------- 77 ITEM 1. Discussion of Business First National Lincoln Corporation (the "Company") was incorporated under the general business laws of the State of Maine on January 15, 1985, for the purpose of becoming the parent holding company of The First National Bank of Damariscotta (the "Bank"). The common stock of the Bank is the principal asset of the Company, which has no other subsidiaries. As of December 31, 1997, the Company's securities consisted of one class of common stock, $.01 par value per share, of which there were 2,475,548 shares outstanding and held of record by approximately 360 shareholders. The Bank was chartered as a national bank under the laws of the United States on May 30, 1864. The Bank's capital stock consists of one class of common stock of which 120,000 shares, par value $2.50 per share, are authorized and outstanding. All of the Bank's common stock is owned by the Company. The Bank has five offices in Mid-Coast Maine, including its principal office located on Main Street, Damariscotta, Lincoln County, Maine and four branch offices located at U.S. Route 1, Waldoboro, Maine; Townsend Avenue, Boothbay Harbor, Maine; Route 27, Wiscasset, Maine; and U.S. Route 1, Rockport, Maine. The Bank also maintains an Operations Center at the corner of Bristol Road and Cross Street in Damariscotta. The Bank has not consummated any mergers, consolidations or other acquisitions of assets with any other person during the past five years, other than as described elsewhere herein. The Bank emphasizes personal service to the community, concentrating on retail banking. Customers are primarily small businesses and individuals for whom the Bank offers a wide variety of services, including checking, savings and investment accounts, consumer, commercial and mortgage loans, credit cards, as well as a full investment management and trust department. The Bank has not made any material changes in its mode of conducting business during the past five years. The banking business in the Bank's market area historically has been seasonal with lower deposits in the winter and spring and higher deposits in the summer and fall. This swing is fairly predictable and has not had a materially adverse effect on the Bank. The Bank operates in a highly competitive geographical area with respect to both loans and deposits, primarily from savings banks, savings and loan associations, credit unions, and other commercial banks, some of which are larger institutions with higher lending limits than the Bank. The Bank also has competition from non-banking providers of financial products and services such as insurance companies, mortgage companies, automotive finance companies, and mutual funds both from within and without the Bank's primary geographic service area. Competition has intensified in recent years with a revision in banking law which allows out-of-state bank holding companies to acquire or establish banks in Maine. As a result, several out-of-state holding companies have entered the Maine banking market, principally through the acquisition of existing Maine banks. The Bank expects to be subject to an increased level of competition from these out-of-state banking institutions. The Bank anticipates that the further relaxation of restrictions on interstate banking potentially resulting from the recently enacted Riegle-Neal bill and the Maine Legislature's recent adoption of legislation permitting out-of-state banks, under certain circumstances, to establish or acquire branches in Maine, will heighten competition faced by the Bank, although the extent to which such legislation will have an effect in Maine is as yet unclear. As of December 31, 1997, the Bank employed 110 persons, with 97 full-time equivalent employees. Page 1 Supervision and Regulation The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the "Act"), and is required to file with the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") an annual report and other information required pursuant to the Act. The Company is subject to examination by the Federal Reserve Board. The Act requires the prior approval of the Federal Reserve Board for a bank holding company to acquire or hold more than a 5% voting interest in any bank, and controls interstate banking activities. The Act restricts First National Lincoln Corporation's non-banking activities to those which are determined by the Federal Reserve Board to be closely related to banking. The Act does not place territorial restrictions on the activities of non-bank subsidiaries of bank holding companies. The majority of the Company's cash revenues are generally derived from dividends paid to the Company by the Bank. These dividends are subject to various legal and regulatory restrictions which are summarized in Note 16 to the accompanying financial statements. The Bank is subject to the provisions of the National Bank Act, and as such, must meet certain liquidity and capital requirements, which are discussed in Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations. The Office of the Comptroller of the Currency - the Bank's principal regulatory agency -- conducts periodic examinations of the Bank. Certain state banking regulations also apply to the Bank, as administered by the Maine Bureau of Banking. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) recapitalized the deposit insurance funds and gave regulators the authority to restrict the operations, management and capital distributions of a bank, depending upon its risk. On December 31, 1997, the Bank was classified in the lowest risk category. FDICIA also directs regulators to establish underwriting and operations standards, encompassing such areas as real estate lending, consumer disclosure rules, internal controls and new reporting requirements. The monetary policies of regulatory authorities, including the Federal Reserve Board, have a significant effect on the operating results of banks and bank holding companies. Through open market securities transactions and changes in its discount rate and reserve requirements, the Board of Governors exerts considerable influence over the cost and availability of funds for lending and investment. The nature of future monetary policies and the effect of such policies on the future business and earnings of the Company and the Bank cannot be predicted. See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations, regarding the Bank's net interest margin and the effect of interest-rate volatility on future earnings. Page 2 ITEM 2. Properties The principal office of the Bank is located in Damariscotta, Maine, and serves the people of Newcastle, Edgecomb, Jefferson, Bremen, Wiscasset, Nobleboro, South Bristol and Bristol. A branch office opened in Waldoboro in 1975, which is located approximately ten miles from Damariscotta on U.S. Rt. 1, serves the population of Waldoboro and the surrounding towns of Friendship, Warren, Washington and Monhegan Island. In 1979, a branch office was opened in Boothbay Harbor, which is situated approximately 16 miles from Damariscotta. This office serves the towns of Boothbay, West Boothbay, Boothbay Harbor, Southport and neighboring areas. In 1988, a branch office was opened in Wiscasset, which is approximately eight miles from Damariscotta. This office serves the towns of Wiscasset, Edgecomb, Alna, Woolwich and Dresden. An operations center was completed in the adjacent block fronting on Bristol Road in Damariscotta. It was put in service in July, 1989. The Bank owns all of its facilities. Expansion of the Bank's Boothbay Harbor office began in the Fall of 1995 to better serve customer needs. It included utilization of an adjacent property that was purchased in 1994. The project was completed in the Summer of 1996. The Bank also owns real estate on Water Street in Damariscotta, Maine, which was put into use for additional office space during 1995. In 1997, the Bank purchased and renovated a property on Route 1 in Rockport, Maine, in which to open its first branch office outside of Lincoln County, Maine. Rockport is located in Knox County, Maine, which is contiguous to Lincoln County, Maine, and with similar demographic characteristics. This move into Knox County was made to provide additional growth opportunities for the Bank, which has limited potential for growth in its existing market area. Management believes that the Bank's current facilities are suitable and adequate in light of its current needs and its anticipated needs over the near term. Page 3 ITEM 3. Legal Proceedings There are no material pending legal proceedings to which the Company or the Bank is the party or to which any of its property is subject, other than routine litigation incidental to the business of the Bank. None of these proceedings is expected to have a material effect on the financial condition of the Company or of the Bank. Page 4 ITEM 4. Submission of Matters to a Vote of Security Holders There were no items submitted to a vote of security holders of the Company during the fourth quarter of 1997. Page 5 ITEM 5. Market for Registrant's Common Equity The Company's stock is not traded on any securities exchange and is not regularly quoted by the National Association of Securities Dealers Automated Quotation System (NASDAQ). There is no established public trading market for the Company's stock, and it is traded only sporadically through individual purchases and sales. The following table reflects the high and low price of actual sales in each quarter of 1997 and 1996. Such quotations do not reflect retail mark-ups, mark-downs or brokers' commissions. The data contained in this table has been adjusted to reflect, retroactively, a stock dividend of three shares of common stock paid on December 30, 1997, with respect to each share of common stock outstanding on December 1, 1997. 1997 1996 ----------------- ---------------- High Low High Low 1st Quarter 10 1/2 10 8 3/4 8 1/4 2nd Quarter 11 1/2 10 1/2 9 8 3/4 3rd Quarter 12 1/2 11 1/2 9 1/2 9 4th Quarter 13 3/4 12 1/2 10 1/4 9 1/2 The last known transaction involving the Company's stock during 1997 was at $13.75 per share. There are no warrants outstanding with respect to the Company's common stock, and the Company has no securities outstanding which are convertible into common equity. As of December 31, 1996, there were approximately 360 holders of record of the Company's common stock, as listed on the Company's shareholder records. The table below sets forth the cash dividends declared by the Company during its last two fiscal years, including a special cash dividend of $.05 declared on December 19, 1996 and a special cash dividend of $.06 declared on December 18, 1997: Date Declared Dividend Per Share Date Payable ----------------- ------------------ ---------------- March 21, 1996 0.0425 April 30, 1996 June 13, 1996 0.0450 July 30, 1996 September 19, 1996 0.0475 October 30, 1996 December 19, 1996 0.0500 January 30, 1997 December 19, 1996 0.0500 January 30, 1997 ------ 0.1850 March 20, 1997 0.0525 April 30, 1997 June 19, 1997 0.0550 July 30, 1997 September 18, 1997 0.0575 October 30, 1997 December 18, 1997 0.0600 January 30, 1998 December 18, 1997 0.0600 January 30, 1998 ------ 0.2850 The ability of the Company to pay cash dividends depends on receipt of dividends from the Bank. Dividends may be declared by the Bank out of its net profits as the directors deem appropriate, subject to the limitation that the total of all dividends declared by the Bank in any calendar year may not exceed the total of its net profits of that year plus retained net profits of the preceding two years. The Bank is also required to maintain minimum amounts of capital-to-total-risk-weighted-assets, as defined by banking regulators. At December 31, 1997, the Bank was required to have minimum Tier 1 and Tier 2 risk-based capital ratios of 4.00% and 8.00%, respectively. The Bank's actual ratios were 14.92% and 16.00%, respectively, as of December 31, 1997. Page 6 ITEM 6. Selected Financial Data Dollars in thousands, except for per share amounts Years ended December 31, 1997 1996 1995 1994 1993 ------- ------- ------ ------ ------ Summary of Operations Operating Income $21,439 18,863 17,404 14,871 13,883 Operating Expense 15,757 13,852 13,414 11,766 11,514 Net Interest Income 10,337 9,347 8,538 8,209 7,593 Provision for Loan Losses 103 60 0 0 455 Net Income (1) 3,906 3,424 2,720 2,174 1,695 Per Common Share Data (2) Net Income (1) 1.58 1.40 1.12 0.90 0.70 Cash Dividends Declared 0.29 0.24 0.18 0.14 0.12 Book Value 10.46 9.12 8.03 6.95 6.25 Market Value 13.75 10.25 8.25 6.25 5.13 Financial Ratios Return on Average Equity (1) 16.16% 16.38% 15.03% 13.59% 11.80% Return on Average Assets (1) 1.55 1.54 1.34 1.11 0.98 Average Equity to Average Assets 9.62 9.41 8.90 8.20 8.32 Net Interest Margin 4.45 4.51 4.49 4.54 4.75 Dividend Payout Ratio (1) 18.04 16.82 15.66 15.36 16.52 Allowance for Loan Losses/Total Loans 0.99 1.21 1.55 2.02 2.49 Non-Performing Loans to Total Loans 0.28 0.28 0.78 1.43 2.46 Non-Performing Assets to Total Assets 0.26 0.54 0.79 1.16 1.94 Efficiency Ratio 0.51 0.52 0.57 0.65 0.66 At Year End Total Assets $266,279 230,768 212,282 196,531 181,051 Total Loans 181,510 156,970 133,245 120,294 105,288 Total Investment Securities 68,745 60,564 61,570 65,654 65,434 Total Deposits 169,880 155,674 150,468 142,445 156,710 Total Shareholders' Equity 25,885 22,477 19,565 16,892 15,129 1) 1993 statistics are based upon net income before the one-time change in accounting for income taxes. 2) Per common share data has been adjusted to reflect the 300% stock dividend issued in 1997. High Low ----- ----- Market price per common share of stock during 1997 13.75 10.00 Page 7 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations General First National Lincoln Corporation and its subsidiary, The First National Bank of Damariscotta, posted record earnings in 1997. This was a direct result of the Company's 15.39% growth in assets and ongoing control of expenses. It continues the positive growth in both assets and income seen during the past five years. During 1997, the Bank opened a new office in Rockport, Maine. Up to this point, the Bank's primary market area was in Lincoln County, Maine, where the Bank has had a market share close to 40% in both loans and deposits. In order to provide additional opportunities for future growth, the Bank felt it was necessary to look beyond Lincoln County, Maine. Management determined that the most logical area for expansion was in Knox County, Maine, which is adjacent to Lincoln County. As a result, the Bank purchased a property in Rockport, Maine, in April of 1997, and through the summer months transformed the property into a new banking office. This office opened in October of 1997, and as of year end, was ahead of initial projections. The most significant asset growth came in the loan portfolio, which increased by $24.5 million or 15.63% to end the year at $181.5 million. The largest amount of growth was in residential mortgages, most of which the Bank has opted to hold in its own portfolio rather than selling into the secondary market. The Bank also saw significant growth in commercial loans. Overall loan volumes in the Bank's market area have remained relatively stable during the past few years, but the Bank's market share has grown slightly as a result of increased mortgage loan activity. Non-interest expense increased 9.52% to $6.2 million in 1997 from $5.6 million in 1996. After two years of declining non-interest expense due to a reduction in personnel and increases in productivity, the increases in 1997 were attributable to the new Rockport office as well as other investments for future growth. The Company's efficiency ratio -- a benchmark measure of the amount spent to generate a dollar of income -- was 0.51 in 1997 compared to 0.52 in 1996. The results posted in 1997 are a continued change from the late 1980s and early 1990s. A substantial drop in earnings in 1990 was followed by improved, but weak earnings in 1991 and 1992. Significant improvement was seen between 1993 and 1997 -- driven by a reduction in the Bank's provision for loan losses and marked improvement in net interest income through substantial asset growth. Management believes that the Bank has limited exposure to changes in interest rates, which is discussed more fully in "Interest Rate Risk Management" elsewhere in Management's Discussion. Results of Operations and Three-Year Comparison Net income for the year ended December 31, 1997 was $3,906,000 -- the highest net income recorded by the Company in one year. This represents a 14.08% or $482,000 increase from net income of $3,424,000 that was posted in 1996. Return on average assets in 1997 was 1.55%, up from 1.54% in 1996 and 1.34% in 1995. Return on average equity was 16.16% in 1997, compared to 16.36% in 1996 and 15.03% in 1995. This slight drop in return on equity during 1997 was the result of with equity capital growing at a faster rate than assets. Page 8 Average shareholders' equity to average assets was 9.62% in 1997, compared to 9.41% in 1996 and 8.90% in 1995. Net income per share for the year ended December 31, 1997 was $1.58, compared to $1.40 per share in 1996 and $1.12 in 1995. Book value per share was $10.46 on December 31, 1997, up from $9.12 on December 31, 1996 and $8.03 on December 31, 1995. On December 31, 1997, assets stood at $266.3 million, compared to $230.8 million on December 31, 1996, a 15.39% increase. As of December 31, 1997, total loans were $181.5 million. This represents an increase of 15.63% from total loans of $157.0 million on December 31, 1996. Investments totaled $68.7 million on December 31, 1997, a 13.5% increase from $60.6 million on December 31, 1996. Deposits increased by 9.13% in 1997, standing at $169.9 million on December 31, 1997, compared to $155.7 million on December 31, 1996. The Bank's loan delinquency ratio decreased slightly in 1997, and was 1.60% on December 31, 1997, versus 1.70% on December 31, 1996. The greatest decrease was seen in commercial loans, which posted a significant improvement in delinquencies as a percentage of outstanding loans. In management's opinion, there has been no pattern or trend in loan delinquencies which is of concern. Average Rates and Net Interest Yield The following table shows for the years ended December 31, 1997, 1996 and 1995, the interest earned or paid for each major asset and liability category, the average yield for each major asset and liability category, and the net yield between assets and liabilities. Tax-exempt income has been calculated on a tax- equivalent basis using a 34% rate. Interest not recognized on non-accrual loans is not included in the amount of interest presented, but the average balance of non-accrual loans is included in the denominator when calculating yields. - ------------------------------------------------------------------------------- Years ended December 31, ----1997---- ----1996---- ----1995---- Amount Avg. Amount Avg. Amount Avg. Dollars of Yield/ of Yield/ of Yield/ in thousands interest Rate interest Rate interest Rate - ------------------------------------------------------------------------------- Interest-earning assets: Investments $ 4,809 6.91% 4,302 6.74% 4,365 6.78% Loans held for sale 4 8.33% 98 8.09% 71 7.81% Loans 15,279 9.06% 13,299 9.09% 11,977 9.33% Interest-bearing deposits 42 5.26% 33 5.31% 28 6.09% ------ ----- ------- ----- ------- ----- Total interest-earning assets $20,134 8.42% 17,732 8.36% 16,441 8.47% ------ ----- ------- ----- ------- ----- Interest-bearing liabilities: Deposits $ 5,846 4.00% 5,525 3.97% 5,306 3.97% Other borrowings 3,651 5.56% 2,645 5.48% 2,424 6.07% ------ ----- ------- ----- ------- ----- Total interest-bearing liabilities $ 9,497 4.48% 8,170 4.36% 7,730 4.45% ------ ----- ------- ----- ------- ----- Net interest income $10,637 9,562 8,711 ====== ===== ======= ===== ======= ===== Interest rate spread 3.94% 4.00% 4.02% Net interest margin 4.45% 4.51% 4.49% - ----------------------------------------------------------------------------- Page 9 Average Daily Balance Sheets The following table shows the Company's average daily balance sheets for years ended December 31, 1997, 1996 and 1995. - ---------------------------------------------------------------------------- Dollars in thousands Years ended December 31, 1997 1996 1995 - ---------------------------------------------------------------------------- Cash and due from banks $ 5,317 4,994 4,750 Interest-bearing deposits 798 621 460 Investments U.S. Treasury securities & government agencies 55,825 46,600 42,245 Obligations of states & political subdivisions 3,493 3,168 2,977 Other securities 10,249 14,091 19,112 ------- ------- ------- Total investments 69,567 63,859 64,334 Loans held for sale 42 1,212 909 ------- ------- ------- Loans Commercial 49,255 44,022 42,292 Consumer 29,289 26,595 25,418 State and municipal 8,244 5,964 3,869 Real estate 81,803 69,707 56,767 ------- ------- ------- Total loans 168,591 146,288 128,346 Allowance for loan losses 1,847 1,953 2,274 ------- ------- ------- Net loans 166,744 144,335 126,072 ------- ------- ------- Fixed assets 4,226 4,015 4,298 Other assets 4,646 3,091 2,558 ------- ------- ------- Total assets $ 251,340 222,127 203,381 ======= ======= ======= Deposits Demand $ 13,739 13,133 11,379 NOW 27,662 27,200 27,092 Money market 5,179 6,245 7,662 Savings 34,104 34,091 34,604 Certificates of deposit 64,373 59,084 51,809 Certificates of deposit over $100,000 14,946 12,510 12,595 ------- ------- ------- Total deposits 160,003 152,263 145,141 Borrowed funds 65,672 48,241 39,906 Other liabilities 1,491 716 234 ------- ------- ------- Total liabilities 227,166 201,220 185,281 ------- ------- ------- Common stock 8 752 1,522 Additional paid in capital 4,532 3,544 2,699 Retained earnings 19,634 16,611 13,879 ------- ------- ------- Total capital 24,174 20,907 18,100 ------- ------- ------- Total liabilities and capital $ 251,340 222,127 203,381 ======= ======= ======= - ---------------------------------------------------------------------------- Page 10 Rate Volume Analysis The following tables present the changes in interest income and the changes in interest expense attributable to the change in interest rates, the change in volume, and the change in rate/volume1 of interest-earning assets and interest- bearing liabilities for the periods indicated. Tax-exempt income has been calculated on a tax-equivalent basis, 34% being the tax rate used in 1997 and 1996. - ----------------------------------------------------------------------------- Year ended December 31, 1997 compared to 1996 Rate/ Dollars in thousands Volume Rate volume(1) Total - ----------------------------------------------------------------------------- Interest on earning assets Loans $ 385 $ 112 $ 10 $ 507 Loans held for sale (95) 3 (3) (95) Investment securities 2,028 (42) (6) 1,980 Interest-bearing deposits 9 - - 9 ------- ------- ------- ------- Total interest income $ 2,327 $ 73 $ 1 $ 2,401 ------- ------- ------- ------- Interest expense Deposits $ 283 $ 36 $ 2 $ 321 Other borrowings(2) 956 37 13 1,006 ------- ------- ------- ------- Total interest expense $ 1,239 $ 73 $ 15 $ 1,327 ------- ------- ------- ------- Change in net interest income $ 1,088 $ - $ (14) $ 1,074 ======= ======= ======= ======= - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- Year ended December 31, 1996 compared to 1995 Rate/ Dollars in thousands Volume Rate volume(1) Total - ----------------------------------------------------------------------------- Interest on earning assets Loans $ 1,674 $ (309) $ (43) $ 1,322 Loans held for sale 23 3 1 27 Investment securities (32) (31) 0 (63) Interest-bearing deposits 10 (4) (1) 5 ------- ------- ------- ------- Total interest income $ 1,675 $ (341) $ (43) $ 1,291 ------- ------- ------- ------- Interest expense Deposits $ 213 $ 6 $ - $ 219 Other borrowings(2) 506 (236) (49) 221 ------- ------- ------- ------- Total interest expense $ 719 $ (230) $ (49) $ 440 ------- ------- ------- ------- Change in net interest income $ 956 $ (111) $ 6 $ 851 ======= ======= ======= ======= - ----------------------------------------------------------------------------- (1)Represents the change not solely attributable to change in rate or change in volume, but a combination of these two factors. (2)Includes federal funds purchased. Page 11 Capital Resources Capital on December 31, 1997 was sufficient to meet the requirements of regulatory authorities. Average equity to average assets was 9.62% in 1997, versus 9.41% in 1996. Leverage capital, or total shareholders' equity divided by total assets, stood at 9.72% on December 31, 1997, versus 9.74% in 1996. At December 31, 1997, the Bank had tier-one risk-based capital of 14.92% and tier-two risk-based capital of 16.00%, versus 14.80% and 16.05% in 1996, respectively. To be rated "well-capitalized", requirements call for minimum tier-one and tier-two risk-based capital ratios of 6.00% and 10.00%, respectively. The Bank's actual levels of cpitalization were comfortably above the standards to be rated "well-capitalized" by regulatory authorities. On November 20, 1997, the Board of Directors declared a 300% stock dividend (equivalent to a four-for-one stock split), payable December 30, 1997, to shareholders of record on December 1, 1997. This increased the total number of outstanding shares from 618,887 to 2,475,548. The total number of shares of common stock authorized by the shareholders is 6,000,000. All per share information in this Report has been prepared showing the effect of the stock dividend, and information for prior years has been adjusted to reflect the effect of the stock dividend. During 1997, the Company declared cash dividends of $.05 per share for the first quarter, $.06 per share for the second quarter, $.06 per share for the third quarter, and $.06 per share for the fourth quarter. In addition, the Company declared a special cash dividend of $.06 per share in the fourth quarter. The Company's dividend payout ratio was 18.04% of earnings in 1997, 16.82% in 1996, and 15.66% in 1995. In determining future dividend payout levels, the Board of Directors carefully analyzes capital requirements and earnings retention, as set forth in the Bank's Dividend Policy. The ability of the Company to pay cash dividends to its shareholders depends on receipt of dividends from its subsidiary, the Bank. The subsidiary may pay dividends to its parent out of so much of its net profits as the Bank's directors deem appropriate, subject to the limitation that the total of all dividends declared by the Bank in any calendar year may not exceed the total of its net profits of that year combined with its retained net profits of the preceding two years. The amount available for dividends in 1998 will be that year's net income plus $5,018,000. In 1997, 10,844 shares of common stock were issued via director and employee stock programs for $127,000. The Company also purchased 4,668 shares of common stock, of which all 4,668 shares were re-issued via director and employee stock programs before year-end. Management knows of no present trends, events or uncertainties that will have or are reasonably likely to have a material effect on capital resources, liquidity, or results of operations. Capital Purchases In 1997, the Bank purchased and renovated a property located on Route One in Rockport, Maine, which was used to open an additional office for the Bank. Completed in October of 1997, the total cost of acquisition and property renovation was $730,000. This will add $17,000 to pre-tax operating costs per year. Liquidity As of December 31, 1997, the Bank had primary sources of liquidity of $39.1 Page 12 million, or 14.7% of its assets. It is Management's opinion that this is adequate. The Bank has established guidelines for liquidity management, with policies and procedures prescribed in its funds management policy. The Bank's principal sources of funds are deposits, cash and due from banks, federal funds sold, loan and dividend payments, loan and investment maturities, and borrowed funds from the Federal Home Loan Bank. To compensate for the seasonal flow in its deposit structure, the Bank maintains adequate funding for its loan portfolio by monitoring maturities within its investment portfolio, and utilizing advances from the Federal Home Loan Bank or entering into securities repurchase agreements. Through the Federal Home Loan Bank, the Bank has a credit line of $8.0 million for overnight borrowings, and total short-term and long-term advance capacity of $98.4 million. The Bank's liquidity position is further supplemented with securities repurchase agreements with certain brokers. Deposits grew steadily during 1997, ending the year at $169.9 million. Most of this growth was seen in the CD portfolio. Management has not seen any significant deposit runoff trends which would have a material effect on the Bank's liquidity position. At December 31, 1997, the Company had a net unrealized gain of $93,000 (net of $48,000 in deferred income taxes) in available for sale securities. While the Bank maintains an available for sale portfolio to enhance its overall liquidity position, its present policy is not to liquidate securities to meet short-term liquidity needs. Instead, the Bank uses Federal Home Loan Bank advances or its securities repurchase agreements for this purpose. Investment Activities During 1997 the Company's investment portfolio increased 13.5% to end the year at $68,745,000, compared to $60,564,000 on December 31, 1996. This increase was due to additional investment in U.S. Government Agency and mortgage-backed securities. The Company's investment securities are classified in two categories: securities available for sale and securities to be held to maturity. Securities available for sale consists primarily of debt securities which Management intends to hold for indefinite periods of time. They may be used as part of the Company's funds management strategy, and may be sold in response to changes in interest rates, changes in prepayment risk, changes in liquidity needs, to increase capital, or for other similar factors. Securities to be held to maturity consists primarily of debt securities which Management has acquired solely for long-term investment purposes, rather than for trading or future sale. For securities to be held to maturity, Management has the intent and the Company has the ability to hold such investments until their respective maturity dates. The Company does not hold trading account securities. All investment securities are managed in accordance with a written investment policy adopted by the Board of Directors. It is the Company's general policy that investments for either portfolio be limited to government debt obligations, time deposits, bankers acceptances, corporate bonds and commercial paper with one of the three highest ratings given by a nationally recognized rating agency. In 1997, the Company's investment portfolio saw a continued shift away from U.S. Treasury securities and toward U.S. Government Agency and mortgage- backed securities. This change was made to enhance the portfolio's overall yield. The following table sets forth the Company's investment securities at book carrying amount as of December 31, 1997, 1996 and 1995. Page 13 - ----------------------------------------------------------------------- Dollars in thousands 1997 1996 1995 - ----------------------------------------------------------------------- Securities available for sale: U.S. Treasury and agency $ 6,501 9,411 21,216 Mortgage-backed securities 3,210 2,085 2,466 State and political subdivisions - - - Other securities 6,752 6,996 10,554 ------ ------ ------ 16,463 18,492 34,236 ------ ------ ------ Securities to be held to maturity: U.S. Treasury and agency 16,649 8,994 10,991 Mortgage-backed securities 28,541 23,860 8,652 State and political subdivisions 3,557 3,632 2,050 Other securities 3.535 5,586 5,641 ------ ------ ------ 52,282 42,072 27,334 ------ ------ ------ $ 68,745 60,564 61,570 ====== ====== ====== - ----------------------------------------------------------------------- The following table sets forth certain information regarding the yields and expected maturities of the Company's investment securities as of December 31, 1997. Yields on tax-exempt securities have been computed on a tax- equivalent basis using a tax-rate of 34%. Page 14 - ------------------------------------------------------------------------------ Available for sale Held to maturity ------------------ -------------------- Amortized Yield to Amortized Yield to Dollars in thousands cost maturity cost maturity - ------------------------------------------------------------------------------ U.S. Treasury and Agency: Due in 1 year or less $ 5,498 4.81% 5,000 6.10% Due in 1 to 5 years 992 6.78% 1,999 5.46% Due in 5 to 10 years - 0.00% 4,998 7.40% Due after 10 years - 0.00% 4,652 7.88% ------ ----- ------ ----- 6,490 5.57% 16,649 6.91% ------ ----- ------ ----- Mortgage-backed securities: Due in 1 year or less 426 7.60% 3,926 6.77% Due in 1 to 5 years 1,269 7.60% 11,695 6.77% Due in 5 to 10 years 400 7.60% 6,313 6.77% Due after 10 years 1,003 7.60% 6,607 6.77% ------ ----- ------ ----- 3,098 7.60% 28,541 6.77% ------ ----- ------ ----- State and political subdivisions: Due in 1 year or less - 0.00% 230 9.13% Due in 1 to 5 years - 0.00% 883 6.33% Due in 5 to 10 years - 0.00% 110 8.38% Due after 10 years - 0.00% 2,334 8.29% ------ ----- ------ ----- - 0.00% 3,557 7.86% ------ ----- ------ ----- Other securities: Due in 1 year or less 500 7.99% 3,514 7.07 Due in 1 to 5 years - 0.00% - 0.00% Due in 5 to 10 years - 0.00% 21 6.99% Due after 10 years - 0.00% - 0.00% Equity securities 6,234 6.40% - 0.00% ------ ----- ------ ----- 6,734 6.38% 3,535 7.07% ------ ----- ------ ----- $16,322 6.10% 52,282 6.91% ====== ===== ====== ===== - ----------------------------------------------------------------------------- Lending Activities The loan portfolio experienced growth in all areas during 1997, with the most significant increase seen in residential real estate loans. Total loans were $181,510,000 at December 31, 1997, a 15.6% increase from total loans of $156,970,000 on December 31, 1996. This continues the loan growth trend experienced by the Company over the past five years. The following table summarizes the Bank's loan portfolio as of December 31, 1997, 1996, 1995, 1994 and 1993. Some loans were reclassified in 1994 between commercial real estate and commercial and industrial loans. This internal reclassification was not significant. Page 15 - ---------------------------------------------------------------------------- Dollars in thousands As of December 31, 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------- Commercial loans Real estate $ 20,173 18,220 17,578 21,308 29,085 Other 33,100 26,907 24,918 18,491 9,576 Residential real estate loans Construction 3,053 3,278 2,167 1,919 1,364 Term 92,937 81,088 65,935 60,211 48,243 Consumer loans 24,041 20,288 18,439 16,196 15,771 State and municipal 8,206 7,189 4,208 2,169 1,249 ------- ------- ------- ------- ------- Total $ 181,510 156,970 133,245 120,294 105,288 ======= ======= ======= ======= ======= - ---------------------------------------------------------------------------- On December 31, 1997, 52.9% of the Bank's loan portfolio was in residential real estate loans, 11.1% was in commercial real estate loans, 18.2% was in other commercial loans, 13.3% was in consumer loans, and 4.5% was in state and municipal loans. This compares to 1996 and 1995 figures for residential real estate loans of 53.8% and 51.1%, respectively, commercial real estate loans of 11.6% and 13.2%, respectively, other commercial loans of 17.1% and 18.7%, respectively, consumer loans of 12.9% and 13.8%, respectively, and 4.6% and 3.2%, respectively, in state and municipal loans. While most of the Bank's loan growth in the years prior to and including 1996 was in residential real estate loans, 1997's increase can be attributed to a combination of commercial, residential real estate and consumer loans. The Bank's loan delinquency ratio decreased slightly in 1997, and was 1.60% on December 31, 1997, versus 1.70% on December 31, 1996. This decrease is due to the volume of delinquent loans remaining even with 1996 while total loans increased 15.6% during the year. The Bank issues its own VISA and MasterCard. These loans totaled $2,457,000 as of December 31, 1997, $2,099,000 as of December 31, 1996, $1,571,000 as of December 31, 1995, $920,000 as of December 31, 1994, and $954,000 as of December 31, 1993. The number of credit cards outstanding increased 9.3% in 1997 to end the year at 3,273. The following table sets forth certain information regarding the contractual maturities of the Bank's loan portfolio as of December 31, 1997. - ---------------------------------------------------------------------------- Dollars in thousands < 1 Year 1-5 Years 5-10 Years >10 Years Total - ---------------------------------------------------------------------------- Commercial real estate $ 382 2,602 4,435 12,754 20,173 Commercial other 3,822 6,385 8,382 14,511 33,100 Residential real estate 3 3,294 7,862 81,778 92,937 Residential construction 2,996 57 - - 3,053 Consumer 5,495 12,032 3,294 3,220 24,041 State and municipal 2,085 3,127 507 2,487 8,206 ------- ------- ------- ------- ------- Totals $14,783 27,497 24,480 114,750 181,510 ======= ======= ======= ======= ======= - ---------------------------------------------------------------------------- Page 16 The following table provides a listing of loans by category, excluding loans held for sale, between variable and fixed rates as of December 31, 1997. - ------------------------------------------------------------------ Dollars in thousands Amount % of total - ------------------------------------------------------------------ Variable-rate loans Residential adjustable-rate mortgages $ 50,943 28.07% Equity loans 7,491 4.13% Other consumer loans 3,254 jjn 1.79% Commercial loans 40,552 22.34% ------- ------- Total 102,240 56.33% Fixed-rate loans 79,270 43.67% ------- ------- Total loans $181,510 100.00% ======= ======= - ------------------------------------------------------------------ Approximately 34.3% of the loan portfolio would be repriced within 90 days, and 57.6% within one year. The Bank has $33.3 million or 47.1% of investments maturing or anticipated to be called in 1998. On the liability side, $65.6 million or 76.51% of certificates of deposit will mature by December 31, 1998. Loan Concentrations As of December 31, 1997, the Bank did not have any concentration of loans in one particular industry that exceeded 10% of its total loan portfolio. Loans Held for Sale In 1997, 1996 and 1995, the Bank placed a relatively small volume of residential mortgages into the secondary market compared to prior years. Loans held for sale are carried at the lower of cost or market value, which was $100,000 at December 31, 1997 and $302,000 at December 31, 1996. Non-Performing Assets The aggregate dollar amount of loans more than 90 days past-due or on non- accrual status increased slightly during 1997. The following table sets forth a summary of the value of delinquent loans (more than ninety days in arrears) by category, total loans carried on a non-accrual basis, and income not recognized from non-accrual loans as of December 31, 1997, 1996, 1995, 1994, and 1993. Page 17 - ---------------------------------------------------------------------------- Dollars in thousands As of December 31, 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------- Commercial real estate & business $ 420 203 580 1,359 2,127 Residential real estate 320 359 558 408 457 Consumer 128 39 61 67 47 ------ ------- ------ ------ ------ Total 868 601 1,199 1,834 2,631 ====== ====== ====== ====== ====== Non-accrual loans included in above total 510 440 1,034 1,722 2,585 ====== ====== ====== ====== ======= Income not recognized from non-accrual loans $ 50 62 114 106 185 ====== ====== ====== ====== ====== - ---------------------------------------------------------------------------- It is the policy of the Bank to place a loan on non-accrual status only after a careful review of the loan circumstances and a determination that payment in full of principal and/or interest is not expected. Income not recognized from non-accrual loans represents the interest income, as of the end of each period, that would have been recorded on loans placed on non-accrual status if they were current in accordance with their original terms. None of these amounts were included in interest income for the same periods. Other real estate owned decreased during 1997. At December 31 it included five properties valued at $184,000, compared to 11 properties valued at $814,000 at December 31, 1996. Other real estate owned and repossessed assets owned is comprised of (i) properties or other assets acquired through a foreclosure proceeding, or acceptance of a deed or title in lieu of foreclosure, (ii) properties which secure loans where the Bank obtains possession of the underlying collateral from the borrower, and (iii) other assets repossessed in connection with non- real estate loans. Other real estate and repossessed assets owned are carried at the lower of cost or fair value less the estimated selling expenses of the collateral. An allowance is established for the amount by which cost exceeds fair value less estimated selling expenses on a property by property basis. Losses arising from the acquisition of such properties are charged against the allowance for loan losses. Operating expenses and any subsequent provisions to reduce the carrying value are charged to operations. Gains and losses upon disposition are reflected in earnings as realized. Allowance for Loan Losses and Loan Loss Experience The Bank maintains an allowance for loan losses, which is a valuation reserve for estimated future losses on loans. Management's judgment as to the adequacy of the allowance is based upon a continuing review of loans which considers a variety of factors including the risk characteristics of the loan portfolio, current economic conditions and past experience. Management believes that the allowance for loan losses at December 31, 1997 is adequate. While Management uses available information to recognize losses on loans, changing economic conditions and the economic prospects of borrowers might necessitate future additions to the allowance. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their Page 18 judgments about information available to them at the time of their examination. During 1997, a provision of $103,000 was made to the allowance, compared to a provision of $60,000 in 1996. No provisions were made in 1995. At December 31, 1997, the allowance for loan losses stood at $1,800,000, or 0.99% of total loans outstanding. This compares to $1,906,000, or 1.21% of total loans outstanding at December 31, 1996, and $2,059,000, or 1.55% of total loans outstanding at December 31, 1995. On January 1, 1995, the Bank adopted SFAS 114, "Accounting by Creditors for Impairment of a Loan." SFAS 114 requires creditors to measure impaired loans at the net present value of future cash flows, discounted at the loan's effective interest rate, or at fair market value of collateral if the loan is collateral dependent. This is done by allocating a portion of the allowance for loan losses to impaired loans. The adoption of this statement had no effect on the allowance for loan losses since the Bank was adequately reserved for these loans. The following table reflects allocation of the Bank's allowance for loan losses by category of loan as of December 31, 1997, 1996, 1995, 1994 and 1993. The unallocated portion of the allowance for loan losses is a general reserve that is not allocated to a specific portion of the loan portfolio. - ------------------------------------------------------------------------------ Dollars in thousands As of December 31, 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------ Real estate loans $ 454 53% 419 54% 412 51% 267 51% 403 47% Commercial loans(2) 683 34% 1,010 33% 1,153 35% 1,578 35% 1,860 38% Consumer loans 254 13% 477 13% 494 14% 583 14% 356 15% Unallocated 409 - - - - - - - - - ----- ---- ----- ---- ----- ---- ----- ---- ----- ---- Total $1,800 100% 1,906 100% 2,059 100% 2,428 100% 2,619 100% ===== ==== ===== ==== ===== ==== ===== ==== ===== ==== - ------------------------------------------------------------------------------ (1) Percentage is amount in each category for the stated year (2) Includes commercial real estate loans Net loans charged off in 1997 were $209,000, or 0.12% of average loans outstanding for the year. This compares to net loan chargeoffs of $213,000 in 1996 and $369,000 in 1995. Page 19 The following table summarizes the activity with respect to loan losses for the years ended December 31, 1997, 1996, 1995, 1994 and 1993. - ---------------------------------------------------------------------------- Dollars in thousands As of December 31, 1997 1996 1995 1994 1993 - ---------------------------------------------------------------------------- Balance at beginning of period $ 1,906 2,059 2,428 2,619 2,343 ------- ------- ------- ------- ------- Loans charged off: Commercial(1) 60 154 197 213 128 Real estate mortgage 31 65 131 - 46 Consumer 246 148 156 93 79 ------- ------- ------- ------- ------- Total 337 367 484 306 253 ------- ------- ------- ------- ------- Recoveries on loans previously charged off: Commercial(1) 70 81 30 34 14 Real estate mortgage - 16 - - - Consumer 58 57 85 81 60 ------- ------- ------- ------- ------- Total 128 154 115 115 74 ------- ------- ------- ------- ------- Net loans charged off 209 213 369 191 179 Provision for loan losses 103 60 - - 455 ------- ------- ------- ------- ------- Balance at end of period $ 1,800 1,906 2,059 2,428 2,619 ======= ======= ======= ======= ======= Ratio of net loans charged off to average loans outstanding 0.12% 0.14% 0.29% 0.16% 0.17% - ---------------------------------------------------------------------------- (1)Includes commercial real estate loans Deposits The Bank, with $169,880,000 in deposits as of December 31, 1997 realized an increase of 9.1% in 1997 compared to a 3.5% increase in deposits in 1996 and a 5.6% increase in deposits in 1995. Most of the growth in 1997 and 1996 has been seen in the Bank's CD portfolio, although NOW account deposits also increased significantly in 1997. Average deposits for 1997 were higher than average deposits for 1996. The Bank's deposit balances generally increase during the summer and autumn months of each year due to increased business activity from seasonal tourist trade. In 1997, deposits peaked during the month of December at $172,094,000. Because of uncertainty about future interest rates, in the past few years investors have shown a strong preference for shorter-term deposits which could reprice quickly should rates begin to rise. The Bank's average cost of funds was 4.00% for the year ended December 31, 1997, compared to 3.97% for the year ended December 31, 1996 and 3.97% for the year ended December 31, 1995. The following table sets forth the average daily balance for the Bank's principal deposit categories for the period indicated. Page 20 - ------------------------------------------------------------------------ Dollars in thousands % growth 1997 Years ended December 31, 1997 1996 1995 vs. 1996 - ------------------------------------------------------------------------ Demand deposits $ 13,739 13,133 11,379 4.6% NOW accounts 27,662 27,200 27,092 1.7% Money market accounts 5,179 6,245 7,662 -17.1% Savings 34,104 34,091 34,604 n/c Certificates of deposit 79,319 71,594 64,404 10.8% ------- ------- ------- ------ Total deposits $ 160,003 152,263 145,141 5.1% ======= ======= ======= ====== - ------------------------------------------------------------------------ The following table sets forth the average cost of each category of interest-bearing deposits for the periods indicated. - ------------------------------------------------------------------ Years ended December 31, 1997 1996 1995 - ------------------------------------------------------------------ NOW accounts 1.25% 1.37% 1.74% Money market accounts 2.50% 2.50% 2.50% Savings accounts 2.96% 3.02% 3.20% Certificates of deposit 5.50% 5.54% 5.49% ----- ----- ----- Total interest-bearing deposits 4.00% 3.97% 3.97% ===== ===== ===== - ------------------------------------------------------------------ As of December 31, 1997, the Bank held a total of $17,246,000 in certificate of deposit accounts with balances in excess of $100,000. The following table summarizes the time remaining to maturity for these certificates of deposit: - --------------------------------------- Dollars in thousands - --------------------------------------- Within 3 months $ 4,593 3 months through 6 months 2,729 6 months through 12 months 6,255 Over 12 months 3,669 ------ Total $ 17,246 ====== - --------------------------------------- Borrowed Funds Borrowed funds consists mainly of advances from the Federal Home Loan Bank of Boston (FHLB) which are secured by stock in the FHLB, funds on deposit with FHLB, mortgage-backed securities and qualifying first mortgage loans. Advances at December 31, 1997 totaled $60,268,000, with a weighted average interest rate of 5.74% and maturities ranging from one month to four years. The maximum amount outstanding at any month-end during the year was $64,289,000 at the end of August. The average amount outstanding during the year was $56,969,000, with a weighted average interest rate of 5.67%. This compares to an average outstanding Page 21 amount of $32,734,000 in 1996, with a weighted average interest rate of 5.62%. The average daily balance outstanding on the Bank's borrowed funds for the year ended December 31, 1995 was $32,013,000, with a weighted average interest rate of 6.21%. The Bank began offering securities repurchase agreements to municipal and larger corporate customers as an alternative to deposits. The outstanding balance of all securities repurchase agreements as of December 31, 1997 was $5,474,000, compared to $8,413,000 on December 31,1996, and $5,739,000 on December 31, 1995. The Bank also sells securities under agreement to repurchase to brokerage firms. On January 1, 1997, the Bank joined the Note Option Depository which is offered to banks by the U.S. Treasury Department. Under the Treasury Tax & Loan Note program, the Bank accumulates tax deposits made by its customers and is eligible to receive Treasury Direct investments up to an established maximum balance of $5 million. These deposits are generally made at interest rates that are favorable in comparison to other borrowings. The balance on the Treasury Tax & Loan note at December 31, 1997 was $3,295,000. Investment Management and Fiduciary Activities As of December 31, 1997, the Bank's Investment Management Group had assets with a market value of $74,279,000 under management. This amount consisted of 235 trust accounts, estate accounts, agency accounts, and self-directed individual retirement accounts. Effect of Future Interest Rates on Postretirement Benefit Liabilities In evaluating the Company's postretirement benefit liabilities, Management believes that changes in assumptions, especially with regard to discount rates, will not have a significant impact on future operating results and financial condition. Year 2000 Computer System Compliance In order to ensure that the Bank's computer systems will be able to handle the transition to the year 2000, Management has put into place a Year-2000 task force which will evaluate all of the Bank's computer hardware and software. The most significant issue which the Bank faces is with its core banking application, which the vendor has indicated is not year 2000 compliant. To deal with this issue, the Bank signed an agreement with Phoenix International of Orlando, Florida, to purchase and install a new core banking system. The system has already been certified by the vendor as year 2000 compliant, and is expected to be fully operational in the third quarter of 1998. The anticipated cost of acquiring new software is expected to be approximately $350,000, which will be amortized over five years. This will have minimal impact on the Company's future financial statements, since it will replace the amortization of the former software, which will be fully amortized in June, 1998. Other hardware and software packages in place at the Bank are currently being evaluated, and it is Management's intention to ensure that all issues relating to year 2000 compliance will be resolved by the end of 1998, one year before the deadline. While the costs associated with bringing these other hardware and software packages into compliance have not been fully estimated, in Management's opinion these will not have a material impact on future financial statements. Page 22 Accounting Pronouncements The Company adopted SFAS No.125 and No. 127 in 1997, which relate to the accounting for transfers and servicing of financial assets and extinguishment of certain liabilities. The adoption of these standards did not have a material effect on the financial statements. During 1997, the Financial Accounting Standards Board issued three statements of accounting standards (SFAS), which apply to the Company: SFAS No. 128 "Earnings per Share," SFAS No. 129 "Disclosure about Capital Structure," and SFAS No. 130 "Reporting of Comprehensive Income." These statements do not change the measurement or recognition methods used in financial statements, but rather deal with disclosure and presentation requirements. The financial statements for 1997 and all prior periods include the additional disclosures relating to diluted earnings per share which are required under SFAS No. 128. Financial statement disclosures also comply with SFAS No. 129 which summarizes, but did not change, the Company's disclosure information about capital structure. SFAS No. 130 and No. 131 are effective for periods beginning after December 15, 1997, and Management expects unrealized gains and losses to be the only item reported as other comprehensive income under SFAS No. 130. SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information," was also released in 1997. Since the Company's operations include only its banking activities, it is expected this will impose no additional disclosure standards on the Company. Forward-Looking Statements Certain disclosures in Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as certain disclosures in Item 7A, Quantitative and Qualitative Disclosures about Market Risk, contain certain forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995). In preparing these disclosures, Management must make assumptions, including, but not limited to, the level of future interest rates, prepayments on loans and investment securities, required levels of capital, needs for liquidity, and the adequacy of the allowance for loan losses. These forward-looking statements may be subject to significant known and unknown risks uncertainties, and other factors, including, but not limited to, those matters referred to in the preceding sentence. Although First National Lincoln Corporation believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from the results discussed in these forward-looking statements. Readers are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date hereof. The Company undertakes no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are also urged to carefully review and consider the various disclosures made by the Company which attempt to advise interested parties of the facts which affect the Company's business. Page 23 ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk Market Risk Management Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates. First National Lincoln Corporation's market risk is composed primarily of interest rate risk. The Bank's Asset/Liability Committee (ALCO) is responsible for reviewing the interest rate sensitivity position of the Company and establishing policies to monitor and limit exposure to interest rate risk. All guidelines and policies established by ALCO have been approved by the Board of Directors. Asset/Liability Management The primary goals of asset/liability management are to maximize net interest income within the interest rate risk limits set by ALCO. Interest rate risk is monitored through the use of two complementary measures: static gap analysis and earnings simulation modeling. While each of the interest rate risk measurements has limitations, taken together they represent a reasonably comprehensive view of the magnitude of interest rate risk in the Company, the level of risk through time, and the amount of exposure to changes in certain interest rate relationships. Static gap analysis measures the amount of repricing risk embedded in the balance sheet at a point in time. It does so by comparing the differences in the repricing characteristics of assets and liabilities. A gap is defined as the difference between the principal amount of assets and liabilities which reprice within a specified time period. The cumulative one-year gap, at year- end, was -3.2% of total assets. The policy limit for the one-year gap is plus or minus 20% of total assets. Core deposits with non-contractual maturities are included in the gap repricing distributions based upon historical patterns of balance attrition and pricing behavior which are reviewed at least annually. The gap repricing distributions include principal cash flows from residential mortgage loans and mortgage-backed securities in the time frames in which they are expected to be received. Mortgage prepayments are estimated by applying industry median projections of prepayment speeds to portfolio segments based on coupon range and loan age. A summary of the Company's static gap, as of December 31, 1997, is presented in the following table: Page 24 - ---------------------------------------------------------------------------- Dollars in thousands 0-90 91-365 1-5 5+ Interest rate risk repricing days days years years - ---------------------------------------------------------------------------- Investment securities at amortized cost $ 12,090 20,233 19,442 16,837 Loans held for sale 100 - - - Loans 62,297 42,253 59,154 17,806 Other interest-earning assets 3,538 - - - Non-rate-sensitive assets - - - 12,529 ------ ------ ------ ------ Total assets 78,025 62,486 78,596 47,172 ------ ------ ------ ------ Interest-bearing deposits 27,343 58,676 15,435 54,317 Borrowed funds 63,431 4,660 946 - Non-rate-sensitive liabilities and equity - - - 41,471 ------ ------ ------ ------ Total liabilities and equity $ 90,774 63,336 16,381 95,788 ====== ====== ====== ====== Period gap $ (12,749) (850) 62,215 (48,616) Percent of total assets -4.79% -0.32% 23.36% -18.26% Cumulative gap (current) $ (12,749) (13,599) 48,616 - Percent of total assets -4.79% -5.11% 18.26% 0.00% - ----------------------------------------------------------------------------- The earnings simulation model forecasts one- and two-year net interest income under a variety of scenarios that incorporate changes in the absolute level of interest rates as well as basis risk, as represented by changes in the shape of the yield curve and changes in interest rate relationships. Management evaluates the effects on income of alternative interest rate scenarios against earnings in a stable interest rate environment. This type of analysis is also most useful in determining the short-run earnings exposures to changes in customer behavior involving loan payments and deposit additions and withdrawals. The most recent earnings simulation model projects net interest income would decrease by approximately 1.4% of stable-rate net interest income if rates fall gradually by two percentage points over the next year, and decrease of approximately 0.9% if rates rise gradually by two percentage points. Both scenarios are well within the policy limit of a decrease in net interest income of no more than 5.0% given a 2.0% move in interest rates, up or down. Management believes this reflects a stable interest rate risk position for the one-year horizon. Within a two-year horizon and assuming no additional movement in rates, the model forecasts that net income would fall below that earned in a stable rate environment by 3.0% in a falling rate scenario and fall by 0.9% in a rising rate scenario. This dynamic simulation model includes assumptions about how the balance sheet is likely to evolve through time and in different interest rate environments. Loans and deposits are projected to maintain stable balances. All maturities, calls and prepayments in the securities portfolio are assumed to be reinvested in similar assets. Mortgage loan prepayment assumptions are developed from industry median estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning. Non-contractual deposit volatility and pricing are assumed to follow historical patterns. The sensitivities of key assumptions are analyzed at least annually and reviewed by ALCO. A summary of the Company's interest rate risk simulation modeling, as of December 31, 1997, is presented in the following table: Page 25 - ----------------------------------------------------------------------------- Changes in Net Interest Income Year 1 Projected change if rates decrease by 2.0% -1.4% Projected change if rates increase by 2.0%% -0.9% Year 2 Projected change if rates decrease by 2.0% -3.0% Projected change if rates increase by 2.0%% -0.9% Changes in Market Value of Portfolio Equity Projected change if rates decrease by 2.0% -22.5% Projected change if rates increase by 2.0%% +8.1% - ----------------------------------------------------------------------------- Changes in market value of portfolio equity reflect the anticipated change in net present value of the Company's assets and liabilities, given an instant interest rate shock of plus or minus 2.0%. This market value of portfolio equity disclosure presents the effect of changes in interest rates should the Company seek to liquidate any or all of its assets and liabilities, and does not reflect any consideration for the potential additional value that might be realized from the ongoing viability of the Company's operations. Interest Rate Risk Management A variety of financial instruments can be used to manage interest rate sensitivity. These may include the securities in the investment portfolio, interest rate swaps, interest rate caps and floors. Frequently called interest rate derivatives, interest rate swaps, caps and floors have characteristics similar to securities but possess the advantages of customization of the risk- reward profile of the instrument, minimization of balance sheet leverage and improvement of the liquidity position. As of December 31, 1997, the Company did not have a need and was not using any derivative instruments for interest rate risk management. The Company engages an independent consultant to periodically review its interest rate risk position, as well as the effectiveness of simulation modeling and reasonableness of assumptions used in the modeling. As of December 31, 1997, the were no significant differences between the views of the independent consultant and Management regarding the Company's interest rate risk exposure. Management expects interest rates to be relatively stable during 1998 and believes that the current level of interest rate risk is acceptable. Page 26 ITEM 8. Financial Statements and Supplementary Data Report of Management The management of First National Lincoln Corporation is responsible for the preparation, content, and integrity of the financial statements and other statistical data. The financial statements have been prepared in conformity with generally accepted accounting principles and necessarily include amounts based on management's best estimates and judgment. Management also prepared the other information in this report and is responsible for the accuracy and consistency with the financial statements. First National Lincoln Corporation maintains internal control systems designed to produce reliable financial statements. Management recognizes that although controls established for these systems are applied in a prudent manner, errors and irregularities may occur. However, management believes that its internal accounting and reporting systems provide reasonable assurance that material errors or irregularities are prevented or would be detected and corrected on a timely basis. The Company's internal auditor continually reviews, evaluates, and monitors internal control systems and recommends programs to management to further safeguard assets. The Board of Directors discharges its responsibility for financial statements through its Audit Committee. The Audit Committee regularly meets with the independent auditors, internal auditor, and representatives of management to assure that each is meeting its responsibility. The Committee also reviews the independent auditors' reports and findings as they are submitted throughout the year. Both the independent auditors and internal auditor have direct access to the Audit Committee to discuss the scope and results of their work, the adequacy of internal controls, and the quality of financial reporting. Daniel R. Daigneault Daniel R. Daigneault President & Chief Executive Officer F. Stephen Ward F. Stephen Ward Treasurer Page 27 Berry, Dunn, McNeil & Parker Certified Public Accountants Independent Auditors' Report The Board of Directors and Stockholders First National Lincoln Corporation We have audited the consolidated balance sheets of First National Lincoln Corporation and subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly in all material respects, the consolidated financial position of First National Lincoln Corporation and subsidiary as of December 31, 1997 and 1996, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Berry, Dunn, McNeil & Parker Berry, Dunn, McNeil & Parker Portland, Maine January 30, 1998 Page 28 Consolidated Balance Sheets First National Lincoln Corporation and Subsidiary - ------------------------------------------------------------------------------ As of December 31, 1997 1996 - ------------------------------------------------------------------------------ Assets Cash and due from banks $ 5,683,000 $ 6,023,000 Interest-bearing deposits in other banks - 975,000 Securities available for sale 16,463,000 18,492,000 Securities to be held to maturity, market value of $52,610,000 in 1997 and $41,873,000 in 1996 52,282,000 42,072,000 Loans held for sale at cost, market value $100,000 in 1997 and $302,000 in 1996 100,000 302,000 Loans 181,510,000 156,970,000 Less allowance for loan losses 1,800,000 1,906,000 ------------ ------------ Net loans 179,710,000 155,064,000 ------------ ------------ Accrued interest receivable 1,961,000 1,702,000 Bank premises and equipment 4,871,000 4,172,000 Other real estate owned 184,000 814,000 Other assets 5,025,000 1,152,000 ------------ ------------ Total assets $ 266,279,000 $ 230,768,000 ============ ============ Page 29 Consolidated Balance Sheets, Concluded First National Lincoln Corporation and Subsidiary - ------------------------------------------------------------------------------ As of December 31, 1997 1996 - ------------------------------------------------------------------------------ Liabilities and Shareholders' Equity Demand deposits $ 14,109,000 $ 14,786,000 NOW deposits 29,213,000 26,349,000 Money market deposits 6,238,000 6,314,000 Savings deposits 34,104,000 34,688,000 Certificates of deposit (including certificates of $100,000 or more of $17,246,000 in 1997 and $12,061,000 in 1996) 86,216,000 73,537,000 ------------ ------------- Total deposits 169,880,000 155,674,000 Borrowed funds 69,037,000 51,148,000 Other liabilities 1,477,000 1,469,000 ------------ ------------ Total liabilities 240,394,000 208,291,000 Shareholders' equity: Common stock, one cent par value 25,000 25,000 Additional paid-in capital 4,595,000 4,467,000 Retained earnings 21,172,000 17,971,000 Net unrealized gain on securities available for sale, net of tax 93,000 14,000 ------------ ------------ Total shareholders' equity 25,885,000 22,477,000 Commitments and contingent liabilities (note 12) Total liabilities and shareholders' equity $ 266,279,000 $ 230,768,000 ============ ============ Common stock Number of shares authorized 6,000,000 6,000,000 Number of shares issued and outstanding 2,475,548 2,464,704 - ------------------------------------------------------------------------------ The accompanying footnotes are an integral part of these consolidated financial statements Page 30 Consolidated Statements of Income First National Lincoln Corporation and Subsidiary - ------------------------------------------------------------------------------ Years ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------ Interest income: Interest and fees on loans $ 15,068,000 $ 13,242,000 $ 11,930,000 Interest on deposits with other banks 42,000 33,000 28,000 Interest and dividends on investments (includes tax-exempt income of $161,000 in 1997, $117,000 in 1996 and $106,000 in 1995) 4,724,000 4,242,000 4,310,000 ---------- ---------- ---------- Total interest income 19,834,000 17,517,000 16,268,000 Interest expense: Interest on deposits 5,846,000 5,525,000 5,306,000 Interest on borrowed funds 3,651,000 2,645,000 2,424,000 ---------- ---------- ---------- Total interest expense 9,497,000 8,170,000 7,730,000 Net interest income 10,337,000 9,347,000 8,538,000 Provision for loan losses 103,000 60,000 - ---------- --------- --------- Net interest income after provision for loan losses 10,234,000 9,287,000 8,538,000 Other operating income: Fiduciary and investment management income 324,000 306,000 237,000 Service charges on deposit accounts 562,000 491,000 471,000 Net realized gain (loss) on securities available for sale 3,000 (4,000) (76,000) Net realized gain on securities to be held to maturity - 6,000 30,000 Other 716,000 547,000 474,000 --------- --------- --------- Total other operating income 1,605,000 1,346,000 1,136,000 Other operating expenses: Salaries and employee benefits 3,142,000 2,988,000 2,979,000 Occupancy expense 354,000 330,000 308,000 Furniture and equipment expense 625,000 571,000 586,000 Other 2,036,000 1,733,000 1,811,000 ---------- ---------- ---------- Total other operating expenses 6,157,000 5,622,000 5,684,000 Income before income taxes 5,682,000 5,011,000 3,990,000 Income tax expense 1,776,000 1,587,000 1,270,000 ---------- ---------- ---------- Net income $ 3,906,000 $ 3,424,000 $ 2,720,000 ========== ========== ========== Page 31 Consolidated Statements of Income, Concluded First National Lincoln Corporation and Subsidiary - ------------------------------------------------------------------------------ Years ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------ Basic earnings per share $ 1.58 $ 1.40 $ 1.12 Diluted earnings per share $ 1.55 $ 1.38 $ 1.11 Cash dividends declared per share $ 0.29 $ 0.24 $ 0.18 Weighted average number of shares outstanding 2,468,250 2,444,616 2,432,804 - ------------------------------------------------------------------------------ The accompanying footnotes are an integral part of these consolidated financial statements Page 32 Consolidated Statement of Changes in Shareholders Equity First National Lincoln Corporation and Subsidiary
- ------------------------------------------------------------------------------------------------------------- Years ended December 31, 1997, 1996 and 1995 - ------------------------------------------------------------------------------------------------------------- Net unrealized gain (loss) Total Number of Additional on securities share common Common paid in Retained available Treasury holders' shares stock capital earnings for sale stock equity Balance at December 31, 1994 as originally reported 607,777 $1,538,000 $2,659,000 $12,829,000 $ (134,000) $ 0 $ 16,892,000 Effect of 300% stock dividend declared and issued in 1997 1,823,331 19,000 (19,000) 0 0 0 0 Net income 0 0 0 2,720,000 0 0 2,720,000 Cash dividends declared 0 0 0 (426,000) 0 0 (426,000) Stock issued 7,468 5,000 39,000 0 0 0 44,000 Treasury stock purchases (7,740) 0 0 0 0 (54,000) (54,000) Treasury stock sold 7,300 0 2,000 0 0 51,000 53,000 Net unrealized gain on securities available for sale, net of taxes of $173,000 0 0 0 0 336,000 0 336,000 --------- ---------- ---------- ----------- -------- ------- ----------- Balance at December 31, 1995 2,438,136 1,543,000 2,700,000 15,123,000 202,000 (3,000) 19,565,000 ========= ========== ========== =========== ======== ======= =========== Page 33 Consolidated Statement of Changes in Shareholders Equity continued First National Lincoln Corporation and Subsidiary - ------------------------------------------------------------------------------------------------------------- Years ended December 31, 1997, 1996 and 1995 - ------------------------------------------------------------------------------------------------------------- Net unrealized gain (loss) Total Number of Additional on securities share common Common paid in Retained available Treasury holders' shares stock capital earnings for sale stock equity Effect of change to $0.01 par value 0 (1,518,000) 1,518,000 0 0 0 0 Net income 0 0 0 3,424,000 0 0 3,424,000 Cash dividends declared 0 0 0 (576,000) 0 0 (576,000) Stock issued 26,128 0 248,000 0 0 0 248,000 Treasury stock purchases (2,896) 0 0 0 0 (26,000) (26,000) Treasury stock sold 3,336 0 1,000 0 0 29,000 30,000 Net unrealized loss on securities available for sale, net of taxes of $97,000 0 0 0 0 (188,000) 0 (188,000) --------- ----------- --------- ----------- -------- ------- ----------- Balance at December 31, 1996 2,464,704 25,000 4,467,000 17,971,000 14,000 0 22,477,000 ========= =========== ========== =========== ======== ======= =========== Page 34 Consolidated Statement of Changes in Shareholders Equity concluded First National Lincoln Corporation and Subsidiary - ------------------------------------------------------------------------------------------------------------- Years ended December 31, 1997, 1996 and 1995 - ------------------------------------------------------------------------------------------------------------- Net unrealized gain (loss) Total Number of Additional on securities share common Common paid in Retained available Treasury holders' shares stock capital earnings for sale stock equity Net income 0 0 0 3,906,000 0 0 3,906.000 Cash dividends declared 0 0 0 (705,000) 0 0 (705,000) Stock issued 10,844 0 127,000 0 0 0 127,000 Treasury stock purchases (4,668) 0 0 0 0 (48,000) (48,000) Treasury stock sold 4,668 0 1,000 0 0 48,000 49,000 Net unrealized gain on securities available for sale, net of taxes of $41,000 0 0 0 0 79,000 0 79,000 --------- ----------- --------- ----------- -------- ------- ----------- Balance at December 31, 1997 2,475,548 $ 25,000 $4,595,000 $21,172,000 $ 93,000 $ 0 $ 25,885,000 ========= =========== ========== =========== ======== ======= ===========
The accompanying footnotes are an integral part of these consolidated financial statements Page 35 Consolidated Statements of Cash Flows First National Lincoln Corporation and Subsidiary - --------------------------------------------------------------------------- Years ended December 31, 1997 1996 1995 - --------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 3,906,000 $ 3,424,000 $ 2,720,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 582,000 530,000 528,000 Provision for loan losses 103,000 60,000 0 Provision for losses on other real estate owned 14,000 25,000 15,000 Loans originated for resale (2,677,000) (2,391,000) (5,780,000) Proceeds from sales of loans 2,879,000 2,232,000 1,714,000 Net (gain) loss on sale or call of securities available for sale (3,000) 4,000 76,000 Net gain on sale of investment securities to be held to maturity 0 (6,000) (30,000) Losses related to other real estate owned 33,000 7,000 10,000 Net change in other assets and accrued interest receivable (4,311,000) (274,000) 164,000 Net change in other liabilities (84,000) 454,000 195,000 Net amortization of premium on investments 91,000 141,000 9,000 ---------- ---------- ---------- Net cash provided by operating activities 533,000 4,206,000 (379,000) ---------- ---------- ---------- Cash flows from investing activities: Proceeds from sales, maturities and calls of securities available for sale 4,869,000 16,437,000 7,076,000 Proceeds from maturities and calls of securities to be held to maturity 11,757,000 7,421,000 7,713,000 Proceeds from sales of other real estate owned 634,000 441,000 189,000 Additional investment in other real estate owned (1,000) (36,000) (7,000) Purchases of securities available for sale (2,711,000) (988,000) (2,001,000) Purchases of securities to be held to maturity (22,064,000) (22,306,000) (8,234,000) Purchases of interest bearing deposits in other banks 0 0 (2,700,000) Maturities of interest-bearing deposits in other banks 975,000 1,725,000 0 Net increase in loans (24,618,000) (20,618,000 (13,622,000) Capital expenditures (1,281,000) (556,000) (189,000) ---------- ---------- ---------- Net cash used in investing activities (32,440,000) (18,480,000) (11,775,000) ---------- ---------- ---------- Page 36 Consolidated Statements of Cash Flows, Concluded First National Lincoln Corporation and Subsidiary - --------------------------------------------------------------------------- Years ended December 31, 1997 1996 1995 - --------------------------------------------------------------------------- Cash flows from financing activities: Net increase (decrease) in demand deposits, savings, and money market accounts 1,526,000 1,962,000 (8,521,000) Net increase in certificates of deposit 12,678,000 3,244,000 16,544,000 Net increase in other borrowings 17,889,000 9,923,000 4,615,000 Purchase of Treasury stock (48,000) (26,000) (54,000) Proceeds from sale of Treasury stock 49,000 30,000 53,000 Proceeds from stock issuance 127,000 248,000 44,000 Dividends paid (654,000) (488,000) (353,000) ---------- ---------- ---------- Net cash provided by financing activities 31,567,000 14,893,000 12,328,000 ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents (340,000) 619,000 174,000 Cash and cash equivalents at beginning of year 6,023,000 5,404,000 5,230,000 ---------- ---------- ---------- Cash and cash equivalents at end of year $ 5,683,000 $ 6,023,000 $ 5,404,000 ========== ========== ========== Interest paid $ 9,488,000 $ 8,145,000 $ 7,730,000 Income taxes paid 1,773,000 1,482,000 871,000 Non-cash transactions: Transfers from securities available for sale to securities to be held to maturity 0 0 987,000 Transfers from securities to be held to maturity to securities available for sale 0 0 23,555,000 Loans transferred to other real estate owned (net) (50,000) 604,000 303,000 Loans held for sale transferred to loan portfolio 0 3,923,000 0 Net change in unrealized gain (loss) on available for sale securities 120,000 (285,000) 508,000 - --------------------------------------------------------------------------- The accompanying footnotes are an integral part of these consolidated financial statements Page 37 First National Lincoln Corporation and Subsidiary Notes to Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies The accounting and reporting policies of First National Lincoln Corporation conform to generally accepted accounting principles and to general practice within the banking industry. The following is a description of the more significant policies. Principles of Consolidation The consolidated financial statements include the accounts of First National Lincoln Corporation (the Company) and its wholly-owned subsidiary, The First National Bank of Damariscotta (the Bank). All inter-company accounts and transactions have been eliminated. Business The Bank provides a full range of banking services to individual and corporate customers in Mid-Coast Maine. The Bank is subject to competition from other financial institutions. The Bank is subject to the regulations of certain federal agencies and undergoes periodic examinations by those regulatory authorities. Basis of Financial Statement Presentation In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly 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. Statements of Cash Flows For purposes of the statements of cash flows, cash and cash equivalents includes cash on hand and amounts due from banks. Investment Securities Investment securities are classified as available for sale or held to maturity when purchased. There are no trading account securities. Securities available for sale consists primarily of debt securities which management intends to hold for indefinite periods of time. They may be used as part of the Bank's funds management strategy, and may be sold in response to changes in interest rates, changes in prepayment risk, changes in liquidity needs, to increase capital, or for other similar reasons. These assets are accounted for at fair value, with unrealized gains or losses adjusted through shareholders' equity. Securities to be held to maturity consist primarily of debt securities which management has acquired solely for long-term investment purposes, rather than to acquire such securities for purposes of trading or future sale. For securities to be held to maturity, management has the intent and the Company has the ability to hold such securities until their respective maturity dates, and are carried at cost adjusted for the amortization of premiums and the accretion of discount. Page 38 First National Lincoln Corporation and Subsidiary Notes to Consolidated Financial Statements, Continued Investment securities transactions are accounted for on a settlement date basis. The reported amounts would not be materially different than those accounted for on a trade date basis. Gains and losses on the sales of investment securities are determined using the amortized cost of the specific security sold. Loans Held for Sale Loans held for sale consist of residential real estate mortgage loans and are carried at the lower of aggregate cost or market value, as determined by current investor yield requirements. Other Real Estate Owned Other real estate owned and repossessed assets owned is comprised of (i) properties or other assets acquired through a foreclosure proceeding, or acceptance of a deed or title in lieu of foreclosure, (ii) properties which secure loans where the Bank obtains possession of the underlying collateral from the borrower, (iii) other assets repossessed in connection with non-real estate loans. Other real estate and repossessed assets owned are carried at the lower of cost or fair value less the estimated selling expenses of the collateral. An allowance is established for the amount by which cost exceeds fair value less estimated selling expenses on a property by property basis. Losses arising from the acquisition of such properties are charged against the allowance for loan losses. Operating expenses and any subsequent provisions to reduce the carrying value are charged to operations. Gains and losses upon disposition are reflected in earnings as realized. Bank Premises and Equipment Premises, furniture and equipment are stated at cost, less accumulated depreciation. Depreciation expense is computed by straight-line and accelerated methods over the asset's estimated useful life. Loan Fees and Costs Loan origination fees and certain direct loan origination costs are deferred and recognized in interest income as an adjustment to the loan yield over the life of the related loans. The unamortized net deferred fees and costs are included on the balance sheets with the related loan balances. The amount charged to income is included with the related interest income. Allowance for Loan Losses Loans considered to be uncollectible are charged against the allowance for loan losses. The allowance for loan losses is maintained at a level determined by management to be adequate to absorb possible losses. This allowance is increased by provisions charged to operating expenses and recoveries on loans previously charged off. Arriving at an appropriate level of allowance for loan losses necessarily involves a high degree of judgment. In determining the appropriate level of allowance for loan losses, management takes into consideration the following factors: non-performing loans, performing watch-report loans, size of loan portfolio by category, and economic conditions. Although management utilizes its best judgment in providing for possible losses, there can be no assurance that the Bank will not have to increase its provision for possible losses in the future due to increases in non-performing assets or otherwise, which would adversely affect the results of operations. Page 39 First National Lincoln Corporation and Subsidiary Notes to Consolidated Financial Statements, Continued Impaired loans, including restructured loans, are measured at the present value of expected future cash flows discounted at the loan's effective interest rate, at the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. Management takes into consideration impaired loans in addition to the above mentioned factors in determining the appropriate level of allowance for loan losses. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between 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. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period the change is enacted. Accrual of Interest Income and Expense Interest on loans and investment securities is taken into income using methods which relate the income earned to the balances of loans and investment securities outstanding. Interest expense on liabilities is derived by applying applicable interest rates to principal amounts outstanding. Recording of interest income on problem loans, which includes impaired loans, ceases when collectibility of principal and interest within a reasonable period of time becomes doubtful. Cash payments received on non-accrual loans, which includes impaired loans, are applied to reduce the loan's principal balance until the remaining principal balance is deemed collectible, after which interest is recognized when collected. As a general rule, a loan may be restored to accrual status when payments are current and repayment of the remaining contractual amounts is expected or when it otherwise becomes well secured and in the process of collection. Earnings Per Share Basic earnings per share data are based on the weighted average number of common shares outstanding during each year. Diluted earnings per share gives effect to the stock options outstanding, determined by the treasury stock method. Postretirement Benefits The cost of providing postretirement benefits is accrued during the active service period of the employee. Effect of New Financial Accounting Standards The Company adopted SFAS No. 125 and No. 127 in 1997, which relate to the accounting for transfers and servicing of financial assets and extinguishment of certain liabilities. The adoption of these standards did not have a material effect on the financial statements. During 1997, the Financial Accounting Standards Board issued three statements of accounting standards (SFAS), which apply to the Company: SFAS No. 128 "Earnings per Share," SFAS No. 129 "Disclosure about Capital Structure," and SFAS No. 130 "Reporting of Comprehensive Income." These statements do not change the measurement or recognition methods used in financial statements, but rather deal with disclosure and presentation requirements. The financial statements for 1997 and all prior periods include additional disclosures relating to diluted earnings per share which are required under Page 40 First National Lincoln Corporation and Subsidiary Notes to Consolidated Financial Statements, Continued SFAS No. 128. Financial statement disclosures also comply with SFAS No. 129 which summarizes, but did not change, the Company's disclosure information about capital structure. SFAS No. 130 and No. 131 are effective for periods beginning after December 15, 1997, and management expects unrealized gains and losses to be the only item reported as other comprehensive income under SFAS No. 130. SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information," was also released in 1997. Since the Company's operations include only its banking activities, it is expected this will impose no additional disclosure standards on the Company. Note 2. Cash and Due from Banks At December 31, 1997 the Company had a contractual clearing balance of $500,000 at the Federal Reserve Bank. Note 3. Investment Securities The following tables summarize the amortized cost and estimated market value of investment securities at December 31, 1997 and 1996: - ------------------------------------------------------------------------------ December 31, 1997 Amortized Unrealized Unrealized Market Value Cost Gains Losses (Estimated) - ------------------------------------------------------------------------------ Securities available for sale: U.S. Treasury and agency $ 6,490,000 32,000 (21,000) 6,501,000 Mortgage-backed securities 3,098,000 121,000 (9,000) 3,210,000 Other securities 6,734,000 18,000 - 6,752,000 ----------- ---------- ---------- ------------- 16,322,000 171,000 (30,000) 16,463,000 =========== ========== ========== ============= Securities to be held to maturity: U.S. Treasury and agency 16,649,000 39,000 (40,000) 16,648,000 Mortgage-backed securities 28,541,000 319,000 (160,000) 28,700,000 State and political subdivisions 3,557,000 150,000 - 3,707,000 Other securities 3,535,000 21,000 (1,000) 3,555,000 ----------- ---------- ---------- ------------- 52,282,000 529,000 (201,000) 52,610,000 =========== ========== ========== ============= - ------------------------------------------------------------------------------ Page 41 First National Lincoln Corporation and Subsidiary Notes to Consolidated Financial Statements, Continued - ------------------------------------------------------------------------------ December 31, 1996 Amortized Unrealized Unrealized Market Value Cost Gains Losses (Estimated) - ------------------------------------------------------------------------------ Securities available for sale: U.S. Treasury and agency $ 9,488,000 22,000 (99,000) 9,411,000 Mortgage-backed securities 2,000,000 94,000 (9,000) 2,085,000 Other securities 6,983,000 13,000 - 6,996,000 ----------- ---------- ---------- ------------- 18,471,000 129,000 (108,000) 18,492,000 =========== ========== ========== ============= Securities to be held to maturity: U.S. Treasury and agency 8,994,000 32,000 (134,000) 8,892,000 Mortgage-backed securities 23,860,000 76,000 (290,000) 23,646,000 State and political subdivisions 3,632,000 59,000 (8,000) 3,683,000 Other securities 5,586,000 70,000 (4,000) 5,652,000 ----------- ---------- ---------- ------------- 42,072,000 237,000 (436,000) 41,873,000 =========== ========== ========== ============= - ------------------------------------------------------------------------------ The contractual maturities of investment securities at December 31, 1997, are shown below. For purposes of this table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the weighted-average contractual maturities of the underlying collateral, adjusted for anticipated principal prepayments in accordance with current interest rates. - ---------------------------------------------------------------------------- Securities Securities to be available for sale: held to maturity: ------------------------- ------------------------- Amortized Market Value Amortized Market Value Cost (Estimated) Cost (Estimated) - ---------------------------------------------------------------------------- Due in 1 year or less $6,423,000 6,425,000 12,669,000 12,727,000 Due in 1 to 5 years 2,261,000 2,339,000 14,577,000 14,621,000 Due in 5 to 10 years 401,000 414,000 11,442,000 11,489,000 Due after 10 years 1,002,000 1,039,000 13,594,000 13,773,000 Equity securities 6,235,000 6,246,000 - - ----------- ---------- ---------- ------------ $ 16,322,000 16,463,000 52,282,000 52,610,000 =========== ========== ========== ============ - ---------------------------------------------------------------------------- At December 31, 1997 securities carried at $21,156,000, with a market value of $20,710,000, were pledged to secure borrowings from the Federal Reserve Bank, public deposits, and for other purposes as required by law. Gains and losses on the sale of securities available for sale are computed by subtracting the amortized cost at the time of sale from the security's selling price, net of accrued interest to be received. Information regarding the sales of securities available for sale is summarized below: Page 42 First National Lincoln Corporation and Subsidiary Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------- Proceeds from sales $ - 4,479,000 5,433,000 ========= ========= ========= Gross gains 3,000 - - Gross losses - (4,000) (76,000) --------- --------- --------- Net gain (loss) 3,000 (4,000) (76,000) ========= ========= ========= Related income taxes $ 1,000 (1,000) (26,000) ========= ========= ========= - ---------------------------------------------------------------------------- Realized gains on securities in 1997 were the result of a security which was called at par value by the issuer. In 1995, the Company made a one-time transfer of securities between the securities to be held to maturity and the securities available for sale categories, in accordance with provisions of the Financial Accounting Standards Board. This transfer resulted in an unrealized gain of $239,000. Note 4. Loans The following table shows the composition of the Company's loan portfolio as of December 31, 1997 and 1996: - ---------------------------------------------------------------------------- 1997 1996 - ---------------------------------------------------------------------------- Real estate loans Residential $ 92,937,000 81,088,000 Commercial 20,173,000 18,220,000 Commercial and industrial loans 33,100,000 26,907,000 State and municipal loans 8,206,000 7,189,000 Consumer loans 24,041,000 20,288,000 Residential construction loans 3,053,000 3,278,000 ----------- ----------- Total loans $181,510,000 156,970,000 =========== =========== - ---------------------------------------------------------------------------- Loan balances are stated net of deferred loan fees of $76,000 in 1997 and $153,000 in 1996. At December 31, 1997 and 1996, loans on non-accrual status totaled $510,000 and $440,000, respectively. Interest income which would have been recognized on these loans, if interest had been accrued, was $50,000 for 1997, $62,000 for 1996 and $114,000 for 1995. Loans past due greater than 90 days which are accruing interest totaled $358,000 at December 31, 1997 and $161,000 at December 31, 1996. The Company continues to accrue interest on these loans because it believes collection of principal and interest is reasonably assured. Transactions in the allowance for loan losses for the years ended December 31, 1997, 1996 and 1995 were as follows: Page 43 First National Lincoln Corporation and Subsidiary Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------- Balance at beginning of year $ 1,906,000 2,059,000 2,428,000 Provision charged to operating expenses 103,000 60,000 - --------- --------- --------- 2,009,000 2,119,000 2,428,000 --------- --------- --------- Loans charged off (337,000) (367,000) (484,000) Recoveries on loans 128,000 154,000 115,000 --------- --------- --------- Net loans charged off (209,000) (213,000) (369,000) --------- --------- --------- Balance at end of year $ 1,800,000 1,906,000 2,059,000 ========= ========= ========= - ---------------------------------------------------------------------------- Information regarding impaired loans is as follows: - ---------------------------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------- Average investment in impaired loans $ 361,000 309,000 574,000 Interest income recognized on impaired loans, including cash basis 0 0 0 - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- 1997 1996 - ---------------------------------------------------------------------------- Balance of impaired loans $ 388,000 174,000 Less portion for which no allowance for loan losses is allocated (97,000) (97,000) -------- -------- Portion of impaired loan balance for which an allowance for loan losses is allocated 291,000 77,000 ======== ======== Portion of allowance for loan losses allocated to the impaired loan balance $ 121,000 33,000 ======== ======== - ---------------------------------------------------------------------------- Loans to directors, officers and employees totaled $5,212,000 at December 31, 1997 and $4,418,000 at December 31, 1996. A summary of loans to directors and executive officers, which in the aggregate exceed $60,000, is as follows: - ---------------------------------------------------------------------------- 1997 1996 - ---------------------------------------------------------------------------- Balance at beginning of year $ 2,451,000 2,692,000 New loans 875,000 650,000 Repayments (439,000) (1,173,000) ---------- ---------- Balance at end of year $ 2,887,000 2,169,000 ========== ========== - ---------------------------------------------------------------------------- Page 44 First National Lincoln Corporation and Subsidiary Notes to Consolidated Financial Statements, Continued Note 5. Bank Premises and Equipment A significant investment was made in buildings and equipment for the Bank's Rockport office, which opened in 1997. Bank premises and equipment are carried at cost and consist of the following: - ---------------------------------------------------------------------------- 1997 1996 - ---------------------------------------------------------------------------- Land $ 903,000 749,000 Land improvements 308,000 308,000 Bank buildings 3,996,000 3,405,000 Equipment 3,486,000 3,965,000 ---------- ---------- 8,693,000 8,427,000 Less accumulated depreciation 3,822,000 4,255,000 ---------- ---------- $ 4,871,000 4,172,000 ========== ========== - ---------------------------------------------------------------------------- Note 6. Other Real Estate Owned The following summarizes the composition of other real estate owned: - ---------------------------------------------------------------------------- 1997 1996 - ---------------------------------------------------------------------------- Real estate acquired in settlement of loans $ 208,000 845,000 Less: allowance for losses (24,000) (31,000) ---------- ---------- Other real estate owned, net $ 184,000 814,000 ========== ========== - ---------------------------------------------------------------------------- Changes in the allowance for each of the three years ended December 31 were as follows: - ---------------------------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------- Beginning balance $ 31,000 56,000 53,000 Losses charged to allowance (21,000) (50,000) (12,000) Provisions charged to income 14,000 25,000 15,000 --------- --------- --------- Ending balance $ 24,000 31,000 56,000 ========= ========= ========= - ---------------------------------------------------------------------------- Page 45 First National Lincoln Corporation and Subsidiary Notes to Consolidated Financial Statements, Continued Note 7. Income Taxes The current and deferred components of income tax expense were as follows: - ---------------------------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------- Federal income tax: Current $ 1,655,000 1,413,000 977,000 Deferred 44,000 115,000 236,000 ---------- ---------- ---------- 1,699,000 1,528,000 1,213,000 State income tax 77,000 59,000 57,000 ---------- ---------- ---------- $ 1,776,000 1,587,000 1,270,000 ========== ========== ========== - ---------------------------------------------------------------------------- The actual tax expense differs from the expected tax expense (computed by applying the applicable U.S. Federal corporate income tax rate to income before income taxes) as follows: - ---------------------------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------- Expected tax expense $ 1,931,000 1,704,000 1,357,000 Non-taxable interest income (161,000) (121,000) (99,000) State income taxes 51,000 39,000 38,000 Qualified housing investment tax credit (38,000) (38,000) (38,000) Other (5,000) 3,000 12,000 ---------- ---------- ---------- $ 1,776,000 1,587,000 1,270,000 ========== ========== ========== - ---------------------------------------------------------------------------- The items that give rise to the deferred income tax assets and liabilities and the tax effect of each at December 31 are as follows: - ---------------------------------------------------------------------------- 1997 1996 - ---------------------------------------------------------------------------- Allowance for loan losses and OREO $ 435,000 448,000 Deferred loan fees (6,000) 17,000 Nonaccrual loan interest 33,000 57,000 Accrued pension and post-retirement 65,000 84,000 Depreciation (109,000) (126,000) Unrealized gain on securities available for sale (48,000) (7,000) Other assets 82,000 71,000 Other liabilities (60,000) (67,000) --------- --------- Net deferred income tax asset $ 392,000 477,000 ========= ========= - ---------------------------------------------------------------------------- Page 46 First National Lincoln Corporation and Subsidiary Notes to Consolidated Financial Statements, Continued These amounts are included in other assets on the balance sheets. The deferred income tax asset and liability at December 31, 1997 and 1996 is as follows: - ---------------------------------------------------------------------------- 1997 1996 - ---------------------------------------------------------------------------- Asset $ 615,000 677,000 ========= ========= Liability $ 223,000 200,000 ========= ========= - ---------------------------------------------------------------------------- No valuation allowance is deemed necessary for the deferred tax asset. Note 8. Certificates of Deposit At December 31, 1997, the scheduled maturities of certificates of deposit are as follows: - ----------------------------------------------- 1998 $ 65,619,000 1999 14,757,000 2000 2,968,000 2001 2,249,000 2002 623,000 ----------- Total $ 86,216,000 - ----------------------------------------------- Interest on time certificates of deposit of $100,000 or more was $850,000, $709,000 and $726,000 in 1997, 1996 and 1995, respectively. Note 9. Borrowed Funds Borrowed funds consists of advances from the Federal Home Loan Bank of Boston (FHLB), Treasury Tax & Loan Notes, and securities sold under agreements to repurchase with local municipal and commercial customers. Advances from FHLB include overnight borrowings on an $8,000,000 line of credit. Pursuant to collateral agreements, FHLB advances are collateralized by all stock in the Home Loan Bank, which was $5,942,000 and $4,845,000 at December 31, 1997 and 1996, respectively; qualifying first mortgage loans, which were $90,006,000 and $84,924,000 in 1997 and 1996; U.S. Government and Agency securities not pledged to others, which were $20,710,000 and $16,391,000 in 1997 and 1996; and funds on deposit with FHLB, which were $1,000 and $976,000 in 1997 and 1996. As of December 31, 1997, the Bank's total FHLB borrowing capacity was $98,441,000, of which $38,173,000 was unused and available for additional borrowings. All FHLB advances as of December 31, 1997, had fixed rates of interest until their respective maturity dates, except for the FHLB overnight line of credit, which has an interest rate which can fluctuate daily. Page 47 First National Lincoln Corporation and Subsidiary Notes to Consolidated Financial Statements, Continued Under the Treasury Tax & Loan Note program, the Bank accumulates tax deposits made by customers and is eligible to receive Treasury Direct investments up to an established maximum balance. Securities sold under agreements to repurchase include U.S. Treasury and Agency securities with an aggregate amortized cost of $5,519,000 and $8,588,000 at December 31, 1997 and 1996, respectively, and an aggregate market value of $5,508,000 and $8,491,000 at December 31, 1997 and 1996, respectively. Borrowed funds at December 31, 1997 and 1996 have the following range of interest rates and maturity dates: - ---------------------------------------------------------------------------- December 31, 1997 - ---------------------------------------------------------------------------- Federal Home Loan Bank Advances Maturities within one year 5.62%-7.05% $ 58,905,000 Amortizing through February 2001 5.53% 1,363,000 ----------- 60,268,000 Treasury Tax & Loan Notes variable 3,295,000 ----------- Rate in effect at 12/31/97 was 5.25% 3,295,000 Repurchase agreements Municipal and commercial customers 4.25%-5.40% 5,474,000 ----------- 5,474,000 ----------- $ 69,037,000 =========== - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- December 31, 1996 - ---------------------------------------------------------------------------- Federal Home Loan Bank Advances Maturities within one year 5.35%-5.56% $ 41,000,000 Amortizing through February 2001 5.53% 1,735,000 ----------- 42,735,000 Repurchase agreements Municipal and commercial customers 4.25%-5.50% 8,413,000 ----------- 8,413,000 ----------- $ 51,148,000 =========== - ---------------------------------------------------------------------------- Note 10. Employee Benefit Plans Pension Plans Effective May 31, 1996, the Board of Directors ratified the termination of the Bank's defined benefit pension plan, and regulatory approval for termination of the Plan was received in 1996. Page 48 First National Lincoln Corporation and Subsidiary Notes to Consolidated Financial Statements, Continued The accumulated benefit obligation for each covered participant was settled with the purchase of annuity contracts issued by a major insurance company or through lump sum payments. All assets were distributed to the Plan participants. The Bank recognized a gain on termination of $64,000. The Bank's net periodic pension cost for the Plan was $91,000 in both 1995. The Bank also sponsors an un-funded, non-qualified supplemental retirement plan for certain officers. The agreement provides supplemental retirement benefits payable in installments over 20 years upon retirement or death. The costs for this plan are recognized over the service lives of the participating officers. The expense of this supplemental plan was $36,000 in 1997, $11,000 in 1996, and $15,000 in 1995. As of December 31, 1997, the accrued liability of this plan was $21,000. 401(k) Plan The Bank also has a defined contribution plan available to substantially all employees who have completed six months of service. Employees may contribute up to 15% of their compensation, and the Bank may provide a match of up to 3% of compensation. The Board of Directors may also make a profit-sharing contribution to the Plan. Such contribution equaled 3% and 4% of each eligible employee's compensation in 1997 and 1996, respectively. The Bank's expense relating to the 401(k) plan was $141,000, $121,000, and $22,000 in 1997, 1996 and 1995, respectively. Post-retirement Benefit Plans The Bank sponsors two postretirement benefit plans. One plan provides health insurance benefits to employees hired prior to June 30, 1988 and who retired before June 30, 1996. The other plan provides for life insurance coverage to full-time employees who work until retirement. The Bank also provides health insurance for retired directors. None of these plans are pre- funded. The Bank elected to recognize the accumulated postretirement benefit obligation as of January 1, 1993 of $578,000 as a component of net periodic postretirement benefit cost over a 20-year period. The following table sets forth the plans' accumulated postretirement benefit obligation reconciled with the amount shown in the statements of financial position at December 31: - ---------------------------------------------------------------------------- 1997 1996 - ---------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $ 326,000 371,000 Other active plan participants 140,000 153,000 --------- --------- 466,000 524,000 Unrecognized net (gain) loss (61,000) (23,000) Unrecognized transition obligation 357,000 382,000 --------- --------- Accrued postretirement benefit cost $ 170,000 165,000 ========= ========= - ---------------------------------------------------------------------------- Page 49 First National Lincoln Corporation and Subsidiary Notes to Consolidated Financial Statements, Continued Net periodic postretirement benefit cost includes the following components: - ---------------------------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------- Service cost-benefits attributed to service during the period $ 7,000 6,000 9,000 Interest cost on accumulated benefit obligation 32,000 36,000 38,000 Amortization of transition obligation over 20 years 29,000 29,000 24,000 Amortization of net gain (11,000) (7,000) 3,000 ---------- ---------- ---------- Net periodic postretirement benefit cost $57,000 64,000 74,000 ========== ========== ========== - ---------------------------------------------------------------------------- The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7%. Note 11. Shareholders' Equity On November 20, 1997, the Board of Directors declared a 300% stock dividend (equivalent to a four-for-one stock split), payable December 30, 1997, to shareholders of record on December 1, 1997. This increased the total number of outstanding shares from 618,887 to 2,475,548. The total number of shares of common stock authorized by the shareholders is 6,000,000. The Company has reserved 240,000 shares of its common stock, adjusted for the 300% stock dividend, to be made available to directors and employees who elect to participate in the directors' deferral, stock purchase, or savings and investment plans. As of December 31, 1997, 116,400 shares had been issued pursuant to these plans, leaving 123,600 shares available for future use. The issuance price is based on the market price of the stock at issuance date. Sales of stock to directors and employees amounted to 15,512 shares and 29,464 shares in 1997 and 1996, respectively. For the stock sold to directors and employees in 1997, 4,668 shares were issued from Treasury stock. All share amounts have been adjusted to reflect the 300% stock dividend. In 1995, the Company's shareholders adopted a Stock Option Plan and authorized 200,000 shares, adjusted for the 300% stock dividend, to be reserved for options to be granted to certain key officers of the Company and the Bank. The option exercise price will be equal to the fair market value of the shares on the date of the grant, and options are generally not exercisable before two years from the date they are granted. All options expire 10 years from the date of grant. The following table sets forth options outstanding and the related activity for 1997, 1996 and 1995: Page 50 First National Lincoln Corporation and Subsidiary Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------- Balance at January 1 120,000 96,000 - Granted during year 32,000 24,000 96,000 Weighted-average exercise price of options granted during year 10 8 6 Balance at December 31 152,000 120,000 96,000 Weighted-average life of all options outstanding at December 31 7.7 years 8.3 years 9.1 years Weighted-average exercise price of all options outstanding at December 31 8 7 6 - ---------------------------------------------------------------------------- The exercise price of options granted in 1997 was $10.25 and in 1996 was $8.25. The exercise price of options granted in 1995 ranged from $6.38 to $6.50. As of December 31, 1997, options for 30,000 shares were exercisable, but no options had been exercised. No compensation cost has been recognized for the Plan. The fair market value of the options granted was $83,000 in 1997, $44,000 in 1996 and $155,000 in 1995. The fair market value on the date of the grant is estimated using the Black-Scholes option pricing model with the following assumptions: quarterly dividends of $0.05 in 1997, $0.04 in 1996 and $0.04 in 1995, a risk-free interest rate of 5.36% in 1997, 5.13% in 1996 and 5.95% in 1995, volatility of 10.69% in 1997, 4.91% in 1996 and 8.91% in 1995, and an expected life of 10 years. Had compensation cost been expensed, net of related income taxes, based on the fair market value of the options at the grant dates, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts shown in the following table: - ---------------------------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------- Net income As reported 3,906,000 3,424,000 2,720,000 Pro forma 3,851,000 3,395,000 2,618,000 Basic earnings per share As reported 1.58 1.40 1.12 Pro forma 1.56 1.39 1.08 Diluted earnings per share As reported 1.55 1.38 1.11 Pro forma 1.52 1.37 1.07 - ---------------------------------------------------------------------------- Note 12. Off-Balance Sheet Financial Instruments and Concentrations of Credit Risk Commitments for unused lines are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's Page 51 First National Lincoln Corporation and Subsidiary Notes to Consolidated Financial Statements, Continued creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the borrower. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to originate or purchase loans and standby letters of credit. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated statement of condition. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. At December 31, the Company had the following off-balance sheet financial instruments, whose contract amounts represent credit risk: - ---------------------------------------------------------------------------- 1997 1996 - ---------------------------------------------------------------------------- Unused lines, collateralized by residential real estate $ 7,099,000 6,718,000 Unused credit card lines 7,005,000 6,785,000 Other unused commitments 11,336,000 13,240,000 Standby letters of credit 161,000 145,000 Commitments to extend credit 5,602,000 4,112,000 - ---------------------------------------------------------------------------- The Company grants residential, commercial and consumer loans to customers principally located in the mid-coast area of Maine. Collateral on these loans typically consists of residential or commercial real estate, or personal property. Although the loan portfolio is diversified, a substantial portion of its debtors' ability to honor their contracts is dependent on the economic conditions in the area, especially in the real estate sector. Page 52 First National Lincoln Corporation and Subsidiary Notes to Consolidated Financial Statements, Continued Note 13. Earnings Per Share In 1997, the Company adopted Statement of Financial Standards No. 128 relating to disclosures on earnings per share and the dilutive effect of options, rights, warrants and other securities. The following tables provide detail for basic earnings per share and diluted earnings per share for the years ended December 31, 1997, 1996 and 1995, with per share information for 1996 and 1995 adjusted to reflect the 300% stock dividend paid in 1997: - ---------------------------------------------------------------------------- For the Year Ended December 31, 1997 ------------------------------------ Income Shares Per-Share (Numerator) (Denominator) Amount - ---------------------------------------------------------------------------- Income as reported $ 3,906,000 =========== ============ ========= Basic EPS: Income available to common shareholders 3,906,000 2,468,250 $ 1.58 Effect of dilutive securities: incentive stock options - 56,208 ----------- ------------ --------- Diluted EPS: income available to common shareholders plus assumed conversions $ 3,906,000 2,524,458 $ 1.55 =========== ============ ========= - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- For the Year Ended December 31, 1996 ------------------------------------ Income Shares Per-Share (Numerator) (Denominator) Amount - ---------------------------------------------------------------------------- Income as reported $ 3,424,000 =========== ============ ========= Basic EPS: Income available to common shareholders 3,424,000 2,444,616 $ 1.40 Effect of dilutive securities: incentive stock options - 31,189 ----------- ------------ --------- Diluted EPS: income available to common shareholders plus assumed conversions $ 3,424,000 2,475,805 $ 1.38 =========== ============ ========= - ---------------------------------------------------------------------------- Page 53 First National Lincoln Corporation and Subsidiary Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- For the Year Ended December 31, 1995 ------------------------------------ Income Shares Per-Share (Numerator) (Denominator) Amount - ---------------------------------------------------------------------------- Income as reported $ 2,720,000 =========== ============ ========= Basic EPS: Income available to common shareholders 2,720,000 2,432,804 $ 1.12 Effect of dilutive securities: incentive stock options - 10,000 ----------- ------------ --------- Diluted EPS: income available to common shareholders plus assumed conversions $ 2,720,000 2,442,804 $ 1.11 =========== ============ ========= - ---------------------------------------------------------------------------- All earnings per share calculations have been made using the weighted average number of shares for each year. All of the dilutive securities are incentive stock options granted to certain key members of management. The dilutive numbers of shares has been calculated using the treasury method, and as of each year end, all granted options were exercisable. Note 14. 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 and Federal Funds Sold The carrying value of cash and due from banks approximates their relative fair values. 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. The fair value of certain state and municipal securities is not readily available through market sources other than dealer quotations, so fair value estimates are based on quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued. Fair values are calculated based on the value of one unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, or estimated transaction costs. If these considerations had been incorporated into the fair value estimates, the aggregate fair value could have been changed. The carrying values of restricted equity securities approximate fair values. Loans Fair values are estimated for portfolios of loans with similar financial characteristics. The fair values of performing loans are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest risk inherent in the loan. The estimates of maturity are based on the Company's historical Page 54 First National Lincoln Corporation and Subsidiary Notes to Consolidated Financial Statements, Continued 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. Fair values for significant non-performing loans are based on estimated cash flows and are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. 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 above would be indicative of the value negotiated in the actual sale. The fair value estimate for credit card loans is based on the carrying value of existing loans. This estimate does not include the value that relates to estimated cash flows from new loans generated from existing cardholders over the remaining life of the portfolio. Loans Held for Sale The fair value of loans held for sale is determined by the current investor yield requirements. Accrued Interest Receivable The fair value estimate of this financial instrument approximates the carrying value as this financial instrument has a short maturity. It is the Company's policy to stop accruing interest on loans which it is probable that the interest is not collectible. Therefore, this financial instrument has been adjusted for estimated credit loss. Deposits The fair value of deposits with no stated maturity, such as non-interest- bearing demand deposits, savings and 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 Company's net assets could increase. Borrowed Funds The fair value of borrowed funds is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently available for borrowings of similar remaining maturities. Off-Balance-Sheet Instruments Off-balance-sheet instruments include 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 Page 55 First National Lincoln Corporation and Subsidiary Notes to Consolidated Financial Statements, Continued 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 the deferred tax asset, bank premises and equipment, and other real estate owned. In addition, 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. The estimated fair values for the Company's financial instruments as of December 31, 1997 and 1996 were as follows: - ---------------------------------------------------------------------------- December 31, 1997 December 31, 1996 ----------------------- ------------------------ Carrying Estimated Carrying Estimated amount fair value amount fair value - ---------------------------------------------------------------------------- Financial assets Cash & due from banks $ 5,683,000 5,683,000 6,023,000 6,023,000 Interest-bearing deposits in other banks - - 975,000 975,000 Securities available for sale 16,463,000 16,463,000 18,492,000 18,492,000 Securities to be held to maturity 52,282,000 52,610,000 42,072,000 41,873,000 Loans held for sale 100,000 100,000 302,000 302,000 Loans (net of allowance for loan losses) 179,710,000 179,201,000 155,064,000 154,128,000 Accrued interest receivable 1,961,000 1,961,000 1,702,000 1,702,000 Financial liabilities Deposits 169,880,000 161,568,000 155,674,000 157,133,000 Borrowed funds 69,037,000 69,019,000 51,148,000 51,142,000 - ---------------------------------------------------------------------------- Note 15. Other Operating Income and Expense Other operating income includes the following items greater than 1% of revenues. - ---------------------------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------- Merchant discount fees $ 249,000 196,000 - - ---------------------------------------------------------------------------- There were no other operating expense items that were greater than 1% of revenues in 1997, 1996 or 1995. Page 56 First National Lincoln Corporation and Subsidiary Notes to Consolidated Financial Statements, Continued Note 16. Regulatory Capital Requirements The ability of the Company to pay cash dividends to its shareholders depends on primarily on receipt of dividends from its subsidiary, the Bank. The subsidiary may pay dividends to its parent out of so much of its net profits as the Bank's directors deem appropriate, subject to the limitation that the total of all dividends declared by the Bank in any calendar year may not exceed the total of its net profits of that year combined with its retained net profits of the preceding two years and subject to minimum regulatory capital requirements. The amount available for dividends in 1998 will be 1998 earnings plus retained earnings of $5,018,000 from 1997 and 1996. The payment of dividends by the Company is also affected by various regulatory requirements and policies, such as the requirements to maintain adequate capital. In addition, if, in the opinion of the applicable regulatory authority, a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), that authority may require, after notice and hearing, that such bank cease and desist from that practice. The Federal Reserve Bank and the Comptroller of the Currency have each indicated that paying dividends that deplete a bank's capital base to an inadequate level would be an unsafe and unsound banking practice. The Federal Reserve Bank, the Comptroller and the Federal Deposit Insurance Corporation have issued policy statements which provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings. In addition to the effect on the payment of dividends, failure to meet minimum capital requirements can also result in mandatory and discretionary actions by regulators that, if undertaken, could have an impact on the Company's operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measurements of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of Tier 1 capital and Tier 2 or total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 1997, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1997, the most recent notification from the Office of the Comptroller of the Currency classified the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as adequately capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. The actual capital amounts and ratios for the Bank are presented in the following table: Page 57 First National Lincoln Corporation and Subsidiary Notes to Consolidated Financial Statements, Continued - ---------------------------------------------------------------------------- To be well- For capital capitalized under adequacy prompt corrective Actual purposes action provisions - ---------------------------------------------------------------------------- As of December 31, 1997 Tier 2 capital to $26,596,000 9,972,000 16,620,000 risk-weighted assets 16.00% 6.00% 10.00% --------------------------------------------- Tier 1 capital to 24,796,000 6,648,000 9,972,000 risk-weighted assets 14.92% 4.00% 6.00% --------------------------------------------- Tier 1 capital to 24,796,000 10,526,000 13,157,000 average assets 9.42% 4.00% 5.00% - ---------------------------------------------------------------------------- As of December 31, 1996 Tier 2 capital to $23,253,000 8,693,000 14,488,000 risk-weighted assets 16.05% 6.00% 10.00% --------------------------------------------- Tier 1 capital to 21,442,000 5,795,000 8,693,000 risk-weighted assets 14.80% 4.00% 6.00% --------------------------------------------- Tier 1 capital to 21,442,000 9,154,000 11,443,000 average assets 9.37% 4.00% 5.00% - ---------------------------------------------------------------------------- The actual capital amounts and ratios for the Company, on a consolidated basis, are presented in the following table: - ---------------------------------------------------------------------------- To be well- For capital capitalized under adequacy prompt corrective Actual purposes action provisions - ---------------------------------------------------------------------------- As of December 31, 1997 Tier 2 capital to $27,685,000 9,972,000 16,620,000 risk-weighted assets 16.72% 6.00% 10.00% --------------------------------------------- Tier 1 capital to 25,885,000 6,648,000 9,972,000 risk-weighted assets 15.47% 4.00% 6.00% --------------------------------------------- Tier 1 capital to 25,885,000 10,526,000 13,157,000 average assets 9.80% 4.00% 5.00% - ---------------------------------------------------------------------------- As of December 31, 1996 Tier 2 capital to $24,278,000 8,714,000 14,523,000 risk-weighted assets 16.72% 6.00% 10.00% --------------------------------------------- Tier 1 capital to 22,463,000 5,809,000 8,714,000 risk-weighted assets 15.47% 4.00% 6.00% --------------------------------------------- Tier 1 capital to 22,463,000 9,173,000 11,466,000 average assets 9.80% 4.00% 5.00% - ---------------------------------------------------------------------------- Page 58 First National Lincoln Corporation and Subsidiary Notes to Consolidated Financial Statements, Continued Note 17. Condensed Financial Information of Parent Condensed financial information for First National Lincoln Corporation exclusive of its subsidiary is as follows (amounts in thousands): - ------------------------------------------------------------------------ Balance Sheets December 31, 1997 1996 - ------------------------------------------------------------------------ Assets Cash $ 372 603 Dividends receivable 250 250 Investments 252 0 Investment in subsidiary 24,881 21,456 Other assets 427 414 ------------------ $ 26,182 22,723 ================== Liabilities and shareholders' equity Dividends payable $ 297 246 Shareholders' equity 25,885 22,477 ------------------ $ 26,182 22,723 ================== - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ Statements of Income Years ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------ Investment income $ 6 2 7 Gain (loss) on sale of investments 0 1 0 Other income 48 55 56 ---------------------------- Total income 54 58 63 ---------------------------- Other expense 52 59 65 ---------------------------- Income (loss) before Bank earnings 2 (1) (2) ---------------------------- Equity in earnings of Bank: Remitted 550 488 353 Unremitted 3,354 2,937 2,369 ---------------------------- Net income $ 3,906 3,424 2,720 ============================ - ------------------------------------------------------------------------ Page 59 First National Lincoln Corporation and Subsidiary Notes to Consolidated Financial Statements, Concluded - ------------------------------------------------------------------------ Statements of Cash Flows Years ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 3,906 3,424 2,720 Adjustments to reconcile net income to net cash provided by operating activities: Net realized (gain) loss on sale of securities available for sale 0 (1) 0 Decrease (increase) in other assets (17) (14) 25 Unremitted earnings of Bank (3,354) (2,937) (2,369) ---------------------------- Net cash provided by operating activities 535 472 376 ---------------------------- Cash flows from investment activities: Proceeds from sales and maturities of securities available for sale 0 102 486 Purchases of investments (240) 0 (490) ---------------------------- Net cash provided by investing activities (240) 102 (4) ---------------------------- Cash flows from financing activities: Proceeds from sale of stock 127 248 44 Purchase of Treasury stock (48) (26) (54) Sale of Treasury stock 49 30 53 Dividends paid (654) (488) (353) ---------------------------- Net cash used in financing activities (526) (236) (310) ---------------------------- Net increase in cash (231) 338 62 Cash, beginning of year 603 265 203 ---------------------------- Cash, end of year $ 372 603 265 ============================ - ------------------------------------------------------------------------ Page 60 ITEM 9. Changes in and/or Disagreements with Accountants None. Page 61 ITEM 10. Directors and Executive Officers of the Registrant The Articles of Incorporation of the Company provide that the Board of Directors shall consist of not fewer than five nor more than 25 persons as determined by the Board prior to each Annual Meeting, with Directors serving for "staggered terms" of three years. A resolution of the Board of Directors adopted pursuant to the Company's Articles of Incorporation has established the number of Directors at ten. Each person listed below has consented to be named as a nominee, and the Board of Directors knows of no reason why any of the nominees listed below may not be able to serve as a Director if elected. The following Directors' terms expire in 1998, and each will be nominated for re-election for a three-year term: M. Robert Barter, 68, has been a Director of the Company since its organization in 1985 and has served as a Director of the Bank since 1982, and Chairman of both the Company and the Bank since April, 1989. Mr. Barter has owned and operated Bob's Photo-TV store in Boothbay Harbor, Maine since 1953. Mr. Barter is also serving as Town Clerk for the Town of Boothbay Harbor and is County Commissioner for Lincoln County, Maine. Representing Maine, Mr. Barter is a Director of The National Association of Counties in Washington, D.C. Bruce A. Bartlett, 64, has been a member of the Board of Directors since the Company's organization in 1985. Mr. Bartlett served as President and Chief Executive Officer of the Company until his retirement on April 26, 1994 and as President and Chief Executive Officer of the Bank until his retirement on March 7, 1994. He has served as a Director of the Bank since 1981. Malcolm E. Blanchard, 63, has been a Director of the Company since its organization in 1985, has served as a Director of the Bank since 1976, and is Chairman of the Executive Committee of the Bank. Mr. Blanchard has been actively involved, either as sole proprietor or as a partner, in real estate development since 1970. Stuart G. Smith, 44, was selected as a Director of the Company and the Bank in July, 1997. A resident of Camden, he owns and operates with his wife, Maine Sport Outfitters in Rockport, and Lord Camden Inn and Bayview Landing in Camden, Maine for many years. Mr. Smith is Chairman of the Five-Town CSD School Board and Chairman of the Facilities Planning Committee for the new high school. The following Directors' terms will expire in 1999: Katherine M. Boyd, 47, was elected a Director of the Company and the Bank in 1993. A resident of Boothbay Harbor, she owns Boothbay Region Greenhouses with her husband. Ms. Boyd is a trustee of the Boothbay Region YMCA, Chairperson of the YMCA Annual Fund Drive, and past chairperson of the YMCA Camp Committee. Carl S. Poole, Jr., 52, has been a Director of the Company since its organization in 1985 and has served as a Director of the Bank since 1984. Mr. Poole is President, Secretary and Treasurer of Poole Brothers Lumber, a lumber and building supply company with locations in Damariscotta, Pemaquid and Boothbay Harbor, Maine. David B. Soule, Jr., 51, was elected a Director of the Company and the Bank in June, 1989. Mr. Soule has been practicing law in Wiscasset since 1971. He spent two terms in the Maine House of Representatives, is a past President of the Lincoln County Bar Association, and is a former Public Administrator, Lincoln County. He has served on the Boards of Directors of Bath area YMCA and of the Coastal Economic Development Corporation and as a Trustee of the Wiscasset Library. He was Selectman, Town of Westport from 1975 to 1976 and served as Chairman of the Board of Selectmen from 1993 to 1995. Page 62 The following Directors' terms will expire in 2000: Daniel R. Daigneault, 45, has served as President and Chief Executive Officer of the Company since April 26, 1994, and has served as President and Chief Executive Officer of the Bank since March 7, 1994, and as a member of the Board of Directors of both the Company and the Bank since March 1994. Prior to being employed by the the Bank, Mr. Daigneault was Vice President, Senior Commercial Loan Officer at Camden National Bank, Camden, Maine. Mr. Daigneault is Vice President of the Boothbay Region YMCA Board of Trustees and a director of Maine Bankers Association. Robert B. Gregory, 44, was elected a Director of the Company and the Bank in October, 1987. Mr. Gregory has been a practicing attorney since 1980, first in Lewiston, Maine and since 1984 in Damariscotta, Maine. Mr. Gregory is a member of several legal societies and associations. Parker L. Spofford, 69, has been a Director of the Company since its organization in 1985 and has served as a Director of the Bank since 1979. Mr. Spofford is a Realtor in Waldoboro, Maine. He has been active in that capacity since 1955 and is a Past President of the Maine Association of Realtors as well as a former director of the National Association of Realtors. He began his banking affiliation with the Provident Institution for Savings in Boston and has served in an advisory capacity for the former Depositors Trust Company and the former Heritage Savings Bank. The Bank has five standing committees of the Board of Directors: Executive, Audit, Asset/Liability, Trust, and Directors' Loan. The Compensation Committee is a subcommittee of the Executive Committee. Certain members of management also serve on some committees. The aggregate attendance of committee meetings by members of the Board of Directors in 1997 was in excess of 90%. The Company has no standing committees of the Board of Directors. There are no family relationships among any of the Directors of the Company, and there are no arrangements or understandings between any Director and any other person pursuant to which that Director has been or is to be elected. No Director of the Bank or the Company serves as a Director on the board of any other corporation with a class of securities registered pursuant to Section 12 of the Securities Exchange Act or subject to the reporting requirements of Section 15(d) of the Securities Exchange Act or any company registered as an investment company under the Investment Company Act of 1940, as amended. Executive Officers Each Executive Officer of the Company and the Bank is identified in the following table which also sets forth their respective ages, offices, and periods served as an Executive Officer of the Bank: Name and Age (1) Office & Position Period Served - -------------------- ----------------------------------- ------------- Daniel R. Daigneault President & Chief Executive Officer 1994 to date 45 of the Company and of the Bank F. Stephen Ward Treasurer of the Company; 1993 to date 44 Vice President and Chief Financial Officer and Investment Officer of the Bank Donald C. Means Clerk of the Company; 1973 to date 60 Senior Vice President and Senior Loan Officer of the Bank Page 63 Walter F. Vietze Senior Vice President and 1984 to date 56 Senior Operations Officer of the Bank John T. Blamey Vice President and Banking Services 1994 to date 51 Officer of the Bank Edythe A. Jordan Vice President and Trust Officer 1992 to date 53 of the Bank Michael T. Martin Vice President and Credit 1993 to date 42 Administration Officer of the Bank Alden B. McFarland Vice President and Senior Commercial 1988 to date 50 Loan Officer of the Bank Janet E. Spear Vice President and Mortgage Loan 1990 to date 55 Officer of the Bank Deborah C. Yates Vice President and Loan, Deposit 1992 to date 49 and Trust Operations Officer of the Bank (1) As of December 31, 1997 Daniel R. Daigneault has served as President and Chief Executive Officer of the Company since April 26, 1994, and has served as President and Chief Executive Officer of the Bank since March 7, 1994 and as a member of the Board of Directors of both the Company and the Bank since March 1994. Prior to being employed by the the Bank, Mr. Daigneault was Vice President, Senior Commercial Loan Officer at Camden National Bank, Camden, Maine. F. Stephen Ward has served as Treasurer of the Company since 1994 and as Chief Financial Officer of the Bank since 1993. Mr. Ward has been employed by the Bank since 1990 and served as Assistant Vice President and Marketing Officer from 1990 to 1993. From 1978 to 1990 Mr. Ward was employed by Down East Enterprises, Inc. He will complete his Masters of Business Administration degree in Finance in 1998. Donald C. Means has been employed by the Bank since 1973. From 1962 to 1973 Mr. Means was employed by First National Bank of Boston, a major New England financial institution. While there, Mr. Means' primary responsibilities involved commercial lending. Walter F. Vietze has been employed by the Bank since 1984. From 1979 to 1984, Mr. Vietze was employed by Casco Bank. His primary responsibilities involved providing online banking services to correspondent banks. Prior to 1979, Mr. Vietze was affiliated with BayBanks in Massachusetts. John T. Blamey has been employed by the Bank since 1989. Mr. Blamey was previously Strategic Plan Director and now adds Sales Director to his responsibilities as Vice President of Banking Services. Prior to joining the Bank, Mr. Blamey retired from the United States Air Force as Lieutenant Colonel. Edythe A. Jordan joined the Bank in 1992 as Vice President and Trust Officer. She has 27 years' experience in trust banking with Key Trust Company and Casco Northern Bank and served as manager of Key Trust Company's Presque Isle, Maine, office. Michael T. Martin has been employed by the Bank since 1993. He was employed by Fleet Bank from 1980 to 1992, and by Canal National Bank from 1977 to 1980. His primary responsibilities were in Loan Review and Credit Administration. Page 64 Alden B. McFarland has been employed by the Bank since 1975. From 1984 to 1988, Mr. McFarland served as Assistant Vice President and Commercial Loan Officer of the Bank. Janet E. Spear has been employed by the Bank since 1977. Mrs. Spear served as Assistant Vice President and Mortgage Loan Officer of the Bank from 1987- 1990, and as Mortgage Loan Officer from 1985-87. From 1982 to 1985 she was the Manager of the Bank's Waldoboro office. Deborah C. Yates has been employed by the Bank since 1971. Ms. Yates served as Assistant Vice President and Loan Operations Officer from 1986 to 1992. There are no family relationships among any of the Executive Officers, nor are there any arrangements or understandings between any Executive Officer and any other person pursuant to which that Executive Officer has been or is to be elected. Page 65 ITEM 11. Executive Compensation The table below sets forth cash compensation paid to the President and Chief Executive Officer during 1997, 1996 and 1995. No other Executive Officers of the Bank received compensation in excess of $100,000 for the years ended December 31, 1997, 1996 and 1995. - ---------------------------------------------------------------------------- Annual Long Term Compensation Compensation --------------------------------- ------------ Name and Principal Position Year Salary Bonus(1) Other # Options - ---------------------------------------------------------------------------- Daniel R. Daigneault 1997 $145,000 $ 13,514 $ 9,550(2) 12,000 President and CEO 1996 143,000 15,730 7,425 8,000 1995 130,000 15,839 1,386 64,000 - ---------------------------------------------------------------------------- (1) Bonuses are listed in the year earned and normally accrued. Such bonuses may be paid in the following year. (2) Amounts shown include contributions paid by the Company to the respective accounts of the Named Executive Officer in the 401-k Plan. In 1997 the Company and The First National Bank of Damariscotta contributed to the First National Bank of Damariscotta Savings and Investment Plan, a matching amount for the salary deferred by Mr. Daigneault equal to 3% of Mr. Daigneault's earnings and a profit-sharing component of 3% of Mr. Daigneault's earnings, which were subject to IRS regulations which limit the maximum amount of an officer's earnings eligible for matching or profit-sharing 401(k) contributions to $150,000. These percentages were equivalent to the 401-(k) Plan match and profit sharing contributions made for all eligible employees. Director Compensation Each of the outside directors of the Bank, with the exception of the Chairman of the Board, is paid a director's fee in the amount of $400 for each meeting attended and $100 for each meeting attended of a committee of which the director is a member. The Chairman of the Board is paid an annual fee of $14,000. Directors may elect to defer their fees to be invested in shares of Company stock. As of December 31, 1997, M. Robert Barter and Parker L. Spofford elected to have 100% of their fees invested under the Directors' Compensation Deferral Agreement. Certain Board members are also paid fees for appraisals and consulting services, and such fees are on terms no more favorable to the recipient than are generally available to the Bank for such services from other providers in the area. Fees paid to Directors as a group in 1997 totaled $63,000. No directors' fees are paid to Directors of the Company as such. President Daigneault, who is the only director who is also an officer of the Company, receives no additional compensation for serving on the Board of Directors of the Company or the Bank. Page 66 Executive Compensation Committee Report The Compensation Committee consists of four outside members of the Board of Directors including the Chairman of the Board. This Committee has the responsibility for conducting the annual evaluation of the President and renders recommendations to the full Board of Directors regarding compensation for the President. The compensation of the President consists of a base salary plus a bonus, under an approved plan adopted for all employees of the Bank, and other cash bonuses which the Committee may deem appropriate based on the overall performance of the President and the achievement of prescribed goals. These goals are a combination of financial targets and corporate objectives such as implementation of the strategic plan, satisfactorily addressing issues identified as priorities by the banking regulators and overall performance of the management team. The financial goals pertain to profitability, growth and loan portfolio quality. The compensation philosophy of the Company for all executive officers is to pay a competitive base salary commensurate with salaries paid by other similar sized financial institutions within the State of Maine, plus a short- term incentive which is tied to the achievement of certain performance levels. In 1994 the Company instituted a formal performance-based compensation program called "Performance Compensation for Stakeholders". The overall objective of the program is to shift a greater portion of employee compensation from base salary to performance based payments. The program, which was developed by Mike Higgins & Associates, Inc., is currently being utilized by over 200 banks across the country. In 1997, total cash payout under this Stakeholder Performance Compensation program was 9.32% of the participating employees' base salaries. The cash payout may be deferred to the following calendar year. This performance compensation program's overall objective is to maximize the long-term viability of the Company. It addresses this by tying the bonus compensation to multiple goals which include profit, growth, productivity and quality. The guiding principle is to reach a balance of profitability, growth, productivity and quality which should have a positive impact on maximizing long- term shareholder value. It rewards current performance which contributes toward the achievement of long-term goals. Each year specific key performance indicators are chosen along with financial performance levels. In 1997 some of the indicators were: loan volume, deposit volume, non-performing loan levels, net interest income, salaries and wages as a percentage of income and operating expenses as a percentage of net income. The amount of compensation potentially payable to the President was determined by reviewing an independent salary survey of compensation of officers and employees for comparably sized financial institutions within the State of Maine. The survey was conducted by an independent accounting firm. The committee took into consideration the salary ranges as well as actual salaries paid to Presidents and CEOs of similar banks in establishing the 1997 base salary for President Daigneault. The President is given annual goals relating to both financial performance and corporate objectives, which are established by the Committee pursuant to discussions with the President. On an annual basis the Committee conducts a formal evaluation of the President, compares his performance to the established goals, assesses the overall performance of the Bank and makes recommendations as appropriate. President Daigneault's base compensation for 1997 was based on the Company's overall financial performance in 1996, which, in the opinion of the Compensation Committee, was considered very good. All 1996 goals set for President Daigneault were met or exceeded, which included reaching certain targets for asset growth, asset quality, and overall profitability. Also considered were the actual salaries of CEOs of other financial institutions of similar size and complexity, located within the State of Maine. Taking these Page 67 various factors into consideration and in recognition of his fine performance, the committee granted him additional stock options under the 1995 Company Stock Option Plan and increased his base salary by $2,000. President Daigneault's 1997 bonus compensation was 9.32% of base compensation, paid in accordance with the Company's Stakeholder Performance Compensation program for all employees, which was described previously. Compensation Committee Members: M. Robert Barter Malcolm E. Blanchard Carl S. Poole, Jr. Parker L. Spofford. Stock Option Plan In addition to the cash compensation, in April 1995 the stockholders approved a Stock Option Plan. The purpose of the Stock Option Plan is to encourage the retention of key employees by facilitating their purchase of a stock interest in the Company. The 1995 Stock Option Plan provides for grants of options to purchase Company common stock and is administered by an Options Committee which consists of four outside directors. During 1997, 1996 and 1995, stock options were granted under the 1995 Stock Option Plan, as set forth in the accompanying table. 1997 Option Committee Members: M. Robert Barter Malcolm E. Blanchard Carl S. Poole, Jr. Parker L. Spofford. Compensation Committee Interlocks and Insider Participation in Compensation Decisions During 1997, Directors Barter, Blanchard, Poole and Spofford served as members of the Compensation Committee. No member of the Committee was, or ever has been, an officer or employee of the Company or the Bank. All Committee members are customers of and engage in banking transactions with the Bank in the ordinary course of business. As described in the section entitled "Certain Relationships and Related Transactions", all loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and, in the opinion of management, did not involve more than the normal risk of collectibility or present other unfavorable features. Long-Term Compensation Long-term compensation may be distinguished from annual compensation by the time frame for which performance results are measured to determine awards. While annual compensation covers a calendar year, long-term compensation is provided through the Company's stock option plan which covers a period of two to ten years. The following table sets forth information with respect to the named executive and all other employees concerning grants of stock options during 1997: Page 68 Option Grants During the Year Ended December 31, 1997 - ------------------------------------------------------------------------------- Number % of Potential realizable of total value at assumed securities options Exercise rates of stock underlying granted price Expir- appreciation options in fiscal per ation for option term(1) granted year share(2) date (3) 5% 10% - ------------------------------------------------------------------------------- Daniel R. Daigneault 12,000 37.5% $10.25 01/26/07 $ 77,354 $183,423 All other employees 20,000 62.5% 10.25 01/26/07 128,923 305,705 All optionees 32,000 100.0% 10.25 01/26/07 206,277 489,128 - ------------------------------------------------------------------------------- 1) The dollar gains under these columns result from calculations assuming 5% and 10% growth rates compounded over a 10-year period as set by the Securities and Exchange Commission and are not intended to forecast future price appreciation of the Company's common stock. The gains reflect a future value based upon growth at these prescribed rates. These values have also not been discounted to present value. It is important to note that options have value to the listed executive and to all option recipients only if the stock price advances beyond the exercise price shown on the table during the effective option period. 2) Under the Stock Option Plan, the exercise price may not be less than the fair market value of the common stock on the date the option is granted. 3) In most cases, the Stock Option Plan requires a vesting period of two years after the date granted before 50% of the options may be exercised, and five years after the date granted before 100% of the options may be exercised. All options expire 10 years after the date granted. The following table sets forth information with respect to the named executive and all other optionees concerning the exercise of options during 1997 and unexercised options held as of December 31, 1997: Aggregated Option Exercises in 1997 and December 31, 1997 Option Values - ------------------------------------------------------------------------------- Number of securities Value of underlying unexercised unexercised in-the-money options options at year end at year end -------------------- ------------------- Shares acquired Value Exer- Unexer- Exer- Unexer- on exercise realized cisable cisable cisable cisable - ------------------------------------------------------------------------------- Daniel R. Daigneault -0- -0- 14,000 70,000 $102,000 $448,500 All other employees -0- -0- 16,000 52,000 $116,000 $274,000 All optionees -0- -0- 30,000 122,000 $218,000 $722,500 - ------------------------------------------------------------------------------- Page 69 Description of the Company's Benefit Plans The Company has reserved 240,000 shares of its common stock to be made available to directors and employees who elect to participate in the directors' deferral, employee stock purchase, or 401(k) savings and investment plans. As of December 31, 1997, 116,400 shares had been issued pursuant to these plans, leaving 123,600 shares available for future issuance. The issuance price is based on the market price of the stock at issuance date. All shares for these plans are issued pursuant to an exemption from registration under the Securities Act of 1933, as amended, contained in Section 3(a)(11) thereof and Rule 147 promulgated thereunder. During the period ending nine months after the date of issuance of these shares, these shares may be transferred only to residents of the State of Maine. Each certificate issued for these plan shares bears a legend referring to this restriction. The Bank's 401(k) Plan (The First National Bank of Damariscotta Savings and Investment Plan) is the Bank's sole retirement plan, and was modified in 1996 after termination of the Bank's traditional defined benefit pension plan. It is available to any employee who has attained the age of 21 and completed six months of service (500 hours during a 12 month period). Eligible employees may contribute a percentage of compensation, up to a maximum of 15% annually. The Bank may, by annual vote of its Directors, make matching contributions. In addition, also by vote of its Directors, make an annual profit sharing contribution to the Plan. The 401(k) Plan is administered by a special committee appointed by the Board of Directors with the assistance of Berry, Dunn, McNeil & Parker, the Company's independent public accountants. Employee contributions are 100% vested at all times, while employer contributions are vested over a five-year period. Upon termination of employment for any reason, a plan participant may receive his or her contribution account and earnings allocated to it, as well as the vested portion of his or her employer-matching account and earnings allocated to it. Non-vested amounts are forfeited and are used by the Bank to help defray plan administration expenses incurred by the Bank. The Bank paid $65,000 in matching contributions and $75,000 in profit-sharing contributions to this plan in 1997. Plan participants may direct the trustees of the 401(k) Plan to purchase specific assets for their accounts from a selection which includes seven mutual funds as well as the Company's stock. As of December 31, 1997, 41,376 shares of the Company's stock had been purchased by the 401(k) Plan at the direction of plan participants. The Bank instituted an employee stock purchase plan effective February 1, 1987, and the Board of Directors has allocated 80,000 shares of stock to be available for purchase under this plan. Employees who have been employed by the Bank for three consecutive calendar months are eligible to purchase shares on a quarterly basis through payroll deduction. The price per share for shares sold pursuant to the plan is based on fair market value as determined by the Plan Committee appointed by the Board of Directors. As of December 31, 1997, 34,792 shares of the Company's stock had been purchased pursuant to the plan. On January 15, 1987, the Bank adopted a Compensation Deferral Agreement pursuant to which Directors (other than the Chief Executive Officer) are permitted to defer payment of directors' fees until their retirement from the Board. The Savings and Investment Plan Committee has sole discretion to invest the deferred fees as it sees fit. Two Directors had signed Compensation Deferral Agreements for 1997. The Bank provides all full-time employees with group life, health, and long-term-disability insurance through Independent Bankers' Employee Benefits Trust of Maine. A Flexible Benefits Plan is available to all full-time employees after satisfying eligibility requirements and to part-time employees scheduled to work 20 or more hours a week. Page 70 The Bank also sponsors an un-funded, non-qualified supplemental retirement plan for certain officers. The agreements provides supplemental retirement benefits payable in installments over 20 years upon retirement or death. The costs for this plan are recognized over the service lives of the participating officers. The projected retirement benefit for President Daigneault, assuming he remains employed by the Bank until normal retirement age of 65 is $169,329 per year, with such payments beginning in the year 2017. The expense for all participants of this supplemental plan was $36,000 in 1997, $11,000 in 1996, and $15,000 in 1995. As of December 31, 1997, the accrued liability of this plan was $21,000. On December 15, 1994, the Company's board of directors adopted a Stock Option Plan (the Option Plan) for the benefit of officers and other full-time employees of the Company and the Bank. This plan was approved by the Company's shareholders at the 1995 Annual Meeting. Under the Option Plan, 200,000 shares (subject to adjustment to reflect stock splits and similar events) are reserved from the authorized but unissued common stock of the Company for future issuance by the Company upon exercise of stock options granted to certain key employees of the Company and the Bank from time to time. The purpose of the Option Plan is to encourage the retention of such key employees by facilitating their purchase of a stock interest in the Company. The Option Plan is intended to provide for the granting of incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended (the Code) to employees of the Company or the Bank. The Option Plan is administered by the Options Committee of the Company's board of directors, which is comprised solely of directors who are ineligible to receive grants of stock options under the Option Plan and who have not received grants of options within the 12 months preceding their appointment to the Options Committee. The Options Committee selects the employees of the Bank and the Company to whom options are to be granted and the number of shares to be granted. The Option Plan may be amended only by the vote of the holders of a majority of the Company's outstanding common stock if such amendment would increase the number of shares available for issuance under the Option Plan, change the eligibility criteria for grants of options under the Option Plan, change the minimum option exercise price or increase the maximum term of options. Other amendments may be effected by the Options Committee. Employees selected by the Options Committee receive, at no cost to them, options under the Option Plan. The option exercise prices are equal to the fair market value of the shares on the date of the grant, and no option is exercisable after the expiration of 10 years from the date it is granted. The fair market value of the shares is determined by the Options Committee as specified in the Option Plan. The optionee cannot transfer or assign any option other than by will or in accordance with the laws of descent and distribution, and the option may be exercised only by the employee during the employee's lifetime. After an employee's death, options may be exercised by the employee's estate or heirs up to one year following the date of death. Code Section 422 limits option grants by providing that during the term of the Option Plan, no grant may be made to any employee owning more than 10% of the shares unless the exercise price is at least 110% of the shares' fair market value and such option is not exercisable more than five years following the option grant. The aggregate fair market value of the stock for which any employee may be granted options in any calendar year may generally not exceed $100,000. While generally no options may be exercisable before the second anniversary of the grant date, in the event of a change in control involving the Company all options (other than those held by officers or directors of the Company or the Bank for less than six months) shall become immediately exercisable. Also, an employee whose employment is terminated in connection with or within two years after such a change in control event shall be entitled Page 71 to exercise all options for up to three months following the date of termination; provided that options held by officers or directors shall not be exercisable until six months after the grant date. Employees whose services are terminated, other than following a change in control as described above, shall thereupon forfeit any options held, provided, however, that following termination due to disability an employee shall be entitled to exercise options for up to one year (provided, further, that officers and directors may exercise only with respect to options held for at least six months). The Company receives no monetary consideration for the granting of incentive stock options. Upon the exercise of options, the Company receives payment in cash from optionees in exchange for shares issued. No federal income tax consequences are incurred by the Company at the time incentive stock options are granted or exercised, unless the optionee incurs liability for ordinary income tax treatment upon exercise of the option, as discussed below, in which event the Company would be entitled to a deduction equal to the optionee's ordinary income attributable to the options. Provided the employee holds the shares received on exercise of a stock option for the longer of two years after the option was granted or one year after it was exercised, the optionee will realize capital gains income (or loss) in the year of sale in an amount equal to the difference between the sale price and the option exercise price paid for shares. If the employee sells the shares prior to the expiration of the period, the employee realizes ordinary income in the year of disposition equal to the difference between the fair market value of the shares on the date of exercise and the exercise price and capital gains income (or loss) equal to the difference (if any) between the sale price of the shares and the fair market value of the shares on the date of exercise. In addition to the tax consequences discussed above, the excess of the option price over the fair market value of the optioned stock at the time of option exercise is required to be treated by an incentive optionee as an item of tax preference for purposes of the alternative minimum tax. Page 72 Performance Graph Set forth below is a line graph comparing the five-year cumulative total return of the Company's common stock ("FNLC"), assuming reinvestment of all cash dividends and retention of all stock dividends, with that of the Standard & Poor's 500 Index ("S&P 500") and the NASDAQ Combined Bank Index ("NASD Bank"). The NASD Bank index is a capitalization-weighted index designed to measure the performance of all NASDAQ stocks in the banking sector. Insert performance graph from Excel (refer to Form SE filed by registrant) Performance graph data: - ------------------------------------------------------------------- 1992 1993 1994 1995 1996 1997 - ------------------------------------------------------------------- FNLC 100.00 127.33 171.43 231.09 293.56 401.96 NASD Bank 100.00 129.37 130.80 189.41 238.95 390.90 S&P 500 100.00 109.94 111.34 152.68 187.31 249.32 - ------------------------------------------------------------------- Page 73 ITEM 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth the number of shares of common stock beneficially owned (1) as of December 31, 1997 by each Director and Executive Officer named in the Summary Compensation Table, and by all Directors and Executive Officers as a group: --------------------------------------------------- Name Number of Percent of Director Shares Ownership(1) ------------------- --------- ------------ M. Robert Barter 42,516 1.72% Bruce A. Bartlett 9,228 .37% Malcolm E. Blanchard 36,912 1.49% Katherine M. Boyd 8,868 .36% Daniel R. Daigneault(2) 25,956 1.05% Robert B. Gregory 10,040 .41% Carl S. Poole, Jr. 90,964 3.67% Stuart G. Smith 8,080 .33% David B. Soule, Jr. 5,768 .23% Parker L. Spofford 26,188 1.06% ------- ------ Total ownership of all Directors and Executive Officers as a group(2) 309,991 12.28% --------------------------------------------------- (1)For purposes of this table, beneficial ownership has been determined in accordance with the provisions of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended. In general, a person is deemed to be the beneficial owner of a security if he has or shares the power to vote or to direct the voting of the security or the power to dispose or direct the disposition of the security, or if he has the right to acquire beneficial ownership of the security within 60 days. The figure set forth includes director's qualifying shares owned by each person listed. (2)Includes exercisable stock options as of December 31, 1997, for Daniel R. Daigneault of 14,000 shares, and all directors and executive officers as a group of 30,000 shares. To the knowledge of the management of the Company, the following shareholders beneficially owned more than 5% of First National Lincoln Corporation stock as of December 31, 1997. -------------------------------------- -------------------------------- Name & Address of Beneficial Owner Amount Percentage ------------------------------------- ------------- ---------- Daniel P. Thompson, Edith I. Thompson 143,004 shares 5.78% HC 61 Box 039, New Harbor, ME 04545 --------------------------------------- ------------------------------- Page 74 ITEM 13. Certain Relationships and Related Transactions The Federal Reserve Act permits the Bank to contract for or purchase property from any of its Directors only when such purchase is made in the regular course of business upon terms not less favorable to the Bank than those offered by others unless the purchase has been authorized by a majority of the Board of Directors not interested in the transaction. Similarly, the Federal Reserve Act prohibits loans to Executive Officers of the Bank unless such loans are on terms not more favorable than those afforded other borrowers and certain other prescribed conditions have been met. The Bank has had, and expects to have in the future, banking transactions in the ordinary course of its business with Directors, Officers and principal shareholders of the Company and their associates. All such transactions have been made upon substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with others. In the opinion of management, such loans have not involved more than the normal risk of collectibility nor have they presented other unfavorable features. The total amount of loans outstanding at December 31, 1997 to the Company's Directors, Executive Officers and their associates was $2,946,000, which constituted 1.62% of the Bank's total loans outstanding at that date. Page 75 ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Exhibits Exhibit 3 Articles of Incorporation and Bylaws, filed as Exhibit 3 to Company's Registration Statement No. 2-96573. Exhibit 3.1 Articles of Amendment, filed as part of Exhibit 3 to the Company's Registration Statement No. 2-96573. Exhibit 3.2 Amendments to Articles of Incorporation filed as part of Exhibit 3 to the Company's quarterly filing on Form 10-Q for the second quarter of 1996. Exhibit 4.1 Articles of Incorporation and Bylaws, filed as Exhibit 3 to the Company's Registration Statement No. 2-96573. Exhibit 10.3 EastPoint Technology Purchase and Licensing Agreement, filed as Exhibit 10.3 to the Company's 1993 Annual Report on Form 10-K. Exhibit 27 Financial Data Schedule. (b) Reports on Form 8-K The Company filed no reports on Form 8-K during the quarter ended December 31, 1997. Page 76 SIGNATURES Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ------------------------------------------------ FIRST NATIONAL LINCOLN COPORATION By Daniel R. Daigneault Daniel R. Daigneault, President March 27, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title and Date Daniel R. Daigneault President and Director Daniel R. Daigneault (Principal Executive Officer) March 27, 1998 F. Stephen Ward Treasurer F. Stephen Ward (Principal Financial Officer, Principal Accounting Officer) March 27, 1998 M. Robert Barter Director and M. Robert Barter Chairman of the Board March 27, 1998 Bruce A. Bartlett Director Bruce A. Bartlett March 27, 1998 Malcolm E. Blanchard Director Malcolm E. Blanchard March 27, 1998 Katherine M. Boyd Director Katherine M. Boyd March 27, 1998 Robert B. Gregory Director Robert B. Gregory March 27, 1998 Carl S. Poole, Jr. Director Carl S. Poole, Jr. March 27, 1998 Page 77 Stuart G. Smith Director Stuart G. Smith March 27, 1998 David B. Soule, Jr. Director David B. Soule, Jr. March 27, 1998 Parker L. Spofford Director Parker L. Spofford March 27, 1998 Page 78 EX-27 2
9 1000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 5683 0 0 0 16463 52282 52610 181510 1800 266279 169880 67674 1477 1363 25 0 0 25860 266279 15068 4724 42 19834 5846 9497 10337 103 3 6157 5682 5682 0 0 3906 1.58 1.55 4.16 510 358 0 0 1906 337 128 1800 1800 0 0
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