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
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
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
<S> <C> <C> <C> <C> <C> <C> <C>
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
========= =========== ========== =========== ======== ======= ===========
</TABLE>
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
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