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, 1998
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, 1999:
Common Stock, $.01 par value per share: $55,579,000
Indicate the number of shares outstanding of each of the registrant's classes
of common stock as of March 1, 1999:
Common Stock: 2,470,157 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 ------------------------------------------ 8
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ---------------------------------------- 9
ITEM 7A.Quantitative and Qualitative Disclosures about Market Risk ------ 27
ITEM 8. Financial Statements and Supplementary Data ---------------------- 30
ITEM 9. Changes in and/or Disagreements with Accountants ----------------- 66
PART III
ITEM 10. Directors and Executive Officers of the Registrant -------------- 67
ITEM 11. Executive Compensation ------------------------------------------ 70
ITEM 12. Security Ownership of Certain Beneficial Owners and Management -- 78
ITEM 13. Certain Relationships and Related Transactions ------------------ 79
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K- 80
Signatures --------------------------------------------------------------- 81
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, 1998, the
Company's securities consisted of one class of common stock, $.01 par value per
share, of which there were 2,471,531 shares outstanding and held of record by
approximately 492 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 six offices in Mid-Coast Maine, including its principal
office located on Main Street, Damariscotta, Lincoln County, Maine and five
branch offices located at U.S. Route 1, Waldoboro, Maine; Townsend Avenue,
Boothbay Harbor, Maine; Route 27, Wiscasset, Maine; U.S. Route 1, Rockport,
Maine; and Elm Street, Camden, 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, 1998, the Bank employed 112 persons, with 107 full-time
equivalent employees.
Page 1<PAGE>
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, 1998, 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<PAGE>
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.
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.
In May of 1998, the Bank opened a sixth branch in Camden, Maine, which is
geographically contiguous to Rockport, Maine. The addition of this branch in
the Knox County market has allowed the Bank to better serve customers in this
area by providing both in-town and out-of-town locations that meet different
customer needs.
The Bank owns all of its facilities except for the Camden location, for
which the Bank entered into a long-term lease. 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<PAGE>
ITEM 3. Legal Proceedings
There are no material pending legal proceedings to which the Company or
the Bank is a 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<PAGE>
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 1998.
Page 5<PAGE>
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 prices of
actual sales in each quarter of 1998 and 1997. Such quotations do not reflect
retail mark-ups, mark-downs or brokers' commissions. The data contained in this
table (and the dividend table set forth below) 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.
- -------------------------------------------------------
1998 1997
----------------- -----------------
High Low High Low
1st Quarter 22 13 3/4 10 1/2 10
2nd Quarter 22 1/2 22 11 1/2 10 1/2
3rd Quarter 22 1/2 20 3/4 12 1/2 11 1/2
4th Quarter 23 22 1/2 13 3/4 12 1/2
- -------------------------------------------------------
The last known transaction involving the Company's stock during 1998 was
at $22.50 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, 1998, there were
approximately 492 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 $.06
declared on December 18, 1997 and a special cash dividend of $.05 declared on
December 17, 1998:
- -------------------------------------------------------------------
Date Declared Dividend Per Share Date Payable
----------------- ------------------ ----------------
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
February 24, 1998 $ 0.0700 April 30, 1998
June 18, 1998 0.0800 July 31, 1998
September 17, 1998 0.0900 October 30, 1998
December 17, 1998 0.1000 January 29, 1999
December 17, 1998 0.0500 January 29, 1999
------
$ 0.3900
- -------------------------------------------------------------------
Page 6<PAGE>
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, 1998, 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 15.28% and 16.29%, respectively, as of December 31, 1998.
Page 7<PAGE>
ITEM 6. Selected Financial Data
- ------------------------------------------------------------------------------
Dollars in thousands, except for per share amounts
Years ended December 31, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------
Summary of Operations
Operating Income $23,621 $21,439 $18,863 $17,404 $14,871
Operating Expense 17,903 15,757 13,852 13,414 11,766
Net Interest Income 10,844 10,337 9,347 8,538 8,209
Provision for Loan Losses 400 103 60 0 0
Net Income 4,011 3,906 3,424 2,720 2,174
Per Common Share Data (1)
Net Income
Basic $ 1.62 $ 1.58 $ 1.40 $ 1.12 $ 0.90
Fully Diluted 1.56 1.55 1.38 1.11 0.90
Cash Dividends Declared 0.39 0.29 0.24 0.18 0.14
Book Value 11.64 10.46 9.12 8.03 6.95
Market Value 22.50 13.75 10.25 8.25 6.25
Financial Ratios
Return on Average Equity 14.86% 16.16% 16.38% 15.03% 13.59%
Return on Average Assets 1.44 1.55 1.54 1.34 1.11
Average Equity to Average Assets 9.70 9.62 9.41 8.90 8.20
Net Interest Margin 4.28 4.45 4.51 4.49 4.54
Dividend Payout Ratio 24.06 18.04 16.82 15.66 15.36
Allowance for Loan Losses/Total Loans 0.90 0.99 1.21 1.55 2.02
Non-Performing Loans to Total Loans 0.34 0.28 0.28 0.78 1.43
Non-Performing Assets to Total Assets 0.36 0.26 0.54 0.79 1.16
Efficiency Ratio 0.54 0.51 0.52 0.57 0.65
At Year End
Total Assets $286,806 $266,279 $230,768 $212,282 $196,531
Total Loans 209,224 181,510 156,970 133,245 120,294
Total Investment Securities 59,342 68,745 60,564 61,570 65,654
Total Deposits 201,803 169,880 155,674 150,468 142,445
Total Shareholders' Equity 28,776 25,885 22,477 19,565 16,892
- ------------------------------------------------------------------------------
1) 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 1998 $23.00 $13.75
- ------------------------------------------------------------------------------
Page 8<PAGE>
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 1998, continuing the positive
growth in both assets and income seen during the past five years.
During 1998, the Bank opened a new office in Camden, Maine, and 1998 was
also the first full year of operation for its Rockport, Maine, office which
opened in 1997. As of year end 1998, these offices were ahead of Management's
initial projections.
The most significant asset growth came in the loan portfolio, which
increased during 1998 by $27.7 million or 15. 3% to end the year at $209.2
million. The largest amount of growth was in residential mortgages, but 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 an
increased focus on mortgage loan origination.
Non-interest expense increased 14.3% to $7.0 million in 1998 from $6.2
million in 1997. This increase was attributable to the Bank's new offices in
Rockport and Camden. The Company's efficiency ratio -- a benchmark measure of
the amount spent to generate a dollar of income -- was 0.54 in 1998 compared to
0.51 in 1997.
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, 1998 was $4,011,000 -- the highest
net income recorded by the Company in one year. This represents a 2.69% or
$105,000 increase from net income of $3,906,000 that was posted in
1997. Return on average assets in 1998 was 1.44%, down from 1.55% in 1997 and
1.54% in 1996. Return on average equity was 14.86% in 1998, compared to 16.16%
in 1997 and 16.38% in 1996. This drop in return on equity during 1998 was
attributable to the Company's income growing at a lower rate than in previous
years, the result of narrowed interest rate margins and higher operating
expenses from the opening of two new offices in 1998 and late 1997.
Average shareholders' equity to average assets was 9.70% in 1998, compared
to 9.62% in 1997, and 9.41% in 1996. Net income per share for the year ended
December 31, 1998 was $1.62 compared to $1.58 in 1997, and $1.40 in 1996. Book
value per share was $11.64 on December 31, 1998, up from $10.46 on December 31,
1997 and $9.12 on December 31, 1996.
On December 31, 1998, assets stood at $286.8 million, compared to $266.3
million on December 31, 1997, a 7.7% increase. As of December 31, 1998, total
loans were $209.2 million. This represents an increase of 15.26% from total
loans of $181.5 million on December 31, 1997. Investments totaled $59.3 million
on December 31, 1998, a 13.7% decrease from $68.7 million on December 31, 1997.
Deposits increased 18.79% in 1998, standing at $201.8 million on December 31,
1998, compared to $169.9 million on December 31, 1997.
The Bank's loan delinquency ratio decreased again in 1998, and was 1.50%
on December 31, 1998, versus 1.60% on December 31, 1997. 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.
Page 9<PAGE>
Average Rates and Net Interest Yield
The following table shows for the years ended December 31, 1998, 1997 and 1996,
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, ----1998---- ----1997---- ----1996----
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 $ 4,067 6.62% 4,809 6.91% 4,302 6.74%
Loans held for sale 14 7.45% 4 8.33% 98 8.09%
Loans 17,525 8.81% 15,279 9.06% 13,299 9.09%
Interest-bearing deposits 32 5.29% 42 5.26% 33 5.31%
------ ----- ------- ----- ------- -----
Total interest-earning assets $21,637 8.28% 20,134 8.42% 17,732 8.36%
------ ----- ------- ----- ------- -----
Interest-bearing liabilities:
Deposits $ 6,876 4.09% 5,846 4.00% 5,525 3.97%
Other borrowings 3,588 5.35% 3,651 5.56% 2,645 5.48%
------ ----- ------- ----- ------- -----
Total interest-bearing
liabilities $10,464 4.45% 9,497 4.48% 8,170 4.36%
------ ----- ------- ----- ------- -----
Net interest income $11,173 10,637 9,562
====== ===== ======= ===== ======= =====
Interest rate spread 3.83% 3.94% 4.00%
Net interest margin 4.28% 4.45% 4.51%
- -----------------------------------------------------------------------------
Page 10<PAGE>
Average Daily Balance Sheets
The following table shows the Company's average daily balance sheets for years
ended December 31, 1998, 1997 and 1996.
- ----------------------------------------------------------------------------
Dollars in thousands
Years ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------
Cash and due from banks $ 6,785 5,317 4,994
Interest-bearing deposits 606 798 621
Investments
U.S. Treasury securities &
government agencies 49,113 55,825 46,600
Obligations of states &
political subdivisions 4,295 3,493 3,168
Other securities 8,527 10,249 14,091
------- ------- -------
Total investments 61,935 69,567 63,859
Loans held for sale 188 42 1,212
Loans ------- ------- -------
Commercial 60,705 49,255 44,022
Consumer 26,003 29,289 26,595
State and municipal 10,234 8,244 5,964
Real estate 102,064 81,803 69,707
------- ------- -------
Total loans 199,006 168,591 146,288
Allowance for loan losses 1,756 1,847 1,953
------- ------- -------
Net loans 197,250 166,744 144,335
------- ------- -------
Fixed assets 4,858 4,226 4,015
Other assets 6,700 4,646 3,091
------- ------- -------
Total assets $ 278,322 251,340 222,127
======= ======= =======
Deposits
Demand $ 15,253 13,739 13,133
NOW 31,054 27,662 27,200
Money market 7,918 5,179 6,245
Savings 36,151 34,104 34,091
Certificates of deposit 71,563 64,373 59,084
Certificates of deposit over $100,000 21,306 14,946 12,510
------- ------- -------
Total deposits 183,245 160,003 152,263
Borrowed funds 67,077 65,672 48,241
Other liabilities 999 1,491 716
------- ------- -------
Total liabilities 251,321 227,166 201,220
------- ------- -------
Common stock 25 8 752
Additional paid in capital 4,674 4,532 3,544
Retained earnings 22,403 19,634 16,611
Treasury stock (101) 0 0
------- ------- -------
Total capital 27,001 24,174 20,907
------- ------- -------
Total liabilities and capital $ 278,322 251,340 222,127
======= ======= =======
- ----------------------------------------------------------------------------
Page 11<PAGE>
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/volume(1) of interest-earning assets and
interest-bearing liabilities for the periods indicated. Tax-exempt income is
calculated on a tax-equivalent basis, using a 34% tax rate in 1998 and 1997.
- -----------------------------------------------------------------------------
Year ended December 31, 1998 compared to 1997
Rate/
Dollars in thousands Volume Rate volume(1) Total
- -----------------------------------------------------------------------------
Interest on earning assets
Loans $ (565) $ (201) $ 24 $ (742)
Loans held for sale 12 - (1) 11
Investment securities 2,756 (432) (78) 2,246
Interest-bearing deposits (10) - - (10)
------- ------- ------- -------
Total interest income $ 2,193 $ (633) $ (55) $ 1,505
------- ------- ------- -------
Interest expense
Deposits $ 868 $ 141 $ 21 $ 1,030
Other borrowings(2) 78 (138) (3) (63)
------- ------- ------- -------
Total interest expense $ 946 $ 3 $ 18 $ 967
------- ------- ------- -------
Change in net interest income $ 1,247 $ (636) $ (73) $ 538
======= ======= ======= =======
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
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
======= ======= ======= =======
- -----------------------------------------------------------------------------
(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 12<PAGE>
Capital Resources
Capital on December 31, 1998 was sufficient to meet the requirements of
regulatory authorities. Average equity to average assets was 9.70% in 1998,
versus 9.62% in 1997. Leverage capital, or total shareholders' equity divided
by total assets, stood at 10.03% on December 31, 1998, versus 9.72% in 1997.
At December 31, 1998, the Company had tier-one risk-based capital of
15.92% and tier-two risk-based capital of 16.93%, versus 15.47% and 16.72% in
1997, 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 Company's actual levels of capitalization were comfortably
above the standards to be rated "well-capitalized" by regulatory authorities.
During 1998, the Company declared cash dividends of $.07 per share for the
first quarter, $.08 per share for the second quarter, $.09 per share for the
third quarter, and $.10 per share for the fourth quarter. In addition, the
Company declared a special cash dividend of $.05 per share in the fourth
quarter. The Company's dividend payout ratio was 24.06% of earnings in 1998,
18.04% in 1997, and 16.82% in 1996.
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 1999 will be that year's net income plus $6,055,000.
In 1998, 11,487 shares of common stock were issued via director and
employee stock programs for consideration totaling $218,000. The Company also
purchased 15,504 shares of common stock for total consideration of $343,000, of
which 5,765 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 1998, the Bank opened a sixth office in Camden, Maine, in facilities which
are leased. In order to commence operations, leasehold improvements and
equipment purchased were made which totaled $449,000. This cost will be
amortized over seven to ten years, adding $48,000 to pre-tax operating costs
per year. Also during the year, the Bank purchased and implemented a new core
banking computer system for Year-2000 remediation. The total cost for both
hardware and software was $650,000. This will be amortized over a three-to-five
year period, but will have little material impact on operating costs since the
depreciation expense for new assets will replace that of assets which had just
become fully depreciated.
Liquidity
As of December 31, 1998, the Bank had primary sources of liquidity of $51.5
million, or 18.0% 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.
Page 13<PAGE>
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 during 1998, ending the year at $201.8 million. The growth
was seen in all types of deposit accounts. Management has not seen any
significant deposit runoff trends which would have a material effect on the
Bank's liquidity position.
At December 31, 1998, the Company had a net unrealized gain of $63,000
(net of $32,000 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 1998 the Company's investment portfolio decreased 13.7% to end the year
at $59,342,000, compared to $68,745,000 on December 31, 1997. This decrease was
due to Management's decision to allow the level of the investment portfolio to
decline since available investment opportunities were less attractive than
opportunities available to increase the loan portfolio.
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 the Company 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, banker's acceptances, corporate bonds and
commercial paper with one of the three highest ratings given by a nationally
recognized rating agency.
In 1998, the Company's investment portfolio saw a continued shift away
from U.S. Treasury securities and toward U.S. Government Agency securities,
mortgage-backed securities, and municipal 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,
1998, 1997 and 1996.
Page 14<PAGE>
- -----------------------------------------------------------------------
Dollars in thousands 1998 1997 1996
- -----------------------------------------------------------------------
Securities available for sale:
U.S. Treasury and agency $ 2,036 6,501 9,411
Mortgage-backed securities 5,951 3,210 2,085
State and political subdivisions 1,248 - -
Other securities 9,623 6,752 6,996
------ ------ ------
18,858 16,463 18,492
------ ------ ------
Securities to be held to maturity:
U.S. Treasury and agency 15,746 16,649 8,994
Mortgage-backed securities 20,196 28,541 23,860
State and political subdivisions 4,531 3,557 3,632
Other securities 11 3.535 5,586
------ ------ ------
40,484 52,282 42,072
------ ------ ------
$ 59,342 68,745 60,564
====== ====== ======
- -----------------------------------------------------------------------
The following table sets forth certain information regarding the yields
and expected maturities of the Company's investment securities as of December
31, 1998. Yields on tax-exempt securities have been computed on a tax-
equivalent basis using a tax-rate of 34%.
Page 15<PAGE>
- ------------------------------------------------------------------------------
Available for sale Held to maturity
------------------ --------------------
Fair Yield to Amortized Yield to
Dollars in thousands value maturity cost maturity
- ------------------------------------------------------------------------------
U.S. Treasury and Agency:
Due in 1 year or less $ - 0.00% - 0.00%
Due in 1 to 5 years 1,042 6.77% 1,000 4.31%
Due in 5 to 10 years 994 6.50% 2,000 6.60%
Due after 10 years - 0.00% 12,746 6.69%
------ ----- ------ -----
2,036 6.64% 15,746 6.53%
------ ----- ------ -----
Mortgage-backed securities:
Due in 1 year or less - 0.00% 201 7.34%
Due in 1 to 5 years - 0.00% 2,840 3.70%
Due in 5 to 10 years 1,474 8.35% - 0.00%
Due after 10 years 4,477 6.65% 17,155 6.83%
------ ----- ------ -----
5,951 7.07% 20,196 6.40%
------ ----- ------ -----
State and political subdivisions:
Due in 1 year or less - 0.00% - 0.00%
Due in 1 to 5 years - 0.00% 697 4.19%
Due in 5 to 10 years - 0.00% - 0.00%
Due after 10 years 1,248 4.38% 3,834 5.22%
------ ----- ------ -----
1,248 4.38% 4,531 5.06%
------ ----- ------ -----
Other securities:
Due in 1 year or less - 0.00% - 0.00%
Due in 1 to 5 years 504 6.35% - 0.00%
Due in 5 to 10 years - 0.00% 11 7.01%
Due after 10 years 2,548 6.18% - 0.00%
Equity securities 6,571 6.55% - 0.00%
------ ----- ------ -----
9,623 6.44% 11 7.01%
------ ----- ------ -----
$18,858 6.52% 40,484 6.30%
====== ===== ====== =====
- -----------------------------------------------------------------------------
Lending Activities
The loan portfolio experienced growth in all areas during 1998, with the most
significant increase seen in residential real estate loans. Total loans were
$209,224,000 at December 31, 1998, a 15.3% increase from total loans of
$181,510,000 on December 31, 1997. 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, 1998, 1997, 1996, 1995 and 1994. Some loans were reclassified in 1994
between commercial real estate and commercial and industrial loans. This
internal reclassification was not significant.
Page 16<PAGE>
- ----------------------------------------------------------------------------
Dollars in thousands
As of December 31, 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------
Commercial loans
Real estate $ 25,585 20,173 18,220 17,578 21,308
Other 38,718 33,100 26,907 24,918 18,491
Residential real estate loans
Construction 3,397 3,053 3,278 2,167 1,919
Term 105,877 92,937 81,088 65,935 60,211
Consumer loans 27,993 24,041 20,288 18,439 16,196
Municipal 7,654 8,206 7,189 4,208 2,169
------- ------- ------- ------- -------
Total $ 209,224 181,510 156,970 133,245 120,294
======= ======= ======= ======= =======
- ----------------------------------------------------------------------------
On December 31, 1998, 52.2% of the Bank's loan portfolio was in
residential real estate loans, 12.2% was in commercial real estate loans,
18.5% was in other commercial loans, 13.4% was in consumer loans, and 3.7%
was in state and municipal loans. This compares to 1997 and 1996 figures for
residential real estate loans of 52.9% and 53.8%, respectively, commercial
real estate loans of 11.1% and 11.6%, respectively, other commercial loans of
18.2% and 17.1%, respectively, consumer loans of 13.2% and 12.9%,
respectively, and 4.5% and 4.6%, 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, 1998'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 1998, and was
1.50% on December 31, 1998, versus 1.60% on December 31, 1997. This decrease is
due to the volume of delinquent loans remaining even with 1997 while total
loans increased 15.3% during the year.
The Bank issues its own VISA and MasterCard. These loans totaled
$2,569,000 as of December 31, 1998, $2,457,000 as of December 31, 1997,
$2,099,000 as of December 31, 1996, $1,571,000 as of December 31, 1995, and
$920,000 as of December 31, 1994. The number of credit cards outstanding
increased 9.2% in 1998 to end the year at 3,574.
The following table sets forth certain information regarding the
contractual maturities of the Bank's loan portfolio as of December 31, 1998.
- ----------------------------------------------------------------------------
Dollars in thousands < 1 Year 1-5 Years 5-10 Years >10 Years Total
- ----------------------------------------------------------------------------
Commercial real estate $ 794 1,427 4,830 18,534 25,585
Commercial other 12,569 5,128 11,425 9,596 38,718
Residential real estate 1,608 649 7,768 95,852 105,877
Residential construction 3,397 - - 3,397
Consumer 3,733 10,729 6,866 6,665 27,993
Municipal 3,045 2,132 799 1,678 7,654
------- ------- ------- ------- -------
Totals $25,146 20,065 31,688 132,325 209,224
======= ======= ======= ======= =======
- ----------------------------------------------------------------------------
Page 17<PAGE>
The following table provides a listing of loans by category, excluding
loans held for sale, between variable and fixed rates as of December 31, 1998.
- ------------------------------------------------------------------
Dollars in thousands Amount % of total
- ------------------------------------------------------------------
Variable-rate loans
Residential adjustable-rate mortgages $ 52,950 25.31%
Equity loans 4,930 2.36%
Other consumer loans 6,322 3.02%
Commercial loans 47,562 22.73%
------- -------
Total 111,764 53.42%
Fixed-rate loans 97,460 46.58%
------- -------
Total loans $209,224 100.00%
======= =======
- ------------------------------------------------------------------
Approximately 30.9% of the loan portfolio would be repriced within 90
days, and 56.2% within one year. The Bank has $14.6 million or 24.9% of
investments maturing or anticipated to be called in 1999. On the liability
side, $72.2 million or 71.2% of certificates of deposit will mature by December
31, 1999.
Loan Concentrations
As of December 31, 1998, 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 1998, the Bank placed a much higher volume of residential mortgages into the
secondary market compared to prior years. This was the result of increased
mortgage underwriting opportunities and current interest rates at the time the
loans were sold. Loans held for sale are carried at the lower of cost or market
value, which was $209,000 at December 31, 1998 and $100,000 at December 31,
1997.
Non-Performing Assets
The aggregate dollar amount of loans more than 90 days past-due or on non-
accrual status increased slightly during 1998. 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, 1998, 1997, 1996, 1995 and 1994.
Page 18<PAGE>
- ----------------------------------------------------------------------------
Dollars in thousands
As of December 31, 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------
Commercial real estate
& business $ 414 420 203 580 1,359
Residential real estate 222 320 359 558 408
Consumer 91 128 39 61 67
------ ------- ------ ------ ------
Total 727 868 601 1,199 1,834
====== ====== ====== ====== ======
Non-accrual loans included
in above total 716 510 440 1,034 1,722
====== ====== ====== ====== =======
Income not recognized from
non-accrual loans $ 51 50 62 114 106
====== ====== ====== ====== ======
- ----------------------------------------------------------------------------
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 increased during 1998. At December 31 it included
seven properties valued at $303,000, compared to five properties valued at
$184,000 at December 31, 1997.
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,
1998 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 19<PAGE>
judgments about information available to them at the time of their examination.
During 1998, a provision of $400,000 was made to the allowance, compared
to a provision of $103,000 in 1997, and $60,000 in 1996. At December 31, 1998,
the allowance for loan losses stood at $1,822,000, or 0.87% of total loans
outstanding. This compares to $1,800,000, or 0.99% of total loans outstanding
at December 31, 1997, and $1,906,000, or 1.21% of total loans outstanding at
December 31, 1996.
Impaired loans are measured 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, 1998, 1997, 1996, 1995 and 1994.
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, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------
Real estate loans $ 440 52% 454 53% 419 54% 412 51% 267 51%
Commercial loans(2) 736 35% 683 34% 1,010 33% 1,153 35% 1,578 35%
Consumer loans 408 13% 254 13% 477 13% 494 14% 583 14%
Unallocated 238 - 409 - - - - - - -
----- ---- ----- ---- ----- ---- ----- ---- ----- ----
Total $1,822 100% 1,800 100% 1,906 100% 2,059 100% 2,428 100%
===== ==== ===== ==== ===== ==== ===== ==== ===== ====
- ------------------------------------------------------------------------------
(1) Percentage is amount in each category for the stated year
(2) Includes commercial real estate loans
Net loans charged off in 1998 were $378,000, or 0.19% of average loans
outstanding for the year. This compares to net loan chargeoffs of $209,000 in
1997 and $213,000 in 1996.
Page 20<PAGE>
The following table summarizes the activity with respect to loan losses
for the years ended December 31, 1998, 1997, 1996, 1995 and 1994.
- ----------------------------------------------------------------------------
Dollars in thousands
As of December 31, 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------
Balance at beginning
of period $ 1,800 1,906 2,059 2,428 2,619
------- ------- ------- ------- -------
Loans charged off:
Commercial(1) 121 60 154 197 213
Real estate mortgage 46 31 65 131 -
Consumer 285 246 148 156 93
------- ------- ------- ------- -------
Total 452 337 367 484 306
------- ------- ------- ------- -------
Recoveries on loans
previously charged off:
Commercial(1) 14 70 81 30 34
Real estate mortgage - - 16 - -
Consumer 60 58 57 85 81
------- ------- ------- ------- -------
Total 74 128 154 115 115
------- ------- ------- ------- -------
Net loans charged off 378 209 213 369 191
Provision for loan losses 400 103 60 - -
------- ------- ------- ------- -------
Balance at end of period $ 1,822 1,800 1,906 2,059 2,428
======= ======= ======= ======= =======
Ratio of net loans charged
off to average loans
outstanding 0.19% 0.12% 0.14% 0.29% 0.16%
- ----------------------------------------------------------------------------
(1)Includes commercial real estate loans
Deposits
The Bank, with $201,803,000 in deposits as of December 31, 1998, realized an
increase of 18.8% in 1998 compared to a 9.1% increase in deposits in 1997 and a
3.5% increase in deposits in 1996. Most of the growth in 1998 and 1997 has been
seen in the Bank's CD portfolio, although NOW account, savings and money market
deposits also increased significantly in 1998. Average deposits for 1998 were
higher than average deposits for 1997.
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 1998, deposits peaked during the month of December at
$201,997,000. 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 deposits (including non-interest-bearing
accounts) was 3.75% for the year ended December 31, 1998, compared to 3.65% for
the year ended December 31, 1997 and 3.63% for the year ended December 31,
1996. The following table sets forth the average daily balance for the Bank's
principal deposit categories for the period indicated.
Page 21<PAGE>
- ------------------------------------------------------------------------
Dollars in thousands % growth
1998
Years ended December 31, 1998 1997 1996 vs. 1997
- ------------------------------------------------------------------------
Demand deposits $ 15,253 13,739 13,133 11.0%
NOW accounts 31,054 27,662 27,200 12.3%
Money market accounts 7,918 5,179 6,245 52.9%
Savings 36,151 34,104 34,091 6.0%
Certificates of deposit 92,869 79,319 71,594 17.1%
------- ------- ------- ------
Total deposits $ 183,245 160,003 152,263 14.5%
======= ======= ======= ======
- ------------------------------------------------------------------------
The following table sets forth the average cost of each category of
interest-bearing deposits for the periods indicated.
- ------------------------------------------------------------------
Years ended December 31, 1998 1997 1996
- ------------------------------------------------------------------
NOW accounts 1.27% 1.25% 1.37%
Money market accounts 3.16% 2.50% 2.50%
Savings accounts 2.92% 2.96% 3.02%
Certificates of deposit 5.57% 5.50% 5.54%
----- ----- -----
Total interest-bearing deposits 4.09% 4.00% 3.97%
===== ===== =====
- ------------------------------------------------------------------
As of December 31, 1998, the Bank held a total of $29,131,000 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 $ 10,648
3 months through 6 months 4,674
6 months through 12 months 7,227
Over 12 months 6,582
------
Total $ 29,131
======
- ---------------------------------------
Page 22<PAGE>
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, 1998 totaled $45,433,000, with a weighted average interest rate
of 5.26% and maturities ranging from one day to fifteen years. The maximum
amount outstanding at any month-end during the year was $76,448,000 at the end
of May. The average amount outstanding during the year was $60,335,000, with a
weighted average interest rate of 5.45%. This compares to an average
outstanding amount of $56,969,000 in 1997, with a weighted average interest
rate of 5.67%. The average balance outstanding on the Bank's borrowed funds for
the year ended December 31, 1996 was $32,734,000, with a weighted average
interest rate of 5.62%.
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, 1998 was
$8,742,000, compared to $5,474,000 on December 31,1997, and $8,413,000 on
December 31, 1996. 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 balances on the Treasury
Tax & Loan note at December 31, 1998 and 1997 were $285,000 and $3,295,000,
respectively.
Investment Management and Fiduciary Activities
As of December 31, 1998, the Bank's Investment Management Group had assets with
a market value of $91,719,000 under management. This amount consisted of 297
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 the Company's future operating results
and financial condition.
Page 23<PAGE>
Year 2000 Readiness
With the year 2000 approaching, all businesses and governments are facing the
challenge of assessing and preparing their computer systems to handle dates
beyond 1999. First National Lincoln Corporation and its subsidiary, The First
National Bank of Damariscotta, have taken steps to address the many issues
related to the transition to the next century. The Bank's actions with regard
to Year 2000 compliance are reviewed by the Board of Directors, its internal
audit department, and its Federal Regulators.
The awareness phase of the Company's Year 2000 readiness began with the
creation of a Year 2000 Task Force, overseen by the Board of Directors, which
includes top management and staff from each division. It has been working since
the summer of 1997 towards full Year 2000 compliance.
From this, the Company began its assessment phase, during which a Year
2000 Plan was formulated to direct and coordinate activities related to Year
2000 preparedness. Development of this plan began with an examination of all
internal systems and identification of those which are considered "mission-
critical" and requiring the highest priority in evaluation and remediation.
This process included not only computer hardware and software, but also non-
information-technology systems, such as alarms and heating control systems.
From this evaluation, the scope of the Year 2000 remediation project was
developed and target dates were set for any necessary systems changes. A test
plan was also developed for the testing of all mission-critical systems. The
assessment phase of the project was complete in the first quarter of 1998.
The major project in the remediation phase was the acquisition of a new
core banking system which became operational in the third quarter of 1998. The
system has been certified by the vendor as Year 2000 compliant and offers many
features which Management believes will enhance customer service. In addition,
several stand-alone hardware and software systems have been upgraded or
replaced.
At December 31, 1998, the Company was, in Management's opinion, on track
with its timelines for completion of its Year 2000 plan. At that point
virtually all hardware and software changes required in the remediation phase
were complete and operational, and the testing required in the validation phase
of the plan was substantially complete. It is anticipated that any additional
testing will be completed by the end of the first quarter of 1999.
The estimated cost to address Year 2000 issues is approximately $1
million. This includes $400,000 for the purchase of hardware and software for
the new core banking system, $250,000 for new personal computers and networking
hardware, and $50,000 for new telephone equipment. The purchase of new hardware
and personal computers, although required for operation of the new core banking
system, is part of the Bank's planned upgrade of computers. The phone system is
a more modern system that is being installed irrespective of Year 2000 issues,
but has been certified by the vendor as Year 2000 compliant. Almost all of
these expenditures have been incurred and will be amortized over a three-to-
five year period.
In addition to hardware and software, the above-mentioned estimated total
cost includes a human-resources allocation of $300,000 which has been or will
be expensed as incurred. Of this, it is estimated that only $25,000 will be an
incremental expense, which will include summer college students, overtime for
existing personnel, and outside support. The remaining $275,000 is an
allocation of existing human resources to effectively implement and bring to a
successful conclusion the Year 2000 Plan.
Externally, both business relationships and significant counterparties
have been evaluated for their state of Year 2000 preparedness. The Company has
verified that all key vendors, suppliers and other business partners will be
ready for Year 2000, and has created a team to work with bank customers to
assess their Year 2000 awareness and readiness.
Page 24<PAGE>
At this time, it is Management's opinion that the Company's major Year
2000 risks are primarily related key counterparties which are beyond the
Company's control. The two most significant counterparties are U.S. Government
Agencies -- the Federal Reserve Bank and the Federal Home Loan Bank -- upon
which the Company is dependent for liquidity and funds transfer needs. The
Company has begun and will continue to closely monitor the Year 2000
preparation and readiness of both agencies.
The Company has developed contingency plans for all mission critical
systems. These plans include identification of alternative resources and/or
vendors as well as specific trigger dates for action and implementation. Since
the Company's primary business is providing traditional banking services, the
creation of additional liquidity capacity to meet the potential needs of its
customers and communities is a key part of contingency planning. A separate
liquidity contingency plan will be completed by the end of the first quarter of
1999.
With Year 2000 assessment, remediation and validation now nearly complete,
in Management's opinion the worst-case scenario the Company envisions involves
electric power and telecommunication interruptions. For electric power, the
Company is currently evaluating the installation of a back-up generator for its
operations facility. While no formal plans are in place to address
telecommunication disruptions, in Management's opinion this is not a
significant issue due to the general state of preparedness of the
telecommunications industry.
Page 25<PAGE>
Accounting Pronouncements
During 1998, the Company adopted SFAS 130, 131 and 132. The adoption of
SFAS 130, Reporting Comprehensive Income, required that certain items be
reported under a new category of income, "Other Comprehensive Income".
Unrealized gains and losses on securities available for sale is the only item
included in Other Comprehensive Income. SFAS 131 and 132 relate to disclosures
about segments and employee benefits, respectively. The financial statements
for 1998 and prior periods where applicable, include the required additional
disclosures for SFAS No. 130, 131 and 132. In addition, the Financial
Accounting Standards Board issued SFAS No. 133, Accounting For Derivative
Instruments and Hedging Activities and is effective for fiscal years beginning
after June 15, 1999. Management has not determined the impact of SFAS No. 133
on the financial statements.
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,
general local, regional and national economic conditions, competitive
pressures, 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 and 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 26<PAGE>
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. ALCO's 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, 1998, is
presented in the following table:
Page 27<PAGE>
- -----------------------------------------------------------------------------
Dollars in thousands 0-90 91-365 1-5 5+
Interest rate risk repricing days days years years
- ----------------------------------------------------------------------------
Investment securities at amortized cost $ 14,581 10,531 19,615 14,519
Loans held for sale 209 - - -
Loans 66,736 57,983 67,545 16,960
Other interest-earning assets 3,719 - - -
Non-rate-sensitive assets - - - 14,408
------ ------ ------ -------
Total assets 85,245 68,514 87,160 45,887
====== ====== ====== =======
Interest-bearing deposits 41,871 49,134 29,164 63,985
Borrowed funds 28,554 1,262 24,644 -
Non-rate-sensitive liabilities and equity - - - 48,192
------ ------ ------ -------
Total liabilities and equity $ 70,425 50,396 53,808 112,177
====== ====== ====== =======
Period gap $ 14,820 18,118 33,352 (66,290)
Percent of total assets 5.17% 6.32% 11.63% (23.11%)
Cumulative gap (current) $ 14,820 32,938 66,290 -
Percent of total assets 5.17% 11.48% 23.11% 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 3.3% of stable-rate net interest income if
rates fall gradually by two percentage points over the next year, and increase
of approximately 0.8% if rates rise gradually by two percentage points. Both
scenarios are well within ALCO's 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 4.6% in a falling rate scenario and increase by 2.0%
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, 1998, is presented in the following table:
Page 28<PAGE>
- -----------------------------------------------------------------------------
Changes in Net Interest Income
Year 1
Projected change if rates decrease by 2.0% -3.3%
Projected change if rates increase by 2.0%% +0.8%
Year 2
Projected change if rates decrease by 2.0% -4.6%
Projected change if rates increase by 2.0%% +2.0%
- -----------------------------------------------------------------------------
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, and 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, 1998, the Company 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, 1998, 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 1999 and
believes that the current level of interest rate risk is acceptable.
Page 29<PAGE>
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 30<PAGE>
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, 1998 and 1997, 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, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly in
all material respects, the consolidated financial position of First National
Lincoln Corporation and subsidiary as of December 31, 1998 and 1997, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
Berry, Dunn, McNeil & Parker
Berry, Dunn, McNeil & Parker
Portland, Maine
January 29, 1999
Page 31<PAGE>
Consolidated Balance Sheets
First National Lincoln Corporation and Subsidiary
- ------------------------------------------------------------------------------
As of December 31, 1998 1997
- ------------------------------------------------------------------------------
Assets
Cash and due from banks $ 6,338,000 $5,683,000
Securities available for sale 18,858,000 16,463,000
Securities to be held to maturity,
market value of $40,702,000 in 1998
and $52,610,000 in 1997 40,484,000 52,282,000
Loans held for sale at cost, market value
$209,000 in 1998 and $100,000 in 1997 209,000 100,000
Loans 209,224,000 181,510,000
Less allowance for loan losses 1,822,000 1,800,000
------------ ------------
Net loans 207,402,000 179,710,000
------------ ------------
Accrued interest receivable 1,770,000 1,961,000
Bank premises and equipment 5,866,000 4,871,000
Other real estate owned 303,000 184,000
Other assets 5,576,000 5,025,000
------------ ------------
Total assets $ 286,806,000 $ 266,279,000
============ ============
Page 32<PAGE>
Consolidated Balance Sheets, Concluded
First National Lincoln Corporation and Subsidiary
- ------------------------------------------------------------------------------
As of December 31, 1998 1997
- ------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Demand deposits $ 17,649,000 $ 14,109,000
NOW deposits 33,710,000 29,213,000
Money market deposits 9,793,000 6,238,000
Savings deposits 39,226,000 34,104,000
Certificates of deposit (including
certificates of $100,000 or more of
$29,131,000 in 1998 and of
$17,246,000 in 1997) 101,425,000 86,216,000
------------ ------------
Total deposits 201,803,000 169,880,000
Borrowed funds 54,460,000 69,037,000
Other liabilities 1,767,000 1,477,000
------------ ------------
Total liabilities 258,030,000 240,394,000
------------ ------------
Shareholders' equity:
Common stock, one cent par value 25,000 25,000
Additional paid-in capital 4,687,000 4,595,000
Retained earnings 24,218,000 21,172,000
Net unrealized gain on securities
available for sale, net of tax 63,000 93,000
Treasury stock (217,000) -
------------ ------------
Total shareholders' equity 28,776,000 25,885,000
------------ ------------
Commitments and contingent liabilities (note 12)
Total liabilities and shareholders' equity $ 286,806,000 $ 266,279,000
============ ============
Common stock
Number of shares authorized 6,000,000 6,000,000
Number of shares issued 2,481,270 2,475,548
Number of shares outstanding 2,471,531 2,475,548
The accompanying footnotes are an integral part of these consolidated financial
statements
Page 33<PAGE>
Consolidated Statements of Income
First National Lincoln Corporation and Subsidiary
- ------------------------------------------------------------------------------
Years ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $ 17,289,000 $ 15,068,000 $ 13,242,000
Interest on deposits with other banks 32,000 42,000 33,000
Interest and dividends on investments
(includes tax-exempt income of
$207,000 in 1998, $161,000 in 1997,
and $117,000 in 1996) 3,987,000 4,724,000 4,242,000
---------- ---------- ----------
Total interest income 21,308,000 19,834,000 17,517,000
---------- ---------- ----------
Interest expense:
Interest on deposits 6,876,000 5,846,000 5,525,000
Interest on borrowed funds 3,588,000 3,651,000 2,645,000
---------- ---------- ----------
Total interest expense 10,464,000 9,497,000 8,170,000
---------- ---------- ----------
Net interest income 10,844,000 10,337,000 9,347,000
Provision for loan losses 400,000 103,000 60,000
---------- ---------- ----------
Net interest income after
provision for loan losses 10,444,000 10,234,000 9,287,000
---------- ---------- ----------
Other operating income:
Fiduciary and investment
management income 421,000 324,000 306,000
Service charges on deposit accounts 627,000 562,000 491,000
Net realized gain (loss) on
securities available for sale (21,000) 3,000 (4,000)
Net realized gain on securities
to be held to maturity - - 6,000
Other 1,286,000 716,000 547,000
---------- ---------- ----------
Total other operating income 2,313,000 1,605,000 1,346,000
---------- ---------- ----------
Other operating expenses:
Salaries and employee benefits 3,703,000 3,142,000 2,988,000
Occupancy expense 448,000 354,000 330,000
Furniture and equipment expense 584,000 625,000 571,000
Other 2,304,000 2,036,000 1,733,000
---------- ---------- ----------
Total other operating expenses 7,039,000 6,157,000 5,622,000
---------- ---------- ----------
Income before income taxes 5,718,000 5,682,000 5,011,000
Income tax expense 1,707,000 1,776,000 1,587,000
---------- ---------- ----------
Net income $ 4,011,000 $ 3,906,000 $ 3,424,000
========== ========== ==========
Page 34<PAGE>
Consolidated Statements of Income, Concluded
First National Lincoln Corporation and Subsidiary
- ------------------------------------------------------------------------------
Years ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------
Basic earnings per share $ 1.62 $ 1.58 $ 1.40
Diluted earnings per share $ 1.56 $ 1.55 $ 1.38
Cash dividends declared per share $ 0.39 $ 0.29 $ 0.24
Weighted average number of
shares outstanding 2,478,223 2,468,250 2,444,616
The accompanying footnotes are an integral part of these consolidated financial
statements
Page 35<PAGE
Consolidated Statement of Changes in Shareholders Equity
First National Lincoln Corporation and Subsidiary
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Years ended December 31, 1998, 1997 and 1996
- -------------------------------------------------------------------------------------------------------------
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,
1995 2,438,136 1,543,000 2,700,000 15,123,000 202,000 (3,000) 19,565,000
========= ========== ========== =========== ======== ======= ===========
Net income 0 0 0 3,424,000 0 0 3,424,000
Net
unrealized
loss on
securities
available
for sale,
net of taxes
of $97,000 0 0 0 0 (188,000) 0 (188,000)
--------- ----------- --------- ----------- -------- ------- -----------
Comprehensive
income 3,424,000 (188,000) 3,236,000
Effect of
change to
$0.01 par
value 0 (1,518,000) 1,518,000 0 0 0 0
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
--------- ----------- --------- ----------- -------- ------- -----------
Balance
at December
31, 1996 2,464,704 25,000 4,467,000 17,971,000 14,000 0 22,477,000
========= =========== ========== =========== ======== ======= ===========
Page 36<PAGE>
Consolidated Statement of Changes in Shareholders Equity continued
First National Lincoln Corporation and Subsidiary
- -------------------------------------------------------------------------------------------------------------
Years ended December 31, 1998, 1997 and 1996
- -------------------------------------------------------------------------------------------------------------
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
Net
unrealized
gain on
securities
available
for sale,
net of taxes
of $41,000 0 0 0 0 79,000 0 79,000
--------- ----------- --------- ----------- -------- ------- -----------
Comprehensive
income 3,906,000 79,000 3,985,000
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
--------- ----------- --------- ----------- -------- ------- -----------
Balance at
December 31,
1997 2,475,548 $ 25,000 $4,595,000 $21,172,000 $ 93,000 $ 0 $ 25,885,000
========= =========== ========== =========== ======== ======= ===========
Page 37<PAGE>
Consolidated Statement of Changes in Shareholders Equity concluded
First National Lincoln Corporation and Subsidiary
- -------------------------------------------------------------------------------------------------------------
Years ended December 31, 1998, 1997 and 1996
- -------------------------------------------------------------------------------------------------------------
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 3,011,000 0 0 3,011.000
Net
unrealized
gain on
securities
available
for sale,
net of taxes
of $41,000 0 0 0 0 (30,000) 0 (30,000)
--------- ----------- --------- ----------- -------- ------- -----------
Comprehensive
income 3,011,000 (30,000) 3,981,000
Cash dividends
declared 0 0 0 (965,000) 0 0 (965,000)
Stock issued 5,722 0 90,000 0 0 0 90,000
Treasury
stock
purchases (15,504) 0 0 0 0 (343,000) (343,000)
Treasury
stock sold 5,765 0 2,000 0 0 126,000 128,000
--------- ----------- --------- ----------- -------- ------- -----------
Balance at
December 31,
19987 2,471,531 $ 25,000 $4,687,000 $24,218,000 $ 63,000 $(217,000) $ 28,776,000
========= =========== ========== =========== ======== ======= ===========
</TABLE>
The accompanying footnotes are an integral part of these consolidated
financial statements
Page 38<PAGE>
Consolidated Statements of Cash Flows
First National Lincoln Corporation and Subsidiary
- -----------------------------------------------------------------------------
Years ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 4,011,000 $ 3,906,000 $ 3,424,000
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation 544,000 582,000 530,000
Deferred income taxes (58,000) 44,000 115,000
Provision for loan losses 400,000 103,000 60,000
Provision for losses on other
real estate owned 16,000 14,000 25,000
Loans originated for resale (19,039,000) (2,677,000) (2,391,000)
Proceeds from sales of loans 18,930,000 2,879,000 2,232,000
Net (gain) loss on sale or call of
securities available for sale 21,000 (3,000) 4,000
Net gain on sale of investment securities
to be held to maturity - - (6,000)
Losses related to other
real estate owned (4,000) 33,000 7,000
Net change in other assets and
accrued interest receivable (302,000) (4,355,000) (389,000)
Net change in other liabilities 232,000 (84,000) 454,000
Net amortization of premium
on investments 210,000 91,000 141,000
---------- ---------- ----------
Net cash provided by
operating activities 4,961,000 533,000 4,206,000
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sales, maturities and calls
of securities available for sale 7,836,000 4,869,000 16,437,000
Proceeds from maturities and calls of
securities to be held to maturity 33,739,000 11,757,000 7,421,000
Proceeds from sales of other
real estate owned 24,000 634,000 441,000
Additional investment in other
real estate owned - (1,000) (36,000)
Purchases of securities
available for sale (10,314,000) (2,711,000) (988,000)
Purchases of securities to be
held to maturity (22,134,000) (22,064,000) (22,306,000)
Maturities of interest-bearing
deposits in other banks - 975,000 1,725,000
Net increase in loans (28,247,000) (24,618,000) (20,618,000)
Capital expenditures (1,539,000) (1,281,000) (556,000)
---------- ---------- ----------
Net cash used in investing activities (20,635,000) (32,440,000) (18,480,000)
---------- ---------- ----------
Page 39<PAGE>
Consolidated Statements of Cash Flows, concluded
First National Lincoln Corporation and Subsidiary
- -----------------------------------------------------------------------------
Years ended December 31, 1998 1997 1996
- -----------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in demand deposits,
savings, and money market accounts 16,714,000 1,526,000 1,962,000
Net increase in certificates
of deposit 15,209,000 12,678,000 3,244,000
Net increase (decrease) in
other borrowings (14,577,000) 17,889,000 9,923,000
Purchase of Treasury stock (343,000) (48,000) (26,000)
Proceeds from sale of Treasury stock 128,000 49,000 30,000
Proceeds from stock issuance 90,000 127,000 248,000
Dividends paid (892,000) (654,000) (488,000)
---------- ---------- ----------
Net cash provided by
financing activities 16,329,000 31,567,000 14,893,000
---------- ---------- ----------
Net increase (decrease) in cash
and cash equivalents 655,000 (340,000) 619,000
Cash and cash equivalents at
beginning of year 5,683,000 6,023,000 5,404,000
---------- ---------- ----------
Cash and cash equivalents at
end of year $ 6,338,000 $ 5,683,000 $ 6,023,000
========== ========== ==========
Interest paid $10,445,000 $ 9,488,000 $ 8,145,000
Income taxes paid 1,809,000 1,773,000 1,482,000
Non-cash transactions:
Loans transferred to other
real estate owned (net) (155,000) (50,000) 604,000
Loans held for sale transferred
to loan portfolio - - 3,923,000
Change in unrealized gain (loss) on
available for sale securities (45,000) 120,000 (285,000)
The accompanying footnotes are an integral part of these consolidated financial
statements
Page 40<PAGE>
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 and
disclosures of contingent 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 or 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 such securities are carried at cost adjusted for the amortization of
premiums and accretion of discount.
Page 41<PAGE>
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.
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, and the
amortization 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-per-forming
loans, performing watch-report loans, loan portfolio size by category, and
economic conditions. Although management utilizes its best judgment in
providing for possible losses, there can be no assurance 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.
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.
Page 42<PAGE>
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
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.
Segments
First National Lincoln Corporation, through the branch network of its
subsidiary, First National Bank of Damariscotta, provides a broad range of
financial services to individuals and companies in mid-coast Maine. These
services include demand, time, and savings deposits; lending; credit card
servicing; ATM processing; and trust services. Operations are managed and
financial performance is evaluated on a corporate-wide basis. Accordingly, all
of the Company's banking operations are considered by management to be
aggregated in one reportable operating segment.
Comprehensive Income
Under a new accounting standard, comprehensive income is now reported for all
periods. Comprehensive income includes both net income and other comprehensive
income. Other comprehensive income includes the change in unrealized gains and
losses on securities available for sale and is disclosed in the consolidated
statements of changes in shareholders' equity.
Effect of New Financial Accounting Standards
During 1998, the Company adopted Statements of Financial Accounting Standards
130, 131 and 132. The adoption of SFAS 130, Reporting Comprehensive Income,
required that certain items be reported under a new category of income, "Other
Comprehensive Income". Unrealized gains and losses on securities available for
sale is the only item included in Other Comprehensive Income. SFAS 131 and 132
relate to disclosures about segments and employee benefits, respectively. The
financial statements for 1998 and prior periods where applicable, include the
required additional disclosures for SFAS No. 130, 131 and 132. In addition, the
Financial Accounting Standards Board issued SFAS No. 133, Accounting For
Derivative Instruments and Hedging Activities and is effective for fiscal years
beginning after June 15, 1999. Management has not determined the impact of
SFAS No. 133 on the financial statements.
Page 43<PAGE>
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
Note 2. Cash and Due from Banks
At December 31, 1998 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 fair value of
investment securities at December 31, 1998 and 1997:
- ----------------------------------------------------------------------------
December 31, 1998 Amortized Unrealized Unrealized Fair Value
Cost Gains Losses (Estimated)
- ----------------------------------------------------------------------------
Securities available for sale:
U.S. Treasury and agency $ 1,994,000 48,000 (6,000) 2,036,000
Mortgage-backed securities 5,880,000 110,000 (39,000) 5,951,000
State and political
subdivisions 1,290,000 - (42,000) 1,248,000
Other securities 9,598,000 33,000 (8,000) 9,623,000
---------- ---------- ---------- ----------
$18,762,000 191,000 (95,000) 18,858,000
========== ========== ========== ==========
Securities to be held to maturity:
U.S. Treasury and agency $15,746,000 - (59,000) 15,687,000
Mortgage-backed securities 20,196,000 161,000 (115,000) 20,242,000
State and political
subdivisions 4,531,000 234,000 (3,000) 4,762,000
Other securities 11 ,000 - - 11,000
---------- ---------- ---------- ----------
$40,484,000 395,000 (177,000) 40,702,000
========== ========== ========== ==========
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
December 31, 1997 Amortized Unrealized Unrealized Fair 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 44<PAGE>
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
The contractual maturities of investment securities at December 31, 1998,
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 Fair Value Amortized Fair Value
Cost (Estimated) Cost (Estimated)
- -----------------------------------------------------------------------------
Due in 1 year or less $ 1,217,000 1,231,000 4,178,000 4,188,000
Due in 1 to 5 years 4,749,000 4,843,000 12,890,000 12,918,000
Due in 5 to 10 years 1,913,000 1,918,000 5,148,000 5,153,000
Due after 10 years 4,333,000 4,295,000 18,268,000 18,443,000
Equity securities 6,550,000 6,571,000 - -
---------- ---------- ---------- ----------
$ 18,762,000 18,858,000 40,484,000 40,702,000
========== ========== ========== ==========
- -----------------------------------------------------------------------------
At December 31, 1998 securities carried at $21,502,000, with a market
value of $21,477,000, 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:
- ------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------
Proceeds from sales $ 5,567,000 - 4,479,000
========== ========== ==========
Gross gains 5,000 3,000 -
Gross losses (26,000) - (4,000)
---------- ---------- ----------
Net gain (loss) (21,000) 3,000 (4,000)
========== ========== ==========
Related income taxes $ (6,000) 1,000 (1,000)
========== ========== ==========
- ------------------------------------------------------------------
The realized gain on securities in 1997 was the result of a security which
was called at par value by the issuer.
Page 45<PAGE>
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
Note 4. Loans
The following table shows the composition of the Company's loan portfolio as of
December 31, 1998 and 1997:
- ------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------
Real estate loans
Residential $ 105,877,000 92,937,000
Commercial 25,585,000 20,173,000
Commercial and industrial loans 38,718,000 33,100,000
State and municipal loans 7,654,000 8,206,000
Consumer loans 27,993,000 24,041,000
Residential construction loans 3,397,000 3,053,000
----------- -----------
Total loans $ 209,224,000 181,510,000
=========== ===========
- ------------------------------------------------------------------
Loan balances are stated net of deferred loan fees of $50,000 in 1998 and
$76,000 in 1997.
At December 31, 1998 and 1997, loans on non-accrual status totaled
$716,000 and $510,000, respectively. Interest income which would have been
recognized on these loans, if interest had been accrued, was $51,000 for 1998,
$50,000 for 1997 and $62,000 for 1996. Loans past due greater than 90 days
which are accruing interest totaled $548,000 at December 31, 1998 and $358,000
at December 31, 1997. 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,
1998, 1997 and 1996 were as follows:
- ---------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------
Balance at beginning of year $ 1,800,000 1,906,000 2,059,000
Provision charged to
operating expenses 400,000 103,000 60,000
---------- ---------- ----------
2,200,000 2,009,000 2,119,000
---------- ---------- ----------
Loans charged off (452,000) (337,000) (367,000)
Recoveries on loans 74,000 128,000 154,000
---------- ---------- ----------
Net loans charged off (378,000) (209,000) (213,000)
---------- ---------- ----------
Balance at end of year $ 1,822,000 1,800,000 1,906,000
========== ========== ==========
- ---------------------------------------------------------------------------
Page 46<PAGE>
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
Information regarding impaired loans is as follows:
- ----------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------
Average investment in impaired loans $ 324,000 361,000 309,000
Interest income recognized on impaired
loans, including cash basis 0 0 0
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------
Balance of impaired loans $ 302,000 388,000
Less portion for which no allowance for
loan losses is allocated (39,000) (97,000)
--------- ---------
Portion of impaired loan balance for which
an allowance for loan losses is allocated 263,000 291,000
--------- ---------
Portion of allowance for loan losses
allocated to the impaired loan balance $ 145,000 121,000
========= =========
- ----------------------------------------------------------------------------
Loans to directors, officers and employees totaled $7,637,000 at December
31, 1998 and $5,212,000 at December 31, 1997. A summary of loans to directors
and executive officers, which in the aggregate exceed $60,000, is as follows:
- ------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------
Balance at beginning of year $ 2,855,000 2,451,000
New loans 2,365,000 875,000
Repayments (1,218,000) (439,000)
----------- -----------
Balance at end of year $ 4,002,000 2,887,000
=========== ===========
- ------------------------------------------------------------------
Page 47<PAGE>
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
Note 5. Bank Premises and Equipment
Bank premises and equipment are carried at cost and consist of the following:
- ------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------
Land $ 903,000 903,000
Land improvements 333,000 308,000
Bank buildings 4,300,000 3,996,000
Equipment 4,682,000 3,486,000
----------- -----------
10,218,000 8,693,000
Less accumulated depreciation 4,352,000 3,822,000
----------- -----------
$ 5,866,000 4,871,000
=========== ===========
- ------------------------------------------------------------------
Note 6. Other Real Estate Owned
The following summarizes the composition of other real estate owned:
- ------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------
Real estate acquired in
settlement of loans $ 339,000 208,000
Less: allowance for losses (36,000) (24,000)
----------- -----------
Other real estate owned, net $ 303,000 184,000
=========== ===========
- ------------------------------------------------------------------
Changes in the allowance for each of the three years ended December 31
were as follows:
- ---------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------
Beginning balance $ 24,000 31,000 56,000
Losses charged to allowance (4,000) (21,000) (50,000)
Provision charged to income 16,000 14,000 25,000
---------- ---------- ----------
Ending balance $ 36,000 24,000 31,000
========== ========== ==========
- ---------------------------------------------------------------------------
Page 48<PAGE>
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:
- ---------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------
Federal income tax:
Current $ 1,703,000 1,655,000 1,413,000
Deferred (58,000) 44,000 115,000
---------- ---------- ----------
1,645,000 1,699,000 1,528,000
State income tax 62,000 77,000 59,000
---------- ---------- ----------
$ 1,707,000 1,776,000 1,587,000
========== ========== ==========
- ---------------------------------------------------------------------------
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:
- ---------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------
Expected tax expense $ 1,944,000 1,931,000 1,704,000
Non-taxable income (256,000) (161,000) (121,000)
State income taxes 41,000 51,000 39,000
Qualified housing investment
tax credit (31,000) (38,000) (38,000)
Other 9,000 (7,000) 3,000
---------- ---------- ----------
$ 1,707,000 1,776,000 1,587,000
========== ========== ==========
- ---------------------------------------------------------------------------
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:
- ------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------
Allowance for loan losses and OREO $ 490,000 435,000
Deferred loan fees (24,000) (6,000)
Non-accrual loan interest 9,000 33,000
Accrued pension and post-retirement 100,000 65,000
Depreciation (82,000) (109,000)
Unrealized gain on securities
available for sale (32,000) (48,000)
Other assets 41,000 82,000
Other liabilities (36,000) (60,000)
----------- -----------
Net deferred income tax asset $ 466,000 392,000
=========== ===========
- ------------------------------------------------------------------
Page 49<PAGE>
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, 1998 and 1997 is as
follows:
- ------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------
Asset $ 640,000 615,000
=========== ===========
Liability $ 174,000 223,000
=========== ===========
- ------------------------------------------------------------------
No valuation allowance is deemed necessary for the deferred tax asset.
Note 8. Certificates of Deposit
At December 31, 1998, the scheduled maturities of certificates of deposit are
as follows:
- -------------------------------------
1999 $ 72,245,000
2000 22,481,000
2001 3,901,000
2002 2,404,000
2003 394,000
------------
Total $ 101,425,000
============
- -------------------------------------
Interest on certificates of deposit $100,000 or more was $1,319,000,
$850,000 and $709,000 in 1998, 1997 and 1996, 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, with a value of $5,942,000 at both December 31,
1998 and 1997, qualifying first mortgage loans, which were valued at
$105,507,000 and $90,006,000 in 1998 and 1997, respectively; U.S. Government
and Agency securities not pledged to others, which were valued at $22,339,000
in 1998 and $20,710,000 in 1997; and funds on deposit with FHLB, which were
$1,000 in both 1998 and 1997.
As of December 31, 1998, the Bank's total FHLB borrowing capacity was
$99,326,000, of which $53,893,000 was unused and available for additional
borrowings. All FHLB advances as of December 31, 1998, 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 50<PAGE>
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 $7,876,000 and $5,519,000 at December 31, 1998 and
1997, respectively, and an aggregate fair value of $7,822,000 and $5,508,000 at
December 31, 1998 and 1997, respectively. Borrowed funds at December 31, 1998
and 1997 have the following range of interest rates and maturity dates:
- ------------------------------------------------------------------
December 31, 1998
- ------------------------------------------------------------------
Federal Home Loan Bank Advances
Maturities within one year 5.13%-5.53% $ 20,463,000
Maturities within two years 0
Maturities within three years 5.53%-5.79% 4,970,000
Maturities within four years 0
Maturities within five years 0
Maturities over five years 4.89%-5.15% 20,000,000
-----------
45,433,000
-----------
Treasury Tax & Loan Notes
Rate in effect at 12/31/98 was 4.23% variable 285,000
Repurchase agreements
Municipal and commercial customers 4.30%-5.35% 8,742,000
-----------
8,742,000
-----------
$ 54,460,000
===========
- ------------------------------------------------------------------
- ------------------------------------------------------------------
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
Rate in effect at 12/31/97 was 5.25% variable 3,295,000
Repurchase agreements
Municipal and commercial customers 4.25%-5.40% 5,474,000
-----------
5,474,000
-----------
$ 69,037,000
===========
- ------------------------------------------------------------------
Page 51<PAGE>
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
Note 10. Employee Benefit Plans
Pension Plans
Effective May 31, 1996, the Board of Directors ratified termination of the
Bank's defined benefit pension plan, and regulatory approval for termination of
the Plan was received in 1996. 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 Plan participants. The Bank recognized a gain on termination of
$64,000.
The Bank also sponsors an unfunded, 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 $84,000 in 1998, $36,000 in
1997, and $11,000 in 1996. As of December 31, 1998 and 1997, the accrued
liability of this plan was $109,000 and $21,000, respectively.
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. Subject to a vote of the Board of Directors, the Bank may also
make a profit-sharing contribution to the Plan. Such contribution equaled 3%,
3% and 4% of each eligible employee's compensation in 1998, 1997 and 1996,
respectively.
The expense related to the 401(k) plan was $158,000, $141,000, and
$121,000 in 1998, 1997, and 1996, respectively.
Post-retirement Benefit Plans
The Bank sponsors two post-retirement 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 post-retirement benefit
obligation as of January 1, 1993 of $578,000 as a component of net periodic
post-retirement benefit cost over a 20-year period.
Page 52<PAGE>
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
The following tables sets forth the accumulated post-retirement benefit
obligation, funded status, and net periodic pension cost:
- ----------------------------------------------------------------------------
At December 31, 1998 1997
- ----------------------------------------------------------------------------
Change in benefit obligations:
Benefit obligation at beginning of year: $ 490,000 504,000
Service cost 9,000 7,000
Interest cost 32,000 32,000
Benefits paid (52,000) (53,000)
--------- ---------
Benefit obligation at end of year: $ 479,000 490,000
========= =========
Funded status:
Benefit obligation at end of year $ (479,000) (490,000)
Unrecognized net actuarial loss (74,000) (37,000)
Unamortized prior service cost (32,000) (78,000)
Unrecognized transition obligation 406,000 435,000
--------- ---------
Accrued benefit cost $ (179,000) (170,000)
========= =========
- ----------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Years ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------
Components of net periodic benefit cost:
Service cost $ 9,000 7,000 6,000
Interest cost 32,000 32,000 36,000
Amortization of unrecognized
transition asset 29,000 29,000 29,000
Amortization of prior service cost (5,000) (5,000) (5,000)
Amortization of accumulated gains (3,000) (6,000) (2,000)
--------- --------- ---------
Net periodic benefit cost $ 62,000 57,000 64,000
========= ========= =========
Weighted average assumptions as of December 31:
Discount rate 7.0% 7.0% 7.0%
- ---------------------------------------------------------------------------
Note 11. Shareholders' Equity
At December 31, 1998, the total number of shares of common stock outstanding
was 2,471,531. The total number of shares of common stock authorized by the
shareholders is 6,000,000.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 outstanding shares from 618,887 to 2,475,548.
Page 53<PAGE>
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
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, stock purchase, or savings and investment plans. As of December 31,
1998, 127,887 shares had been issued pursuant to these plans, leaving 112,113
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 11,487 shares and
15,512 shares in 1998 and 1997, respectively. Stock sold to directors and
employees in 1998 included 5,765 Treasury shares.
In 1995, the Company's shareholders adopted a Stock Option Plan and
authorized 200,000 shares to be reserved for options to be granted to certain
key officers of the Company and the Bank. The option exercise price is 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 granted. All options
expire 10 years from the date of grant.
The following table sets forth options granted in 1998 and 1997:
- ----------------------------------------------------------------------------
Weighted Average
Number of Shares Exercise Price
- ----------------------------------------------------------------------------
Balance at December 31, 1996 120,000 $ 6.85
Granted in 1997 32,000 10.25
--------- ---------
Balance at December 31, 1997 152,000 7.56
Granted in 1998 6,000 18.25
--------- ---------
Balance at December 31, 1998 158,000 $ 7.97
========= =========
- ----------------------------------------------------------------------------
For both years, there were no options that were exercised, forfeited, or
expired. The range of prices for outstanding and exercisable stock options at
December 31, 1998 and 1997 were as follows:
- -----------------------------------------------------------------------------
December 31, 1998 December 31, 1997
------------------------ ------------------------
Outstanding Exercisable Outstanding Exercisable
- -----------------------------------------------------------------------------
$6.38 to $10.00 120,000 48,000 120,000 30,000
$10.01 to $18.25 38,000 - 32,000 -
---------- ---------- ---------- ----------
Total options 158,000 48,000 152,000 30,000
========== ========== ========== ==========
Weighted average price $ 7.97 6.78 7.56 6.48
- -----------------------------------------------------------------------------
No compensation cost has been recognized for the Plan. The fair market
value of options granted was $45,000 in 1998, $83,000 in 1997, and $44,000 in
1996. The fair market value is estimated using the Black-Scholes option pricing
model and the following assumptions: quarterly dividends of $0.07 in 1998,
$0.05 in 1997, and $0.04 in 1996, risk-free interest rate of 5.25% in 1998,
5.36% in 1997, and 5.13% in 1996, volatility of 30.17% in 1998, 10.69% in
1997, and 4.91% in 1996 and an expected life of 10 years.
Page 54<PAGE>
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
Had compensation cost been expensed, net of related income taxes, based on
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:
- ---------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------
Net income
As reported $ 4,011,000 3,906,000 3,424,000
Pro forma 3,981,000 3,851,000 3,395,000
Basic earnings per share
As reported 1.62 1.58 1.40
Pro forma 1.61 1.56 1.39
Diluted earnings per share
As reported 1.56 1.55 1.38
Pro forma 1.55 1.52 1.37
- ---------------------------------------------------------------------------
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
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, with the customer
being obligated to repay (with interest) any amounts paid out by the Bank under
the letter of credit. 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 loans, commitments
for unused lines of credit, and standby letters of credit. The instruments
involve, to varying degrees, elements of credit risk in excess of the amount
recognized in the consolidated balance sheets. 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:
Page 55<PAGE>
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
- ----------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------
Unused lines, collateralized by
residential real estate $ 8,561,000 7,099,000
Unused credit card lines 9,900,000 7,005,000
Other unused commitments 13,983,000 11,336,000
Standby letters of credit 241,000 161,000
Commitments to extend credit 12,434,000 5,602,000
- ----------------------------------------------------------------------------
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
the borrower's ability to honor their contracts is dependent on the economic
conditions in the area, especially in the real estate sector.
Note 13. Earnings Per Share
In 1997, the Company adopted SFAS 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, 1998, 1997 and
1996:
- ---------------------------------------------------------------------------
For the Year Ended December 31, 1998
-------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
- ---------------------------------------------------------------------------
Income as reported $ 4,011,000
========= ========= =========
Basic EPS: income available to
common shareholders 4,011,000 2,478,223 $ 1.62
Effect of dilutive securities:
incentive stock options - 88,538
--------- --------- ---------
Diluted EPS: income available to
common shareholders plus
assumed conversions $ 4,011,000 2,566,761 $ 1.56
========= ========= =========
- ---------------------------------------------------------------------------
Page 56<PAGE>
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
- ---------------------------------------------------------------------------
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, 1998
-------------------------------------
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
========= ========= =========
- ---------------------------------------------------------------------------
All earnings per share calculations have been made using the weighted
average number of shares outstanding 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, assuming that all granted options were exercisable at each
year end.
Page 57<PAGE>
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
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
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.
Page 58<PAGE>
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
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 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.
Page 59<PAGE>
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
The estimated fair values for the Company's financial instruments as of
December 31, 1998 and 1997 were as follows:
- -----------------------------------------------------------------------------
December 31, 1998 December 31, 1997
------------------------ ------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
- -----------------------------------------------------------------------------
Financial assets
Cash & due from banks $ 6,338,000 6,338,000 5,683,000 5,683,000
Securities available
for sale 18,858,000 18,858,000 16,463,000 16,463,000
Securities to be held
to maturity 40,484,000 40,702,000 52,282,000 52,610,000
Loans held for sale 209,000 209,000 100,000 100,000
Loans (net of allowance
for loan losses) 207,402,000 207,735,000 179,710,000 179,201,000
Accrued interest receivable 1,770,000 1,770,000 1,961,000 1,961,000
Financial liabilities
Deposits 201,803,000 198,904,000 169,880,000 161,568,000
Borrowed funds 54,460,000 54,561,000 69,037,000 69,019,000
- -----------------------------------------------------------------------------
Note 15. Other Operating Income and Expense
Other operating income includes the following items greater than 1% of
revenues.
- ---------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------
Merchant discount fees $ 359,000 249,000 196,000
Mortgage origination and servicing $ 247,000 - -
- ---------------------------------------------------------------------------
Other operating expense includes the following items greater than 1% of
revenues.
- ---------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------
Stationery and supplies $ 269,000 - -
Merchant interchange fees $ 235,000 - -
Postage, freight and express $ 138,000 - -
- ---------------------------------------------------------------------------
Page 60<PAGE>
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
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 1999 will be 1999 earnings plus retained
earnings of $6,055,000 from 1998 and 1997.
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, 1998, that the Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 1998, the most recent notification from the 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.
Page 61<PAGE>
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
The actual capital amounts and ratios for the Bank are presented in the
following table:
- ---------------------------------------------------------------------------
To be well-
capitalized
under prompt
For capital corrective
adequacy action
Actual purposes provisions
- ---------------------------------------------------------------------------
As of December 31, 1998
Tier 2 capital to $ 29,919,000 10,759,000 17,932,000
risk-weighted assets 16.29% 6.00% 10.00%
---------- ---------- ----------
Tier 1 capital to 27,397,000 7,173,000 10,759,000
risk-weighted assets 15.28% 4.00% 6.00%
---------- ---------- ----------
Tier 1 capital to 27,397,000 11,418,000 14,272,000
average assets 9.60% 4.00% 5.00%
- ---------------------------------------------------------------------------
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%
- ---------------------------------------------------------------------------
Page 62<PAGE>
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
The actual capital amounts and ratios for the Company, on a consolidated basis,
are presented in the following table:
- ---------------------------------------------------------------------------
To be well-
capitalized
under prompt
For capital corrective
adequacy action
Actual purposes provisions
- ---------------------------------------------------------------------------
As of December 31, 1998
Tier 2 capital to $ 30,535,000 10,821,000 18,035,000
risk-weighted assets 16.93% 6.00% 10.00%
---------- ---------- ----------
Tier 1 capital to 28,713,000 7,214,000 10,821,000
risk-weighted assets 15.92% 4.00% 6.00%
---------- ---------- ----------
Tier 1 capital to 28,713,000 11,456,000 14,320,000
average assets 10.03% 4.00% 5.00%
- ---------------------------------------------------------------------------
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%
- ---------------------------------------------------------------------------
Page 63<PAGE>
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, 1998 1997
- ----------------------------------------------------------------------------
Assets
Cash $ 194 372
Dividends receivable 500 250
Investments 578 252
Investment in subsidiary 27,446 24,881
Other assets 437 427
--------- ---------
$ 29,155 26,182
========= =========
Liabilities and shareholders' equity
Dividends payable $ 371 297
Other liabilities 8 -
Shareholders' equity 28,776 25,885
--------- ---------
$ 29,155 26,182
========= =========
- ----------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Statements of Income
Years ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------
Investment income $ 25 6 2
Gain (loss) on sale of investments - - 1
Other income 48 48 55
--------- --------- ---------
Total income 73 54 58
Other expense 63 52 59
--------- --------- ---------
Income (loss) before Bank earnings 10 2 (1)
Equity in earnings of Bank:
Remitted 1,150 550 488
Unremitted 2,851 3,354 2,937
--------- --------- ---------
Net income $ 4,011 3,906 3,424
========= ========= =========
- ---------------------------------------------------------------------------
Page 64<PAGE>
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, concluded
- ---------------------------------------------------------------------------
Statements of Cash Flows
Years ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 4,011 3,906 3,424
Adjustments to reconcile net income
to net cash provided by
operating activities:
Net realized gain on sale of
securities available for sale - - (1)
Increase in other assets (5) (17) (14)
Unremitted earnings of Bank (2,851) (3,354) (2,937)
--------- --------- ---------
Net cash provided by
operating activities 1,155 535 472
--------- --------- ---------
Cash flows from investment activities:
Proceeds from sales and maturities of
securities available for sale - - 102
Purchases of investments (316) (240) -
--------- --------- ---------
Net cash provided (used) by
investing activities (316) (240) 102
--------- --------- ---------
Cash flows from financing activities:
Proceeds from sale of stock 90 127 248
Purchase of Treasury stock (343) (48) (26)
Sale of Treasury stock 128 49 30
Dividends paid (892) (654) (488)
--------- --------- ---------
Net cash used in financing activities (1,017) (526) (236)
Net increase (decrease) in cash (178) (231) 338
--------- --------- ---------
Cash, beginning of year 372 603 265
Cash, end of year $ 194 372 603
========= ========= =========
- ---------------------------------------------------------------------------
Page 65<PAGE>
ITEM 9. Changes in and/or Disagreements with Accountants
None.
Page 66<PAGE>
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 eleven. 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 1999, and each will be nominated for
re-election for a three-year term:
Katherine M. Boyd, 48, 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 serves on the Boothbay Region YMCA Camp Committee
and is Secretary for the local chapter of AFS. Ms. Boyd previously served as
trustee of the YMCA, and past chairperson of the YMCA Annual Fund Drive.
Carl S. Poole, Jr., 53, 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., 52, 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.
Bruce B. Tindal, 48, was elected as a Director of the Company and the Bank
in January, 1999. Mr. Tindal formed and is co-owner of Tindal & Callahan Real
Estate in Boothbay Harbor, which has been in operation since 1985. Mr. Tindal
is a Trustee at St. Andrews Hospital and serves on the Board of Directors of
the Boothbay Region Land Trust and the Boothbay Region Economic Development
Corp. Mr. Tindal is also a member of the National Association of Realtors.
The following Directors' terms will expire in 2000:
Daniel R. Daigneault, 46, 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 Bank, Mr. Daigneault was Vice President, Senior
Commercial Loan Officer at Camden National Bank, Camden, Maine. Mr. Daigneault
is President of the Boothbay Region YMCA Board of Trustees and a director of
Maine Bankers Association.
Dana L. Dow, 47, was elected as a Director of the Company and the Bank in
January 1999. Mr. Dow is President of Dow Furniture, Inc., which he purchased
from his father in 1977. Prior to purchasing Dow Furniture, he taught chemistry
and physics at Medomak Valley High School. Mr. Dow was elected by the Board of
Directors in December, 1998, to fill the unexpired term of Parker Spofford, who
retired from the Board upon reaching the mandatory retirement age.
Robert B. Gregory, 45, was elected a Director of the Company and the Bank
in October, 1987 and has served as Chairman of both the Company and the Bank
since September, 1998. 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.
Page 67<PAGE>
The following Directors' terms will expire in 2001:
Bruce A. Bartlett, 65, 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 and the Bank until his retirement in 1994. He
has served as a Director of the Bank since 1981.
Malcolm E. Blanchard, 64, 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 elected 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. Mr. Smith is Chairman of the Five-Town CSD School Board.
Parker L. Spofford retired from the Board of Directors in December, 1998,
upon reaching the mandatory retirement age. M. Robert Barter resigned from the
Board of Directors in February, 1999.
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 1998 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:
Page 68<PAGE>
- -------------------- ----------------------------------- -------------
Name and Age (1) Office & Position Period Served
- -------------------- ----------------------------------- -------------
Daniel R. Daigneault President & Chief Executive Officer 1994 to date
46 of the Company and of the Bank
F. Stephen Ward Treasurer of the Company; 1993 to date
45 Vice President and Chief Financial Officer
and Investment Officer of the Bank
Donald C. Means Clerk of the Company; 1973 to date
61 Senior Vice President and
Senior Loan Officer of the Bank
Walter F. Vietze Senior Vice President and 1984 to date
57 Senior Operations Officer of the Bank
John T. Blamey Vice President and Banking Services 1994 to date
52 Officer of the Bank
Michael T. Martin Vice President and Credit 1993 to date
43 Administration Officer of the Bank
- -------------------- ----------------------------------- -------------
(1) As of December 31, 1998
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 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. He 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 he was employed by Down East Enterprises,
Inc. Mr. Ward holds a Masters of Business Administration degree in Finance.
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 U.S. Air Force as Lieutenant Colonel.
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.
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 69<PAGE>
ITEM 11. Executive Compensation
The table below sets forth cash compensation paid to the President and
Chief Executive Officer during 1998, 1997 and 1996. No other Executive
Officers of the Bank received compensation in excess of $100,000 for the years
ended December 31, 1998, 1997 and 1996.
- ----------------------------------------------------------------------------
Annual Long Term
Compensation Compensation
--------------------------------- ------------
Name and Principal Position
Year Salary Bonus(1) Other # Options
- ----------------------------------------------------------------------------
Daniel R. Daigneault 1998 $156,000 $ 14,040 $ 9,600(2) -0-
President and CEO 1997 $145,000 $ 13,514 $ 9,550(2) 12,000
1996 $143,000 $ 15,730 $ 7,425 8,000
- ----------------------------------------------------------------------------
(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 1998 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
$160,000. 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 $450 for each
meeting attended and $150 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
$15,000. Certain Board members are also paid fees for appraisals, consulting
services and legal services, and such fees are on terms no more favorable to
the recipient than are generally paid by the Bank for such services from other
providers in the area. Fees paid by the Bank to its Directors as a group
totaled $62,000 in 1997, but no fees are paid to Directors of the Company,
however. 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 70<PAGE>
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 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 and
non-banks across the country. In 1998, total cash payout under this
Stakeholder Performance Compensation program was 9.30% 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 1998 some of
the indicators were: loan volume, deposit volume, non-performing loan levels,
non-interest income, net interest income, salaries and wages as a percentage of
income and operating expenses as a percentage of net income.
The amount of base 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 1998
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 1998 was reflective of the
Company's overall financial performance in 1997, which, in the opinion of the
Compensation Committee, was considered very good. All 1997 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
Page 71<PAGE>
similar size and complexity, located within the State of Maine. Taking these
various factors into consideration and in recognition of his performance,
the committee increased his base salary by $11,000 to $156,000.
President Daigneault's 1998 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 1998, 1997 and
1996, stock options were granted under the 1995 Stock Option Plan, as set forth
in the accompanying table.
1998 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 1998, 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
1998:
Page 72<PAGE>
Option Grants During the Year Ended December 31, 1998
- -------------------------------------------------------------------------------
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 -0- 0.0% n/a n/a $ -0- $ -0-
All other employees 6,000 100.0% 18.25 01/26/08 68,864 163,291
All 6,000 100.0% 18.25 01/26/08 68,864 163,291
- -------------------------------------------------------------------------------
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
1998 and unexercised options held as of December 31, 1998:
Aggregated Option Exercises in 1998 and December 31, 1998 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- 24,000 60,000 $384,000 $ 901,500
All other
employees -0- -0- 24,000 50,000 $370,000 $ 640,000
All optionees -0- -0- 48,000 110,000 $754,000 $1,541,500
- -------------------------------------------------------------------------------
Page 73<PAGE>
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, 1998, 127,887 shares had been issued pursuant to these plans,
leaving 112,113 shares available for future issuance. The issuance price is
based on the market price of the stock at issuance date.
All shares for the directors' deferral and 401(k) savings and investment
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.
Shares issued under the employee stock purchase plan prior to September
11, 1998, have been issued pursuant to exemptions from registration under
Section 3(a)(11) and Rule 147 of the Securities Act of 1933. Shares issued
under the employee stock purchase plan on or after September 11, 1998, have
been issued pursuant to a registration statement filed under the Securities Act
of 1933, as amended (the "Securities Act"). The members of the Board of
Directors and certain officers of the Company, who may be deemed to be
"affiliates", may resell shares of the Company's Common Stock purchased or
acquired under the Plan only in accordance with certain restrictions imposed by
the Securities Act and Rule 144 promulgated thereunder.
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 to their plan accounts a percentage of their compensation, up to
a maximum of 15% annually. The Bank may, by an annual vote of its Directors,
make matching contributions. In addition, also by vote of its Directors, the
Bank may 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.
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 1998.
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, 1998, 45,659 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, 1998,
40,581 shares of the Company's stock had been purchased pursuant to the plan.
Page 74<PAGE>
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 1998.
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.
The Bank also sponsors an un-funded, non-qualified supplemental retirement
plan for certain officers. The plan 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
in this supplemental plan was $84,000 in 1998, $36,000 in 1997, and $11,000 in
1996. As of December 31, 1998 and 1997, the accrued liability of this plan was
$109,000 and $21,000, respectively.
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
Page 75<PAGE>
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
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 76<PAGE>
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:
- ------------------------------------------------------------------------
1993 1994 1995 1996 1997 1998
- ------------------------------------------------------------------------
FNLC 100.00 124.63 168.01 213.42 292.23 485.63
NASD Bank 100.00 101.11 146.42 184.71 302.17 266.60
S&P 500 100.00 101.27 138.88 170.38 226.78 291.04
- ------------------------------------------------------------------------
Page 77<PAGE>
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, 1998 by each Director (2) 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)
------------------- --------- ------------
Bruce A. Bartlett 9,228 .37%
Malcolm E. Blanchard 30,826 1.25%
Katherine M. Boyd 9,723 .39%
Daniel R. Daigneault(3) 36,825 1.49%
Dana L. Dow 667 .03%
Robert B. Gregory 11,070 .45%
Carl S. Poole, Jr. 86,410 3.49%
Stuart G. Smith 12,643 .51%
David B. Soule, Jr. 4,776 .19%
Bruce B. Tindal 667 .03%
------- ------
202,835 8.21%
Other Executive Officers 41,484 1.68%
------- ------
Total ownership of all
Directors and Executive
Officers as a group(2) 244,319 9.89%
---------------------------------------------------
(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) This table does not include 29,359 shares owned by former director M.
Robert Barter, who resigned from the Board of Directors in February of 1999.
(2)Includes exercisable stock options as of December 31, 1998, for Daniel
R. Daigneault of 24,000 shares, and all directors and executive officers as a
group of 48,000 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, 1998.
-------------------------------------- --------------------------------
Name & Address of Beneficial Owner Amount Percentage
------------------------------------- ------------- ----------
Daniel P. Thompson, Edith I. Thompson 140,804 shares 5.70%
HC 61 Box 039, New Harbor, ME 04545
--------------------------------------- -------------------------------
Page 78<PAGE>
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, 1998 to the
Company's Directors, Executive Officers and their associates was $4,032,000,
which constituted 1.93% of the Bank's total loans outstanding at that date.
Page 79<PAGE>
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 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, 1998.
Page 80<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
------------------------------------------------
FIRST NATIONAL LINCOLN COPORATION
By Daniel R. Daigneault
Daniel R. Daigneault, President
March 25, 1999
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 25, 1999
F. Stephen Ward Treasurer
F. Stephen Ward (Principal Financial Officer,
Principal Accounting Officer)
March 25, 1999
Robert B. Gregory Director and
Robert B. Gregory Chairman of the Board
March 25, 1999
Bruce A. Bartlett Director
Bruce A. Bartlett March 25, 1999
Malcolm E. Blanchard Director
Malcolm E. Blanchard March 25, 1999
Katherine M. Boyd Director
Katherine M. Boyd March 25, 1999
Dana L. Dow Director
Dana L. Dow March 25, 1999
Carl S. Poole, Jr. Director
Carl S. Poole, Jr. March 25, 1999
Stuart G. Smith Director
Stuart G. Smith March 25, 1999
David B. Soule, Jr. Director
David B. Soule, Jr. March 25, 1999
Bruce A. Tindal Director
Bruce A. Tindal March 25, 1999
Page 81<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 6338
<INT-BEARING-DEPOSITS> 0
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<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18858
<INVESTMENTS-CARRYING> 40484
<INVESTMENTS-MARKET> 40702
<LOANS> 209224
<ALLOWANCE> 1822
<TOTAL-ASSETS> 286806
<DEPOSITS> 201803
<SHORT-TERM> 20463
<LIABILITIES-OTHER> 1767
<LONG-TERM> 24970
<COMMON> 25
0
0
<OTHER-SE> 28751
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<EXPENSE-OTHER> 7039
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4011
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<ALLOWANCE-OPEN> 1800
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