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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, 1999
Commission File Number 0-26589
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
Common Stock, $.01 par value per share
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, 2000:
Common Stock, $.01 par value per share: $33,569,000
Indicate the number of shares outstanding of each of the registrant's classes
of common stock as of March 1, 2000:
Common Stock: 2,387,600 shares
TABLE OF CONTENTS
PART I
ITEM 1. Discussion of Business ------------------------------------------- 1
ITEM 2. Properties ------------------------------------------------------- 4
ITEM 3. Legal Proceedings ------------------------------------------------ 5
ITEM 4. Submission of Matters to a Vote of Security Holders -------------- 6
PART II
ITEM 5. Market for Registrant's Common Equity ---------------------------- 7
ITEM 6. Selected Financial Data ------------------------------------------ 9
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ---------------------------------------- 10
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 ----------------- 64
PART III
ITEM 10. Directors and Executive Officers of the Registrant -------------- 65
ITEM 11. Executive Compensation ------------------------------------------ 68
ITEM 12. Security Ownership of Certain Beneficial Owners and Management -- 75
ITEM 13. Certain Relationships and Related Transactions ------------------ 77
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K- 78
Signatures --------------------------------------------------------------- 79
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, 1999, the
Company's securities consisted of one class of common stock, $.01 par value per
share, of which there were 2,370,047 shares outstanding and held of record by
approximately 500 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 financial services landscape has changed considerably over the past
five years in the Bank's primary market area. Two large out-of-state banks have
continued to experience local change as a result of mergers and acquisitions at
the regional and national level. Credit unions have continued to expand their
membership and the scope of banking services offered. Non-banking entities such
as brokerage houses, mortgage companies and insurance companies are offering
very competitive products. Many of these entities and institutions have
resources substantially greater than those available to the Bank and are not
subject to the same regulatory restrictions as the Company and the Bank.
Interstate banking also could intensify competition if out-of-state
institutions increasingly take advantage of recent legislation liberalizing
interstate banking and branching opportunities in Maine.
In November of 1999, Congress adopted the Gramm-Leach-Bliley Financial
Modernization Act. This legislation breaks down the firewalls separating
related business in order to create more competition and a level playing field.
In this case, the Act eliminates depression-era restrictions which separate the
business of banking from the business of insurance and securities underwriting,
and also resulted in modifications to protect consumers and streamline
regulation. While the Company view this legislation as an opportunity to offer
a more comprehensive range of financial products and services, at the same time
it will also provide additional competition in the marketplace.
Page 1
Over the past decade, due to more liberal interstate banking laws, Maine
has seen an increase in acquisitions of locally-owned Maine-based banks. It is
Management's view that these acquisitions often result in customer
dissatisfaction as the decision-making on loans, marketing, and other aspects
of the acquired banks' businesses are shifted from local bank management
possessing independent decision-making power to management operating under
policies and guidelines from corporate headquarters in other states. The
Company believes that this shift often results in delayed decision-making by
management which is not familiar with the needs of the acquired bank's
customers or the communities they serve. Individuals and small businesses are
particularly sensitive to these changes since they may not fit the product
parameters established by the larger banks.
Thus, the Company believes that there will continue to be a need for a
bank in the Bank's primary market area with local management having decision-
making power and emphasizing loans to small and medium sized businesses and to
individuals. The Bank has concentrated on extending business loans to such
customers in the Bank's primary market area and to extending trust services to
clients with accounts of all sizes. The Bank's management also makes decisions
based upon, among other things, the knowledge of the Bank's employees regarding
the communities and customers in the Bank's primary market area. The
individuals employed by the Bank, to a large extent, reside near the branch
offices and thus are generally familiar with their communities and customers.
This is important in local decision-making and allows the Bank to respond to
customer questions and concerns on a timely basis and fosters quality customer
service.
The Trust and Investment Services Department of the Bank has taken
advantage of opportunities created as the larger banks have altered their
personal service commitment to clients not meeting established account
criteria. The Bank is able to offer a comprehensive array of trust and
investments services to individuals, businesses, non-profit organizations and
municipalities of varying asset size and to provide the highest level of
personal service. The staff includes trust and investment professionals with
extensive experience.
The Bank has worked and will continue to work to position itself to be
competitive in its market area. The Bank's ability to make decisions close to
the marketplace, management's commitment to providing quality banking products,
the caliber of the professional staff, and the community involvement of the
Bank's employees are all factors affecting the Bank's ability to be
competitive. If the Company and the Bank are unable to compete successfully,
however, the business and operations could be adversely affected.
As of December 31, 1999, the Bank employed 112 persons, with 110 full-time
equivalent employees.
Page 2
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, 1999, 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 3
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.
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.
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.
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.
An operations center is located in the adjacent block to the Damariscotta
office, fronting on Bristol Road. It was put in service in July, 1989. The Bank
also owns real estate on Water Street in Damariscotta, Maine, which was put
into use for additional office space during 1995.
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 4
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 5
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 1999.
Page 6
ITEM 5. Market for Registrant's Common Equity
The common stock of First National Lincoln Corporation (ticker symbol
FNLC) began trading on the Nasdaq National Market System in July 1999. Prior to
that date, the stock was not traded on any exchange and it traded only
sporadically through individual purchases and sales. The following table
reflects the high and low prices of actual sales in each quarter of 1999 and
1998. Such quotations do not reflect retail mark-ups, mark-downs or brokers'
commissions.
- -------------------------------------------------------
1999 1998
----------------- -----------------
High Low High Low
1st Quarter 22 1/2 19 22 13 3/4
2nd Quarter 21 20 22 1/2 22
3rd Quarter 21 18 22 1/2 20 3/4
4th Quarter 18 1/2 16 1/4 23 22 1/2
- -------------------------------------------------------
The last known transaction involving the Company's stock during 1999 was
at $16.25 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, 1999, there were
approximately 500 holders of record of the Company's common stock, as listed on
the Company's shareholder records.
The table below sets forth the cash dividends declared by the Company
during its last two fiscal years, including a special cash dividend of $.05
declared on December 17, 1998:
- -------------------------------------------------------------------
Date Declared Dividend Per Share Date Payable
----------------- ------------------ ----------------
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
February 25, 1999 $ 0.1100 April 30, 1999
June 21, 1999 $ 0.1200 July 30, 1999
September 16, 1999 $ 0.1300 October 29, 1999
December 16, 1999 $ 0.1400 January 28, 2000
------
$ 0.5000
- -------------------------------------------------------------------
Page 7
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 13.28% and 14.21%, respectively, as of December 31, 1999.
Page 8
ITEM 6. Selected Financial Data
- ------------------------------------------------------------------------------
Dollars in thousands, except for per share amounts
Years ended December 31, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------
Summary of Operations
Operating Income $26,348 $23,621 $21,439 $18,863 $17,404
Operating Expense 20,025 17,903 15,757 13,852 13,414
Net Interest Income 11,949 10,844 10,337 9,347 8,538
Provision for Loan Losses 645 400 103 60 0
Net Income 4,451 4,011 3,906 3,424 2,720
Per Common Share Data (1)
Net Income
Basic $ 1.84 $ 1.62 $ 1.58 $ 1.40 $ 1.12
Fully Diluted 1.77 1.56 1.55 1.38 1.11
Cash Dividends Declared 0.50 0.39 0.29 0.24 0.18
Book Value 12.09 11.64 10.46 9.12 8.03
Market Value 16.25 22.50 13.75 10.25 8.25
Financial Ratios
Return on Average Equity 15.67% 14.86% 16.16% 16.38% 15.03%
Return on Average Assets 1.39 1.44 1.55 1.54 1.34
Average Equity to Average Assets 8.88 9.70 9.62 9.41 8.90
Net Interest Margin 4.12 4.28 4.45 4.51 4.49
Dividend Payout Ratio 27.17 24.06 18.04 16.82 15.66
Allowance for Loan Losses/Total Loans 0.88 0.87 0.99 1.21 1.55
Non-Performing Loans to Total Loans 0.29 0.34 0.28 0.28 0.78
Non-Performing Assets to Total Assets 0.30 0.36 0.26 0.54 0.79
Efficiency Ratio 0.51 0.52 0.50 0.52 0.58
At Year End
Total Assets $341,287 $286,806 $266,279 $230,768 $212,282
Total Loans 232,526 209,224 181,510 156,970 133,245
Total Investment Securities 87,999 59,342 68,745 60,564 61,570
Total Deposits 205,458 201,803 169,880 155,674 150,468
Total Shareholders' Equity 28,662 28,776 25,885 22,477 19,565
- ------------------------------------------------------------------------------
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 $22.50 $16.25
- ------------------------------------------------------------------------------
Page 9
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 1999, continuing the positive growth
in both assets and income seen during the past six years. After opening new
offices in Camden, Maine, in 1998 and in Rockport, Maine, in 1997, the Bank had
fully absorbed the additional operating costs for these facilities in 1999. As
of year end 1999, both offices were well ahead of Management's initial
projections.
The most significant asset growth came in the investment portfolio, which
increased during 1999 by $28.7 million or 48.3% to end the year at $88.0
million. These additions were made due to a favorable interest rate environment
resulting from a steeper yield curve. The loan portfolio also experienced
healthy growth in 1999, increasing by $23.3 million or 11.1% to end the year at
$232.5 million. Most of this growth was in residential mortgages and 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 10.7% to $7.8 million in 1999 from $7.0
million in 1998. The largest increase was attributable to merchant credit card
processing expense, which was directly offset by corresponding income. The
Company's efficiency ratio -- a benchmark measure of the amount spent to
generate a dollar of income -- improved slightly in 1999 to 0.51 compared to
0.52 in 1998.
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, 1999 was $4,451,000 -- the highest
net income recorded by the Company in one year. This represents an 11.0% or
$440,000 increase from net income of $4,011,000 that was posted in 1998. Return
on average assets in 1999 was 1.39%, down from 1.44% in 1998 and 1.55% in 1997.
Return on average equity was 15.67% in 1999, compared to 14.86% in 1998 and
16.16% in 1997. The rise in return on equity during 1999 was attributable to
the Company's strong asset growth which resulted in net interest income growing
by $1.1 million or 10.2% while operating expenses remained well-controlled.
Average shareholders' equity to average assets was 8.88% in 1999, compared
to 9.70% in 1998, and 9.62% in 1997. This ratio declined as a result of the
Company repurchasing 107,633 shares or 4.4% of its common stock. Earnings per
share for the year ended December 31, 1999 increased 13.6% to $1.84. This
compares to $1.62 in 1998, and $1.58 in 1997. Book value per share was $12.09
on December 31, 1999, up from $11.64 on December 31, 1998 and $10.46 on
December 31, 1997.
On December 31, 1999, assets stood at $341.3 million, compared to $286.8
million on December 31, 1998, a 19.0% increase. As of December 31, 1999, total
loans were $232.5 million. This represents an increase of 11.1% from total
loans of $209.2 million on December 31, 1998. Investments totaled $88.0 million
on December 31, 1999, a 48.3% increase from $59.3 million on December 31, 1998.
Deposits increased 1.8% in 1999, standing at $205.5 million on December 31,
1999, compared to $201.8 million on December 31, 1998.
The Bank's loan delinquency ratio decreased again in 1999, and was 1.29%
on December 31, 1999, versus 1.50% on December 31, 1998. In Management's
opinion, there has been no pattern or trend in loan delinquencies which is of
concern.
Page 10
Average Daily Balance Sheets
The following table shows the Company's average daily balance sheets for years
ended December 31, 1999, 1998 and 1997.
- ----------------------------------------------------------------------------
Dollars in thousands
Years ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------
Cash and due from banks $ 6,750 6,785 5,317
Interest-bearing deposits 466 606 798
-------- -------- --------
Investments
U.S. Treasury securities & government agencies 56,445 49,113 55,825
Obligations of states & political subdivisions 9,301 4,295 3,493
Other securities 12,506 8,527 10,249
-------- -------- --------
Total investments 78,252 61,935 69,567
-------- -------- --------
Loans held for sale 65 188 42
-------- -------- --------
Loans
Commercial 69,706 60,705 49,255
Consumer 28,774 26,003 29,289
State and municipal 9,405 10,234 8,244
Real estate 114,952 102,064 81,803
-------- -------- --------
Total loans 222,837 199,006 168,591
Allowance for loan losses 1,950 1,756 1,847
-------- -------- --------
Net loans 220,887 197,250 166,744
-------- -------- --------
Fixed assets 5,673 4,858 4,226
Other assets 7,624 6,700 4,646
-------- -------- --------
Total assets $319,717 278,322 251,340
======== ======== ========
Deposits
Demand $ 17,230 15,253 13,739
NOW 34,654 31,054 27,662
Money market 10,597 7,918 5,179
Savings 40,121 36,151 34,104
Certificates of deposit 74,983 71,563 64,373
Certificates of deposit over $100,000 26,598 21,306 14,946
-------- -------- --------
Total deposits 204,183 183,245 160,003
Borrowed funds 85,000 67,077 65,672
Other liabilities 2,130 999 1,491
-------- -------- --------
Total liabilities 291,313 251,321 227,166
-------- -------- --------
Common stock 25 25 8
Additional paid in capital 4,685 4,674 4,532
Retained earnings 24,849 22,403 19,634
Treasury stock (1,155) (101) 0
-------- -------- --------
Total capital 28,404 27,001 24,174
-------- -------- --------
Total liabilities and capital $319,717 278,322 251,340
======== ======== ========
- ----------------------------------------------------------------------------
Average Rates and Net Interest Yield
The following table shows, for the years ended December 31, 1999, 1998 and
1997, 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, 1999 1998 1997
--------------- -------------- --------------
Amount Avg Amount Avg Amount Avg
of yield/ of yield/ of yield/
interest rate interest rate interest rate
- -------------------------------------------------------------------------------
Interest-earning assets
Interest-bearing deposits $ 24 5.15% 32 5.29% 42 5.26%
Investments 5,244 6.70% 4,067 6.62% 4,809 6.91%
Loans held for sale 5 7.69% 14 7.45% 4 8.33%
Loans 18,737 8.41% 17,525 8.81% 15,279 9.06%
------- ----- ------ ----- ------ -----
Total interest-earning
assets $24,010 7.96% 21,638 8.28% 20,134 8.42%
------- ----- ------ ----- ------ -----
Interest-bearing liabilities
Deposits $ 7,205 3.85% 6,876 4.09% 5,846 4.00%
Other borrowings 4,386 5.16% 3,588 5.35% 3,651 5.56%
------- ----- ------ ----- ------ -----
Total interest-bearing
liabilities $11,591 4.26% 10,464 4.45% 9,497 4.48%
------- ----- ------ ----- ------ -----
Net interest income $12,419 11,174 10,637
======= ===== ====== ===== ====== =====
Interest rate spread 3.70% 3.83% 3.94%
Net interest margin 4.12% 4.28% 4.45%
- -------------------------------------------------------------------------------
Page 12
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 1999 and 1998.
Year ended December 31, 1999 compared to 1998
- --------------------------------------------------------------------------
Rate/
Dollars in thousands Rate Volume volume(1) Total
- --------------------------------------------------------------------------
Interest on earning assets
Interest-bearing deposits $ (7) $ (1) $ - $ (8)
Investment securities 1,117 48 13 1,178
Loans held for sale (9) - - (9)
Loans 2,099 (792) (95) 1,212
-------- -------- -------- --------
Total interest income $ 3,200 $ (745) $ (82) $ 2,373
-------- -------- -------- --------
Interest expense
Deposits $ 776 $ (402) $ (45) $ 329
Other borrowings(2) 959 (127) (34) 798
-------- -------- -------- --------
Total interest expense $ 1,735 $ (529) $ (79) $ 1,127
-------- -------- -------- --------
Change in net interest income $ 1,465 $ (216) $ (3) $ 1,246
======== ======== ======== ========
- --------------------------------------------------------------------------
Year ended December 31, 1998 compared to 1997
- --------------------------------------------------------------------------
Rate/
Dollars in thousands Rate Volume volume(1) Total
- --------------------------------------------------------------------------
Interest on earning assets
Interest-bearing deposits $ (10) $ - $ - $ (10)
Investment securities (565) (201) 24 (742)
Loans held for sale 12 - (1) 11
Loans 2,756 (432) (78) 2,246
-------- -------- -------- --------
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
======== ======== ======== ========
- --------------------------------------------------------------------------
(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 13
Capital Resources
Capital on December 31, 1999 was sufficient to meet the requirements of
regulatory authorities. Average equity to average assets was 8.88% in 1999,
versus 9.70% in 1998. Leverage capital, or total shareholders' equity divided
by average total assets less any net unrealized gain or loss on securities
available for sale, stood at 9.00% on December 31, 1999, versus 10.03% in 1998.
At December 31, 1999, the Company had tier-one risk-based capital of
14.12% and tier-two risk-based capital of 15.08%, versus 15.92% and 16.93% in
1998, 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 1999, the Company declared cash dividends of $0.11 per share for
the first quarter, $0.12 per share for the second quarter, $0.13 per share for
the third quarter, and $0.14 per share for the fourth quarter. The Company's
dividend payout ratio was 27.17% of earnings in 1999, 24.06% in 1998, and
18.04% in 1997.
In determining future dividend payout levels, the Board of Directors
carefully analyzes capital requirements and earnings retention, as set forth in
the Company'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
2000 will be that year's net income plus $4,178,000.
In 1999, 6,149 shares of common stock were issued via director and
employee stock programs for consideration totaling $127,000. The Company also
purchased 107,633 shares of common stock for total consideration of $2,104,000,
of which 6,149 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 1999, the Bank made capital purchases totaling $190,000. This cost will be
amortized over an average of five years, adding $38,000 to pre-tax operating
costs per year. The capital purchases were primarily related to technology.
Liquidity
As of December 31, 1999, the Bank had primary sources of liquidity of $35.4
million, or 10.4% of its assets. It is Management's opinion that this is
adequate. The Bank has established guidelines for liquidity management, with
policies and procedures prescribed in its funds management policy.
The Bank's principal sources of funds are deposits, cash and due from
banks, federal funds sold, loan and dividend payments, loan and investment
maturities, and borrowed funds from the Federal Home Loan Bank. To compensate
for the seasonal flow in its deposit structure, the Bank maintains adequate
funding for its loan portfolio by monitoring maturities within its investment
portfolio, and utilizing advances from the Federal Home Loan Bank or entering
into securities repurchase agreements.
Page 14
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 $108.3 million. The Bank's liquidity position is further
supplemented with securities repurchase agreements with certain brokers and a
$5.0 million credit line with a correspondent bank.
Deposits grew during 1999, ending the year at $205.5 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, 1999, the Company had a net unrealized loss of $1,319,000
(net of $679,000 in deferred income tax benefits) in available for sale
securities. This unrealized loss is in line with Management's expectations
given the rise in interest rates experienced in 1999. 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 1999 the Company's investment portfolio increased 48.3% to end the year
at $87,999,000, compared to $59,342,000 on December 31, 1998. This $28.7
million increase was due to attractive investment opportunities as a result of
a favorable interest rate environment during the year.
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 1999, the Company's investment portfolio continued a shift away from
U.S. Treasury securities and toward U.S. Government Agency securities,
corporate 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, 1999, 1998 and
1997.
Page 15
- -------------------------------------------------------------------
Dollars in thousands 1999 1998 1997
- -------------------------------------------------------------------
Securities available for sale:
U.S. Treasury and agency $ 12,155 2,036 6,501
Mortgage-backed securities 4,352 5,951 3,210
State and political subdivisions 6,536 1,248 -
Other securities 19,048 9,623 6,752
-------- -------- --------
42,091 18,858 16,463
-------- -------- --------
Securities to be held to maturity:
U.S. Treasury and agency 27,860 15,746 16,649
Mortgage-backed securities 13,485 20,196 28,541
State and political subdivisions 4,560 4,531 3,557
Other securities 3 11 3,535
-------- -------- --------
45,908 40,484 52,282
-------- -------- --------
Total securities $ 87,999 59,342 68,745
======== ======== ========
- -------------------------------------------------------------------
The following table sets forth certain information regarding the yields
and expected maturities of the Company's investment securities as of December
31, 1999. Yields on tax-exempt securities have been computed on a tax-
equivalent basis using a tax-rate of 34%.
Page 16
- --------------------------------------------------------------------------
Dollars in thousands Available for sale Held to maturity
-------------------- --------------------
Fair Yield to Amortized Yield to
value maturity cost maturity
- --------------------------------------------------------------------------
U.S. Treasury and Agency:
Due in 1 year or less $ - 0.00% $ 1,000 4.31%
Due in 1 to 5 years 1,004 6.77% - 0.0%
Due in 5 to 10 years 6,601 6.38% - 0.0%
Due after 10 years 4,550 6.81% 26,860 6.70%
-------- -------- -------- --------
12,155 6.57% 27,860 6.62%
-------- -------- -------- --------
Mortgage-backed securities:
Due in 1 year or less - 0.00% 1,151 5.67%
Due in 1 to 5 years - 0.00% 502 6.46%
Due in 5 to 10 years 1,084 8.44% - 0.00%
Due after 10 years 3,268 6.64% 11,832 6.89%
-------- -------- -------- --------
4,352 7.09% 13,485 6.77%
-------- -------- -------- --------
State and political subdivisions:
Due in 1 year or less - 0.00% 495 6.39%
Due in 1 to 5 years - 0.00% 201 6.57%
Due in 5 to 10 years - 0.00% 537 8.44%
Due after 10 years 6,536 7.30% 3,327 7.96%
-------- -------- -------- --------
6,536 7.30% 4,560 7.79%
-------- -------- -------- --------
Other securities:
Due in 1 year or less - 0.00% - 0.00%
Due in 1 to 5 years 3,804 6.97% - 0.00%
Due in 5 to 10 years 4,594 7.18% 3 7.01%
Due after 10 years 4,005 6.07% - 0.00%
Equity securities 6,645 6.69% - 0.00%
-------- -------- -------- --------
19,048 6.73% 3 7.01%
-------- -------- -------- --------
$ 42,091 6.81% $ 45,908 6.78%
======== ======== ======== ========
- --------------------------------------------------------------------------
Lending Activities
The loan portfolio experienced growth in almost all areas during 1999, with the
most significant increase seen in residential real estate loans. Total loans
were $232,526,000 at December 31, 1999, an 11.1% increase from total loans of
$209,224,000 on December 31, 1998. 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, 1999, 1998, 1997, 1996 and 1995:
Page 17
- -------------------------------------------------------------------------------
Dollars in thousands
As of December 31, 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------
Commercial loans
Real estate $ 30,305 25,585 20,173 18,220 17,578
Other 41,970 38,718 33,100 26,907 24,918
Residential real estate loans
Construction 1,661 3,397 3,053 3,278 2,167
Term 121,599 105,877 92,937 81,088 65,935
Consumer loans 29,227 27,993 24,041 20,288 18,439
Municipal 7,764 7,654 8,206 7,189 4,208
-------- -------- -------- -------- --------
Total $232,526 209,224 181,510 156,970 133,245
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------
On December 31, 1999, 53.1% of the Bank's loan portfolio was in
residential real estate loans, 13.0% was in commercial real estate loans, 18.0%
was in other commercial loans, 12.6% was in consumer loans, and 3.3% was in
state and municipal loans. This compares to 1998 and 1997 figures for
residential real estate loans of 52.2% and 52.9%, respectively, commercial real
estate loans of 12.2% and 11.1%, respectively, other commercial loans of 18.5%
and 18.2%, respectively, consumer loans of 13.4% and 13.3%, respectively, and
3.7% and 4.5%, respectively, in state and municipal loans. As in prior years,
the largest amount of the Bank's loan growth was in residential real estate
loans.
The Bank issues its own VISA and MasterCard. These loans totaled
$2,536,000 as of December 31, 1999, $2,569,000 as of December 31, 1998,
$2,457,000 as of December 31, 1997, $2,099,000 as of December 31, 1996, and
$1,571,000 as of December 31, 1995. The number of credit card accounts
increased 6.4% in 1999 to end the year at 3,802.
The following table sets forth certain information regarding the
contractual maturities of the Bank's loan portfolio as of December 31, 1999.
- -------------------------------------------------------------------------------
Dollars in thousands < 1 Year 1-5 Years 5-10 Years >10 Years Total
- -------------------------------------------------------------------------------
Commercial real estate $ 317 1,198 5,639 23,151 30,305
Commercial other 12,087 5,760 12,322 11,801 41,970
Residential real estate 2,310 672 9,982 108,635 121,599
Residential construction 1,661 - - - 1,661
Consumer 3,358 10,854 7,052 7,963 29,227
Municipal 3,243 331 896 3,294 7,764
-------- -------- -------- -------- --------
Totals $ 22,976 18,815 35,891 154,844 232,526
======== ======== ======== ======== ========
- -------------------------------------------------------------------------------
The following table provides a listing of loans by category, excluding
loans held for sale, between variable and fixed rates as of December 31, 1999.
Page 18
- -------------------------------------------------------------------------------
Dollars in thousands Amount % of total
- -------------------------------------------------------------------------------
Variable-rate loans
Commercial loans $ 52,542 22.6%
State and municipal loans 2,052 0.9%
Consumer loans 6,672 2.8%
Equity loans 4,905 2.1%
Residential adjustable-rate mortgages 60,380 26.0%
-------- --------
Total 126,551 54.5%
Fixed-rate loans 105,975 45.5%
-------- --------
Total loans $232,526 100.0%
======== ========
- -------------------------------------------------------------------------------
The Bank's loan delinquency ratio decreased slightly in 1999, and was
1.29% on December 31, 1999, versus 1.50% on December 31, 1998.
Loan Concentrations
As of December 31, 1999, 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 1999, the Bank placed a lower volume of residential mortgages into the
secondary market compared to prior years. This was the result of decreased
mortgage underwriting opportunities resulting from higher interest rates. Loans
held for sale are carried at the lower of cost or market value, which were
$127,000 at December 31, 1999 and $209,000 at December 31, 1998.
Non-Performing Assets
The aggregate dollar amount of loans more than 90 days past-due or on non-
accrual status increased during 1999 but remains low relative to peer. 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,
1999, 1998, 1997, 1996 and 1995.
- -------------------------------------------------------------------------------
Dollars in thousands
As of December 31, 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------
Commercial real estate &
business $ 822 414 420 203 580
Residential real estate 260 222 320 359 558
Consumer 90 91 128 39 61
-------- -------- -------- -------- --------
Total 1,172 727 868 601 1,199
======== ======== ======== ======== ========
Non-accrual loans
included in above total 681 716 510 440 1,034
Income not recognized
from non-accrual loans $ 64 51 50 62 114
- -------------------------------------------------------------------------------
Page 19
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 slightly during 1999. At December 31 it
included eight properties valued at $336,000, compared to seven properties
valued at $303,000 at December 31, 1998.
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,
1999 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
processes, periodically review the Bank's allowance for loan losses. Such
agencies may require the Bank to recognize additions to the allowance based on
their judgments about information available to them at the time of their
examination.
During 1999, a provision of $645,000 was made to the allowance, compared
to a provision of $400,000 in 1998, and $103,000 in 1997. In Management's
opinion, this increased level of provision is not indicative of a decline in
credit quality within the portfolio but is, instead, the result of loan growth
experienced over the past few years. At December 31, 1999, the allowance for
loan losses stood at $2,035,000, or 0.88% of total loans outstanding. This
compares to $1,822,000, or 0.87% of total loans outstanding at December 31,
1998, and $1,800,000, or 0.99% of total loans outstanding at December 31, 1997.
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 following table reflects allocation of the Bank's allowance for loan
losses by category of loan as of December 31, 1999, 1998, 1997, 1996, and 1995.
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. Commercial
includes commercial real estate loans.
Page 20
- ----------------------------------------------------------------------------
Dollars in thousands
As of
December 31, 1999 1998 1997 1996 1995
------------ ----------- ----------- ----------- -----------
Real estate $ 478 53% 440 52% 454 53% 419 54% 412 51%
Commercial 577 34% 736 35% 683 34% 1,010 33% 1,153 35%
Consumer 495 13% 408 13% 254 13% 477 13% 494 14%
Unallocated 485 - 238 - 409 - - - - -
------ ---- ----- ---- ----- ---- ----- ---- ----- ----
Total $2,035 100% 1,822 100% 1,800 100% 1,906 100% 2,059 100%
====== ==== ===== ==== ===== ==== ===== ==== ===== ====
- ----------------------------------------------------------------------------
(1) Percentage is amount in each category for the stated year
Net loans charged off in 1999 were $432,000, or 0.19% of average loans
outstanding for the year. This compares to net loan chargeoffs of $378,000 or
0.19% in 1998 and $209,000 or 0.12% in 1997.
The following table summarizes the activity with respect to loan losses
for the years ended December 31, 1999, 1998, 1997, 1996, and 1995.
- -------------------------------------------------------------------------------
Dollars in thousands
As of December 31, 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------
Balance at
beginning of period $1,822 1,800 1,906 2,059 2,428
======== ======== ======== ======== ========
Loans charged off:
Commercial (1) 153 121 60 154 197
Real estate mortgage 31 46 31 65 131
Consumer 359 285 246 148 156
-------- -------- -------- -------- --------
Total 543 452 337 367 484
-------- -------- -------- -------- --------
Recoveries on loans previously charged off:
Commercial(1) 12 14 70 81 30
Real estate mortgage 8 - - 16 -
Consumer 91 60 58 57 85
-------- -------- -------- -------- --------
Total 111 74 128 154 115
-------- -------- -------- -------- --------
Net loans charged off 432 378 209 213 369
Provision for loan losses 645 400 103 60 -
-------- -------- -------- -------- --------
Balance at end of period $ 2,035 1,822 1,800 1,906 2,059
======== ======== ======== ======== ========
Ratio of net loans charged off to average loans outstanding
0.19% 0.19% 0.12% 0.14% 0.29%
- -------------------------------------------------------------------------------
(1) Includes commercial real estate loans
Page 21
Deposits
The Bank, with $205,458,000 in deposits as of December 31, 1999, realized an
increase of 1.8% in 1999 compared to an 18.8% increase in deposits in 1998 and
a 9.1% increase in deposits in 1997. Most of the growth in 1999 was seen in
low-cost, core deposits, with higher cost certificates of deposits posting the
most significant drop.
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 1999, the maximum amount of deposits at any month end was
$216,044,000 on October 31. 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 3.53% for the year ended December 31, 1999, compared to 3.75% for
the year ended December 31, 1998 and 3.65% for the year ended December 31,
1997. The following table sets forth the average daily balance for the Bank's
principal deposit categories for the period indicated.
- --------------------------------------------------------------------------
Dollars in thousands %growth
Years ended December 31, 1999 1998 1997 1999vs1998
- --------------------------------------------------------------------------
Demand deposits $ 17,230 15,253 13,739 13.0%
NOW accounts 34,654 31,054 27,662 11.6%
Money market accounts 10,597 7,918 5,179 33.8%
Savings 40,121 36,151 34,104 11.0%
Certificates of deposit 101,581 92,869 79,319 9.4%
-------- -------- -------- --------
Total deposits $204,183 183,245 160,003 11.4%
======== ======== ======== ========
- --------------------------------------------------------------------------
The following table sets forth the average cost of each category of
interest-bearing deposits for the periods indicated.
- -------------------------------------------------------------------
Years ended December 31, 1999 1998 1997
- -------------------------------------------------------------------
NOW accounts 1.26% 1.27% 1.25%
Money market accounts 3.47% 3.16% 2.50%
Savings accounts 2.77% 2.92% 2.96%
Certificates of deposit 5.21% 5.57% 5.50%
-------- -------- --------
Total interest-bearing deposits 3.85% 4.09% 4.00%
======== ======== ========
- -------------------------------------------------------------------
As of December 31, 1999, the Bank held a total of $22,183,000 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:
Page 22
- -----------------------------------------------
Dollars in thousands
- -----------------------------------------------
Within 3 months $ 9,970
3 months through 6 months 6,502
6 months through 12 months 3,468
Over 12 months 2,244
--------
Total $ 22,184
========
- -----------------------------------------------
Of all certificates of deposit, $72.2 million or 71.2% of certificates of
deposit will mature by December 31, 2000.
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, investment securities and qualifying first mortgage loans. Advances at
December 31, 1999 totaled $89,709,000, with a weighted average interest rate of
5.85% and maturities ranging from one day to fifteen years.
The Bank offers 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, 1999 was $12,489,000,
compared to $8,742,000 on December 31, 1998, and $5,474,000 on December 31,
1997. In prior years, the Bank has also sold securities under agreements 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 $5.0 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, 1999, 1998 and 1997 were $2,850,000,
$285,000 and $3,295,000, respectively.
The maximum amount of borrowed funds outstanding at any month-end during
the year was $105,048,000 at the end of December. The average amount
outstanding during the year was $85,000,000, with a weighted average interest
rate of 5.16%. This compares to an average outstanding amount of $60,335,000 in
1998, with a weighted average interest rate of 5.45%. The average balance
outstanding on the Bank's borrowed funds for the year ended December 31, 1997
was $56,969,000, with a weighted average interest rate of 5.67%.
Investment Management and Fiduciary Activities
As of December 31, 1999, the Bank's Investment Management Group had assets with
a market value of $105,796,000 under management. This amount consisted of 395
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
Quarterly Information
The following tables provides unaudited financial information by quarter for
each of the past two years:
- --------------------------------------------------------------------------
Dollars in thousands 1999 Q1 1999 Q2 1999 Q3 1999 Q4
- --------------------------------------------------------------------------
Balance Sheets
Cash $ 5,620 6,548 6,379 8,221
Investments 70,991 83,925 82,210 87,999
Net loans 214,500 223,656 227,003 230,618
Other assets 13,579 14,024 13,591 14,449
-------- -------- -------- --------
Total assets $304,690 328,153 329,183 341,287
======== ======== ======== ========
Deposits $196,879 201,786 210,949 205,458
Borrowed funds 76,342 96,520 87,597 105,048
Other liabilities 2,096 1,535 1,695 2,119
Shareholders' equity 29,373 28,312 28,942 28,662
-------- -------- -------- --------
Total liabilities
& equity $304,690 328,153 329,183 341,287
======== ======== ======== ========
Income Statement
Interest income $ 5,410 5,792 6,087 6,253
Interest expense 2,623 2,876 3,009 3,082
-------- -------- -------- --------
Net interest income 2,787 2,916 3,078 3,171
Provision for loan losses 90 285 120 150
-------- -------- -------- --------
Net interest income
after provision 2,697 2,631 2,958 3,021
Non-interest income 539 780 812 677
Non-interest expense 1,770 1,840 2,108 2,072
-------- -------- -------- --------
Income before taxes 1,466 1,571 1,662 1,626
Income taxes 438 465 490 480
-------- -------- -------- --------
Net income $ 1,028 1,106 1,172 1,146
======== ======== ======== ========
Basic earnings per share 0.42 0.45 0.49 0.48
Diluted earnings per share 0.40 0.44 0.47 0.46
- --------------------------------------------------------------------------
Page 24
- --------------------------------------------------------------------------
Dollars in thousands 1998 Q1 1998 Q2 1998 Q3 1998 Q4
- --------------------------------------------------------------------------
Balance Sheets
Cash $ 4,652 6,494 10,091 6,338
Investments 64,415 64,666 60,598 59,342
Net loans 190,414 201,533 205,439 207,611
Other assets 12,128 13,090 13,177 13,515
-------- -------- -------- --------
Total assets $271,609 285,783 289,305 286,806
======== ======== ======== ========
Deposits $169,381 181,560 196,374 201,803
Borrowed funds 73,539 75,052 62,996 54,460
Other liabilities 1,917 1,676 1,632 1,767
Shareholders' equity 26,772 27,495 28,303 28,776
-------- -------- -------- --------
Total liabilities
& equity $271,609 285,783 289,305 286,806
======== ======== ======== ========
Income Statement
Interest income $ 5,204 5,323 5,452 5,329
Interest expense 2,538 2,653 2,677 2,596
-------- -------- -------- --------
Net interest income 2,666 2,670 2,775 2,733
Provision for loan losses 45 60 170 125
-------- -------- -------- --------
Net interest income
after provision 2,621 2,610 2,605 2,608
Non-interest income 415 465 763 670
Non-interest expense 1,616 1,647 1,900 1,876
-------- -------- -------- --------
Income before taxes 1,420 1,428 1,468 1,402
Income taxes 428 428 437 414
-------- -------- -------- --------
Net income $ 992 1,000 1,031 988
======== ======== ======== ========
Basic earnings per share 0.40 0.40 0.42 0.40
Diluted earnings per share 0.39 0.39 0.40 0.38
- --------------------------------------------------------------------------
Year 2000 Experience
As a result of extensive preparations for the century date change that began in
1997, the Company experienced no problems with its computer systems or other
affected areas on January 1, 2000.
In prior filings, the Company disclosed its estimated cost to address Year
2000 issues at approximately $1 million. This included $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. These expenditures are being amortized over a three-to-five year
period. In addition to hardware and software, the total includes a human-
resources allocation of $300,000 which was expensed as incurred. Of this, only
$25,000 was an incremental expense, which included summer college students,
overtime for existing personnel, and outside support. The remaining $275,000
was an allocation of existing human resources costs. The Company did not incur
any additional costs for Year 2000 preparations beyond those previously
disclosed.
Page 25
In Management's opinion, the Company's major Year 2000 risks were
primarily related to key counterparties which are beyond the Company's control,
including the Federal Reserve Bank and the Federal Home Loan Bank -- upon which
the Company is dependent for liquidity and funds transfer needs. The Company
experienced no problems or issues related to the century date change with
either counterparty.
Accounting Pronouncements
During 1999, the Bank implemented Statement of Financial Accounting Standards
(SFAS) 125 related to the servicing of financial assets. In 1999, mortgage
servicing rights of $360,000 were capitalized, and amortization for the year
totaled $85,000. After deducting for a valuation allowance of $72,000, at
December 31, 1999, mortgage servicing rights had a fair value of $203,000,
which is included in other assets. At December 31, 1999 and 1999, the Bank
serviced loans for others totaling $35,546,000 and $30,545,000, respectively.
During 1999, the Financial Accounting Standards Board (FASB) issued SFAS
134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise," SFAS 135, "Rescission of FASB Statement No. 75 and Technical
Corrections", and SFAS 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of SFAS 133." SFAS 134 and 135
have no effect on the financial condition and results of operations of the
Company.
SFAS 133, which established accounting reporting standards for derivative
instruments and for hedging activity, was amended by SFAS 137. SFAS 137 defers
the effective date of SFAS 133 to fiscal years beginning after June 15, 2000.
The Bank does not hold any derivative instruments and Management does not
expect to enter into derivative transactions in the near future. Should the
Bank enter into derivative transactions, SFAS 137 will be followed when
effective.
Forward-Looking Statements
Certain disclosures in Management's Discussion and Analysis of Financial
Condition and Results of Operations 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
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 goal of asset/liability management is 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 -6.7% 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, 1999, is
presented in the following table:
Page 27
- --------------------------------------------------------------------------
0-90 91-365 1-5 5+
Dollars in thousands days days years years
- --------------------------------------------------------------------------
Investment securities at
amortized cost $ 11,621 29,712 22,704 25,954
Loans held for sale 127 - - -
Loans 59,576 52,448 87,310 33,193
Other interest-earning assets 3,887 - - -
Non-rate-sensitive assets 336 - - 14,419
-------- -------- -------- --------
Total assets 75,547 82,160 110,014 73,566
-------- -------- -------- --------
Interest-bearing deposits 34,763 51,436 12,742 88,772
Borrowed funds 81,603 11,076 7,368 5,000
Non-rate-sensitive
liabilities and equity 356 1,209 - 46,962
-------- -------- -------- --------
Total liabilities and equity $116,722 63,721 20,110 140,734
-------- -------- -------- --------
Period gap $(41,175) 18,439 89,904 (67,168)
======== ======== ======== ========
Percent of total assets (12.1%) 5.4% 26.3% (19.7%)
Cumulative gap (current) $(41,175) (22,736) 67,168 -
Percent of total assets (12.1%) (6.7%) 19.7% 0.0%
- --------------------------------------------------------------------------
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 simulation model projects net interest income would
increase by approximately 2.6% of stable-rate net interest income if rates fall
gradually by two percentage points over the next year, and decrease by
approximately 3.5% 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 be greater than that earned
in a stable rate environment by 12.2% in a falling rate scenario and decrease
by 4.6% 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 annually and reviewed by ALCO.
Page 28
A summary of the Company's interest rate risk simulation modeling, as of
December 31, 1999 and 1998 is presented in the following table:
- --------------------------------------------------------------
Changes in Net Interest Income 1999 1998
- --------------------------------------------------------------
Year 1
Projected change if rates decrease by 2.0% +2.6% -3.3%
Projected change if rates increase by 2.0% -3.5% +0.8%
- --------------------------------------------------------------
Year 2
Projected change if rates decrease by 2.0% +12.2% -4.6%
Projected change if rates increase by 2.0% -4.6% +2.0%
- --------------------------------------------------------------
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 liquidity. As of December 31, 1999,
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, 1999, there 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 may rise during 2000 but believes that
the current level of interest rate risk is acceptable.
Page 29
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 F. Stephen Ward
President & Chief Executive Officer Treasurer & Chief Accounting Officer
Page 30
Berry, Dunn, McNeil & Parker
Certified Public Accountants
Independent Auditors' Report
The Board of Directors and Shareholders
First National Lincoln Corporation
We have audited the consolidated balance sheets of First National Lincoln
Corporation and Subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1999.
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, 1999 and 1998, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the three-year period ended December 31, 1999, in
conformity with generally accepted accounting principles.
Berry, Dunn, McNeil & Parker
Berry, Dunn, McNeil & Parker
Portland, Maine
February 4, 2000
Page 31
Consolidated Balance Sheets
First National Lincoln Corporation and Subsidiary
- ----------------------------------------------------------------------------
As of December 31, 1999 1998
- ----------------------------------------------------------------------------
Assets
Cash and due from banks $ 8,221,000 $ 06,338,000
Securities available for sale 42,091,000 18,858,000
Securities to be held to maturity,
market value of $43,581,000 in 1999
and $40,702,000 in 1998 45,908,000 40,484,000
Loans held for sale at cost,
which approximates market value 127,000 209,000
Loans 232,526,000 209,224,000
Less allowance for loan losses 2,035,000 1,822,000
------------- -------------
Net loans 230,491,000 207,402,000
------------- -------------
Accrued interest receivable 2,335,000 1,770,000
Bank premises and equipment 5,518,000 5,866,000
Other real estate owned 336,000 303,000
Other assets 6,260,000 5,576,000
------------- -------------
TOTAL ASSETS $ 341,287,000 $ 286,806,000
============= =============
Page 32
Consolidated Balance Sheets, Concluded
First National Lincoln Corporation and Subsidiary
- ----------------------------------------------------------------------------
As of December 31, 1999 1998
- ----------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Demand deposits $ 17,746,000 $ 17,649,000
NOW deposits 36,714,000 33,710,000
Money market deposits 16,607,000 9,793,000
Savings deposits 41,349,000 39,226,000
Certificates of deposit (including
certificates of $100,000 or more
of $22,183,000 in 1999
and of $29,131,000 in 1998) 93,042,000 101,425,000
------------- -------------
Total deposits 205,458,000 201,803,000
Borrowed funds 105,048,000 54,460,000
Other liabilities 2,119,000 1,767,000
------------- -------------
Total liabilities 312,625,000 258,030,000
------------- -------------
Shareholders' equity:
Common stock, one cent par value 25,000 25,000
Additional paid-in capital 4,687,000 4,687,000
Retained earnings 27,463,000 24,218,000
Net unrealized gain (loss) on
securities available for sale,
net of tax (1,319,000) 63,000
Treasury stock, at cost (2,194,000) (217,000)
------------- -------------
Total shareholders' equity 28,662,000 28,776,000
Commitments and contingent liabilities
(notes 11, 12 and 16)
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 341,287,000 $ 286,806,000
============= =============
- ----------------------------------------------------------------------------
Common stock
Number of shares authorized 6,000,000 6,000,000
Number of shares issued 2,481,270 2,481,270
Number of shares outstanding 2,370,047 2,471,531
- ----------------------------------------------------------------------------
The accompanying footnotes are an integral part of these consolidated financial
statements
Page 33
Consolidated Statements of Income
First National Lincoln Corporation and Subsidiary
- ----------------------------------------------------------------------------
Years ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------
Interest income:
Interest and fees on loans $ 18,501,000 $ 17,289,000 $ 15,068,000
Interest on deposits with
other banks 24,000 32,000 42,000
Interest and dividends on
investments (includes tax-exempt
income of $447,000 in 1999,
$207,000 in 1998,
and $161,000 in 1997) 5,015,000 3,987,000 4,724,000
------------ ------------ ------------
Total interest income 23,540,000 21,308,000 19,834,000
------------ ------------ ------------
Interest expense:
Interest on deposits 7,205,000 6,876,000 5,846,000
Interest on borrowed funds 4,386,000 3,588,000 3,651,000
------------ ------------ ------------
Total interest expense 11,591,000 10,464,000 9,497,000
------------ ------------ ------------
Net interest income 11,949,000 10,844,000 10,337,000
Provision for loan losses 645,000 400,000 103,000
------------ ------------ ------------
Net interest income after
provision for loan losses 11,304,000 10,444,000 10,234,000
------------ ------------ ------------
Other operating income:
Fiduciary and investment
management income 546,000 421,000 324,000
Service charges on deposit accounts 685,000 627,000 562,000
Net realized gain (loss) on
securities available for sale - (21,000) 3,000
Other 1,577,000 1,286,000 716,000
------------ ------------ ------------
Total other operating income 2,808,000 2,313,000 1,605,000
------------ ------------ ------------
Other operating expenses:
Salaries and employee benefits 3,981,000 3,703,000 3,142,000
Occupancy expense 472,000 448,000 354,000
Furniture and equipment expense 705,000 584,000 625,000
Other 2,631,000 2,304,000 2,036,000
------------ ------------ ------------
Total other operating expenses 7,789,000 7,039,000 6,157,000
------------ ------------ ------------
Income before income taxes 6,323,000 5,718,000 5,682,000
Income tax expense 1,872,000 1,707,000 1,776,000
------------ ------------ ------------
Net income $ 4,451,000 $ 4,011,000 $ 3,906,000
============ ============ ============
- ----------------------------------------------------------------------------
Page 34
Consolidated Statements of Income, Concluded
First National Lincoln Corporation and Subsidiary
- ----------------------------------------------------------------------------
Years ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------
Basic earnings per share $ 1.84 $ 1.62 $ 1.58
Diluted earnings per share $ 1.77 $ 1.56 $ 1.55
Cash dividends declared per share $ 0.50 $ 0.39 $ 0.29
Weighted average number
of shares outstanding 2,424,385 2,478,223 2,468,250
- ----------------------------------------------------------------------------
The accompanying footnotes are an integral part of these consolidated financial
statements
Page 35
Consolidated Statement of Changes in Shareholders Equity
First National Lincoln Corporation and Subsidiary
- -------------------------------------------------------------------------------------------------------------
Years ended December 31, 1999, 1998 and 1997
- -------------------------------------------------------------------------------------------------------------
Net
unrealized
gain (loss) Total
Number of Additional on securities share
common Common paid-in Retained available Treasury holders'
shares stock capital earnings for sale stock equity
- -------------------------------------------------------------------------------------------------------------
Balance at
December 31,
1996 2,464,704 $25,000 $4,467,000 $17,971,000 $ 14,000 - $22,477,000
Net income - - - 3,906,000 - - 3,906,000
Net unrealized
gain on
securities
available for
sale, net of
tax expense
of $41,000 - - - - 79,000 - 79,000
--------- ------- ---------- ----------- ----------- ----------- -----------
Comprehensive
income - - - 3,906,000 79,000 - 3,985,000
Cash dividends
declared - - - (705,000) - - (705,000)
Stock issued 10,844 - 127,000 - - - 127,000
Treasury stock
purchases (4,668) - - - - (48,000) (48,000)
Treasury stock
sold 4,668 - 1,000 - - 48,000 49,000
--------- ------- ---------- ----------- ----------- ----------- -----------
Balance at
December 31,
1997 2,475,548 25,000 4,595,000 21,172,000 00 ,93,000 - 25,885,000
========= ======= ========== =========== =========== =========== ===========
Page 36
Consolidated Statement of Changes in Shareholders Equity, continued
First National Lincoln Corporation and Subsidiary
- -------------------------------------------------------------------------------------------------------------
Years ended December 31, 1999, 1998 and 1997
- -------------------------------------------------------------------------------------------------------------
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 - - - 4,011,000 - - 4,011,000
Net unrealized
loss on
securities
available for
sale, net of
tax benefit
of $15,000 - - - - (30,000) - (30,000)
--------- ------- ---------- ----------- ----------- ----------- -----------
Comprehensive
income - - - 4,011,000 (30,000) - 3,981,000
Cash dividends
declared - - - (965,000) - - (965,000)
Stock issued 5,722 - 90,000 - - - 90,000
Treasury stock
purchases (15,504) - - - - (343,000) (343,000)
Treasury stock
sold 5,765 - 2,000 - - 126,000 128,000
--------- ------- ---------- ----------- ----------- ----------- -----------
Balance at
December 31,
1998 2,471,531 25,000 4,687,000 24,218,000 63,000 (217,000) 28,776,000
========= ======= ========== =========== =========== =========== ===========
Page 37
Consolidated Statement of Changes in Shareholders Equity, concluded
First National Lincoln Corporation and Subsidiary
- -------------------------------------------------------------------------------------------------------------
Years ended December 31, 1999, 1998 and 1997
- -------------------------------------------------------------------------------------------------------------
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 - - - 4,451,000 - - 4,451,000
Net unrealized
loss on
securities
available for
sale, net of
tax benefit
of $713,000 - - - - (1,382,000) - (1,382,000)
--------- ------- ---------- ----------- ----------- ----------- -----------
Comprehensive
income - - - 4,451,000 (1,382,000) - 3,069,000
Cash dividends
declared - - - (1,206,000) - - (1,206,000)
Treasury stock
purchases (107,633) - - - - (2,104,000) (2,104,000)
Treasury stock
sold 6,149 - - - - 127,000 127,000
--------- ------- ---------- ----------- ----------- ----------- -----------
Balance at
December 31,
1999 2,370,047 $25,000 $4,687,000 $27,463,000 $(1,319,000) $(2,194,000) $28,662,000
========= ======= ========== =========== =========== =========== ===========
The accompanying footnotes are an integral part of these consolidated financial statements
Page 38
Consolidated Statements of Cash Flows
First National Lincoln Corporation and Subsidiary
- ----------------------------------------------------------------------------
Years ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 4,451,000 $ 4,011,000 $ 3,906,000
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation 538,000 544,000 582,000
Deferred income taxes (235,000) (58,000) 44,000
Provision for loan losses 645,000 400,000 103,000
Provision for losses on
other real estate owned 20,000 16,000 14,000
Loans originated for resale (9,115,000) (19,039,000) (2,677,000)
Proceeds from sales of loans 9,197,000 18,930,000 2,879,000
Net (gain) loss on sale or call of
securities available for sale - 21,000 (3,000)
(Gain) loss on sale of
other real estate owned 6,000 (4,000) 33,000
Net change in other assets and
accrued interest receivable (741,000) (302,000) (4,355,000)
Net change in other liabilities 830,000 232,000 (84,000)
Net amortization of premium (accretion
of discount) on investments (20,000) 210,000 91,000
----------- ----------- -----------
Net cash provided by
operating activities 5,576,000 4,961,000 533,000
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sales, maturities
and calls of securities
available for sale 2,833,000 7,836,000 4,869,000
Proceeds from maturities and calls of
securities to be held to maturity 12,557,000 33,739,000 11,757,000
Proceeds from sales of
other real estate owned 281,000 24,000 634,000
Additional investment in
other real estate owned - - (1,000)
Purchases of securities
available for sale (28,122,000) (10,314,000) (2,711,000)
Purchases of securities
to be held to maturity (18,000,000) (22,134,000) (22,064,000)
Maturities of interest-bearing
deposits in other banks - - 975,000
Net increase in loans (24,074,000) (28,247,000) (24,618,000)
Capital expenditures (190,000) (1,539,000) (1,281,000)
----------- ----------- -----------
Net cash used in
investing activities (54,715,000) (20,635,000) (32,440,000)
----------- ----------- -----------
Page 39
Consolidated Statements of Cash Flows, concluded
First National Lincoln Corporation and Subsidiary
- ----------------------------------------------------------------------------
Years ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in demand deposits,
savings, and money market accounts 12,038,000 16,714,000 1,526,000
Net increase (decrease) in
certificates of deposit (8,383,000) 15,209,000 12,678,000
Net increase (decrease) in
other borrowings 50,588,000 (14,577,000) 17,889,000
Purchase of Treasury stock (2,104,000) (343,000) (48,000)
Proceeds from sale of Treasury stock 127,000 128,000 49,000
Proceeds from stock issuance - 90,000 127,000
Dividends paid (1,244,000) (892,000) (654,000)
----------- ----------- -----------
Net cash provided by
financing activities 51,022,000 16,329,000 31,567,000
----------- ----------- -----------
Net increase (decrease) in
cash and cash equivalents 1,883,000 655,000 (340,000)
Cash and cash equivalents at
beginning of year 6,338,000 5,683,000 6,023,000
----------- ----------- -----------
Cash and cash equivalents at
end of year $ 8,221,000 $46,338,000 $05,683,000
----------- ----------- -----------
- ----------------------------------------------------------------------------
Interest paid $11,591,000 $10,445,000 $ 9,488,000
Income taxes paid 1,949,000 1,809,000 1,773,000
Non-cash transactions:
Loans transferred to
other real estate owned (340,000) (155,000) (50,000)
Change in unrealized gain (loss) on
available for sale securities (2,095,000) (45,000) 120,000
- ----------------------------------------------------------------------------
The accompanying footnotes are an integral part of these consolidated financial
statements
Page 40
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 consist 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
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
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, The 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
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.
Loan Servicing
Servicing rights are recognized when rights are acquired through sale of loans.
Capitalized servicing rights are reported in other assets and are amortized
into non-interest income in proportion to, and over the period of, the
estimated future net servicing income of the underlying financial assets.
Servicing rights are evaluated for impairment based upon the fair value of the
rights as compared to amortized cost. Impairment is determined by stratifying
rights by predominant characteristics, such as interest rates and terms.
Impairment is recognized through a valuation allowance for an individual
stratum, to the extent that fair value is less than the capitalized amount for
the stratum.
Page 43
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
Effect of New Financial Accounting Standards
During 1999, the Bank implemented Statement of Financial Accounting Standards
(SFAS) 125 related to the servicing of financial assets. In 1999, mortgage
servicing rights of $360,000 were capitalized, and amortization for the year
totaled $85,000. After deducting for a valuation allowance of $72,000, at
December 31, 1999, mortgage servicing rights had a fair value of $203,000,
which is included in other assets. At December 31, 1999 and 1999, the Bank
serviced loans for others totaling $35,546,000 and $30,545,000, respectively.
In 1999, the Financial Accounting Standards Board (FASB) issued SFAS 134
"Accounting for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise," SFAS 135
"Rescission of FASB Statement No. 75 and Technical Corrections", and SFAS 137
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of
the Effective Date of SFAS 133." SFAS 134 and 135 have no effect on the
financial condition and results of operations of the Company.
SFAS 133, which established accounting and reporting standards for
derivative instruments and for hedging activity, was amended by SFAS 137. SFAS
137 defers the effective date of SFAS 133 to fiscal years beginning after June
15, 2000. The Bank does not hold any derivative instruments and Management does
not expect to enter into derivative transactions in the near future. Should the
Bank enter into derivative transactions, SFAS 137 will be followed when
effective.
Note 2. Cash and Due from Banks
At December 31, 1999 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, 1999 and 1998:
- -----------------------------------------------------------------------------
December 31, 1999 Amortized Unrealized Unrealized Fair Value
Cost Gains Losses (Estimated)
- -----------------------------------------------------------------------------
Securities available for sale:
U.S. Treasury and agency $13,093,000 8,000 (946,000) 12,155,000
Mortgage-backed securities 4,523,000 46,000 (217,000) 4,352,000
State and political
subdivisions 7,067,000 - (531,000) 6,536,000
Other securities 19,407,000 - (359,000) 19,048,000
----------- ---------- ---------- ----------
$44,090,000 54,000 (2,053,000) 42,091,000
=========== ========== ========== ==========
Securities to be held to maturity:
U.S. Treasury and agency $27,860,000 304,000 (2,203,000) 25,961,000
Mortgage-backed securities 13,485,000 16,000 (386,000) 13,115,000
State and political
subdivisions 4,560,000 34,000 (92,000) 4,502,000
Other securities 3,000 - - 3,000
----------- ---------- ---------- ----------
$45,908,000 354,000 (2,681,000) 43,581,000
=========== ========== ========== ==========
- -----------------------------------------------------------------------------
Page 44
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
- -----------------------------------------------------------------------------
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
=========== ========== ========== ==========
- -----------------------------------------------------------------------------
The contractual maturities of investment securities at December 31, 1999
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.
- -----------------------------------------------------------------------------
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 $ - - 2,646,000 2,633,000
Due in 1 to 5 years 4,852,000 4,808,000 703,000 693,000
Due in 5 to 10 years 12,876,000 12,279,000 540,000 548,000
Due after 10 years 19,612,000 18,359,000 42,019,000 39,707,000
Equity securities 6,750,000 6,645,000 - -
----------- ---------- ---------- ----------
$44,090,000 42,091,000 45,908,000 43,581,000
=========== ========== ========== ==========
- -----------------------------------------------------------------------------
At December 31, 1999 securities carried at $31,066,000, with a market
value of $29,465,000, were pledged to secure borrowings from the Federal
Reserve Bank, public deposits, and for other purposes as required by law.
Gains and losses on the sale of securities available for sale are computed
by subtracting the amortized cost at the time of sale from the security's
selling price, net of accrued interest to be received. Information regarding
the sales of securities available for sale is summarized below:
Page 45
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
- -----------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------
Proceeds from sales $ 100,000 5,567,000 -
Gross gains - 5,000 3,000
Gross losses - (26,000) -
---------- ---------- ----------
Net gain (loss) - (21,000) 3,000
========== ========== ==========
Related income taxes $ - (6,000) 1,000
- -----------------------------------------------------------------------------
The realized gain on securities in 1997 was the result of a security which
was called at par value by the issuer.
Note 4. Loans
The following table shows the composition of the Company's loan portfolio as of
December 31, 1999 and 1998:
- -----------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------
Real estate loans
Residential $ 121,599,000 105,877,000
Commercial 30,305,000 25,585,000
Commercial and industrial loans 41,970,000 38,718,000
State and municipal loans 7,764,000 7,654,000
Consumer loans 29,227,000 27,993,000
Residential construction loans 1,661,000 3,397,000
------------- ------------
Total loans $ 232,526,000 209,224,000
============= ============
- -----------------------------------------------------------------------------
Loan balances are stated net of deferred loan fees of $267,000 in 1999 and
$50,000 in 1998.
At December 31, 1999 and 1998, loans on non-accrual status totaled
$681,000 and $716,000, respectively. Interest income which would have been
recognized on these loans, if interest had been accrued, was $64,000 for 1999,
$51,000 for 1998 and $50,000 for 1997. Loans past due greater than 90 days
which are accruing interest totaled $589,000 at December 31, 1999 and $548,000
at December 31, 1998. 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, 1999, 1998 and 1997 were as follows:
Page 46
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
- -----------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------
Balance at beginning of year $ 1,822,000 1,800,000 1,906,000
========== ========== ==========
Provision charged to operating expenses 645,000 400,000 103,000
2,467,000 2,200,000 2,009,000
Loans charged off (543,000) (452,000) (337,000)
Recoveries on loans 111,000 74,000 128,000
---------- ---------- ----------
Net loans charged off (432,000) (378,000) (209,000)
---------- ---------- ----------
Balance at end of year $ 2,035,000 1,822,000 1,800,000
========== ========== ==========
- -----------------------------------------------------------------------------
Information regarding impaired loans is as follows:
- -----------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------
Average investment in impaired loans $ 536,000 324,000 361,000
========== ========== ==========
Interest income recognized on
impaired loans, including cash basis 51,000 - -
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------
Balance of impaired loans $ 266,000 302,000
Less portion for which no
allowance for loan losses is allocated (24,000) (39,000)
------------- ------------
Portion of impaired loan balance
for which an allowance
for loan losses is allocated 242,000 263,000
============= ============
Portion of allowance for loan losses
allocated to the impaired loan balance $ 98,000 145,000
- -----------------------------------------------------------------------------
Loans to directors, officers and employees totaled $7,201,000 at December
31, 1999 and $7,637,000 at December 31, 1998. A summary of loans to directors
and executive officers, which in the aggregate exceed $60,000, is as follows:
- -----------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------
Balance at beginning of year $ 3,779,000 2,855,000
New loans 1,957,000 2,365,000
Repayments (2,208,000) (1,218,000)
------------- ------------
Balance at end of year $ 3,528,000 4,002,000
============= ============
- -----------------------------------------------------------------------------
Page 47
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:
- -----------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------
Land $ 0,903,000 903,000
Land improvements 333,000 333,000
Bank buildings 4,301,000 4,300,000
Equipment 5,000,000 4,682,000
------------- ------------
10,537,000 10,218,000
Less accumulated depreciation 5,019,000 4,352,000
------------- ------------
$ 5,518,000 5,866,000
============= ============
- -----------------------------------------------------------------------------
Note 6. Other Real Estate Owned
The following summarizes other real estate owned:
- -----------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------
Real estate acquired in settlement of loans $ 372,000 339,000
Less: allowance for losses (36,000) (36,000)
------------- ------------
Other real estate owned, net $ 336,000 303,000
============= ============
- -----------------------------------------------------------------------------
Changes in the allowance for each of the three years ended December 31
were as follows:
- -----------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------
Beginning balance $ 36,000 24,000 31,000
Losses charged to allowance (20,000) (4,000) (21,000)
Provision charged to income 20,000 16,000 14,000
---------- ---------- ----------
Ending balance $ 36,000 36,000 24,000
========== ========== ==========
- -----------------------------------------------------------------------------
Page 48
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:
- -----------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------
Federal income tax:
Current $2,034,000 1,703,000 1,655,000
Deferred (235,000) (58,000) 44,000
---------- ---------- ----------
1,799,000 1,645,000 1,699,000
State income tax 73,000 62,000 77,000
---------- ---------- ----------
$1,872,000 1,707,000 1,776,000
========== ========== ==========
- -----------------------------------------------------------------------------
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:
- -----------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------
Expected tax expense $2,150,000 1,944,000 1,931,000
Non-taxable income (349,000) (256,000) (161,000)
State income taxes 48,000 41,000 51,000
Qualified housing investment tax credit (31,000) (31,000) (38,000)
Other 54,000 9,000 (7,000)
---------- ---------- ----------
$1,872,000 1,707,000 1,776,000
========== ========== ==========
- -----------------------------------------------------------------------------
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:
- -----------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------
Allowance for loan losses and OREO $ 486,000 490,000
Deferred loan fees 91,000 (24,000)
Non-accrual loan interest - 9,000
Accrued pension and post-retirement 139,000 100,000
Depreciation (82,000) (82,000)
Unrealized (gain) loss on
securities available for sale 679,000 (32,000)
Mortgage servicing rights 69,000 -
Other assets 93,000 41,000
Other liabilities (62,000) (36,000)
------------- ------------
Net deferred income tax asset $1,413,000 466,000
============= ============
- -----------------------------------------------------------------------------
Page 49
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, 1999 and 1998 are as
follows:
- -----------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------
Asset $ 1,557,000 640,000
============= ============
Liability $ 144,000 174,000
============= ============
- -----------------------------------------------------------------------------
No valuation allowance is deemed necessary for the deferred tax asset.
Note 8. Certificates of Deposit
At December 31, 1999, the scheduled maturities of certificates of deposit are
as follows:
- ---------------------------------
2000 $ 80,200,000
2001 8,214,000
2002 3,141,000
2003 1,152,000
2004 335,000
--------------
Total $ 93,042,000
- ---------------------------------
Interest on certificates of deposit of $100,000 or more was $1,411,000,
$1,319,000 and $850,000 in 1999, 1998 and 1997, 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,
1999 and 1998; qualifying first mortgage loans, which were valued at
$118,268,000 and $105,507,000 in 1999 and 1998, respectively; U.S. Government
and Agency securities not pledged to others, which were valued at $30,677,000
in 1999 and $22,339,000 in 1998; and funds on deposit with FHLB, which were
$1,000 in both 1999 and 1998.
As of December 31, 1999, the Bank's total FHLB borrowing capacity was
$116,310,000, of which $26,601,000 was unused and available for additional
borrowings. All FHLB advances as of December 31, 1999 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
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
Under the Treasury Tax & Loan Note program, the Bank accumulates tax
deposits made by customers and is eligible to receive Treasury Direct
investments up to an established maximum balance. Securities sold under
agreements to repurchase include U.S. Treasury and Agency securities with an
aggregate amortized cost of $5,034,000 and $7,876,000 at December 31, 1999 and
1998, respectively, and an aggregate fair value of $4,836,000 and $7,822,000 at
December 31, 1999 and 1998, respectively. Borrowed funds at December 31, 1999
and 1998 have the following range of interest rates and maturity dates:
- -----------------------------------------------------------------------------
December 31, 1999
- -----------------------------------------------------------------------------
Federal Home Loan Bank Advances
Maturities within one year 4.90%-6.38% $ 77,155,000
Maturities within two years 5.05%-5.79% 7,554,000
Maturities within three years - -
Maturities within four years - -
Maturities within five years - -
Maturities over five years 5.27% 5,000,000
------------- ------------
89,709,000
------------- ------------
Treasury Tax & Loan Notes
Rate in effect at 12/31/99 was 5.25% variable 2,850,000
Repurchase agreements
Municipal and commercial customers 4.16%-5.35% 12,489,000
------------- ------------
$105,048,000
============= ============
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
December 31, 1998
- -----------------------------------------------------------------------------
Federal Home Loan Bank Advances
Maturities within one year 5.13%-5.53% $ 20,463,000
Maturities over one year 5.53% 24,970,000
------------- ------------
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
------------- ------------
$ 54,460,000
============= ============
- -----------------------------------------------------------------------------
Page 51
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
Note 10. Employee Benefit Plans
401(k) Plan
The Bank 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% of
each eligible employee's compensation in 1999, 1998 and 1997.
The expense related to the 401(k) plan was $165,000, $158,000, and
$141,000 in 1999, 1998, and 1997, respectively.
Pension Plans
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 $115,000 in 1999, $84,000 in 1998,
and $36,000 in 1997. As of December 31, 1999 and 1998, the accrued liability of
this plan was $219,000 and $109,000, 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.
The following tables sets forth the accumulated post-retirement benefit
obligation, funded status, and net periodic pension cost:
- -----------------------------------------------------------------------------
At December 31, 1999 1998
- -----------------------------------------------------------------------------
Change in benefit obligations:
Benefit obligation at beginning of year: $ 479,000 490,000
Service cost 8,000 9,000
Interest cost 32,000 32,000
Benefits paid (56,000) (52,000)
------------- ------------
Benefit obligation at end of year: $ 463,000 479,000
============= ============
Funded status:
Benefit obligation at end of year $ (463,000) (479,000)
Unrecognized net actuarial loss (69,000) (74,000)
Unamortized prior service cost (24,000) (32,000)
Unrecognized transition obligation 373,000 406,000
------------- ------------
Accrued benefit cost $ (183,000) (179,000)
============= ============
- -----------------------------------------------------------------------------
Page 52
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
- -----------------------------------------------------------------------------
Years ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------
Components of net periodic benefit cost:
Service cost $ 8,000 9,000 7,000
Interest cost 32,000 32,000 32,000
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 (4,000) (3,000) (6,000)
---------- ---------- ----------
Net periodic benefit cost $ 60,000 62,000 57,000
========== ========== ==========
Weighted average assumptions as of December 31:
Discount rate 7.0% 7.0% 7.0%
- -----------------------------------------------------------------------------
Note 11. Shareholders' Equity
At December 31, 1999, the total number of shares of common stock outstanding
was 2,370,047. 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.
The Company has reserved 180,000 shares of its common stock to be made
available to directors and employees who elect to participate in the stock
purchase or savings and investment plans. As of December 31, 1999, 92,389
shares had been issued pursuant to these plans, leaving 67,611 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 6,149 shares in
1999, 11,487 shares in 1998, and 15,512 in 1997. Stock sold to directors and
employees in 1999 included 6,149 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
or exceeds 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 1999, 1998 and 1997:
Page 53
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
- -----------------------------------------------------------------------------
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
Granted in 1999 20,000 19.06
------------- ------------
Balance at December 31, 1999 178,000 $ 9.21
============= ============
- -----------------------------------------------------------------------------
For all years, there were no options that were exercised, forfeited, or
expired. The range of prices for outstanding and exercisable stock options at
December 31, 1999 were as follows:
- -----------------------------------------------------------------------------
Weighted
Average Weighted
Remaining Average
Number Contractual Exercise
Outstanding Life Price
- -----------------------------------------------------------------------------
Options Outstanding
$6.38 to $10.00 120,000 5.3 $ 6.85
$10.01 to $15.00 32,000 7.1 10.25
$15.01 to $20.00 21,000 9.5 18.01
$20.00 to $22.50 5,000 9.0 22.50
---------- ---------- ----------
178,000 6.2 $ 9.21
========== ========== ==========
Options Exercisable
$6.38 to $10.00 58,000 5.2 $ 6.73
$10.01 to $15.00 12,000 7.1 10.25
$15.01 to $20.00 - - -
$20.00 to $22.50 - - -
---------- ---------- ----------
70,000 5.5 $ 7.34
========== ========== ==========
- -----------------------------------------------------------------------------
No compensation cost has been recognized for the Plan. The fair market
value of options granted was $93,000 in 1999, $45,000 in 1998, and $83,000 in
1997. The fair market value is estimated using the Black-Scholes option pricing
model and the following assumptions: quarterly dividends of $0.11 in 1999,
$0.07 in 1998, and $0.05 in 1997, risk-free interest rate of 5.25% in 1999,
5.25% in 1998, and 5.36% in 1997, volatility of 13.85% in 1999, 30.17% in
1998, and 10.69% in 1997 and an expected life of 10 years.
Page 54
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:
- -----------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------
Net income
As reported $4,451,000 4,011,000 3,906,000
Pro forma 4,390,000 3,981,000 3,851,000
Basic earnings per share
As reported 1.84 1.62 1.58
Pro forma 1.81 1.61 1.56
Diluted earnings per share
As reported 1.77 1.56 1.55
Pro forma 1.74 1.55 1.52
- -----------------------------------------------------------------------------
Note 12. Off-Balance Sheet Financial
Instruments and Concentrations of Credit Risk
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.
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. Loan commitments are recorded when funded. 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'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:
Page55
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
- -----------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------
Unused lines, collateralized
by residential real estate $ 9,759,000 8,561,000
Unused credit card lines 11,103,000 9,900,000
Other unused commitments 24,329,000 13,983,000
Standby letters of credit 151,000 241,000
Commitments to extend credit 6,409,000 12,434,000
- -----------------------------------------------------------------------------
The Company grants residential, commercial and consumer loans to customers
principally located in the Mid-Coast region 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, 1999, 1998 and
1997:
- -----------------------------------------------------------------------------
For the Year Ended December 31, 1999 Income Shares Per-Share
(Numerator) (Denominator) Amount
- -----------------------------------------------------------------------------
Income as reported $4,451,000
---------- ---------- ----------
Basic EPS: Income available to
common shareholders 4,451,000 2,424,385 $ 1.84
Effect of dilutive securities:
incentive stock options - 93,001
---------- ---------- ----------
Diluted EPS: income available to
common shareholders plus
assumed conversions $4,451,000 2,517,386 $ 1.77
========== ========== ==========
- -----------------------------------------------------------------------------
Page 56
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
- -----------------------------------------------------------------------------
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
========== ========== ==========
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
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
========== ========== ==========
- -----------------------------------------------------------------------------
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 number of shares has been calculated using the
treasury method, assuming that all granted options were exercisable at each
year end.
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
The carrying value of cash and due from banks approximates their relative fair
values.
Page 57
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
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.
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 for 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 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.
Page 58
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
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 Management's judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance-sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial instruments include the deferred tax asset, bank premises
and equipment, and other real estate owned. In addition, tax ramifications
related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in any
of the estimates.
The estimated fair values for the Company's financial instruments as of
December 31, 1999 and 1998 were as follows:
- -----------------------------------------------------------------------------
December 31, 1999 December 31, 1998
------------------------ ------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
- -----------------------------------------------------------------------------
Financial assets
Cash & due from banks $ 8,221,000 8,221,000 6,338,000 6,338,000
Securities available
for sale 42,091,000 42,091,000 18,858,000 18,858,000
Securities to be
held to maturity 45,908,000 43,581,000 40,484,000 40,702,000
Loans held for sale 127,000 127,000 209,000 209,000
Loans (net of allowance
for loan losses) 230,491,000 227,384,000 207,402,000 207,735,000
Accrued interest
receivable 2,335,000 2,335,000 1,770,000 1,770,000
Financial liabilities
Deposits 205,458,000 189,248,000 201,803,000 198,904,000
Borrowed funds 105,048,000 107,297,000 54,460,000 54,561,000
- -----------------------------------------------------------------------------
Page 59
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
Note 15. Other Operating Income and Expense
Other operating income includes the following items greater than 1% of
revenues.
- -----------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------
Merchant discount fees $ 553,000 359,000 249,000
Mortgage origination and servicing 412,000 247,000 -
- -----------------------------------------------------------------------------
Other operating expense includes the following items greater than 1% of
revenues.
- -----------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------
Stationery and supplies $ 162,000 269,000 167,000
Merchant interchange fees 407,000 235,000 160,000
Postage, freight and express 163,000 138,000 133,000
Exams & audits 179,000 118,000 112,000
- -----------------------------------------------------------------------------
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 2000 will be 2000 earnings plus retained
earnings of $4,178,000 from 1999 and 1998.
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.
Page 60
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued
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, 1999, that the Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 1999, 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 this notification that Management believes have
changed the institution's category.
The actual capital amounts and ratios for the Bank are presented in the
following table:
- -----------------------------------------------------------------------------
To be well-
capitalized
For under prompt
Capital corrective
adequacy action
Actual purposes provisions
- -----------------------------------------------------------------------------
As of December 31, 1999
Tier 2 capital to $30,972,000 16,912,000 21,140,000
risk-weighted assets 14.65% 8.00% 10.00%
Tier 1 capital to 28,936,000 8,456,000 12,684,000
risk-weighted assets 13.69% 4.00% 6.00%
Tier 1 capital to 28,936,000 13,292,000 16,616,000
average assets 8.71% 4.00% 5.00%
- -----------------------------------------------------------------------------
As of December 31, 1998
Tier 2 capital to $29,919,000 14,345,000 17,932,000
risk-weighted assets 16.29% 8.00% 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%
- -----------------------------------------------------------------------------
Page 61
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
For under prompt
Capital corrective
adequacy action
Actual purposes provisions
- -----------------------------------------------------------------------------
As of December 31, 1999
Tier 2 capital to $32,016,000 16,982,000 21,227,000
risk-weighted assets 15.08% 8.00% 10.00%
Tier 1 capital to 29,981,000 8,491,000 12,736,000
risk-weighted assets 14.12% 4.00% 6.00%
Tier 1 capital to 29,981,000 13,327,000 16,659,000
average assets 9.00% 4.00% 5.00%
- -----------------------------------------------------------------------------
As of December 31, 1998
Tier 2 capital to $30,535,000 14,428,000 18,035,000
risk-weighted assets 16.93% 8.00% 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%
- -----------------------------------------------------------------------------
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, 1999 1998
- -----------------------------------------------------------------------------
Assets
Cash $ 00,128 194
Dividends receivable - 500
Investments 652 578
Investment in subsidiary 27,722 27,446
Other assets 513 437
------------- ------------
$ 29,015 29,155
============= ============
Liabilities and shareholders' equity
Dividends payable $ 00,331 371
Other liabilities 22 8
Shareholders' equity 28,662 28,776
------------- ------------
$ 29,015 29,155
============= ============
- -----------------------------------------------------------------------------
Page 62
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, concluded
- -----------------------------------------------------------------------------
Statements of Income
Years ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------
Investment income $ 000,35 25 , 6
Other income - 48 48
---------- ---------- ----------
Total income 35 73 54
---------- ---------- ----------
Other expense 54 63 52
---------- ---------- ----------
Income (loss) before Bank earnings (19) 10 2
Equity in earnings of Bank:
Remitted 3,395 1,150 550
Unremitted 1,075 2,851 3,354
---------- ---------- ----------
Net income $ 4,451 4,011 3,906
========== ========== ==========
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Statements of Cash Flows
Years ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 4,451 4,011 3,906
Adjustments to reconcile net income
to net cash provided
by operating activities:
Increase in other assets (41) (5) (17)
Increase in other liabilities 20 - -
Unremitted earnings of Bank (1,075) (2,851) (3,354)
---------- ---------- ----------
Net cash provided by operating activities 3,355 1,155 535
---------- ---------- ----------
Cash flows from investment activities:
Proceeds from sales and maturities of
securities available for sale 100 - -
Purchases of investments (300) (316) (240)
---------- ---------- ----------
Net cash used by investing activities (200) (316) (240)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from sale of stock - 90 127
Purchase of Treasury stock (2,104) (343) (48)
Sale of Treasury stock 127 128 49
Dividends paid (1,244) (892) (654)
---------- ---------- ----------
Net cash used in financing activities (3,221) (1,017) (526)
---------- ---------- ----------
Net decrease in cash (66) (178) (231)
Cash, beginning of year 194 372 603
---------- ---------- ----------
Cash, end of year $ 0,128 194 372
========== ========== ==========
- -----------------------------------------------------------------------------
Page 63
ITEM 9. Changes in and/or Disagreements with Accountants
None.
Page 64
ITEM 10. Directors and Executive Officer of the Registrant
The Articles of Incorporation of the Company provide that the Board of
Directors shall consist of not fewer than five (5) nor more than twenty-five
(25) persons as determined by the Board prior to each Annual Meeting, with
Directors serving for "staggered terms" of three years. A resolution of the
Board of Directors adopted pursuant to the Company's Articles of Incorporation
has established the number of Directors at ten. Each person listed below has
consented to be named as a nominee, and the Board of Directors knows of no
reason why any of the nominees listed below may not be able to serve as a
Director if elected.
The following Directors' terms expire in 2000, and each will be nominated for a
re-election for a three-year term as Director expiring in 2003:
Daniel R. Daigneault has served as President, Chief Executive Officer and
as a member of the Board of Directors of both the Company and its wholly owned
subsidiary, The First National Bank of Damariscotta (the "Bank") since 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 Second Vice
President of the Maine Bankers Association.
Dana L. Dow has served as a Director of the Company and the Bank since
January 1999. Mr. Dow is President of Dow Furniture, Inc., located in
Waldoboro, Maine, which he purchased from his father in 1977. Prior to
purchasing Dow Furniture, Mr. Dow taught chemistry and physics at Medomak
Valley High School.
Robert B. Gregory has served as a Director of the Company and the Bank
since 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 1983 in Damariscotta, Maine.
The following Directors' terms will expire in 2001:
Bruce A. Bartlett has served as a Director of the Company since its
organization in 1985 and has served as a Director of the Bank since 1981. Mr.
Bartlett served as President and Chief Executive Officer of the Company and the
Bank until his retirement in 1994.
Malcolm E. Blanchard has served as a Director of the Company since its
organization in 1985, and has served as a Director of the Bank since 1976. Mr.
Blanchard has been actively involved, either as sole proprietor or as a
partner, in real estate development since 1970 and is now retired.
Stuart G. Smith has served as a Director of the Company and the Bank since
July 1997. A resident of Camden, he and his wife own and operate 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.
The following Directors' terms will expire in 2002:
Katherine M. Boyd has served as a Director of the Company and the Bank
since 1993. A resident of Boothbay Harbor, she owns the Boothbay Region
Greenhouses with her husband. Ms. Boyd serves on the Boothbay Region YMCA Camp
Committee and is Secretary for the local chapter of the American Field Service.
Ms. Boyd previously served as trustee of the YMCA, and past chairperson of the
YMCA Annual Fund Drive.
Carl S. Poole, Jr. has served as 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.
Page 65
David B. Soule, Jr. has served as a Director of the Company and the Bank
since June 1989. Mr. Soule has been practicing law in Wiscasset since 1971.
He served 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.
Bruce B. Tindal has served as a Director of the Company and the Bank since
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 of 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 and
the Boothbay Harbor Rotary Club.
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 of 1934 or that is subject to the
reporting requirements of Section 15(d) of the Securities Exchange Act of 1934,
or of 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 Company or the Bank:
- -------------------------------------------------------------------------------
Name & Age(1) Office & Position Period Served
- -------------------------------------------------------------------------------
Daniel R. Daigneault President & Chief Executive Officer 1994 to date
47 of the Company and of the Bank
F. Stephen Ward Treasurer of the Company, Senior Vice 1993 to date
46 President Finance and Investments
and Chief Financial Officer of the Bank
Donald C. Means Clerk of the Company, Senior Vice 1973 to date
62 President and Senior Loan Officer of the Bank
Walter F. Vietze Senior Vice President and Senior 1984 to date
58 Operations Officer of the Bank
Michael T. Martin Vice President and Credit 1993 to date
44 Administration Officer of the Bank
John T. Blamey Vice President and Banking Services 1994 to date
53 Officer of the Bank
Charles A. Wootton Vice President and Retail Services 2000 to date
43 Officer of the Bank
- -------------------------------------------------------------------------------
(1) As of December 31, 1999
Page 66
Daniel R. Daigneault has served as President, Chief Executive Officer and
as a member of the Board of Directors of both the Company and the Bank since
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. Mr. Ward has been employed by
the Bank since 1990 and served as Assistant Vice President and Marketing
Officer from 1990 to 1993. From 1978 to 1990 Mr. Ward was employed by Down
East Enterprises, Inc. 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 The First National Bank of Boston, a major New
England financial institution. While employed 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, Portland, Maine. His primary
responsibilities involved providing online banking services to correspondent
banks. Prior to 1979, Mr. Vietze was affiliated with BayBanks in
Massachusetts.
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.
John T. Blamey has been employed by the Bank since 1989. Mr. Blamey was
Strategic Plan Director in 1993-94 and added Sales Director to his
responsibilities as Vice President of Banking Services in 1996. Prior to
joining the Bank, Mr. Blamey retired from the U.S. Air Force as Lieutenant
Colonel. Mr. Blamey will retire from the Bank on April 1, 2000.
Charles A. Wootton joined the Bank in January 2000. From 1981 to 2000 Mr.
Wootton was employed by Camden National Bank, serving as branch manager,
commercial loan and business development officer. In 1996, Mr. Wootton became
Vice President responsible for branch 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.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires that the Company's directors,
executive officers, and any person holding more than ten percent of the
Company's Common Stock file with the SEC reports of ownership changes, and that
such individuals furnish the Company with copies of the reports.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons, the Company believes
that all of its executive officers and directors complied with all Section
16(a) filing requirements applicable to them in 1999.
Page 67
ITEM 11. Executive Compensation
The table below sets forth cash compensation paid to the President and
Chief Executive Officer during 1999, 1998, and 1997. No other Executive
Officers of the Bank received compensation in excess of $100,000 for the years
ended December 31, 1999, 1998, and 1997.
- -------------------------------------------------------------------------------
Name Annual Long-Term
and Compensation Compensation
Principal ---------------------------- ---------------------
Position Year Salary Bonus(1) Other # Options
- -------------------------------------------------------------------------------
Daniel R. Daigneault 1999 $ 164,300 $ 17,416 $ 9,600(2) 4,000
President and CEO 1998 $ 156,000 $ 14,040 $ 9,600(2) -0-
1997 $ 145,000 $ 13,514 $ 9,550 12,000
- -------------------------------------------------------------------------------
(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 1999 the
Company and the Bank contributed to the Bank's 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 limiting 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.
Executive Compensation Committee Report
The Compensation Committee consists of three outside members of the Board
of Directors. 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, 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. In 1999, total cash payout under this Stakeholder Performance
Compensation program was 10.60% 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
Page 68
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 1999 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. The
committee took into consideration the salary ranges as well as actual salaries
paid to Presidents and CEOs of similar banks in establishing the 1999 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 1999 was reflective of the
Company's overall financial performance in 1998, which, in the opinion of the
Compensation Committee, was considered very good. All 1998 goals set for
President Daigneault were met or exceeded, which included reaching certain
targets for asset growth, asset quality, and overall profitability. Taking
these various factors into consideration and in recognition of his performance,
the committee increased his base salary by $8,300 to $164,300.
President Daigneault's 1999 bonus compensation was 10.60% of base
compensation, paid in accordance with the Company's Stakeholder Performance
Compensation program for all employees, which was described previously.
Compensation Committee Members:
Robert B. Gregory
Malcolm E. Blanchard
Carl S. Poole, Jr.
Director Compensation
Each of the outside directors of the Bank, with the exception of the
Chairman of the Board, received 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 received an annual fee of
$15,000. Certain Board members were 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 $73,725 in 1999, but no fees are paid to Directors of the Company.
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.
The Company has two standing committees of the Board of Directors: Audit
and Options. The Bank has six standing committees of the Board of Directors:
Executive, Audit, Asset/Liability, Trust, Directors' Loan and Compensation.
Certain members of management also serve on some committees. All directors
attended at least 75% of Board meetings and meetings held by Committees of
which they were members, and the aggregate attendance of Board and Committee
meetings by all members of the Board of Directors in 1999 was in excess of 90%.
Page 68
Stock Option Plan
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 three outside
directors. During 1999, 1998 and 1997, stock options were granted under the
1995 Stock Option Plan, as set forth in the accompanying table.
1999 Option Committee Members:
Robert B. Gregory
Malcolm E. Blanchard
Carl S. Poole, Jr.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
During 1999, Directors Gregory, Blanchard, and Poole 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.
Page 70
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 1999:
- -------------------------------------------------------------------------------
Option Grants During the Year Ended December 31, 1999
- -------------------------------------------------------------------------------
% of Potential realizable
Number of options value at assumed rates
securities granted Exercise of stock appreciation
underlying in price for option term(1)
options fiscal per Expiration ---------------------
granted year Share(2) Date(3) 5% 10%
- -------------------------------------------------------------------------------
Daniel R. Daigneault 4,000 20.0% $18.50 12/30/09 $ 47,000 $118,000
All other employees 5,000 25.0% 22.50 02/07/09 71,000 179,000
All other employees 11,000 55.0% 17.70 12/30/09 122,000 311,000
- -------------------------------------------------------------------------------
All 20,000 100.0% $19.06 various $240,000 $608,000
- -------------------------------------------------------------------------------
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 exercisable and
unexercisable options held as of December 31, 1999:
- -------------------------------------------------------------------------------
Aggregated Option Exercises in 1999 and December 31, 1999 Option Values
- -------------------------------------------------------------------------------
Number of securities Value of unexercised
underlying unexercised in-the-money
Shares options at year end options at year end
acquired -------------------------- --------------------
on Value Exer- Unexer- Exer- Unexer-
exercise realized cisable cisable cisable cisable
- -------------------------------------------------------------------------------
Daniel R. Daigneault -0- -0- 36,000 52,000 $344,000 $416,000
All other employees -0- -0- 34,000 56,000 $280,000 $280,000
- -------------------------------------------------------------------------------
All optionees -0- -0- 70,000 108,000 $624,000 $696,000
- -------------------------------------------------------------------------------
Description of the Company's Benefit Plans
The Company has reserved 160,000 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, 1999, 92,389 shares had been issued pursuant to these plans,
leaving 67,611 shares available for future issuance. The issuance price is
based on the market price of the stock at issuance date.
All shares issued under the 401(k) savings and investment plans are issued
pursuant to an exemption from registration under the Securities Act of 1933, as
amended (the "Securities Act"), 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, were issued pursuant to exemptions from registration under Section
3(a)(11) and Rule 147 of the Securities Act. 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. 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 this 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 continuous service. 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 $80,000 in matching
contributions and $85,000 in profit-sharing contributions to this plan in 1999.
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, 1999, 46,575 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 defined as the closing price on the day the shares are
purchased. As of December 31, 1999, 45,814 shares of the Company's stock had
been purchased pursuant to the plan.
Page 72
The Bank provides all full-time employees with group life, health, and
long-term-disability insurance through the 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 $115,000 in 1999, $84,000 in 1998, and $36,000 in
1997. As of December 31, 1999 and 1998, the accrued liability of this plan was
$219,000 and $109,000, 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 designates the number of
options 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 or
exceed the fair market value of the shares on the date of the grant, and no
option is exercisable after the expiration of 10 years from the date it is
granted. The fair market value of the shares is determined by the Options
Committee as specified in the Option Plan. The optionee cannot transfer or
assign any option other than by will or in accordance with the laws of descent
and distribution, and the option may be exercised only by the employee during
the employee's lifetime. After an employee's death, options may be exercised
by the employee's estate or heirs up to one year following the date of death.
Code Section 422 limits option grants by providing that during the term of the
Option Plan, no grant may be made to any employee owning more than 10% of the
shares unless the exercise price is at least 110% of the underlying 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 incentive stock options which are first
exercisable in any calendar year may generally not exceed $100,000.
Page 73
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.
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.
- -------------------------------------------------------------------------------
Performance graph data 1994 1995 1996 1997 1998 1999
- -------------------------------------------------------------------------------
FNLC 100.00 134.80 171.24 234.47 389.65 290.07
NASD Bank 100.00 144.81 182.69 298.85 263.68 242.63
S&P 500 100.00 137.14 168.24 223.93 287.39 347.28
- -------------------------------------------------------------------------------
Page 74
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the number of shares of common stock of the
Company beneficially owned as of March 6, 2000 by (i) each person known by the
Company to own beneficially more than five percent of the Company's common
stock, (ii) each current director of the Company and nominee for a position on
the Board, (iii) the named executive officers, and (iv) all executive officers
and directors of the Company as a group. Except as otherwise indicated below,
each of the directors, executive officers and shareholders owning more than
five percent of the Company's stock has sole voting and investment power with
respect to all shares of stock beneficially owned as set forth opposite his or
her name.
Page 75
- -------------------------------------------------------------------------------
Owners of 5% or More(1)
- -------------------------------------------------------------------------------
Shares Percent
Owned Owned
- -------------------------------------------------------------------------------
Daniel P. & Edith I. Thompson 140,804 5.90%
HC 61 Box 039
New Harbor, ME 04545
- -------------------------------------------------------------------------------
Directors & Executive Officers
- -------------------------------------------------------------------------------
Name Position Term Shares Percent
Age Expires Owned Owned
- -------------------------------------------------------------------------------
Bruce A. Bartlett Director of the Bank and the Company; 2001 8,928 *
66 Chairman, Trust Committee
Malcolm E. Blanchard Director of the Bank and the Company; 2001 30,339 1.27%
65 Chairman, Executive Committee
Katherine M. Boyd Director of the Bank and the Company 2002 10,059 *
48
Daniel R. Daigneault President, Chief Executive Officer 2000 64,097(3) 2.68%
47 and Director of the Bank and the Company
Dana L. Dow Director of the Bank and the Company 2000 667 *
48
Robert B. Gregory Chairman of The Board of Directors 2000 13,537 *
46 of the Bank and the Company
Carl S. Poole, Jr. Director of the Bank and the Company; 2002 88,692 3.71%
54 Chairman, Asset/Liability Committee
Stuart G. Smith Director of the Bank and the Company; 2001 13,129 *
47 Chairman, Directors' Loan Committee
David B. Soule, Jr. Director of the Bank and the Company; 2002 6,890 *
54 Chairman, Audit Committees of the
Bank and the Company
Bruce B. Tindal Director of the Bank and the Company 2002 1,067 *
49
- -------------------------------------------------------------------------------
Total Ownership of all Directors and group 309,179(3)12.95%
Executive Officers as a
- -------------------------------------------------------------------------------
* Less than one percent of total outstanding shares
(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/she 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/she 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.
(2) As of December 31, 1999.
(3) Includes exercisable stock options.
Page 76
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 affiliates. 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, 1999 to the
Company's Directors, Executive Officers and their associates was $3,618,000,
which constituted 1.56% of the Bank's total loans outstanding at that date.
Page 77
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, 1999.
Page 78
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 23, 2000
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 23, 2000
F. Stephen Ward Treasurer
F. Stephen Ward (Principal Financial Officer,
Principal Accounting Officer)
March 23, 2000
Robert B. Gregory Director and
Robert B. Gregory Chairman of the Board
March 23, 2000
Bruce A. Bartlett Director
Bruce A. Bartlett March 23, 2000
Malcolm E. Blanchard Director
Malcolm E. Blanchard March 23, 2000
Katherine M. Boyd Director
Katherine M. Boyd March 23, 2000
Dana L. Dow Director
Dana L. Dow March 23, 2000
Carl S. Poole, Jr. Director
Carl S. Poole, Jr. March 23, 2000
Stuart G. Smith Director
Stuart G. Smith March 23, 2000
David B. Soule, Jr. Director
David B. Soule, Jr. March 23, 2000
Bruce A. Tindal Director
Bruce A. Tindal March 23, 2000
Page 79