FIRST NATIONAL LINCOLN CORP /ME/ - 10-K Annual Report

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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, 2002

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[ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K
or any amendment to this form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [X] No[ ]

State the aggregate market value of voting stock held by
non-affiliates of the Registrant as of March 1, 2003:
Common Stock, $.01 par value per share: $88,316,000

Indicate the number of shares outstanding of each of the registrant's classes
of common stock as of March 1, 2003:
Common Stock: 2,419,621 shares

TABLE OF CONTENTS

PART I
ITEM 1. Discussion of Business ........................................... 1
ITEM 2. Properties ....................................................... 5
ITEM 3. Legal Proceedings ................................................ 6
ITEM 4. Submission of Matters to a Vote of Security Holders .............. 7

PART II
ITEM 5. Market for Registrant's Common Equity ............................ 8
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 ....... 29
ITEM 8. Financial Statements and Supplementary Data ...................... 32
ITEM 9. Changes in and/or Disagreements with Accountants ................. 68

PART III
ITEM 10. Directors and Executive Officers of the Registrant ............... 69
ITEM 11. Executive Compensation ........................................... 73
ITEM 12. Security Ownership of Certain Beneficial Owners and Management ... 81
ITEM 13. Certain Relationships and Related Transactions ................... 83

PART IV
ITEM 14. Controls and Procedures .......................................... 84
ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8.K. 85

Signatures ................................................................ 86
Certifications ............................................................ 87

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, 2002, the
Company's securities consisted of one class of common stock, $.01 par value per
share, of which there were 2,414,693 shares outstanding and held of record by
approximately 700 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 seven offices in Mid-Coast Maine, including its principal
office located on Main Street, Damariscotta, Lincoln County, Maine and six
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; Elm Street, Camden, Maine; and Route 1, Rockland, 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 and commercial and mortgage loans. 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.
In addition to providing traditional banking services, the Company
provides investment management and private banking services through Pemaquid
Advisors, which is an operating division of the Bank. In 2000, the Bank
separated its Trust and Investment Services Department into a separate division
with a different brand identity. Under the name of Pemaquid Advisors, the
division is focused on taking advantage of opportunities created as the larger
banks have altered their personal service commitment to clients not meeting
established account criteria. Pemaquid Advisors is able to offer a
comprehensive array of private banking, financial planning, investment
management and trust 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 investment and trust
professionals with extensive experience.
In June, 2001, the Bank acquired White Pine Asset Management of Portland,
Maine, which then became part of Pemaquid Advisors. Pemaquid Advisors operates
from its offices on Bristol Road in Damariscotta, Maine and Monument Square,
Portland, Maine.
As of December 31, 2002, the Company employed 134 persons, with 131 full-
time equivalent employees.
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

Page 1
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 ("GLBA"). 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 views 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.
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 investment and
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 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.

Customer Information Security.

The FDIC and other bank regulatory agencies have published final
guidelines establishing standards for safeguarding nonpublic personal
information about customers that implement provisions of the GLBA (the
"Guidelines"). Among other things, the Guidelines require each financial
institution, under the supervision and ongoing oversight of its Board of
Directors or an appropriate committee thereof, to develop, implement and
maintain a comprehensive written information security program designed to
ensure the security and confidentiality of customer information, to protect

Page 2
against any anticipated threats or hazards to the security or integrity of such
information, and to protect against unauthorized access to or use of such
information that could result in substantial harm or inconvenience to any
customer.

Privacy.

The FDIC and other regulatory agencies have published final privacy rules
pursuant to provisions of the GLBA ("Privacy Rules"). The Privacy Rules, which
govern the treatment of nonpublic personal information about consumers by
financial institutions, require a financial institution to provide notice to
customers (and other consumers in some circumstances) about its privacy
policies and practices, describe the conditions under which a financial
institution may disclose nonpublic personal information to nonaffiliated third
parties, and provide a method for consumers to prevent a financial institution
from disclosing that information to most nonaffiliated third parties by
"opting-out" of that disclosure, subject to certain exceptions.

USA Patriot Act.

The USA Patriot Act of 2001 (the "Patriot Act"), designed to deny
terrorists and others the ability to obtain access to the United States
financial system, has significant implications for depository institutions,
broker-dealers and other businesses involved in the transfer of money. The
Patriot Act requires financial institutions to implement additional policies
and procedures with respect to money laundering, suspicious activities,
currency transaction reporting and due diligence on customers. Implementation
of the Patriot Act's requirements will occur in stages, as rules regarding its
provisions are finalized by government agencies.

Sarbanes-Oxley Act

On July 30, 2002, President George W. Bush signed into law the Sarbanes-
Oxley Act of 2002. The Sarbanes-Oxley Act implements a broad range of
corporate governance and accounting measures for public companies designed to
promote honesty and transparency in corporate America and better protect
investors from the type of corporate wrongdoing that occurred in Enron,
WorldCom and similar companies. The Sarbanes-Oxley Act's principal legislation
includes:

* the creation of an independent accounting oversight board;
* auditor independence provisions which restrict non-audit services that
accountants may provide to their audit clients;
* additional corporate governance and responsibility measures, including the
requirement that the chief executive officer and chief financial officer
certify financial statements and the expansion of powers of audit
committees;
* expanded disclosure requirements, including accelerated reporting of stock
transactions by insiders;
* mandatory disclosure by analysts of potential conflicts of interest; and
* a range of enhanced penalties for fraud and other violations.

We do not believe that the Sarbanes-Oxley Act will have a material adverse
affect upon our operations in the near term.

Page 3
Supervision and Regulation

The Company is a financial holding company within the meaning of the Bank
Holding Company Act of 1956, as amended (the "Act"), and section 225.82 of
Regulation Y issued by the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board"), and is required to file with 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
financial 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 financial 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 17 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 Financial Institutions.

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, 2002, 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 4
ITEM 2. Properties

The principal office of the Bank is located in Damariscotta, Maine, and
serves the people of Damariscotta, 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 2002, the Bank purchased additional property in Boothbay
Harbor for use as an auxiliary office for the branch and for Pemaquid Advisors.
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.
In September of 2001, the Bank opened its Rockland office at the corner of
Route One and Broadway in Rockland Maine. Located in Knox County between the
Waldoboro and Rockport offices, the Rockland office serves the towns of
Rockland, Thomaston, Owl's Head and St. George.
An operations center is located in the block adjacent 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.
In 2001, the Bank purchased property at 9 Bristol Road in Damariscotta,
Maine and moved its Pemaquid Advisors division into the facility. The division
also occupies leased office space at 2 Monument Square in Portland, Maine, from
which it provides its services to the Portland community.
The Bank owns all of its facilities except for the Camden and Portland
locations, for which the Bank entered into long-term leases. 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 5
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 6
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 2002.

Page 7
ITEM 5. Market for Registrant's Common Equity

The common stock of First National Lincoln Corporation (ticker symbol FNLC)
trades on the Nasdaq National Market System. The following table reflects the
high and low prices of actual sales in each quarter of 2002 and 2001. Such
quotations do not reflect retail mark-ups, mark-downs or brokers' commissions.

- ----------------------------------------------------
2002 2001
- ----------------------------------------------------
High Low High Low
1st Quarter 28.20 21.75 15.75 15.00
2nd Quarter 32.00 27.35 18.50 15.42
3rd Quarter 31.00 25.60 21.75 17.50
4th Quarter 34.50 27.00 22.25 19.50
- ----------------------------------------------------

The last known transaction of the Company's stock during 2002 was on
December 31 at $31.48 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.
The table below sets forth the cash dividends declared in the last two
fiscal years:

- -------------------------------------------------------------------
Date Declared Amount Per Share Date Payable
- -------------------------------------------------------------------
March 13, 2001 $0.1900 April 27, 2001
June 14, 2001 $0.2000 July 31, 2001
September 20, 2001 $0.2100 October 31, 2001
December 20, 2001 $0.2200 January 31, 2002
March 27, 2002 $0.2300 April 30, 2002
June 20, 2002 $0.2400 July 31, 2002
September 19, 2002 $0.2500 October 31, 2002
December 19, 2002 $0.2600 January 31, 2003
- -------------------------------------------------------------------

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, 2002, 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 11.75% and 12.88%, respectively, as of December 31, 2002.

Page 8
ITEM 6. Selected Financial Data

- -------------------------------------------------------------------------------
Dollars in thousands, except for per share amounts
Years ended December 31, 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------
Summary of Operations
Operating Income $ 34,258 33,960 30,890 26,348 23,621
Operating Expense 25,072 26,239 24,390 20,025 17,903
Net Interest Income 17,103 15,031 12,770 11,949 10,844
Provision for Loan Losses 1,323 1,230 700 645 400
Net Income 6,507 5,493 4,607 4,451 4,011

Per Common Share Data
Net Income
Basic 2.71 2.30 1.93 1.84 1.62
Diluted 2.64 2.24 1.89 1.77 1.56
Cash Dividends (Declared) 0.98 0.82 0.66 0.50 0.39
Book Value 17.68 15.61 13.94 12.09 11.64
Market Value 31.48 22.10 15.50 16.25 22.50

Financial Ratios
Return on Average Equity 16.34% 15.51% 15.15% 15.67% 14.86%
Return on Average Assets 1.39 1.33 1.27 1.39 1.44
Average Equity to Average Assets 8.49 8.55 8.36 8.88 9.70
Net Interest Margin (Tax-Equivalent) 4.00 3.99 3.88 4.12 4.28
Dividend Payout Ratio (Declared) 36.16 35.65 34.20 27.17 24.06
Allowance for Loan Losses/Total Loans 1.11 1.00 0.87 0.88 0.87
Non-Performing Loans to Total Loans 0.32 0.22 0.89 0.29 0.34
Non-Performing Assets to Total Assets 0.27 0.20 0.69 0.30 0.36
Efficiency Ratio 50.49 50.60 52.06 50.93 51.75

At Year End
Total Assets $494,068 434,466 393,216 341,287 286,806
Total Loans 332,074 301,304 264,929 232,526 209,224
Total Investment Securities 122,073 108,186 105,220 87,999 59,342
Total Deposits 334,224 262,689 254,566 205,458 201,803
Total Shareholders' Equity 42,695 37,334 33,160 28,662 28,776
- -------------------------------------------------------------------------------
High Low
Market price per common share of stock during 2002 $ 34.50 21.75
- -------------------------------------------------------------------------------

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ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

General

First National Lincoln Corporation (the "Company") and its subsidiary, The
First National Bank of Damariscotta (the "Bank"), posted record earnings in
2002, the result of continued positive growth in both assets and income seen
during the past ten years. During this period, the Company focused on cost
reduction and increased efficiency prior to 1997 to increase its profitability.
In the subsequent years, however, the Company's strategy has changed to
controlled, profitable, "organic" growth.
The value of this strategy can be seen in the Company's expansion into
Knox County during the past five years, where offices were opened in Rockport
and Camden in 1997 and 1998, respectively, and in Rockland in 2001. These
offices have far exceeded their initial goals and have provided the opportunity
for substantial new market growth. The Company's expansion has not come at the
expense of profitability, however. Since the Bank has traditionally operated on
a lower net interest margin than its peers, it operates with lower expenses
than its peers, and this is reflected in its efficiency ratio, which is
consistently better than its peers, on average. It can also be seen in the
Company's return on average assets and return on average equity, which were
1.39% and 16.34%, respectively, in 2002, and again significantly higher than
those of its peer group, on average.
The Company experienced strong asset growth in 2002, with the loan
portfolio increasing by $30.8 million or 10.2%, and the investment portfolio
increasing $13.9 million or 12.8%. The combined effect saw total assets
increasing by 13.7% or $59.6 million from $434.5 million to $494.1 million.
Asset growth was funded with deposits, which increased $71.5 million, or 27.2%.
Deposit growth also funded a net paydown in borrowed funds, which decreased
$18.0 million or 13.7% in 2002. The Company saw very good growth in low-cost
core deposits during the year and, coupled with favorable pricing of
borrowings, allowed approximately $12.4 million of high-cost certificates of
deposit to mature without renewal by year-end. As a result of 2002's balance
sheet growth and a slightly wider interest margin, the Company increased net
interest income by $2.1 million or 13.8% to $17.1 million.
Management believes the Bank has limited exposure to changes in interest
rates, as discussed in "Interest Rate Risk Management" elsewhere in
Management's Discussion.

Critical Accounting Policies

Management's discussion and analysis of the Company's financial condition is
based on the consolidated financial statements which are prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of such financial statements requires Management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosure of contingent assets and
liabilities. On an ongoing basis, Management evaluates its estimates, including
those related to the allowance for loan losses. Management bases its estimates
on historical experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets that are not readily
apparent from other sources. Actual results could differ from the amount
derived from Management's estimates and assumptions under different assumptions
or conditions.

Page 10
Management believes the allowance for loan losses is a critical accounting
policy that requires the most significant estimates and assumptions used in the
preparation of the consolidated financial statements. The allowance for loan
losses is based on Management's evaluation of the level of the allowance
required in relation to the estimated loss exposure in the loan portfolio.
Management believes the allowance for loan losses is a significant estimate and
therefore regularly evaluates it for adequacy by taking into consideration
factors such as prior loan loss experience, the character and size of the loan
portfolio, business and economic conditions and Management's estimation of
potential losses. The use of different estimates or assumptions could produce
different provisions for loan losses.

Financial Condition and Results of Operations

Net income for the year ended December 31, 2002 was $6,507,000 - the highest
annual net income ever recorded by the Company. This represents an 18.5% or
$1,014,000 increase from net income of $5,493,000 that was posted in 2001 and
is $1,900,000, or 41.2%, above 2000 net income of $4,607,000. Return on average
assets in 2002 was 1.39%, up from 1.33% in 2001 and 1.27% in 2000. The
increases are attributable to the Company's strong asset growth accompanied by
wider interest margins due to recent drops in interest rates and lower funding
costs. Return on average equity was 16.34% in 2002, compared to 15.51% in 2001
and 15.15% in 2000. The increase in 2002 was primarily due to the record
earnings resulting from higher net interest income, caused by the factors noted
above.
Non-interest income increased by 27.0% from $3,898,000 in 2001 to
$4,951,000 in 2002. The increase was attributable to increased income on
mortgage origination and servicing due to higher volumes of loan sales in a
favorable interest rate climate, increased document preparation fees on loans
and a one-time gain of $219,000 resulting from the sale of the Bank's credit
card portfolio, net of taxes and related expenses. Non-interest income
increased 31.4% in 2001 to $3,898,000 from 2000's level of $2,967,000. The
increase was attributable to increased income on mortgage origination and
servicing due to higher volumes of loan sales in a favorable interest rate
climate, newly instituted document preparation fees on loans and increased
merchant credit card volume.
Non-interest expense increased 15.7% to $11.5 million in 2002 from $10.0
million in 2001, which was attributable to increased employee expenses for
staff expansion and increased equipment and software expense. These were
necessary to maintain the high level of service we are committed to delivering
to our customer base. The Company's efficiency ratio - a benchmark measure of
the amount spent to generate a dollar of income - was 0.50 in 2002 compared to
0.59 for its peer group, on average. The efficiency ratio is calculated by
dividing the Company's operating expenses (which excludes the provision for
loan losses) by the total of net interest income on a tax-equivalent basis
before provision for loan losses and other operating income (which excludes
securities gains). The Company's efficiency ratio was 0.51 in 2001 compared to
0.62 for its peer group average. In 2001, non-interest expense increased 16.9%
to $10.0 million from $8.5 million in 2000, attributable primarily to increased
costs for merchant credit card services, increased equipment and software
expenses and employee expenses.

Page 11

Average shareholders' equity to average assets was 8.49% in 2002, compared
to 8.55% in 2001, and 8.36% in 2000. The 2002 ratio declined due to strong
asset growth and the Company repurchasing shares of its own stock. The 2001
increase was the result of strong earnings. Earnings per share for the year
ended December 31, 2002 increased 17.8% to $2.71, compared to $2.30 in 2001,
and $1.93 in 2000. Earnings per share on a fully diluted basis increased 17.9%
for the year ended December 31, 2002, to $2.64, compared to $2.24 in 2001, and
$1.89 in 2000. Book value per share was $17.68 on December 31, 2002, up from
$15.61 on December 31, 2001 and $13.94 on December 31, 2000.
The Bank's loan delinquency ratio decreased in 2002, and was 1.04% on
December 31, 2002, versus 1.45% on December 31, 2001 and 2.26% on December 31,
2000. In Management's opinion, there has been no pattern or trend in loan
delinquencies which is of concern. The levels seen in 2002 and 2001 are related
to the Bank's ability to control loan quality and resolve delinquency issues
quickly. Delinquencies in 2000 were isolated circumstances involving a small
number of borrowers.

Average Rates and Net Interest Yield

The following table shows, for the years ended December 31, 2002, 2001 and
2000, 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 35% rate. Unrecognized interest on non-accrual
loans is not included in the amount presented, but the average balance of non-
accrual loans is included in the denominator when calculating yields.

- -------------------------------------------------------------------------------
Years ended December 31, 2002 2001 2000
--------------- -------------- ---------------
Amount Avg Amount Avg Amount Avg
of Yield/ of Yield/ of Yield/
Dollars in thousands interest Rate interest Rate interest Rate
- -------------------------------------------------------------------------------
Interest-earning assets
Interest-bearing deposits $ 62 1.34% 77 3.94% 25 7.41%
Investments 7,685 6.44% 7,537 6.82% 6,660 7.12%
Loans held for sale 151 7.46% 33 7.05% 0 0%
Loans 22,143 6.93% 23,138 8.21% 21,841 8.71%
------ ----- ------ ----- ------ -----
Total interest-earning
assets $30,041 6.74% 30,785 7.79% 28,526 8.28%
------ ----- ------ ----- ------ -----
Interest-bearing liabilities
Deposits $ 7,702 2.76% 10,006 4.07% 8,626 4.23%
Other borrowings 4,502 3.68% 5,025 4.59% 6,528 6.10%
------ ----- ----- ----- ----- -----
Total interest-bearing
liabilities $12,204 3.04% 15,031 4.23% 15,154 4.88%
------ ----- ------ ----- ------ -----
Net interest income $17,837 15,754 13,372
====== ====== ======
Interest rate spread 3.70% 3.56% 3.40%
Net interest margin 4.00% 3.99% 3.88%
- -------------------------------------------------------------------------------

Page 12
Average Daily Balance Sheets

The following table shows the Company's average daily balance sheets for the
years ended December 31, 2002, 2001 and 2000.
- -------------------------------------------------------------------------------
Dollars in thousands
Years ended December 31, 2002 2001 2000
- -------------------------------------------------------------------------------
Cash and due from banks $ 9,419 5,997 6,943
Interest-bearing deposits 4,640 1,954 343
------- ------ -------
Investments
U.S. Treasury securities & government agencies 60,480 53,094 57,113
Obligations of states & political subdivisions 21,774 18,514 13,282
Other securities 37,045 38,992 23,129
------- ------- -------
Total investments 119,299 110,600 93,524
------- ------- -------
Loans held for sale 2,025 466 -
------- ------- -------
Loans
Commercial 112,483 95,401 80,167
Consumer 29,898 31,645 30,195
State and municipal 8,377 9,059 9,180
Real estate 168,872 145,783 131,231
------- ------- -------
Total loans 319,630 281,888 250,773
Allowance for loan losses 3,401 2,583 2,126
------- ------- -------
Net loans 316,229 279,305 248,647
------- ------- -------
Fixed assets 7,803 6,119 5,421
Other assets 9,526 9,764 8,724
------- ------- -------
Total assets $ 468,941 414,205 363,602
======= ======= =======
Deposits
Demand $ 24,316 20,529 20,324
NOW 45,916 40,616 38,067
Money market 50,490 12,297 12,874
Savings 53,313 42,004 40,205
Certificates of deposit 76,115 67,776 43,169
Certificates of deposit over $100,000 53,022 83,075 69,385
------- ------- -------
Total deposits 303,172 266,297 224,024
------- ------- -------
Borrowed funds 122,253 109,418 107,044
Other liabilities 3,698 3,072 2,126
------- ------- -------
Total liabilities 429,123 378,787 333,194
Common stock 25 25 25
Additional paid in capital 4,687 4,687 4,687
Retained earnings 37,296 32,929 27,851
Treasury stock (2,190) (2,223) (2,155)
------- ------- -------
Total capital 39,818 35,418 30,408
------- ------- -------
Total liabilities and capital $ 468,941 414,205 363,602
======= ======= =======
- -------------------------------------------------------------------------------
Rate Volume Analysis

The following tables present changes in interest income and expense
attributable to changes in interest rates, volume, and rate/volume(1) for
interest-earning assets and interest-bearing liabilities. Tax-exempt income is
calculated on a tax-equivalent basis, using a 35.0% tax rate in 2002 and 2001.

Year ended December 31, 2002 compared to 2001
- -------------------------------------------------------------------------------
Rate/
Dollars in thousands Volume Rate volume(1) Total
- -------------------------------------------------------------------------------
Interest on earning assets
Interest-bearing deposits $ 106 (51) (70) (15)
Investment securities 593 (413) (32) 148
Loans held for sale 110 2 6 118
Loans 3,098 (3,610) (483) (995)
----- ----- --- -----
Total interest income 3,907 (4,072) (579) (744)
----- ----- --- -----
Interest expense
Deposits 1,347 (3,218) (433) (2,304)
Other borrowings(2) 589 (995) (117) (523)
----- ----- --- -----
Total interest expense 1,936 (4,213) (550) (2,827)
----- ----- --- -----
Change in net interest income $ 1,971 141 (29) 2,083
===== ===== === =====
- -------------------------------------------------------------------------------

Year ended December 31, 2001 compared to 2000
- -------------------------------------------------------------------------------
Rate/
Dollars in thousands Volume Rate volume(1) Total
- -------------------------------------------------------------------------------
Interest on earning assets
Interest-bearing deposits $ 120 (12) (56) 52
Investment securities 1,215 (286) (52) 877
Loans held for sale - - 33 33
Loans 2,710 (1,257) (156) 1,297
----- ----- --- -----
Total interest income 4,045 (1,555) (231) 2,259
----- ----- --- -----
Interest expense
Deposits 1,781 (332) (69) 1,380
Other borrowings(2) 146 (1,613) (36) (1,503)
----- ----- ---- -----
Total interest expense 1,927 (1,945) (105) (123)
----- ----- --- -----
Change in net interest income $ 2,118 390 (126) 2,382
===== ===== === =====
- -------------------------------------------------------------------------------
(1) Represents the change attributable to a combination of change in rate and
change in volume.
(2)Includes federal funds purchased.

Page 14
Investment Activities

During 2002, the Company's investment portfolio increased 12.8% to end the
year at $122,073,000, compared to $108,186,000 on December 31, 2001. Much of
the Company's investment portfolio consists of callable securities. A declining
interest rate environment in 2002 resulted in a large number of the Company's
portfolio being called by issuers. The Company was able to replace these
securities at favorable levels, resulting in the $13.9 million net growth in
the portfolio in 2002.
The Company's investment securities are classified into two categories:
securities available for sale and securities to be held to maturity. 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
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 ratios, or for other similar reasons. Securities to be held to
maturity consist primarily of debt securities that the Company has acquired
solely for long-term investment purposes, rather than for trading or future
sale. For securities to be categorized as held to maturity, Management must
have the intent and the Company must have 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 2002, the growth in the Company's investment
portfolio was primarily in U.S. Government Agency mortgage-backed securities,
tax-exempt obligations of states and political subdivisions, and corporate debt
securities. These changes were made to enhance the portfolio's overall yield
while not materially adding to the Company's level of interest rate risk. The
following table sets forth the Company's investment securities at their
carrying amounts as of December 31, 2002, 2001 and 2000.

- -------------------------------------------------------------------------------
Dollars in thousands 2002 2001 2000
- -------------------------------------------------------------------------------
Securities available for sale
U.S. Treasury and agency $ - - 13,847
Mortgage-backed securities 6,397 2,425 3,712
State and political subdivisions 14,626 13,770 10,952
Corporate securities 28,288 27,861 27,742
Federal Home Loan Bank stock 6,195 6,005 5,941
Federal Reserve Bank stock 53 53 53
Other equity securities 851 800 670
------- ------- -------
$ 56,410 50,914 62,917
------- ------- -------
Securities to be held to maturity
U.S. Treasury and agency 30,952 35,444 27,025
Mortgage-backed securities 16,090 13,851 10,311
State and political subdivisions 12,032 6,393 4,380
Corporate securities 6,589 1,584 587
------- ------- -------
65,663 57,272 42,303
------- ------- -------
Total securities $ 122,073 108,186 105,220
======= ======= =======
- -------------------------------------------------------------------------------
The following table sets forth certain information regarding the yields
and expected maturities of the Company's investment securities as of December
31, 2002. Yields on tax-exempt securities have been computed on a tax-
equivalent basis using a tax-rate of 35%. Mortgage-backed securities are
presented according to their final contractual maturity date, while the
calculated yield takes into effect the intermediate cashflows from repayment of
principal which results in a much shorter average life.

- -------------------------------------------------------------------------------
Available for sale Held to maturity
------------------ -----------------------
Fair Yield to Amortized Yield to
Dollars in thousands value maturity cost maturity
- -------------------------------------------------------------------------------
U.S. Treasury and Agency
Due in 1 year or less $ - - $ - -
Due in 1 to 5 years - - - -
Due in 5 to 10 years - - 4,996 5.39%
Due after 10 years - - 25,956 6.06%
------ ------ ------ ------
- - 30,952 5.95%
------ ------ ------ ------
Mortgage-backed securities
Due in 1 year or less - - 27 5.58%
Due in 1 to 5 years 60 3.84% - -
Due in 5 to 10 years 2,408 4.91% 2,463 2.30%
Due after 10 years 3,929 5.58% 13,600 5.31%
------ ------ ------ ------
6,397 5.31% 16,090 4.85%
------ ----- ------ ------
State and political subdivisions
Due in 1 year or less - - - -
Due in 1 to 5 years - - - -
Due in 5 to 10 years 506 6.71% 4,822 7.36%
Due after 10 years 14,120 7.61% 7,210 6.10%
------ ----- ------ ------
14,626 7.58% 12,032 6.60%
------ ----- ------ ------
Corporate debt securities
Due in 1 year or less 502 6.35% - -
Due in 1 to 5 years 10,217 7.45% 125 4.00%
Due in 5 to 10 years 13,596 7.70% 469 8.10%
Due after 10 years 3,973 6.13% 5,995 4.77%
------ ----- ------ ------
28,288 7.36% 6,589 4.99%
------ ----- ------ ------
Equity Securities 7,099 4.23% - -
------ ----- ------ ------
$ 56,410 6.79% $ 65,663 5.70%
====== ===== ====== ======
- -------------------------------------------------------------------------------

Page 16
Lending Activities

The loan portfolio experienced growth in almost all areas during 2002, with the
most significant increase seen in residential real estate loans and commercial
loans. Total loans were $332,074,000 at December 31, 2002, a 10.2% increase
from total loans of $301,304,000 at December 31, 2001. This continues the loan
growth trend experienced by the Company over the past five years.
The following tables summarize the Bank's loan portfolio as of December
31, 2002, 2001, 2000, 1999 and 1998.

The Bank issued both VISA and MasterCard credit cards, whose balances are
shown in the table above, until December 2002 when the Bank sold its credit
card portfolio. Balances totaling $2,499,000 were sold.

Page 17
The following table sets forth certain information regarding the
contractual maturities of the Bank's loan portfolio as of December 31, 2002.

- -------------------------------------------------------------------------------
Dollars in thousands < 1 Year 1-5 Years 5-10 Years >10 Years Total
- -------------------------------------------------------------------------------
Commercial real estate $ 90 1,506 2,650 32,836 37,082
Commercial other 21,667 11,132 16,996 32,709 82,504
Residential real estate 795 508 5,904 166,863 174,070
Residential construction 1,019 - - - 1,019
Consumer 6,259 7,592 7,345 6,729 27,925
Municipal 2,777 483 1,427 4,787 9,474
------ ------ ------ ------- -------
Totals $ 32,607 21,221 34,322 243,924 332,074
====== ====== ====== ======= =======
- -------------------------------------------------------------------------------

The following table provides a listing of loans by category, excluding
loans held for sale, between variable and fixed rates as of December 31, 2002.

- -------------------------------------------------------------------------------
Dollars in thousands Amount % of total
- -------------------------------------------------------------------------------
Variable-rate loans
Commercial loans $ 98,688 29.7%
State and municipal loans 5,689 1.7%
Consumer loans 3,260 1.0%
Equity loans 30,766 9.3%
Residential adjustable-rate mortgages 77,325 23.3%
-------- ------
Total variable-rate loans 215,728 65.0%
Fixed-rate loans 116,346 35.0%
--------- ------
Total loans $ 332,074 100.0%
========= ======
- -------------------------------------------------------------------------------

The Bank's loan delinquency ratio decreased in 2002, and was 1.04% on
December 31, 2002, versus 1.45% on December 31, 2001.

Loan Concentrations

As of December 31, 2002, 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 2002, the Bank placed a higher volume of residential mortgages into the
secondary market compared to 2001. This was the result of increased mortgage
underwriting opportunities resulting from lower interest rates. Loans held for
sale are carried at the lower of cost or market value, which was $2,613,000 at
December 31, 2002. Loans held for sale at December 31, 2001 were $466,000.

Page 18
Non-Performing Assets

The aggregate dollar amount of loans more than 90 days past-due or on non-
accrual status increased during 2002, but remains low relative to the Bank's
peer group average. In Management's opinion, there has been no pattern or trend
in non-performing assets of concern. An increase in 2000 was related to
isolated circumstances involving a small number of borrowers. The levels at
December 31, 2002 and 2001 are more in line with the Bank's normal delinquency
rates.
The following table sets forth a summary of the value of delinquent loans
(more than ninety days past due) by category, total loans carried on a non-
accrual basis, and income not recognized from non-accrual loans as of December
31, 2002, 2001, 2000, 1999 and 1998.

- -------------------------------------------------------------------------------
Dollars in thousands
As of December 31, 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------
Commercial real estate & business $ 921 655 2,479 822 414
Residential real estate 463 275 267 260 222
Consumer 92 150 103 90 91
----- ----- ----- ----- ----
Total 1,476 1,080 2,849 1,172 727
===== ===== ===== ===== ====
Non-accrual loans included
in above total $1,070 667 2,366 681 716
Income not recognized from
non-accrual loans $ 108 77 185 64 51
- -------------------------------------------------------------------------------

It is the policy of the Bank to place a loan on non-accrual status only
after a careful review of the loan circumstances and a determination that
payment in full of principal and/or interest is not expected. Income not
recognized from non-accrual loans represents the interest income, as of the end
of each period, that would have been recorded on loans placed on non-accrual
status if they were current in accordance with their original terms. None of
these amounts were included in interest income for the same periods.
Other real estate owned increased during 2002. At December 31, 2002 it
included three properties valued at $255,000, compared to two properties valued
at $202,000 at December 31, 2001.
Other real estate owned and repossessed assets are 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 owned and repossessed assets 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 of the property are charged to operations. Gains and
losses upon disposition of the property are reflected in earnings as realized.

Page 19
Allowance for Loan Losses and Loan Loss Experience

The allowance for loan losses represents the amount available for credit losses
inherent in the Company's loan portfolio. Loans are charged off when they are
deemed uncollectible, after giving consideration to factors such as the
customer's financial condition, underlying collateral and guarantees, as well
as general and industry economic conditions.
In general, the Company determines the appropriate overall reserve for
loan losses based upon periodic, systematic reviews of its portfolio to
identify inherent losses based on Management's judgment about various
qualitative factors. These reviews result in the identification and
quantification of loss factors, which are used in determining the amount of the
allowance for loan losses. The Company periodically evaluates prevailing
economic and business conditions, industry concentrations, changes in the size
and characteristics of the portfolio and other pertinent factors. Portions of
the allowance for loan losses are quantified to cover the estimated losses
inherent in each loan category based on the results of this detailed review
process.
Commercial loans are individually reviewed and assigned a credit risk
rating from "1" (low risk of loss) to "8" (high risk of loss). For non-impaired
loans with a credit risk rating of "1" to "7", estimated loss factors based on
historical loss experience (ranging from two to five years) are used to
calculate a loan loss reserve for each credit risk rating classification.
Qualitative adjustments are also made based upon Management's assessment of
prevailing economic conditions, trends in volumes and terms of loans, levels
and trends in delinquencies and non-accruals, and the effect of changes in
lending policies. A specific allocation is made for impaired loans (loans on
non-accrual status), which 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. The combination of
these analyses is the basis for the determination of the commercial loan
portion of the allowance for loan losses.
Consumer loans, which include credit cards, residential mortgages, home
equity loans/lines, and direct/indirect loans, are generally evaluated as a
group based on product type. The determination of the consumer loan portion of
the allowance for loan losses is based on a five-year average of annual
historical losses, adjusted for the qualitative factors noted above.
The results of all analyses are reviewed and discussed by the Directors'
Loan Committee. An integral component of the Company's risk management process
is to ensure the proper quantification of the reserve for loan losses based
upon an analysis of risk characteristics, demonstrated losses, loan
segmentations, and other factors. Reserve methodology is reviewed on a periodic
basis and modified as appropriate. Based on this analysis, including the
aforementioned assumptions, the Company believes that the allowance for loan
losses is adequate as of December 31, 2002. The unallocated component of the
allowance for loan losses represents Management's view that, given the
complexities of the loan portfolio, there are estimable losses that have been
incurred within the portfolio but not yet tied to specific loans.

Page 20
The following table reflects the Bank's allowance for loan losses by
category of loan as of December 31, 2002, 2001, 2000, 1999 and 1998. 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. The commercial
category includes commercial real estate loans.

- -------------------------------------------------------------------------------
Dollars in thousands
As of December 31, 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------
Real estate $ 568 53% 618 54% 562 53% 488 53% 440 52%
Commercial 1,835 39% 1,467 36% 907 35% 686 34% 736 35%
Consumer 806 8% 604 10% 631 12% 580 13% 408 13%
Unallocated 491 - 311 - 201 - 281 - 238 -
------ ---- ----- ---- ----- ---- ----- ---- ----- ----
Total $3,700 100% 3,000 100% 2,301 100% 2,035 100% 1,822 100%
====== ==== ===== ==== ===== ==== ===== ==== ===== ====
- -------------------------------------------------------------------------------
Percentage is amount of loans in each category as a percent of total loans for
the stated year.

Net loans charged off in 2002 were $623,000, or 0.19% of average loans
outstanding for the year. This compares to net loan chargeoffs of $531,000, or
0.19% in 2001 and $434,000 or 0.17% in 2000. The following table summarizes the
activity with respect to loan losses for the years ended December 31, 2002,
2001, 2000, 1999 and 1998.

- -------------------------------------------------------------------------------
Dollars in thousands
As of December 31, 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------
Balance at beginning of period $ 3,000 2,301 2,035 1,822 1,800
===== ===== ===== ===== =====
Loans charged off:
Commercial(1) 432 391 164 153 121
Real estate mortgage 24 1 5 31 46
Consumer 268 243 388 359 285
----- ----- ----- ----- -----
Total 724 635 557 543 452
----- ----- ----- ----- -----
Recoveries on loans previously
charged off:
Commercial(1) 16 34 44 12 14
Real estate mortgage - 1 6 8 -
Consumer 85 69 73 91 60
----- ----- ----- ----- -----
Total 101 104 123 111 74
----- ----- ----- ----- -----
Net loans charged off 623 531 434 432 378
Provision for loan losses 1,323 1,230 700 645 400
----- ----- ----- ----- -----
Balance at end of period $ 3,700 3,000 2,301 2,035 1,822
===== ===== ===== ===== =====
Ratio of net loans charged off
to average loans outstanding 0.19% 0.19% 0.17% 0.19% 0.19%
- -------------------------------------------------------------------------------
(1) Includes commercial real estate loans

Page 21
During 2002, a provision of $1,323,000 was made to the allowance for loan
losses, compared to a provision of $1,230,000 in 2001, and $700,000 in 2000. In
Management's opinion, this increased level of provision is not indicative of a
decline in overall credit quality within the portfolio. Instead, it is the
result of the significant loan growth experienced combined with an additional
provision for commercial loans as a result of the impact on the fishing and
hospitality industries from the September 11, 2001, terrorist attack as well as
probable unanticipated declines in the credit quality of our borrowers due to
the current economic recession. At December 31, 2002, the allowance for loan
losses stood at $3,700,000, or 1.11% of total loans outstanding. This compares
to $3,000,000, or 1.00% of total loans outstanding at December 31, 2001, and
$2,301,000, or 0.87% of total loans outstanding at December 31, 2000.

Deposits

The Bank realized an increase in deposits of 27.2% in 2002, compared to a 3.2%
increase in 2001 and a 23.9% increase in 2000. Most of the growth in 2002 was
seen in core deposits, which are typically added at favorable costs relative to
borrowed funds and certificates of deposit.
The Bank's deposit balances generally increase during the summer and
autumn months of each year due to increased seasonal business activity. In
2002, the maximum amount of deposits at any month end was $336.8 million on
September 30. Because of uncertainty about future interest rates, in recent
years investors have shown a 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 2.54% for the year ended December 31, 2002, compared to 3.76% for
the year ended December 31, 2001 and 3.85% for the year ended December 31,
2000. The following table sets forth the average daily balance for the Bank's
principal deposit categories for each period.

- -------------------------------------------------------------------------------
Dollars in thousands %growth
Years ended December 31, 2002 2001 2000 2002 vs.2001
- -------------------------------------------------------------------------------
Demand deposits $ 24,316 20,529 20,324 18.4%
NOW accounts 45,916 40,616 38,067 13.0%
Money market accounts 50,490 12,297 12,874 310.6%
Savings 53,313 42,004 40,205 26.9%
Certificates of deposit 129,137 150,851 112,554 -14.4%
------- ------- ------- ------
Total deposits $ 303,172 266,297 224,024 13.8%
======= ======= ======= ======
- -------------------------------------------------------------------------------

The following table sets forth the average cost of each category of
interest-bearing deposits for the periods indicated.

- -------------------------------------------------------------------------------
Years ended December 31, 2002 2001 2000
- -------------------------------------------------------------------------------
NOW accounts 0.49% 1.05% 1.27%
Money market accounts 2.47% 3.40% 3.70%
Savings accounts 1.83% 2.57% 2.79%
Certificates of deposit 4.07% 5.36% 5.82%
----- ------ ------
Total interest-bearing deposits 2.76% 4.07% 4.23%
===== ===== =====
- -------------------------------------------------------------------------------
Page 22
As of December 31, 2002, the Bank held a total of $50,256,000 in
certificate of deposit accounts with balances in excess of $100,000. The
following table summarizes the time remaining to maturity for these
certificates of deposit:

- -------------------------------------------------------------------------------
Dollars in thousands
- -------------------------------------------------------------------------------
Within 3 months $ 5,834
3 months through 6 months 13,955
6 months through 12 months 16,651
Over 12 months 13,816
------
Total $ 50,256
======
- -------------------------------------------------------------------------------

Of all certificates of deposit, $86.0 million or 70.8% will mature by
December 31, 2003.

Borrowed Funds

Borrowed funds consists mainly of advances from the Federal Home Loan Bank
(FHLB) which are secured by stock in the FHLB, funds on deposit with FHLB, U.S.
Treasury and Agency notes and mortgage-backed securities and qualifying first
mortgage loans. Advances at December 31, 2002 totaled $90,500,000, with a
weighted average interest rate of 4.32% and remaining maturities ranging from
five months to eight years.
The Bank offers securities repurchase agreements to municipal and
corporate customers as an alternative to deposits. The balance of these
agreements as of December 31, 2002 was $19,317,000, compared to $22,424,000 on
December 31, 2001, and $16,512,000 on December 31, 2000. The Bank also had a
repurchase agreement with a brokerage firm at December 31, 2001 in the amount
of $9,767,000, which was repaid in 2002.
The Bank participates in the Note Option Depository which is offered 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
additional Treasury Direct investments up to an established maximum balance of
$5.0 million. The balances invested by the Treasury are increased and decreased
at the discretion of the Treasury. The 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, 2002, 2001 and 2000 were $3,548,000,
$166,000 and $1,077,000, respectively.
The maximum amount of borrowed funds outstanding at any month-end during
each of the last three years was $143,553,000 at the end of May during 2002,
$131,357,000 at the end of December for the year 2001, and $116,966,000 at the
end of December for the year 2000. The average amount outstanding during 2002
was $122,253,000, with a weighted average interest rate of 3.68%. This compares
to an average outstanding amount of $109,418,000 in 2001, with a weighted
average interest rate of 4.59%. The average balance outstanding on the Bank's
borrowed funds for the year ended December 31, 2000 was $107,044,000, with a
weighted average interest rate of 6.10%.

Page 23
Contractual Obligations

The following table sets forth the contractual obligations of the Company as of
December 31, 2002:

- -------------------------------------------------------------------------------
Less than 1-3 4-5 More than
Dollars in thousands Total 1 Year Years Years 5 Years
- -------------------------------------------------------------------------------
Borrowed funds $ 113,365 50,865 23,000 12,000 27,500
Operating leases 313 78 136 91 8
Certificates of deposit 121,425 86,017 26,093 9,315 -
------- ------- ------ ------ ------
Total $ 235,103 136,960 49,229 21,406 27,508
======= ======= ====== ====== ======
Commitments to extend
credit and
unused lines of credit $ 64,665 65,665 - - -
- -------------------------------------------------------------------------------

Capital Resources

Capital at December 31, 2002 was sufficient to meet the requirements of
regulatory authorities. Average equity to average assets was 8.49% in 2002,
versus 8.55% in 2001. Leverage capital of the Company, or total shareholders'
equity divided by average total assets less goodwill and any net unrealized
gain or loss on securities available for sale, stood at 8.19% on December 31,
2002, versus 8.56% in 2001.
At December 31, 2002, the Company had tier-one risk-based capital of 12.32%
and tier-two risk-based capital of 13.45%, versus 12.88% and 13.95%,
respectively, in 2001. To be rated "well-capitalized", regulatory 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 2002, the Company declared cash dividends of $0.23 per share for the
first quarter, $0.24 per share for the second quarter, $0.25 per share for the
third quarter, and $0.26 per share for the fourth quarter. The Company's
dividend payout ratio was 36.16% of earnings in 2002, 35.65% in 2001, and
34.20% in 2000.
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
2003 will be that year's net income plus $7,043,000. A total of $2,363,000 in
dividends was declared in 2002.
In 2002, 43,200 shares of common stock were issued in conjunction with the
exercise of stock options for consideration totaling $294,000. The Company also
purchased 32,067 shares of common stock for total consideration of $945,000, of
which 12,185 shares were reissued via employee stock programs during the year.
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.

Page 24
Capital Purchases

In 2002, the Company made capital purchases totaling $1,222,000. This cost
will be amortized over an average of seventeen years, adding approximately
$75,000 to pre-tax operating costs per year. The capital purchases included
primarily real estate improvements for Branch premises and equipment related to
technology.

Investment Management and Fiduciary Activities

As of December 31, 2002, Pemaquid Advisors, the Bank's private banking and
investment management division, had assets with a market value of $118,995,000
under management. This amount consisted of 628 trust accounts, estate accounts,
agency accounts, and self-directed individual retirement accounts. This
compares to December 31, 2001 when 597 accounts with market value of
$126,486,000 were under management. The decline in value of assets under
management was in proportion to the average market value decline seen
throughout the equity markets in 2002.

Effect of Future Interest Rates on Post-retirement Benefit Liabilities

In evaluating the Company's post-retirement benefit liabilities, Management
believes that changes in assumptions, especially in discount rates, will not
have a significant impact on the Company's future operating results or
financial condition.

Impact of Recently Issued Accounting Standards

Statement of Financial Accounting Standards (SFAS) No. 147, "Acquisitions of
Certain Financial Institutions," amends SFAS No. 72, "Accounting for Certain
Acquisitions of Banking or Thrift Institutions," to exclude from its scope most
acquisitions of financial institutions. Such transactions should be accounted
for in accordance with SFAS No. 141, "Business Combinations." This Statement
had no impact on the Company's consolidated financial condition and results of
operations.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," contains enhanced disclosure requirements for stock-based
compensation. The transition guidance and annual disclosure provisions of SFAS
No. 148 are effective for fiscal years ending after December 15, 2002. Adoption
of the Statement in 2002 had no impact on the Company's consolidated financial
condition and results of operations.
Statement of Position (SOP) 01-6, "Accounting by Certain Entities
(Including Entities with Trade Receivables) That Lend to or Finance the
Activities of Others," was issued in December 2001. The SOP is effective for
financial statements issued for the fiscal year beginning after December 15,
2001. The SOP reconciles and conforms the accounting and financial reporting
provisions established by various Audit and Accounting Industry Guides.
Adoption of this Statement had no impact on the Company's consolidated
financial condition and results of operations.

Page 25
Liquidity

As of December 31, 2002, the Bank had primary sources of liquidity of $55.3
million, or 11.2% 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 interest payments, loan and investment
maturities, and borrowed funds from the Federal Home Loan Bank. To compensate
for the seasonal flow in its deposit structure, the Bank maintains adequate
funding for its loan portfolio by monitoring maturities within its investment
portfolio and utilizing advances from the Federal Home Loan Bank or entering
into securities repurchase agreements.
Through the Federal Home Loan Bank, the Bank has a credit line of $8.0
million for overnight borrowings, plus short-term and long-term advance
capacity of $132.5 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 2002, ending the year at $334.2 million. The growth
was primarily in core deposits. Because of the liquidity provided in part by
the increase in core deposits, Management allowed certificates of deposit from
non-local sources to mature without renewal. These funds are typically
available to the Bank to meet future liquidity needs. Management has not seen
any recent significant deposit trends which would have a material effect on the
Bank's liquidity position.
At December 31, 2002, the Company had a net unrealized gain of $2,170,000
(net of $1,118,000 in deferred income taxes) on available for sale securities.
This unrealized gain is in line with Management's expectations given the drop
in interest rates experienced in 2002. While the Bank maintains an available
for sale portfolio of securities 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.

Page 26
Quarterly Information

The following tables provides unaudited financial information by quarter for
each of the past two years:

- -------------------------------------------------------------------------------
Dollars in thousands 2002 Q1 2002 Q2 2002 Q3 2002 Q4
- -------------------------------------------------------------------------------
Balance Sheets
Cash $ 7,829 9,573 26,304 23,506
Investments 107,200 128,350 124,104 122,073
Net loans 303,637 323,315 329,497 330,987
Other assets 18,053 17,384 17,343 17,502
------- ------- ------- -------
Total assets $ 436,719 478,622 497,248 494,068
======= ======= ======= =======
Deposits $ 276,397 308,294 336,800 334,224
Borrowed funds 118,763 126,734 113,975 113,365
Other liabilities 3,424 3,691 4,359 3,784
Shareholders' equity 38,135 39,903 42,114 42,695
------- ------- ------- -------
Total liabilities & equity $ 436,719 478,622 497,248 494,068
======= ======= ======= =======
Income Statements
Interest income $ 7,154 7,403 7,513 7,237
Interest expense 2,992 3,077 3,174 2,961
------- ------- ------- -------
Net interest income 4,162 4,326 4,339 4,276
Provision for loan losses 410 280 255 378
------- ------- ------- -------
Net interest income
after provision 3,752 4,046 4,084 3,898
Non-interest income 919 1,017 1,368 1,647
Non-interest expense 2,619 2,709 3,041 3,176
------- ------- ------- -------
Income before taxes 2,052 2,354 2,411 2,369
Income taxes 579 708 722 670
------- ------- ------- -------
Net income $ 1,473 1,646 1,689 1,699
======= ======= ======= =======
Basic earnings per share $ 0.62 0.69 0.70 0.70
Diluted earnings per share $ 0.60 0.66 0.68 0.70
- -------------------------------------------------------------------------------

Page 27
- -------------------------------------------------------------------------------
Dollars in thousands 2001 Q1 2001 Q2 2001 Q3 2001 Q4
- -------------------------------------------------------------------------------
Balance Sheets
Cash $ 6,897 11,121 13,447 10,894
Investments 114,491 111,102 105,791 108,186
Net loans 270,776 279,876 285,515 298,770
Other assets 15,511 16,826 16,951 16,616
------- ------- ------- -------
Total assets $ 407,675 418,925 421,704 434,466
======= ======= ======= =======
Deposits $ 240,973 281,370 277,733 262,689
Borrowed funds 128,867 99,353 102,696 131,357
Other liabilities 3,288 2,980 4,297 3,086
Shareholders' equity 34,547 35,222 36,978 37,334
------- ------- ------- -------
Total liabilities & equity $ 407,675 418,925 421,704 434,466
======= ======= ======= ========
Income Statements
Interest income $ 7,536 7,635 7,541 7,350
Interest expense 4,173 3,975 3,663 3,220
------- ------- ------- -------
Net interest income 3,363 3,660 3,878 4,130
Provision for loan losses 195 280 215 540
----- ------- ------- -------
Net interest income
after provision 3,168 3,380 3,663 3,590
Non-interest income 740 942 1,153 1,063
Non-interest expense 2,212 2,296 2,776 2,694
----- ------- ------- -------
Income before taxes 1,696 2,026 2,040 1,959
Income taxes 489 595 594 550
----- ------- ------- -------
Net income $ 1,207 1,431 1,446 1,409
======= ======= ======= =======
Basic earnings per share $ 0.51 0.60 0.61 0.58
Diluted earnings per share $ 0.50 0.58 0.59 0.57
- -------------------------------------------------------------------------------

Page 28
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 measurement 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 4.0% 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
presented 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.
The Company's summarized static gap, as of December 31, 2002, is presented
in the following table:

Page 29
- -------------------------------------------------------------------------------
0-90 91-365 1-5 5+
Dollars in thousands days days years years
- -------------------------------------------------------------------------------
Overnight funds sold $ 9,325 - - -
Investment securities at
amortized cost 22,168 18,182 44,390 34,046
Loans held for sale 22 101 844 1,646
Loans 128,110 58,026 118,464 27,474
Other interest-earning assets - 4,468 - -
Non-rate-sensitive assets - - - 26,802
--------- ------ ------- ------
Total assets $ 159,625 80,777 163,698 89,968
--------- ------ ------- ------
Interest-bearing deposits 100,803 66,054 35,370 106,513
Borrowed funds 22,739 28,125 35,000 27,501
Non-rate-sensitive liabilities
and equity 650 2,100 15,000 54,213
-------- ------ ------ ------
Total liabilities and equity $ 124,192 96,279 85,370 188,227
-------- ------ ------ -------
Period gap $ 35,433 (15,502) 78,328 (98,259)
========= ====== ====== ======
Percent of total assets 7.2% (3.1%) 5.9% (19.9%)
Cumulative gap (current) $ 35,433 19,931 98,259 -
Percent of total assets 7.2% 4.0% 19.9% 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 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 0.8% of stable-rate net interest income if rates fall
gradually by one percentage point over the next year, and increase by
approximately 0.2% 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 10.0% given a 2.0% move in interest rates, up or down.
Management believes this reflects a reasonable interest rate risk position.
Within a two-year horizon and assuming no additional movement in rates, the
model forecasts that net interest income would be higher than that earned in a
stable rate environment by 1.5% in a falling rate scenario and decrease by 1.3%
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.
A summary of the Company's interest rate risk simulation modeling, as of
December 31, 2002 and 2001 is presented in the following table:

Page 30
- -------------------------------------------------------------------------------
Changes in Net Interest Income 2002 2001
- -------------------------------------------------------------------------------
Year 1
Projected change if rates decrease by 1.0% +0.8% n/a
Projected change if rates decrease by 2.0% n/a -0.6%
Projected change if rates increase by 2.0% +0.2% +0.6%
- -------------------------------------------------------------------------------
Year 2
Projected change if rates decrease by 1.0% +1.5% n/a
Projected change if rates decrease by 2.0% n/a -0.5%
Projected change if rates increase by 2.0% -1.3% -5.6%
- -------------------------------------------------------------------------------

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, 2002,
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. As of December 31, 2002, 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 will remain constant for much of 2003 and believes that
the current level of interest rate risk is acceptable.

Forward-Looking Statements

Certain disclosures in Management's Discussion 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,
assumptions concerning the level of future interest rates, general local,
regional and national economic conditions, competitive pressures, prepayments
on loans and investments, 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 factors which affect the Company's business.

Page 31
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 presented in this report. The financial statements have been
prepared in conformity with U.S. 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 its 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 and internal 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.

/s/Daniel R. Daigneault /s/F. Stephen Ward

Daniel R. Daigneault F. Stephen Ward
President & Chief Executive Officer Treasurer & Chief Financial
Officer

Page 32
Berry, Dunn, McNeil & Parker
Certified Public Accountants

Independent Auditors' Report

The Board of Directors and Shareholders
First National Lincoln Corporation

We have audited the accompanying consolidated balance sheets of First National
Lincoln Corporation and Subsidiary as of December 31, 2002 and 2001, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the three years in the three-year period ended December
31, 2002. 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 U.S. 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, 2002 and 2001, 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, 2002, in
conformity with U.S. generally accepted accounting principles.

/s/Berry, Dunn, McNeil and Parker

Portland, Maine
January 31, 2003

Page 33
Consolidated Balance Sheets
First National Lincoln Corporation and Subsidiary

- -------------------------------------------------------------------------------
As of December 31, 2002 2001
- -------------------------------------------------------------------------------
Assets
Cash and due from banks $ 14,181,000 $ 10,894,000
Overnight funds sold 9,325,000 -
----------- -----------
Cash and cash equivalents 23,506,000 10,894,000
----------- -----------
Securities available for sale 56,410,000 50,914,000
Securities to be held to maturity,
market value of $67,421,000
at December 31, 2002 and
$56,921,000 at December 31, 2001 65,663,000 57,272,000
Loans held for sale at cost,
which approximates market value 2,613,000 466,000
Loans 332,074,000 301,304,000
Less allowance for loan losses 3,700,000 3,000,000
----------- -----------
Net loans 328,374,000 298,304,000
----------- -----------
Accrued interest receivable 2,642,000 2,635,000
Bank premises and equipment 7,833,000 7,563,000
Other real estate owned 255,000 202,000
Other assets 6,772,000 6,216,000
----------- -----------
Total assets $ 494,068,000 $ 434,466,000
=========== ===========

Page 34
Consolidated Balance Sheets, concluded
First National Lincoln Corporation and Subsidiary

- -------------------------------------------------------------------------------
As of December 31, 2002 2001
- -------------------------------------------------------------------------------

Liabilities
Demand deposits $ 25,484,000 $ 22,496,000
NOW deposits 46,989,000 43,644,000
Money market deposits 80,805,000 15,878,000
Savings deposits 59,521,000 46,855,000
Certificates of deposit (including
certificates of $100,000 or more
of $50,256,000 in 2002 and
$53,909,000 in 2001) 121,425,000 133,816,000
----------- -----------
Total deposits 334,224,000 262,689,000
Borrowed funds 113,365,000 131,357,000
Other liabilities 3,784,000 3,086,000
----------- -----------
Total liabilities 451,373,000 397,132,000
----------- -----------
Commitments and contingent liabilities
(notes 12, 13 and 17)
Shareholders' equity
Common stock, one cent par value 25,000 25,000
Additional paid-in capital 4,687,000 4,687,000
Retained earnings 38,322,000 34,030,000
Accumulated other comprehensive income
Net unrealized gain on
securities available for sale, net of
tax of $1,118,000 in 2002 and
$404,000 in 2001 2,170,000 784,000
Treasury stock, at cost,
66,577 shares in 2002
and 89,895 shares in 2001 (2,509,000) (2,192,000)
----------- -----------
Total shareholders' equity 42,695,000 37,334,000
----------- -----------
Total liabilities and shareholders'
equity $ 494,068,000 $ 434,466,000
=========== ===========
- -------------------------------------------------------------------------------
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 2,414,693 2,391,375
- -------------------------------------------------------------------------------
The accompanying footnotes are an integral part of these consolidated financial
statements

Page 35

Consolidated Statements of Income
First National Lincoln Corporation and Subsidiary

- -------------------------------------------------------------------------------
Years ended December 31, 2002 2001 2000
- -------------------------------------------------------------------------------
Interest income
Interest and fees on loans $ 22,154,000 $ 22,953,000 $ 21,600,000
Interest on deposits with other banks 62,000 77,000 25,000
Interest and dividends on investments
(includes tax-exempt income
of $1,075,000 in 2002, $926,000 in
2001, $659,000 in 2000) 7,091,000 7,032,000 6,298,000
---------- ---------- ----------
Total interest income 29,307,000 30,062,000 27,923,000
---------- ---------- ----------
Interest expense
Interest on deposits 7,702,000 10,006,000 8,625,000
Interest on borrowed funds 4,502,000 5,025,000 6,528,000
---------- ---------- ----------
Total interest expense 12,204,000 15,031,000 15,153,000
---------- ---------- ----------
Net interest income 17,103,000 15,031,000 12,770,000
Provision for loan losses 1,323,000 1,230,000 700,000
---------- ---------- ----------
Net interest income after provision
for loan losses 15,780,000 13,801,000 12,070,000
---------- ---------- ----------
Other operating income
Fiduciary and investment
management income 728,000 698,000 673,000
Service charges on deposit accounts 985,000 901,000 832,000
Net realized gain on securities
available for sale - 73,000 -
Other 3,238,000 2,226,000 1,462,000
---------- ---------- ----------
Total other operating income 4,951,000 3,898,000 2,967,000
---------- ---------- ----------
Other operating expenses
Salaries and employee benefits 5,766,000 4,903,000 4,334,000
Occupancy expense 738,000 573,000 478,000
Furniture and equipment expense 1,286,000 1,023,000 750,000
Other 3,755,000 3,479,000 2,975,000
---------- ---------- ----------
Total other operating expenses 11,545,000 9,978,000 8,537,000
---------- ---------- ----------
Income before income taxes 9,186,000 7,721,000 6,500,000
Income tax expense 2,679,000 2,228,000 1,893,000
---------- ---------- ----------
Net income $ 6,507,000 $ 5,493,000 $ 4,607,000
========== ========== ==========

Page 36
Consolidated Statements of Income, concluded
First National Lincoln Corporation and Subsidiary

- -------------------------------------------------------------------------------
Years ended December 31, 2002 2001 2000
- -------------------------------------------------------------------------------

Basic earnings per share $ 2.71 $ 2.30 1.93
Diluted earnings per share $ 2.64 $ 2.24 1.89
Cash dividends declared per share $ 0.98 $ 0.82 0.66
Weighted average number of
shares outstanding 2,404,965 2,384,402 2,384,356
- -------------------------------------------------------------------------------
The accompanying footnotes are an integral part of these consolidated financial
statements

Page 37

Consolidated Statements of Changes in Shareholders' Equity
First National Lincoln Corporation and Subsidiary

Page 40
Consolidated Statements of Cash Flows
First National Lincoln Corporation and Subsidiary

- -------------------------------------------------------------------------------
Years ended December 31, 2002 2001 2000
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 6,507,000 $ 5,493,000 $4,607,000
Adjustments to reconcile net income
to net cash
provided by operating activities:
Depreciation 952,000 774,000 675,000
Deferred income taxes (255,000) - 148,000
Provision for loan losses 1,323,000 1,230,000 700,000
Loans originated for resale (42,531,000) (18,451,000) (3,426,000)
Proceeds from sales of loans 40,384,000 17,985,000 3,553,000
Net gain on sale of credit card portfolio (219,000) - -
Net gain on sale or call of securities
available for sale - (73,000) -
Losses on other real estate owned - 55,000 5,000
Net change in other assets and
accrued interest receivable (308,000) 485,000 (1,540,000)
Net change in other liabilities 30,000 119,000 223,000
Net accretion of discount
on investments (604,000) (278,000) (147,000)
----------- ---------- ----------
Net cash provided by operating
activities 5,279,000 7,339,000 4,798,000
----------- ---------- ----------

Cash flows from investing activities:
Proceeds from sales, maturities
and calls of securities
available for sale 2,255,000 17,629,000 1,496,000
Proceeds from maturities and calls
of securities to be held to maturity 40,172,000 31,025,000 4,556,000
Proceeds from sales of other real
estate owned 15,000 537,000 35,000
Net proceeds from sale of
credit card portfolio 2,718,000 - -
Purchases of securities available
for sale (5,581,000) (4,585,000) (19,952,000)
Purchases of securities to be
held to maturity (48,029,000) (45,804,000) (868,000)
Net increase in loans (33,960,000) (37,344,000) (32,897,000)
Capital expenditures (1,222,000) (2,985,000) (509,000)
----------- ---------- ----------
Net cash used in investing activities (43,632,000) (41,527,000) (48,139,000)
----------- ---------- ----------

Page 41
Consolidated Statements of Cash Flows, concluded
First National Lincoln Corporation and Subsidiary

- -------------------------------------------------------------------------------
Years ended December 31, 2002 2001 2000
- -------------------------------------------------------------------------------

Cash flows from financing activities:
Net increase (decrease) in
demand deposits, savings,
and money market accounts 83,926,000 17,733,000 (1,276,000)
Net increase (decrease) in
certificates of deposit (12,391,000) (9,610,000) 50,384,000
Advances on long-term borrowings 24,000,000 51,500,000 15,000,000
Repayments on long-term borrowings - (7,114,000) (5,440,000)
Net decrease in short-term borrowings (41,992,000) (15,948,000) (11,689,000)
Purchase of treasury stock (945,000) (254,000) (316,000)
Proceeds from sale of treasury stock 628,000 312,000 260,000
Dividends paid (2,261,000) (1,861,000) (1,479,000)
---------- ---------- ----------
Net cash provided by
financing activities 50,965,000 34,758,000 45,444,000
---------- ---------- ----------
Net increase in cash and
cash equivalents 12,612,000 570,000 2,103,000
Cash and cash equivalents
at beginning of year 10,894,000 10,324,000 8,221,000
----------- ---------- ----------
Cash and cash equivalents
at end of year $ 23,506,000 $10,894,000 $10,324,000
========== ========== ==========
Interest paid $ 12,228,000 $15,003,000 $14,911,000
Income taxes paid 2,668,000 2,526,000 1,935,000
Non-cash transactions:
Loans transferred to
other real estate owned (68,000) (438,000) (60,000)
Change in unrealized gain (loss) on
available for sale securities 2,100,000 880,000 2,306,000
- -------------------------------------------------------------------------------
The accompanying footnotes are an integral part of these consolidated financial
statements

Page 42
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 U.S. generally accepted accounting principles and to general
practice within the banking industry. The following is a description of the
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 intercompany accounts and
transactions have been eliminated in consolidation.

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.
Pemaquid Advisors, a division of the Bank, provides investment management,
private banking and financial planning services. Pemaquid Advisors has offices
in Damariscotta and Portland, Maine.

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.

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, net of related income taxes.
Securities to be held to maturity consist primarily of debt securities
which Management has acquired solely for long-term investment purposes, rather
than 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. Such securities are
carried at cost adjusted for the amortization of premiums and accretion of
discounts.

Page 43
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued

Investment securities transactions are accounted for on a settlement date
basis; reported amounts would not be materially different from 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.

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 probable 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: reviews of
individual non-performing loans and performing watch-report loans, loan
portfolio size by category, recent loss experience, delinquency trends and
current economic conditions. Loans more than 30 days past due are considered
delinquent. 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 or at 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 44
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.

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.

Other Real Estate Owned (OREO)
Real estate acquired by foreclosure or deed in lieu of foreclosure is
transferred to OREO and recorded at the lower of cost or fair market value,
less estimated costs to sell, based on appraised value at the date actually or
constructively received. Loan losses arising from the acquisition of such
property are charged against the allowance for loan losses. An allowance for
losses on OREO is maintained for subsequent valuation adjustments on a specific
property basis.

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.

Post-Retirement Benefits
The cost of providing post-retirement 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 investment management 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.

Page 45
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued

Stock Options
The Company established a stock option plan in 1995. Under the plan, the
Company may grant options to its employees for up to 200,000 shares of common
stock. Only incentive stock options may be granted under the plan. The option
price of each option grant is determined by the Options Committee of the Board
of Directors, and in no instance shall be less than the fair market value on
the date of the grant. An option's maximum term is ten years from the date of
grant.
The Company applies Accounting Principles Board Opinion No.25 and related
interpretations in accounting for the stock option plan. Accordingly, no
compensation cost has been recognized. The following table illustrates the
effect on net income and earnings per share if the Company had applied the fair
value recognition provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation", to stock-based employee
compensation.

- -------------------------------------------------------------------------------
2002 2001 2000
- -------------------------------------------------------------------------------
Net income
As reported $ 6,507,000 5,493,000 4,607,000
Value of option grants, net of tax 60,000 - 11,000
Pro forma 6,447,000 5,493,000 4,596,000
- -------------------------------------------------------------------------------
Basic earnings per share
As reported 2.71 2.30 1.93
Value of option grants, net of tax 0.03 - -
Pro forma 2.68 2.30 1.93
- -------------------------------------------------------------------------------
Diluted earnings per share
As reported 2.64 2.24 1.89
Value of option grants, net of tax 0.02 - 0.01
Pro forma 2.62 2.24 1.88
- -------------------------------------------------------------------------------

The fair market value of options granted, net of tax, was $60,000 in 2002,
and $11,000 in 2000. No options were granted in 2001. The weighted average
fair market value of options granted was $8.32 in 2002 and $3.24 in 2000. The
fair market value is estimated using the Black-Scholes option pricing model and
the following assumptions: quarterly dividends of $0.22 in 2002 and $0.18 in
2000, risk-free interest rate of 1.59% in 2002 and 6.00% in 2000, volatility of
37.73% in 2002 and 25.11% in 2000, and an expected life of 10 years.

Loan Servicing
Servicing rights are recognized when they 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 46
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued

Effect of New Financial Accounting Standards
Statement of Financial Accounting Standards (SFAS) No. 147, "Acquisitions
of Certain Financial Institutions," amends SFAS No. 72, "Accounting for Certain
Acquisitions of Banking or Thrift Institutions," to exclude from its scope most
acquisitions of financial institutions. Such transactions should be accounted
for in accordance with SFAS No. 141, "Business Combinations." This Statement
had no impact on the Company's consolidated financial condition and results of
operations.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," contains enhanced disclosure requirements for stock-based
compensation. The transition guidance and annual disclosure provisions of SFAS
No. 148 are effective for fiscal years ending after December 15, 2002. Adoption
of the Statement in 2002 had no impact on the Company's consolidated financial
condition and results of operations.
Statement of Position (SOP) 01-6, "Accounting by Certain Entities
(Including Entities with Trade Receivables) That Lend to or Finance the
Activities of Others," was issued in December 2001. The SOP is effective for
financial statements issued for the fiscal year beginning after December 15,
2001. The SOP reconciles and conforms the accounting and financial reporting
provisions established by various Audit and Accounting Industry Guides.
Adoption of this Statement had no impact on the Company's consolidated
financial condition and results of operations.

Note 2. Cash and Cash Equivalents

For the purposes of reporting consolidated cash flows, cash and cash
equivalents include cash on hand, amounts due from banks and federal funds
sold. At December 31, 2002 the Company had a contractual clearing balance of
$500,000 and a reserve balance requirement of $4,056,000 at the Federal Reserve
Bank, which are satisfied by both cash on hand at branches and balances held at
the Federal Reserve Bank of Boston. The Company maintains a portion of its cash
in bank deposit accounts which, at times, may exceed federally insured limits.
The Company has not experienced any losses in such accounts. The Company
believes it is not exposed to any significant risk with respect to these
accounts.

Page 47
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued

Note 3. Investment Securities

The following tables summarize the amortized cost and estimated fair value of
investment securities at December 31, 2002 and 2001:

Page 48
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued

The contractual maturities of investment securities at December 31, 2002
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 $ 500,000 502,000 27,000 26,000
Due in 1 to 5 years 9,385,000 10,277,000 125,000 125,000
Due in 5 to 10 years 15,004,000 16,510,000 12,750,000 13,202,000
Due after 10 years 21,145,000 22,022,000 52,761,000 54,068,000
Equity securities 7,089,000 7,099,000 - -
---------- ---------- ---------- ----------
$53,123,000 56,410,000 65,663,000 67,421,000
========== ========== ========== ==========
- -------------------------------------------------------------------------------

At December 31, 2002 securities carried at $44,327,000, with a fair value
of $44,714,000, were pledged to secure borrowings from the Federal Home Loan
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
gains and losses arising from the sales and calls of securities available for
sale is summarized below:

- -------------------------------------------------------------------------------
2002 2001 2000
- -------------------------------------------------------------------------------
Proceeds from sales and calls $ - 1,000,000 -
===== ========= =====
Gross gains - 73,000 -
Gross losses - - -
----- --------- -----
Net gain - 73,000 -
===== ========= =====
Related income taxes $ - 25,000 -
- -------------------------------------------------------------------------------

The realized gain on securities in 2001 was the result of a security which
was called at par value by the issuer.

Page 49
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued

Note 4. Loan Servicing

At December 31, 2002 and 2001, the Bank serviced loans for others totaling
$70,097,000 and $46,723,000, respectively. Net gains from the sale of loans
totaled $482,000 in 2002, $161,000 in 2001 and $47,000 in 2000.
In 2002, mortgage servicing rights of $315,000 were capitalized, and
amortization for the year totaled $183,000. After deducting for a valuation
allowance of $190,000, at December 31, 2002, mortgage servicing rights had a
fair value of $303,000, which is included in other assets. In 2001, mortgage
servicing rights of $245,000 were capitalized, and amortization for the year
totaled $95,000. After deducting for a valuation allowance of $127,000, at
December 31, 2001, mortgage servicing rights had a fair value of $234,000.

Note 5. Loans

The following table shows the composition of the Company's loan portfolio as of
December 31, 2002 and 2001:

- -------------------------------------------------------------------------------
2002 2001
- -------------------------------------------------------------------------------
Real estate loans
Residential $ 174,070,000 159,743,000
Commercial 37,082,000 32,638,000
Commercial and industrial loans 82,504,000 68,378,000
State and municipal loans 9,474,000 7,296,000
Consumer loans 27,925,000 30,727,000
Residential construction loans 1,019,000 2,522,000
----------- -----------
Total loans $ 332,074,000 301,304,000
=========== ===========
- -------------------------------------------------------------------------------

Loan balances include net deferred loan costs of $807,000 in 2002 and
$681,000 in 2001.
At December 31, 2002 and 2001, loans on non-accrual status totaled
$1,070,000 and $667,000, respectively. Interest income which would have been
recognized on these loans, if interest had been accrued, was $108,000 for 2002,
$77,000 for 2001 and $185,000 for 2000. Loans past due greater than 90 days
which are accruing interest totaled $406,000 at December 31, 2002 and $452,000
at December 31, 2001. The Company continues to accrue interest on these loans
because it believes collection of principal and interest is reasonably assured.

Page 50
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued

Transactions in the allowance for loan losses for the years ended December
31, 2002, 2001 and 2000 were as follows:

- -------------------------------------------------------------------------------
2002 2001 2000
- -------------------------------------------------------------------------------
Balance at beginning of year $ 3,000,000 2,301,000 2,035,000
Provision charged to operating
expenses 1,323,000 1,230,000 700,000
--------- --------- ---------
4,323,000 3,531,000 2,735,000
--------- --------- ---------
Loans charged off (724,000) (635,000) (557,000)
Recoveries on loans 101,000 104,000 123,000
--------- --------- ---------
Net loans charged off (623,000) (531,000) (434,000)
--------- --------- ---------
Balance at end of year $ 3,700,000 3,000,000 2,301,000
========= ========= =========
- -------------------------------------------------------------------------------

Information regarding impaired loans is as follows:

- -------------------------------------------------------------------------------
2002 2001 2000
- -------------------------------------------------------------------------------
Average investment in impaired loans $ 1,367,000 1,055,000 654,000
Interest income recognized on
impaired loans, including cash basis 17,000 38,000 16,000
- -------------------------------------------------------------------------------

- -------------------------------------------------------------------------------
2002 2001
- -------------------------------------------------------------------------------
Balance of impaired loans $1,070,000 667,000
Less portion for which no allowance
for loan losses is allocated (309,000) (247,000)
--------- -------
Portion of impaired loan balance
for which an allowance for loan losses
is allocated 761,000 420,000
========= =======
Portion of allowance for loan losses
allocated to the impaired loan balance $ 297,000 202,000
- -------------------------------------------------------------------------------

Page 51
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued

Loans to directors, officers and employees totaled $11,730,000 at December
31, 2002 and $10,431,000 at December 31, 2001. A summary of loans to directors
and executive officers, which in the aggregate exceed $60,000, is as follows:

- -------------------------------------------------------------------------------
2002 2001
- -------------------------------------------------------------------------------
Balance at beginning of year $ 5,925,000 7,000,000
New loans 3,397,000 1,892,000
Repayments (2,041,000) (2,967,000)
--------- ---------
Balance at end of year $ 7,281,000 5,925,000
========= =========
- -------------------------------------------------------------------------------

Note 6. Premises and Equipment

Bank premises and equipment are carried at cost and consist of the following:

- -------------------------------------------------------------------------------
2002 2001
- -------------------------------------------------------------------------------
Land $ 1,551,000 1,309,000
Land improvements 444,000 414,000
Bank buildings 5,963,000 5,579,000
Equipment 7,233,000 6,730,000
---------- ----------
15,191,000 14,032,000
Less accumulated depreciation 7,358,000 6,469,000
---------- ----------
$ 7,833,000 7,563,000
========== ==========
- -------------------------------------------------------------------------------

Note 7. Other Real Estate Owned

The following summarizes other real estate owned:

- -------------------------------------------------------------------------------
2002 2001
- -------------------------------------------------------------------------------
Real estate acquired in settlement of loans $ 255,000 202,000
- -------------------------------------------------------------------------------

Changes in the allowance for each of the three years ended December 31 were as
follows:

- -------------------------------------------------------------------------------
2002 2001 2000
- -------------------------------------------------------------------------------
Beginning balance $ - 36,000 36,000
Losses charged to allowance - (36,000) -
Provision charged to income - - -
----- ------ ------
Ending balance $ - - 36,000
===== ====== ======
- -------------------------------------------------------------------------------
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued

Note 8. Income Taxes

The current and deferred components of income tax expense were as follows:

- -------------------------------------------------------------------------------
2002 2001 2000
- -------------------------------------------------------------------------------
Federal income tax
Current $ 2,830,000 2,138,000 1,650,000
Deferred (255,000) - 148,000
--------- --------- ---------
2,575,000 2,138,000 1,798,000
State income tax 104,000 90,000 95,000
--------- --------- ---------
$ 2,679,000 2,228,000 1,893,000
========= ========= =========
- -------------------------------------------------------------------------------

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:

- -------------------------------------------------------------------------------
2002 2001 2000
- -------------------------------------------------------------------------------
Expected tax expense $ 3,123,000 2,625,000 2,210,000
Non-taxable income (484,000) (452,000) (431,000)
State income taxes 69,000 59,000 63,000
Qualified housing tax credit - (8,000) (30,000)
Other (29,000) 4,000 81,000
--------- -------- ---------
$ 2,679,000 2,228,000 1,893,000
========= ========= =========
- -------------------------------------------------------------------------------

Items that give rise to the deferred income tax assets and liabilities and
the tax effect of each at December 31 are as follows:

- -------------------------------------------------------------------------------
2002 2001
- -------------------------------------------------------------------------------
Allowance for loan losses and OREO $ 1,092,000 887,000
Deferred loan fees (329,000) (285,000)
Accrued pension and post-retirement 281,000 240,000
Depreciation (93,000) (111,000)
Unrealized gain on securities
available for sale (1,118,000) (404,000)
Mortgage servicing rights (103,000) (80,000)
Other assets (14,000) (102,000)
Other liabilities 6,000 36,000
--------- -------
Net deferred income tax asset (liability) $ (278,000) 181,000
========= =======
- -------------------------------------------------------------------------------

Page 53
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued

These amounts are included in other assets on the balance sheets, except
for the deferred tax liability on unrealized gains on securities available for
sale which is included in other liabilities. The deferred income tax asset and
liability at December 31, 2002 and 2001 are as follows:

- -------------------------------------------------------------------------------
2002 2001
- -------------------------------------------------------------------------------
Asset $ 1,379,000 1,163,000
========= =========
Liability $ 1,657,000 982,000
========= =========
- -------------------------------------------------------------------------------

No valuation allowance is deemed necessary for the deferred tax asset.

Note 9. Certificates of Deposit

At December 31, 2002, the scheduled maturities of certificates of deposit are
as follows

- -------------------------------------------------------------------------------
2003 $ 86,017,000
2004 21,398,000
2005 4,695,000
2006 4,731,000
2007 4,584,000
-----------
Total $ 121,425,000
===========
- -------------------------------------------------------------------------------

Interest on certificates of deposit of $100,000 or more was $2,343,000,
$3,680,000 and $2,732,000 in 2002, 2001 and 2000, respectively.

Note 10. Borrowed Funds

Borrowed funds consists of advances from the Federal Home Loan Bank (FHLB),
Treasury Tax & Loan Notes, and securities sold under agreements to repurchase
with municipal and commercial customers.
Pursuant to collateral agreements, FHLB advances are collateralized by all
stock in the Home Loan Bank, with a value of $6,195,000 at December 31, 2002
and $6,005,000 at December 31, 2001; qualifying first mortgage loans, which
were valued at $155,348,000 and $153,607,000 in 2002 and 2001, respectively;
U.S. Government and Agency securities not pledged to others, which were valued
at $26,620,000 in 2002 and $25,677,000 in 2001; and funds on deposit with FHLB.
As of December 31, 2002, the Bank's total FHLB borrowing capacity was
$140,468,000, of which $49,968,000 was unused and available for additional
borrowings. All FHLB advances as of December 31, 2002 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.
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

Page 54
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued

agreements to repurchase include U.S. Treasury and Agency securities with an
aggregate amortized cost of $19,290,000 and $32,185,000 at December 31, 2002
and 2001, respectively, and an aggregate fair value of $19,670,000 and
$32,514,000 at December 31, 2002 and 2001, respectively. Repurchase agreements
have maturity dates ranging from 1 to 365 days. The Bank also has in place a
$5.0 million credit line with a correspondent bank which is currently not in
use.
Borrowed funds at December 31, 2002 and 2001 have the following range of
interest rates and maturity dates:

- -------------------------------------------------------------------------------
December 31, 2002
- -------------------------------------------------------------------------------
Federal Home Loan Bank Advances
Maturities within one year 4.19%-4.81% $ 28,000,000
Maturities within two years 2.01%-4.89% 23,000,000
Maturities within five years 3.99%-4.47% 12,000,000
Maturities over five years 3.93%-5.41% 27,500,000
-----------
90,500,000
Treasury Tax & Loan Notes
(rate in effect at December 31, 2002 was 0.99%) variable 3,548,000
Repurchase agreements
Municipal and commercial customers 1.14%-2.65% 19,317,000
-----------
$ 113,365,000
===========
- -------------------------------------------------------------------------------

- -------------------------------------------------------------------------------
December 31, 2001
- -------------------------------------------------------------------------------
Federal Home Loan Bank Advances
Maturities within one year 1.83%-2.53% $ 32,500,000
Maturities within two years 4.19%-4.81% 28,000,000
Maturities within three years 4.75%-4.89% 11,000,000
Maturities over five years 3.93%-5.41% 27,500,000
-----------
99,000,000
Treasury Tax & Loan Notes
(rate in effect at December 31, 2001 was 1.39%) variable 166,000
Repurchase agreements
Municipal and commercial customers 2.25% - 3.65% 22,424,000
Brokers 2.05% 9,767,000
-----------
$ 131,357,000
===========
- -------------------------------------------------------------------------------

Page 55
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued

Note 11. 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 50.0% of their compensation (not to exceed $11,000 if under age 50 and
$12,000 if over age 50), and the Bank may provide a match of up to 3.0% 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 3.0%
of each eligible employee's compensation in 2002, 3.0% in 2001, and 2.5% in
2000.
The expense related to the 401(k) plan was $216,000, $146,000, and
$160,000 in 2002, 2001, and 2000, respectively.

Pension Plan
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 periods of the participating
officers. The expense of this supplemental plan was $113,000 in 2002, $141,000
in 2001, and $123,000 in 2000. As of December 31, 2002 and 2001, the accrued
liability of this plan was $591,000 and $484,000, 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 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 set forth the accumulated post-retirement benefit
obligation, funded status, and net periodic pension cost:

- -------------------------------------------------------------------------------
At December 31, 2002 2001
- -------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year: $ 428,000 445,000
Service cost 5,000 5,000
Interest cost 34,000 32,000
Benefits paid (52,000) (54,000)
------- -------
Benefit obligation at end of year $ 415,000 428,000
======= =======
Funded status:
Benefit obligation at end of year $ (415,000) (428,000)
Unrecognized prior service cost (43,000) (60,000)
Unamortized net actuarial gain (46,000) (24,000)
Unrecognized transition obligation 290,000 319,000
------- -------
Accrued benefit cost $ (214,000) (193,000)
======= =======
- -------------------------------------------------------------------------------

Page 56
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued

- -------------------------------------------------------------------------------
Years ended December 31, 2002 2001 2000
- -------------------------------------------------------------------------------
Components of net periodic benefit cost:
Service cost $ 5,000 5,000 5,000
Interest cost 34,000 32,000 32,000
Amortization of unrecognized
transition obligation 29,000 29,000 29,000
Amortization of prior service cost (3,000) (5,000) (5,000)
Amortization of accumulated gains 2,000 (2,000) (3,000)
------ ------ ------
Net periodic benefit cost $ 67,000 59,000 58,000
====== ====== ======
Weighted average assumptions as of December 31:
Discount rate 7.0% 7.0% 7.0%
- -------------------------------------------------------------------------------

Note 12. Shareholders' Equity

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 stock
purchase or savings and investment plans. As of December 31, 2002, 110,523
shares had been issued pursuant to these plans, leaving 49,477 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 5,157 shares in
2002, 7,573 shares in 2001, and 29,179 shares in 2000. Stock sold to directors
and employees in 2002 was all from treasury shares.
In 2001, the Company established a dividend reinvestment plan to allow its
shareholders to use their cash dividends for the automatic repurchase of shares
in the Company. When the plan was established, 200,000 shares were registered
with the Securities Exchange Commission, and as of December 31, 2002, 9,179
shares have been issued, leaving 190,821 shares for future use. Participation
in this plan is optional and at the individual discretion of each shareholder.
Shares are purchased for the plan from the Company at a price per share equal
to the average of the daily bid and asked prices reported on the NASDAQ System
for the five trading days immediately preceding, but not including, the
dividend payment date. Sales of stock under the Dividend Reinvestment Plan
amounted to 7,028 shares in 2002 and 2,151 shares in 2001. All stock sold in
2002 was from 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 ten years from the date of grant.

Page 57
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued

The following table sets forth the status of the plan as of December 31,
2002, 2001 and 2000, and changes during the years then ended:

- -------------------------------------------------------------------------------
Number Weighted Average
of Shares Exercise Price
- -------------------------------------------------------------------------------
Balance at December 31, 1999 178,000 $ 9.21
Granted in 2000 5,000 16.50
Exercised in 2000 (22,000) 6.98
Forfeited in 2000 (6,000) 12.96
------- ------
Balance at December 31, 2000 155,000 9.62
Exercised in 2001 (17,000) 7.84
------- ------
Balance at December 31, 2001 138,000 9.84
Granted in 2002 11,000 28.00
Exercised in 2002 (43,200) 6.81
Forfeited in 2002 (1,000) 22.50
------- ------
Balance at December 31, 2002 104,800 $ 12.88
======= ======
- -------------------------------------------------------------------------------

The number and weighted average exercise price of exercisable options was
68,300 and $9.55 at December 31, 2002, 93,500 and $8.28 at December 31, 2001,
and 81,700 and $7.45 at December 31, 2000. The range of prices for outstanding
and exercisable stock options at December 31, 2002 was as follows:

- -------------------------------------------------------------------------------
Weighted
Average Weighted
Remaining Average
Number Contractual Exercise
Outstanding Life Price
- -------------------------------------------------------------------------------
Options Outstanding
$6.38 to $10.00 43,000 2.4 $ 7.15
$10.01 to $15.00 24,000 4.1 10.25
$15.01 to $20.00 23,800 6.9 17.67
$20.01 to $25.00 3,000 6.0 22.50
$25.01 to $28.00 11,000 9.1 28.00
------- ---- ------
104,800 4.6 $ 12.88
======= ==== ======
Options Exercisable
$6.38 to $10.00 35,000 2.3 $ 6.90
$10.01 to $15.00 24,000 4.1 10.25
$15.01 to $20.00 8,800 7.1 17.41
$20.01 to $25.00 500 6.0 22.50
$25.01 to $28.00 - 9.1 28.00
------- ---- ------
68,300 3.6 $ 9.55
======= ==== ======
- -------------------------------------------------------------------------------

Page 58
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued

Note 13. 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 a customer's performance 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:

- -------------------------------------------------------------------------------
2002 2001
- -------------------------------------------------------------------------------
Unused lines, collateralized by
residential real estate $ 22,472,000 10,445,000
Unused credit card lines - 11,718,000
Other unused commitments 30,890,000 22,367,000
Standby letters of credit 50,000 60,000
Commitments to extend credit 11,253,000 15,718,000
Unused portion of foreign exchange
forward contract, US$ equivalent - 319,000
- -------------------------------------------------------------------------------

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
borrowers' ability to honor their contracts is dependent on the economic
conditions in the area, especially in the real estate sector.

Page 59
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued

Note 14. Earnings Per Share

The following tables provide detail for basic earnings per share and diluted
earnings per share for the years ended December 31, 2002, 2001 and 2000:
- -------------------------------------------------------------------------------
Income Shares Per-Share
For the Year Ended December 31, 2002 (Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------
Net income as reported $ 6,507,000
========= ========= ========
Basic EPS: Income available to
common shareholders $ 6,507,000 2,404,965 $ 2.71
Effect of dilutive securities:
incentive stock options 56,804
--------- --------- --------
Diluted EPS: Income available to common
shareholders plus assumed conversions $ 6,507,000 2,461,769 $ 2.64
========= ========= ========
- -------------------------------------------------------------------------------
Income Shares Per-Share
For the Year Ended December 31, 2001 (Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------
Net income as reported $ 5,493,000
========= ========= =========
Basic EPS: Income available to
common shareholders $ 5,493,000 2,384,402 $ 2.30
Effect of dilutive securities:
incentive stock options 70,547
--------- --------- ---------
Diluted EPS: Income available to common
shareholders plus assumed conversions $ 5,493,000 2,454,949 $ 2.24
========= ========= =========
- -------------------------------------------------------------------------------
Income Shares Per-Share
For the Year Ended December 31, 2000 (Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------
Net income as reported $ 4,607,000
========= ========= =========
Basic EPS: Income available to
common shareholders $ 4,607,000 2,384,356 $ 1.93
Effect of dilutive securities:
incentive stock options 56,752
--------- --------- ---------
Diluted EPS: Income available to common
shareholders plus assumed conversions $ 4,607,000 2,441,108 $ 1.89
========= ========= =========
- -------------------------------------------------------------------------------

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.

Page 60
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued

Note 15. Fair Value of Financial Instruments

Fair value estimates, methods, and assumptions are set forth below for the
Company's financial instruments.

Cash and Cash Equivalents
The carrying values of cash, cash equivalents, due from banks and federal funds
sold approximate their relative fair values.

Investment Securities
The fair values of investment securities are estimated based on bid prices
published in financial newspapers or bid quotations received from securities
dealers. The fair value of certain state and municipal securities is not
readily available through market sources other than dealer quotations, so fair
value estimates are based on quoted market prices of similar instruments,
adjusted for differences between the quoted instruments and the instruments
being valued. Fair values are calculated based on the value of one unit without
regard to any premium or discount that may result from concentrations of
ownership of a financial instrument, possible tax ramifications, or estimated
transaction costs. If these considerations had been incorporated into the fair
value estimates, the aggregate fair value could have been changed. The carrying
values of restricted equity securities approximate fair values.

Loans Held for Sale
The fair value of loans held for sale is determined by the current investor
yield requirements.

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.
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.
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 an
actual sale.

Page 61
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued

Cash Surrender Value of Life Insurance
The fair value is based on the actual cash surrender value of life insurance
policies.

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.

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.

Accrued Interest Payable
The fair value estimate approximates the carrying amount as this financial
instrument has a short maturity.

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.

Page 62
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued

The estimated fair values for the Company's financial instruments as of
December 31, 2002 and 2001 were as follows:

- -------------------------------------------------------------------------------
December 31, 2002 December 31, 2001
------------------------- -------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
- -------------------------------------------------------------------------------
Financial assets
Cash and due from banks $ 14,181,000 14,181,000 10,894,000 10,894,000
Overnight funds sold 9,325,000 9,325,000 - -
Securities available
for sale 56,410,000 56,410,000 50,914,000 50,914,000
Securities to be held
to maturity 65,663,000 67,421,000 57,272,000 56,921,000
Loans held for sale 2,613,000 2,613,000 466,000 466,000
Loans (net of allowance
for loan losses) 328,374,000 334,928,000 298,304,000 303,828,000
Cash surrender value
of life insurance 4,468,000 4,468,000 4,250,000 4,250,000
Accrued interest receivable 2,642,000 2,642,000 2,635,000 2,635,000
- -------------------------------------------------------------------------------
Financial liabilities
Deposits $ 334,224,000 329,671,000 262,689,000 258,697,000
Borrowed funds 113,365,000 115,938,000 131,357,000 133,285,000
Accrued interest payable 786,000 786,000 891,000 891,000
- -------------------------------------------------------------------------------

Note 16. Other Operating Income and Expense

Other operating income includes the following items greater than 1% of
revenues.

- -------------------------------------------------------------------------------
2002 2001 2000
- -------------------------------------------------------------------------------
Merchant discount fees $ 967,000 880,000 743,000
Mortgage origination and servicing 685,000 357,000 71,000
- -------------------------------------------------------------------------------

Other operating expense includes the following items greater than 1% of
revenues.

- -------------------------------------------------------------------------------
2002 2001 2000
- -------------------------------------------------------------------------------
Stationery and supplies $ 293,000 215,000 160,000
Merchant interchange fees 681,000 620,000 551,000
Postage, freight and express 182,000 186,000 169,000
Exams and audits 233,000 231,000 190,000
- -------------------------------------------------------------------------------

Page 63
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued

Note 17. 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 income 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 income of that year combined with its retained net income of the
preceding two years and subject to minimum regulatory capital requirements. The
amount available for dividends in 2003 will be 2003 earnings plus retained
earnings of $7,043,000 from 2002 and 2001.
The payment of dividends by the Company is also affected by various
regulatory requirements and policies, such as the requirements to maintain
adequate capital. In addition, if, in the opinion of the applicable regulatory
authority, a bank under its jurisdiction is engaged in or is about to engage in
an unsafe or unsound practice (which, depending on the financial condition of
the bank, could include the payment of dividends), that authority may require,
after notice and hearing, that such bank cease and desist from that practice.
The Federal Reserve Bank and the Comptroller of the Currency have each
indicated that paying dividends that deplete a bank's capital base to an
inadequate level would be an unsafe and unsound banking practice. The Federal
Reserve Bank, the Comptroller and the Federal Deposit Insurance Corporation
have issued policy statements which provide that bank holding companies and
insured banks should generally only pay dividends out of current operating
earnings.
In addition to the effect on the payment of dividends, failure to meet
minimum capital requirements can also result in mandatory and discretionary
actions by regulators that, if undertaken, could have an impact on the
Company's operations. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measurements of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of Tier 1 capital and Tier 2 or total capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December
31, 2002, that the Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 2002, 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.

Page 64
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued

The actual and minimum 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, 2002
Tier 2 capital to $ 42,086,000 26,143,000 32,679,000
risk-weighted assets 12.88% 8.00% 10.00%
Tier 1 capital to 38,386,000 13,072,000 19,607,000
risk-weighted assets 11.75% 4.00% 6.00%
Tier 1 capital to 38,386,000 19,667,000 24,584,000
average assets 7.81% 4.00% 5.00%
- -------------------------------------------------------------------------------
As of December 31, 2001
Tier 2 capital to $ 37,533,000 22,494,000 28,118,000
risk-weighted assets 13.35% 8.00% 10.00%
Tier 1 capital to 34,533,000 11,247,000 16,871,000
risk-weighted assets 12.28% 4.00% 6.00%
Tier 1 capital to 34,533,000 16,967,000 21,208,000
average assets 8.14% 4.00% 5.00%
- -------------------------------------------------------------------------------

The actual and minimum 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, 2002
Tier 2 capital to $ 44,070,000 26,222,000 32,778,000
risk-weighted assets 13.45% 8.00% 10.00%
Tier 1 capital to 40,370,000 13,111,000 19,667,000
risk-weighted assets 12.32% 4.00% 6.00%
Tier 1 capital to 40,370,000 19,707,000 24,633,000
average assets 8.19% 4.00% 5.00%
- -------------------------------------------------------------------------------
As of December 31, 2001
Tier 2 capital to $ 39,402,000 22,603,000 28,254,000
risk-weighted assets 13.95% 8.00% 10.00%
Tier 1 capital to 36,402,000 11,302,000 16,952,000
risk-weighted assets 12.88% 4.00% 6.00%
Tier 1 capital to 36,402,000 17,016,000 21,270,000
average assets 8.56% 4.00% 5.00%
- -------------------------------------------------------------------------------

Page 65
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, continued

Note 18. Condensed Financial Information of Parent

Condensed financial information for First National Lincoln Corporation
exclusive of its subsidiary is as follows:

- -------------------------------------------------------------------------------
Balance Sheet
December 31, 2002 2001
- -------------------------------------------------------------------------------
Assets
Cash $ 560,000 656,000
Dividends receivable 750,000 550,000
Investments 766,000 750,000
Investment in subsidiary 40,704,000 35,469,000
Other assets 565,000 479,000
---------- ----------
$ 43,345,000 37,904,000
========== ==========
Liabilities and shareholders' equity
Dividends payable $ 628,000 526,000
Other liabilities 22,000 44,000
Shareholders' equity 42,695,000 37,334,000
---------- ----------
$ 43,345,000 37,904,000
========== ==========
- -------------------------------------------------------------------------------

- -------------------------------------------------------------------------------
Statements of Income
Years ended December 31, 2002 2001 2000
- -------------------------------------------------------------------------------
Investment income $ 56,000 56,000 57,000
Operating expense 84,000 47,000 50,000
--------- --------- ---------
Income (loss) before Bank earnings (28,000) 9,000 7,000
Equity in earnings of Bank:
Remitted 2,590,000 2,200,000 1,600,000
Unremitted 3,917,000 3,284,000 3,000,000
--------- --------- ---------
Net income $ 6,507,000 5,493,000 4,607,000
========= ========= =========
- -------------------------------------------------------------------------------

Page 66
First National Lincoln Corporation and Subsidiary
Notes to Consolidated Financial Statements, concluded

- -------------------------------------------------------------------------------
Statements of Cash Flows
Years ended December 31, 2002 2001 2000
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 6,507,000 5,493,000 4,607,000
Adjustments to reconcile net
income to net cash
provided by operating activities:
(Increase) decrease in other assets (86,000) 5,000 23,000
Increase (decrease) in other
liabilities (22,000) 23,000 (1,000)
Unremitted earnings of Bank (3,917,000) (3,284,000) (3,000,000)
--------- --------- ---------
Net cash provided by operating
activities 2,482,000 2,237,000 1,629,000
---------- --------- ---------
Cash flows from financing activities:
Purchase of Treasury stock (945,000) (254,000) (316,000)
Sale of Treasury stock 628,000 312,000 260,000
Dividends paid (2,261,000) (1,861,000) (1,479,000)
--------- --------- ---------
Net cash used in financing
activities (2,578,000) (1,803,000) (1,535,000)
--------- --------- ---------
Net increase (decrease) in cash (96,000) 434,000 94,000
Cash, beginning of year 656,000 222,000 128,000
--------- --------- ---------
Cash, end of year $ 560,000 656,000 222,000
========= ========= =========
- -------------------------------------------------------------------------------

Page 67
ITEM 9. Changes in and/or Disagreements with Accountants

None.

Page 68
ITEM 10. Directors and Executive Officers of the Registrant

The Articles of Incorporation of the Company provide that the Board of
Directors shall consist of not fewer than five (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 2003, and each will be nominated for a
re-election for a three-year term as Director expiring in 2006:

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 First
National Bank of Damariscotta (the "Bank"), the Company's wholly owned
subsidiary, since 1994. Prior to being employed by the Bank, Mr. Daigneault was
Vice President, Senior Commercial Loan Officer and Chief Financial Officer at
Camden National Bank, Camden, Maine. Mr. Daigneault is past Chairman of the
Maine Bankers Association and past President of the Boothbay Region YMCA Board
of Trustees.
Dana L. Dow has served as a Director of the Company and the Bank since
1999. Mr. Dow is President of Dow Furniture, located in Waldoboro, Maine, which
he purchased from his father in 1977 and Dow's Fine Furniture located in
Rockland, Maine. 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 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 2004:

Bruce A. Bartlett has served as a Director of the Company since its
organization in 1985 and 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.
Stuart G. Smith has served as a Director of the Company and the Bank since
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 also on the board and part owner of the Mid Coast
Recreation Center in Rockport. He also serves on the Five Town CSD High School
Board and the SAD 28 Camden/Rockport School Board.

Page 69
The following Directors' terms will expire in 2005:

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 as Vice President of the Boothbay
Region YMCA, and is 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.
David B. Soule, Jr. has served as a Director of the Company and the Bank
since 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
1999. Mr. Tindal formed and is owner of Tindal & Callahan Real Estate in
Boothbay Harbor, which has been in operation since 1985. Mr. Tindal serves on
the Board of Directors of the Boothbay Region Land Trust, the Lincoln County
Board of Realtors and the St. Andrews Village Association. Mr. Tindal is also a
member of the National Association of Realtors, the Maine Association of
Realtors, the Council of Residential Specialists 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.

Page 70
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
50 of the Company and of the Bank
F. Stephen Ward Treasurer & Chief Financial Officer 1993 to date
49 of the Company; Senior Vice President
and Chief Financial Officer of the
Bank; Principal of Pemaquid Advisors
Charles A. Wootton Clerk of Company; Senior Vice President, 2000 to date
46 Banking Services Officer and Senior
Loan Officer of the Bank
Walter F. Vietze Senior Vice President and Senior 1984 to date
61 Operations Officer of the Bank
Michael T. Martin Senior Vice President and Credit 1993 to date
47 Administration Officer of the Bank
Richard M. Elder Vice President, Retail Services 2002 to date
37
Susan A. Norton Vice President, Human Resources and 2002 to date
42 Compliance
John E. Thien Vice President, Controller 2003 to date
53
William M. Hunter,II Managing Principal, Pemaquid Advisors 2003 to date
53
- -----------------------------------------------------------------------------
(1) As of December 31, 2002

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 Company and the Bank, Mr. Daigneault was
Vice President, Senior Commercial Loan Officer and Chief Financial Officer at
Camden National Bank, Camden, Maine.
F. Stephen Ward has served as Treasurer & Chief Financial Officer 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.
Charles A. Wootton has been employed by the Bank since January 2000. In
2001, Mr. Wootton was promoted to Senior Vice President for Banking Services
and Senior Loan Officer. 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.
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. In 2001, Mr.
Martin was promoted to Senior Vice President for Credit Administration. He was
employed by Fleet Bank from 1980 to 1992, and by Canal National Bank from 1977
to 1980. His primary responsibilities were in Loan Review and Credit
Administration.

Page 71
Susan A. Norton became a member of the Executive Leadership Team in 2002
when she was promoted to Vice President Human Resources and Compliance. In
1995, Ms. Norton was the Assistant Compliance Officer and Education Officer.
She also holds the position of Assistant Director of Strategic Planning and CRA
Officer as well as being the Compliance Officer for the Company. Ms. Norton has
been employed by the Bank since 1992.
John E. Thien has been employed by the Bank since 2000. In 2001, he was
promoted to Vice President, Controller. Prior to joining the Bank, Mr. Thien
worked at Kingfield Bank as Chief Financial Officer.
Richard M. Elder has served as Vice President Retail Services since 2000
and became a member of the Executive Leadership Team in 2002. Mr. Elder
previously served as Manager of the Bank's Boothbay Harbor branch and Senior
Commercial Loan Officer. Mr. Elder has been employed by the Bank since 1993.
William M. Hunter, II joined the Company in 2001 with the merger of
Pemaquid Advisors and White Pine Asset Management. In 2002, Mr. Hunter was
named as Chief Investment Officer and in 2003 he was promoted to Managing
Principal of Pemaquid Advisors. Prior to joining the Company, Mr. Hunter was
Executive Vice President in charge of KeyCorp's national trust business.

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 2002.

Page 72
ITEM 11. Executive Compensation

Executive Compensation

The table below sets forth cash compensation paid to the President & Chief
Executive Officer as well as the Treasurer & Chief Financial Officer and the
Senior Vice President/Senior Loan Officer during 2002, 2001 and 2000. No other
Executive Officers of the Company received compensation in excess of $100,000
for the years ended December 31, 2002, 2001 and 2000

- -------------------------------------------------------------------------------
Name Annual Long-Term
and Compensation Compensation
Principal ----------------------------- ------------
Position Year Salary Bonus(1) Other(2) # Options
- -------------------------------------------------------------------------------
Daniel R. Daigneault 2002 $ 230,000 $ 49,960 $ 19,217 -0-
President and CEO 2001 $ 195,000 $ 48,750 $ 14,660 -0-
2000 $ 184,000 $ 17,112 $ 14,005 -0-
- -------------------------------------------------------------------------------
F. Stephen Ward 2002 $ 125,000 $ 25,000 $ 11,283 -0-
Treasurer and CFO 2001 $ 115,000 $ 10,560 $ 11,972 -0-
2000 $ 85,000 $ 8,670 $ 5,387 -0-
- -------------------------------------------------------------------------------
Charles A. Wootton 2002 $ 110,000 $ 22,720 $ 11,800 5,000
SVP and Senior Loan 2001 $ 80,000 $ 11,200 $ 10,000 -0-
Officer 2000 $ 70,000 $ 6,510 $ 5,500 5,000
- -------------------------------------------------------------------------------
(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 Officers in the 401(k) Plan. In 2002 the
Company and the Bank contributed to the Bank's Savings and Investment Plan a
matching amount for the salary deferred by Mr. Daigneault, Mr. Ward and Mr.
Wootton equal to 3.0% of their respective earnings and a profit-sharing
component of 3.0% of their respective 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 $200,000. These percentages
were equivalent to the 401(k) Plan match and profit sharing contributions made
for all eligible employees. This figure also recognizes the value to the
officers of a Company-provided vehicle.

Compensation of the Chief Executive Officer

The Compensation Committee consists of four outside members of the Board
of Directors. This Committee has the responsibility for conducting the annual
evaluation and determining the compensation level of the Chief Executive
Officer. The compensation of the Chief Executive Officer 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 Chief Executive Officer 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 and the Company. The
financial goals pertain to profitability, loan and deposit growth as well as
loan portfolio quality.

Page 73
The compensation philosophy of the Company for all management personnel is
to pay a competitive base salary commensurate with salaries paid by other
similar financial institutions, plus a short-term incentive bonus which is tied
to the achievement of certain performance goals. 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 2002, total cash payout under this Stakeholder Performance
Compensation program was 15.20% of the participating employees' base salaries.
This performance compensation program's overall objective is to maximize
the long-term viability of the Company and increase shareholder value. It
addresses this by tying the bonus payout to multiple goals which include
profitability, growth, productivity and loan quality. The guiding principle is
to reach a balance of profitability, growth, productivity and loan 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 2002 some of the indicators were: loan
volume, deposit volume, non-performing loan levels, non-interest income, net
interest income and operating expenses as a percentage of net income.
The amount of base compensation potentially payable to the Chief Executive
Officer and other executive officers was determined by reviewing independent
salary surveys of compensation of officers for similar financial institutions
located in New England. The committee took into consideration the actual
salaries paid to Presidents and CEOs of these peer banks and the performance of
the Company in comparison to this peer group in establishing the 2002 base
salary for the Chief Executive Officer.
The Chief Executive Officer is given annual goals relating to both
financial performance and corporate objectives, which are established by the
Committee pursuant to discussions with the Chief Executive Officer. On an
annual basis, the Committee conducts a formal evaluation of the Chief Executive
Officer, compares his performance to the established goals, assesses the
overall performance of the Company and makes recommendations as appropriate.
The Chief Executive Officer's base compensation for 2002 was reflective of
the Company's overall financial performance in 2001, which, in the opinion of
the Compensation Committee, was considered excellent. All 2001 goals set for
the Chief Executive Officer 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
overall performance, the committee increased his base salary by $35,000 or
18.00% to $230,000 for 2002.
The Chief Executive Officer's 2002 bonus compensation was 21.70% of base
compensation, of which 15.20% was paid in accordance with the Company's
Stakeholder Performance Compensation program for all employees. The additional
bonus for 2002 is a reflection of the exceptional year the Company had in
exceeding its financial performance goals, most notably a $1,014,000 increase
in net income or 18.50% and a return on average equity of 16.34%.

2002 Compensation Committee Members:
Malcolm E. Blanchard, Chair
Robert B. Gregory
Carl S. Poole, Jr.
Stuart G. Smith

Page 74
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions

During 2002, Directors Gregory, Blanchard, Poole and Smith 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 to such individuals 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.

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 $500 for each
meeting attended and $300 for each meeting attended of a committee of which the
director is a member. The Chairman of the Board received an annual fee of
$18,000. The Chairman of the Executive Committee also received a stipend of
$4,500 in addition to meeting fees paid for meetings attended. 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 to other providers in the
area. Fees paid by the Bank to its Directors as a group totaled $91,700 in
2002, 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 three standing committees of the Board of Directors:
Audit, Options and Nominating. The Bank has seven standing committees of the
Board of Directors: Executive, Audit, Asset/Liability, Trust, Directors' Loan,
Compensation and Nominating. 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 2002
was in excess of 90%.

Page 75
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 and to align
their interest with those of the shareholders. The 1995 Stock Option Plan
provides for grants of options to purchase Company common stock and is
administered by an Options Committee which consists of four outside directors.
During 2002, 11,000 stock options were granted under the 1995 Stock Option
Plan. The following table sets forth the status of the Stock Option Plan as of
December 31, 2002:

- -------------------------------------------------------------------------------
Options approved by Shareholders 200,000
- -------------------------------------------------------------------------------
Options granted (194,000)
Options forfeited 7,000
- -------------------------------------------------------------------------------
Ungranted options remaining 13,000
- -------------------------------------------------------------------------------

- -------------------------------------------------------------------------------
Outstanding Weighted average Number of
unexercised options exercise price options
- -------------------------------------------------------------------------------
Exercisable $ 9.55 68,300
Non-exercisable 19.12 36,500
- -------------------------------------------------------------------------------
$ 12.88 104,800
- -------------------------------------------------------------------------------

2002 Option Committee Members:
Malcolm E. Blanchard, Chair
Robert B. Gregory
Carl S. Poole, Jr.
Stuart G. Smith

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 executives and all other employees concerning grants of stock options
during 2002:

Page 76
- -------------------------------------------------------------------------------
Option Grants During the Year Ended December 31, 2002
- -------------------------------------------------------------------------------
% 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 5% 10%
- -------------------------------------------------------------------------------
Daniel R. Daigneault -0- 0.0% $ -0- - $ -0- $ -0-
F. Stephen Ward -0- 0.0% $ -0- - $ -0- $ -0-
Charles A. Wootton 5,000 45.5% $ 28.00 4/2012 $ 88,000 $ 223,000
All other employees 6,000 54.5% $ 28.00 4/2012 $ 106,000 $ 268,000
- -------------------------------------------------------------------------------
All 11,000 100.0% $ 28.00 4/2012 $ 194,000 $ 491,000
- -------------------------------------------------------------------------------
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. The values have 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.

The following table sets forth information with respect to exercisable and
unexercisable options held as of December 31, 2002:

- -------------------------------------------------------------------------------
Aggregated Option Exercises in 2002 and December 31, 2002 Option Values
- -------------------------------------------------------------------------------
Number of
securities underlying Value of unexercised
unexercised options in-the-money
Shares at year end options at year end
acquired ------------------ ---------------------
on Value Exer- Unexer- Exer- Unexer-
exercise realized cisable cisable cisable cisable
- -------------------------------------------------------------------------------
Daniel R. Daigneault 35,000 $798,000 31,000 12,000 $ 729,000 $ 238,000
F. Stephen Ward -0- -0- 10,500 2,500 209,000 31,000
Charles A. Wootton -0- -0- 5,000 10,000 74,000 92,000
All other employees 8,200 165,000 21,800 12,000 486,000 91,000
- -------------------------------------------------------------------------------
All optionees 43,200 $963,000 68,300 36,500 $1,498,000 $ 452,000
- -------------------------------------------------------------------------------

Page 77
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, 2002, 110,523 shares had been issued pursuant to these plans,
leaving 49,477 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. Employees may contribute up to 50.0% of their
compensation (not to exceed $11,000 if under age 50 and $12,000 if over age
50), and the Bank may provide a match of up to 3.0% of compensation. Subject to
a vote of the Board of Directors, the Bank may also make a profit-sharing
contribution to the Plan, and in 2002 this contribution equaled 3.0% of each
eligible employee's compensation. 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 $95,000 in matching
contributions and $121,000 in profit-sharing contributions to this plan in
2002. 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, 2002, 57,321 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, 2002, 53,202 shares of the Company's stock had
been purchased pursuant to the plan.

Page 78
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 Mr. 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 projected retirement benefit
for Mr. Ward, assuming he remains employed by the Bank until normal retirement
age of 65, is $61,127 per year, with such payments beginning in the year 2018.
The expense for all participants in this supplemental plan was $112,000 in
2002, $141,000 in 2001, and $123,000 in 2000. As of December 31, 2002 and 2001,
the accrued liability of this plan was $591,000 and $484,000, 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 for 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
Company's outstanding 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

Page 79
are first exercisable in any calendar year may generally not exceed $100,000.
While generally no options may be exercisable before the second
anniversary of the grant date, in the event of a change in control involving
the Company all options (other than those held by officers or directors of the
Company or the Bank for less than six months) shall become immediately
exercisable. Also, an employee whose employment is terminated in connection
with or within two years after such a change in control event shall be entitled
to exercise all options for up to three months following the date of
termination; provided that options held by officers or directors shall not be
exercisable until six months after the grant date. Employees whose services are
terminated, other than following a change in control as described above, shall
thereupon forfeit any options held; provided, however, that following
termination due to disability an employee shall be entitled to exercise options
for up to one year (provided, further, that officers 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 $100.00 invested in the Company's common stock ("FNLC"), assuming
reinvestment of all cash dividends and retention of all stock dividends, with a
comparable amount invested in 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.

The following information is presented in a line graph in the printed form
10_K:

- -------------------------------------------------------------------------------
Performance graph data 1997 1998 1999 2000 2001 2002
- -------------------------------------------------------------------------------
FNLC 100.00 166.18 123.71 123.03 184.42 271.97
NASD Bank 100.00 88.23 81.19 93.10 102.48 107.11
S&P 500 100.00 128.34 155.08 141.08 124.36 96.87
- -------------------------------------------------------------------------------

Page 80
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Directors, Management and Principal Shareholders(1)

The following table sets forth the number of shares of common stock of the
Company beneficially owned as of March 10, 2003 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 81
- -------------------------------------------------------------------------------
Shares Percent
Owners of 5% or More Owned Owned
- -------------------------------------------------------------------------------
Daniel P. & Edith I. Thompson 157,804 6.52%
20 Pounds Road
New Harbor, ME 04545
- -------------------------------------------------------------------------------
Directors & Executive Officers
- -------------------------------------------------------------------------------
Name Position Term Shares Percent
Age(2) Expires Owned Owned
- -------------------------------------------------------------------------------
Bruce A. Bartlett Director of the Bank and the Company; 2004 8,571 *
69 Chairman, Trust Committee
Malcolm E. Blanchard Director of the Bank and the Company; 2004 28,440 1.18%
68 Chairman, Executive Committee
Katherine M. Boyd Director of the Bank and the Company 2005 11,015 *
51
Daniel R. Daigneault President, Chief Executive Officer 2003 78,920(3) 3.26%
50 and Director of the Bank and the Company
Dana L. Dow Director of the Bank and the Company 2003 1,631 *
51
Robert B. Gregory Chairman of the Boards of Directors 2003 14,856 *
49 of the Bank and the Company
Carl S. Poole, Jr. Director of the Bank and the Company; 2005 90,305 3.73%
57 Chairman, Asset/Liability Committee
Stuart G. Smith Director of the Bank and the Company; 2004 27,391 1.13%
50 Chairman, Directors' Loan Committee
David B. Soule, Jr. Director of the Bank and the Company; 2005 5,721 *
57 Chairman, Audit Committees of the
Bank and the Company
Bruce B. Tindal Director of the Bank and the Company 2005 1,985 *
52
F. Stephen Ward Treasurer & Chief Financial Officer n/a 26,965(3) 1.11%
49 of the Company; Senior Vice President
and Chief Financial Officer of the
Bank; Principal of Pemaquid Advisors
Charles A. Wootton Clerk of Company; Senior Vice n/a 5,075(3) *
46 President Banking Services
Officer and Senior Loan Officer
of the Bank
- -------------------------------------------------------------------------------
Total Ownership of all Directors and
Executive Officers as a group 335,848 13.88%
- -------------------------------------------------------------------------------

* 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, 2002.
(3)Includes exercisable stock options.

Page 82
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,
2002 to the Company's Directors, Executive Officers and their associates was
$7,324,141, which constituted 2.21% of the Bank's total loans outstanding at
that date.

Page 83
ITEM 14. Controls and Procedures

Evaluation of disclosure controls and procedures.

As required by Rule 13a-15 under the Securities Exchange Act of 1934, within
the 90 days prior to the date of this report, the Company carried out an
evaluation under the supervision and with the participation of the Company's
Management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in the reports it files or submits
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Securities and Exchange Commission's rules
and forms. In connection with the new rules, the Company is currently in the
process of further reviewing and documenting disclosure controls and
procedures, including internal controls and procedures for financial reporting,
and may from time to time make changes aimed at enhancing their effectiveness
and to ensure that these systems evolve with the Company's business.

Changes in internal controls.

None.

Page 84

ITEM 15. 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 99.1 Certification of Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002

Exhibit 99.2 Certification of Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K

The Company's press release announcing its third quarter earnings was filed on
Form 8-K under item 5 on October 16, 2002.

Pursuant to section 906 of the Sarbanes-Oxley Act of 2002, the certifications
of Daniel R. Daigneault, President & Chief Executive Officer, and F. Stephen
Ward, Treasurer & Chief Financial Officer, were filed on Form 8-K under item 9
on November 8, 2002. The certifications were filed in connection with the
filing of the Company's report on Form 10-Q for the period ended September 30,
2002.

The Company's press release announcing the fourth quarter 2002 dividend
declaration was filed on Form 8-K under item 5 on December 20, 2002.

Page 85
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 /s/Daniel R. Daigneault
Daniel R. Daigneault, President
March 20, 2003

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

/s/Daniel R. Daigneault President and Director
Daniel R. Daigneault (Principal Executive Officer)
March 20, 2003

/s/F. Stephen Ward Treasurer
F. Stephen Ward (Principal Financial Officer,
Principal Accounting Officer)
March 20, 2003

/s/Robert B. Gregory Director and
Robert B. Gregory Chairman of the Board
March 20, 2003

/s/Bruce A. Bartlett Director
Bruce A. Bartlett March 20, 2003

/s/Malcolm E. Blanchard Director
Malcolm E. Blanchard March 20, 2003

/s/Katherine M. Boyd Director
Katherine M. Boyd March 20, 2003

/s/Dana L. Dow Director
Dana L. Dow March 20, 2003

/s/Carl S. Poole, Jr. Director
Carl S. Poole, Jr. March 20, 2003

/s/Stuart G. Smith Director
Stuart G. Smith March 20, 2003

/s/David B. Soule, Jr. Director
David B. Soule, Jr. March 20, 2003

/s/Bruce A. Tindal Director
Bruce A. Tindal March 20, 2003

Page 86
CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Daniel R. Daigneault, certify that:

1. I have reviewed this annual report on Form 10-K of First National Lincoln
Corporation;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 20, 2003

/s/ Daniel R. Daigneault

Daniel R. Daigneault
President & Chief Executive Officer
First National Lincoln Corporation

Page 87
CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, F. Stephen Ward, certify that:

1. I have reviewed this annual report on Form 10-K of First National Lincoln
Corporation;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 20, 2003

/s/ F. Stephen Ward

F. Stephen Ward
Treasurer & Chief Financial Officer
First National Lincoln Corporation

Page 88