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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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, 1996
Commission File Number 2-96573
FIRST NATIONAL LINCOLN CORPORATION
(Exact name of Registrant as specified in its charter)
MAINE 01-0404322
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
MAIN STREET, DAMARISCOTTA, MAINE 04543
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (207) 563-3195
Securities registered pursuant to Section 12(b) or Section 12(g)
of the Securities Exchange Act of 1934
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding twelve months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes [X] No[ ]
State the aggregate market value of voting stock held by
non-affiliates of the Registrant as of March 1, 1997:
Common Stock, $.01 par value per share: $25,216,886
Indicate the number of shares outstanding of each of the issuer's class
of common stock as of March 1, 1997:
Common stock: 615,046 shares
TABLE OF CONTENTS
PART I
ITEM 1. Discussion of Business ------------------------------------------- 1
ITEM 2. Properties ------------------------------------------------------- 3
ITEM 3. Legal Proceedings ------------------------------------------------ 4
ITEM 4. Submission of matters to a Vote of Security Holders -------------- 5
PART II
ITEM 5. Market for Registrant's Common Equity ---------------------------- 6
ITEM 6. Selected Financial Data ------------------------------------------ 7
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ---------------------------------------- 8
ITEM 8. Financial Statements and Supplementary Data ---------------------- 23
ITEM 9. Changes in and/or Disagreements with Accountants ----------------- 53
PART III
ITEM 10. Directors and Executive Officers of the Registrant -------------- 54
ITEM 11. Executive Compensation ------------------------------------------ 57
ITEM 12. Security Ownership of Certain Beneficial Owners and Management -- 64
ITEM 13. Certain Relationships and Related Transactions ------------------ 65
PART IV
ITEM 14. Exhibits -------------------------------------------------------- 66
Signatures --------------------------------------------------------------- 67
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, 1996, the
Company's securities consisted of one class of common stock, $.01 par value per
share, of which there were 616,176 shares outstanding and held of record by
approximately 350 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 four offices in Mid-Coast Maine, including its principal
office located on Main Street, Damariscotta, Lincoln County, Maine and three
branch offices located at U.S. Route 1, Waldoboro, Maine; Townsend Avenue,
Boothbay Harbor, Maine; and Route 27, Wiscasset, 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.
The Bank emphasizes personal service to the community, concentrating on
retail banking. Customers are primarily small businesses and individuals for
whom the Bank offers a wide variety of services, including checking, savings
and investment accounts, consumer, commercial and mortgage loans, credit cards,
as well as a full trust department. The Bank has not made any material changes
in its mode of conducting business during the past five years.
The banking business in the Bank's market area historically has been
seasonal with lower deposits in the winter and spring and higher deposits in
the summer and fall. This swing is fairly predictable and has not had a
materially adverse effect on the Bank. The Bank operates in a highly
competitive geographical area with respect to both loans and deposits,
primarily from savings banks, savings and loan associations, credit unions, and
other commercial banks, some of which are larger institutions with higher
lending limits than the Bank. The Bank also has competition from non-banking
providers of financial products and services such as insurance companies,
mortgage companies, automotive finance companies, and mutual funds both from
within and without the Bank's primary geographic service area.
Competition has intensified in recent years with a revision in banking law
which allows out-of-state bank holding companies to acquire or establish banks
in Maine. As a result, several out-of-state holding companies have entered the
Maine banking market, principally through the acquisition of existing Maine
banks. The Bank expects to be subject to an increased level of competition from
these out-of-state banking institutions. The Bank anticipates that the further
relaxation of restrictions on interstate banking potentially resulting from the
recently enacted Riegle-Neal bill and the Maine Legislature's recent adoption
of legislation permitting out-of-state banks, under certain circumstances, to
establish or acquire branches in Maine, will heighten competition faced by the
Bank, although the extent to which such legislation will have an effect in
Maine is as yet unclear.
As of December 31, 1996, the Bank employed 101 persons, with 91 full-time
equivalent employees.
Supervision and Regulation
The Company is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended (the "Act"), and is required to file
with the Board of Governors of the Federal Reserve System (the "Federal Reserve
Page 1
Board") an annual report and other information required pursuant to the Act.
The Company is subject to examination by the Federal Reserve Board.
The Act requires the prior approval of the Federal Reserve Board for a
bank holding company to acquire or hold more than a 5% voting interest in any
bank, and restricts interstate banking activities. The Act restricts First
National Lincoln Corporation's non-banking activities to those which are
determined by the Federal Reserve Board to be closely related to banking. The
Act does not place territorial restrictions on the activities of non-bank
subsidiaries of bank holding companies.
The majority of the Company's cash revenues are generally derived from
dividends paid to the Company by the Bank. These dividends are subject to
various legal and regulatory restrictions which are summarized in Note 15 to
the accompanying financial statements.
The Bank is subject to the provisions of the National Bank Act, and as
such, must meet certain liquidity and capital requirements, which are discussed
in Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations. The Office of the Comptroller of the Currency -- the
Bank's principal regulatory agency -- conducts periodic examinations of the
Bank. Certain state banking regulations also apply to the Bank, as administered
by the Maine Bureau of Banking.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
recapitalized the deposit insurance funds and gave regulators the authority to
restrict the operations, management and capital distributions of a bank,
depending upon its risk. On December 31, 1996, the Bank was classified in the
lowest risk category. FDICIA also directs regulators to establish underwriting
and operations standards, encompassing such areas as real estate lending,
consumer disclosure rules, internal controls and new reporting requirements.
The monetary policies of regulatory authorities, including the Federal
Reserve Board, have a significant effect on the operating results of banks and
bank holding companies. Through open market securities transactions and changes
in its discount rate and reserve requirements, the Board of Governors exerts
considerable influence over the cost and availability of funds for lending and
investment. The nature of future monetary policies and the effect of such
policies on the future business and earnings of the Company and the Bank cannot
be predicted. See Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations, regarding the Bank's net interest margin
and the effect of interest-rate volatility on future earnings.
Page 2
ITEM 2. Properties
The principal office of the Bank is located in Damariscotta, Maine, and
serves the people of Newcastle, Edgecomb, Jefferson, Bremen, Wiscasset,
Nobleboro, South Bristol and Bristol. A branch office opened in Waldoboro in
1975, which is located approximately ten miles from Damariscotta on U.S. Rt. 1,
serves the population of Waldoboro and the surrounding towns of Friendship,
Warren, Washington and Monhegan Island.
In 1979, a branch office was opened in Boothbay Harbor, which is situated
approximately 16 miles from Damariscotta. This office serves the towns of
Boothbay, West Boothbay, Boothbay Harbor, Southport and neighboring areas. In
1988, a branch office was opened in Wiscasset, which is approximately eight
miles from Damariscotta. This office serves the towns of Wiscasset, Edgecomb,
Alna, Woolwich and Dresden. An operations center was completed in the adjacent
block fronting on Bristol Road in Damariscotta. It was put in service in July,
1989. The Bank owns all of its facilities.
Expansion of the Bank's Boothbay Harbor office began in the Fall of 1995
to better serve customer needs. It included utilization of an adjacent
property that was purchased in 1994. The project was completed in
the Summer of 1996. The Bank also owns real estate on Water Street in
Damariscotta, Maine, which was put into use for additional office space during
1995.
Management believes that the Bank's current facilities are suitable and
adequate in light of its current needs and its anticipated needs over the near
term.
Page 3
ITEM 3. Legal Proceedings
There are no material pending legal proceedings to which the Company or
the Bank is the party or to which any of its property is subject, other than
routine litigation incidental to the business of the Bank. None of these
proceedings is expected to have a material effect on the financial condition of
the Company or of the Bank.
Page 4
ITEM 4. Submission of matters to a Vote of Security Holders
There were no items submitted to a vote of security holders of the Company
during the fourth quarter of 1996.
Page 5
ITEM 5. Market for Registrant's Common Equity
The Company's stock is not traded on any securities exchange and is not
regularly quoted by the National Association of Securities Dealers Automated
Quotation System (NASDAQ). There is no established public trading market for
the Company's stock, and it is traded only sporadically through individual
purchases and sales. The following table reflects the high and low price of
actual sales in each quarter of 1996 and 1995. Such quotations do not reflect
retail mark-ups, mark-downs or brokers' commissions.
1996 1995
----------------- ----------------
High Low High Low
1st Quarter 35 33 26 25
2nd Quarter 36 35 27 1/2 26
3rd Quarter 38 36 30 1/2 27 1/2
4th Quarter 41 38 33 30 1/2
The last known transaction involving the Company's stock during 1996 was
on December 17 at $41.00 per share. There are no warrants outstanding with
respect to the Company's common stock, and the Company has no securities
outstanding which are convertible into common equity. As of December 31, 1996,
there were approximately 350 holders of record of the Company's common stock,
as listed on the Company's shareholder records. The table below sets forth the
cash dividends declared by the Company during its last two fiscal years,
including a special cash dividend of $.10 declared on December 21, 1995 and a
special cash dividend of $.20 declared on December 19, 1996:
Date Declared Dividend Per Share Date Payable
----------------- ------------------ ----------------
March 16, 1995 .14 April 15, 1995
June 15, 1995 .15 July 15, 1995
September 21, 1995 .15 October 30, 1995
December 21, 1995 .16 January 31, 1996
December 21, 1995 .10 January 31, 1996
-----
.70
March 21, 1996 .17 April 30, 1996
June 13, 1996 .18 July 30, 1996
September 19, 1996 .19 October 30, 1996
December 19, 1996 .20 January 30, 1997
December 19, 1996 .20 January 30, 1997
-----
.94
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 so much
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 combined with the 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, 1996, the Bank was required to have minimum Tier 1
and Tier 2 risk-based capital ratios of 4.00% and 8.00%, respectively. The
Bank's actual ratios were 14.80% and 16.05%, respectively, as of December 31,
1996.
Page 6
ITEM 6. Selected Financial Data
Dollars in thousands, except for per share amounts
Years ended December 31, 1996 1995 1994 1993 1992
------- ------- ------ ------ ------
Summary of Operations
Operating Income $18,863 17,404 14,871 13,883 14,550
Operating Expense 13,852 13,414 11,766 11,514 13,167
Net Interest Income 9,347 8,538 8,209 7,593 6,761
Provision for Loan Losses 60 0 0 455 1,200
Net Income (1) 3,424 2,720 2,174 1,695 1,149
Per Common Share Data (2)
Net Income (1) 5.60 4.47 3.58 2.81 1.91
Cash Dividends Declared 0.94 0.70 0.55 0.46 0.44
Book Value 36.48 32.10 27.79 25.00 22.17
Market Value (2) 41.00 33.00 25.00 20.50 15.00
Financial Ratios
Return on Average Equity (1) 16.38% 15.03% 13.59% 11.80% 8.98%
Return on Average Assets (1) 1.54 1.34 1.11 0.98 0.68
Average Equity to Average Assets 9.41 8.90 8.20 8.32 7.53
Net Interest Margin 4.51 4.49 4.54 4.75 4.50
Dividend Payout Ratio (1) 16.82 15.66 15.36 16.52 22.89
Allowance for Loan Losses/Total Loans 1.21 1.55 2.02 2.49 2.26
Non-Performing Loans to Total Loans 0.28 0.78 1.43 2.46 1.04
Non-Performing Assets to Total Assets 0.54 0.79 1.16 1.94 1.67
Efficiency Ratio 0.52 0.57 0.65 0.66 0.65
At Year End
Total Assets $230,768 212,282 196,531 181,051 169,588
Total Loans 156,970 133,245 120,294 105,288 103,500
Total Investment Securities 60,564 61,570 65,654 65,434 53,928
Total Deposits 155,674 150,468 142,445 156,710 155,485
Total Shareholders' Equity 22,477 19,565 16,892 15,129 13,348
1) 1993 statistics are based upon net income before the one-time change in
accounting for income taxes. See Note 7 to the financial statements.
2) Per common share data has been adjusted to reflect the 10% stock dividend
issued in 1993.
High Low
----- -----
Market price per common share of stock during 1996 41.00 33.00
Page 7
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
First National Lincoln Corporation and its subsidiary, The First National Bank
of Damariscotta, posted record earnings in 1996. This was a direct result of the
Company's 8.7% growth in assets and ongoing control of expenses. It continues
the positive growth in income seen during the past five years, as well as the
positive growth in assets seen since 1993.
Asset growth came in loans, which increased 14.6% to end the year at $157.3
million (including $0.3 million of residential mortgages held for sale). The
majority of this growth was in residential mortgages which the Bank has opted to
hold in its own portfolio rather than selling into the secondary market.
Overall loan volumes in the Bank's market area have remained relatively stable
during the past few years, and the Bank's market share has remained relatively
constant at about 40%.
At the same time, non-interest expense decreased 1.1% to $5.6 million from
$5.7 million in 1995. The Company's efficiency ratio -- a benchmark measure of
the amount spent to generate a dollar of income -- was 0.52 compared to 0.57 in
1995.
The results posted in 1996 are a continued change from the late 1980s and
early 1990s. A substantial drop in earnings in 1990 was followed by improved,
but relatively weak earnings in 1991 and 1992. Significant improvement was seen
in 1993 and 1994 -- driven by a reduction in the Bank's provision for loan
losses and marked improvement in net interest margin through reductions in its
cost of funds.
While the Bank's net interest margin remained steady in 1995 and 1996, the
growth in assets previously mentioned produced substantially higher net interest
income. The Bank has limited exposure to changes in interest rates, which is
discussed more fully in the Funds Management section of Management's Discussion.
Results of Operations and Three-Year Comparison
Net income for the year ended December 31, 1996 was $3,424,000 -- the highest
net income recorded by the Company in one year. This represents a 25.9% or
$704,000 increase from net operating income of $2,720,000 that was posted in
1995. Return on average assets in 1996 was 1.54%, up from 1.34% in 1995 and
1.11% in 1994. Return on average equity was 16.4% in 1996, compared to 15.0% in
1995 and 13.6% in 1994. Average shareholders' equity to average assets was
9.41% in 1996, compared to 8.90% in 1995 and 8.20% in 1994. Net income per
share for the year ended December 31, 1996 was $5.60, compared to $4.47 per
share in 1995 and $3.58 in 1994. Book value per share was $36.48 on December
31, 1996, up from $32.10 on December 31, 1995 and $27.79 on December 31, 1994.
On December 31, 1996, assets stood at $230.8 million, compared to $212.3
million on December 31, 1995, an 8.7% increase. As of December 31, 1996, total
loans were $157.0 million, while loans held for sale totaled $0.3 million. This
represents an increase of 14.6% from total loans and loans held for sale of
$137.3 million on December 31, 1995. Investments totaled $60.6 million on
December 31, 1996, a 1.6% decrease from $61.6 million on December 31, 1995.
Deposits increased by 3.5% in 1996, standing at $155.7 million on December 31,
1996, compared to $150.5 million on December 31, 1995.
The Bank's loan delinquency ratio increased slightly in 1996, and was 1.70%
on December 31, 1996, versus 1.50% on December 31, 1995. This increase was
related to a larger number of delinquent commercial loans in the 31 to 60 day
Page 8
category at year-end 1996 compared to year-end 1995. The 91 day and over
category showed a decrease from 1995 to 1996, however. In management's opinion,
this is not indicative of a trend in increased overdue loans.
Average Rates and Net Interest Yield
The following table shows for the years ended December 31, 1996, 1995 and 1994,
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 34% for 1996, 1995 and 1994. Interest not recognized on
non-accrual loans is not included.
- -------------------------------------------------------------------------------
Years ended December 31, ----1996---- ----1995---- ----1994----
Amount Avg. Amount Avg. Amount Avg.
Dollars of Yield/ of Yield/ of Yield/
in thousands interest Rate interest Rate interest Rate
- -------------------------------------------------------------------------------
Interest-earning assets:
Investments $ 4,302 6.74% 4,365 6.78% 4,341 6.47%
Loans held for sale 98 8.09% 71 7.81% - -
Loans 13,299 9.09% 11,977 9.33% 9,722 8.24%
Interest-bearing deposits 33 5.31% 28 6.09% - -
------ ----- ------- ----- ------- -----
Total interest-earning assets $17,732 8.36% 16,441 8.47% 14,063 7.60%
------ ----- ------- ----- ------- -----
Interest-bearing liabilities:
Deposits $ 5,525 3.97% 5,306 3.97% 4,330 3.10%
Other borrowings 2,645 5.48% 2,424 6.07% 1,336 4.70%
------ ----- ------- ----- ------- -----
Total interest-bearing
liabilities $ 8,170 4.36% 7,730 4.45% 5,666 3.38%
------ ----- ------- ----- ------- -----
Net interest income $ 9,562 8,711 8,397
====== ===== ======= ===== ======= =====
Interest rate spread 4.00% 4.02% 4.22%
Net interest margin 4.51% 4.49% 4.54%
- -----------------------------------------------------------------------------
Page 9
Average Daily Balance Sheets
The following table shows the Company's average daily balance sheets for years
ended December 31, 1996, 1995 and 1994.
- ----------------------------------------------------------------------------
Dollars in thousands
Years ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------
Cash and due from banks $ 4,994 4,750 5,335
Interest-bearing deposits 621 460 -
Investments
U.S. Treasury securities &
government agencies 46,600 42,245 42,478
Obligations of states &
political subdivisions 3,168 2,977 3,638
Other securities 14,091 19,112 20,979
------- ------- -------
Total investments 63,859 64,334 67,095
Loans held for sale 1,212 909 -
------- ------- -------
Loans
Commercial 44,022 42,292 39,636
Consumer 26,595 25,418 23,245
State and municipal 5,964 3,869 6,645
Real estate 69,707 56,767 48,474
------- ------- -------
Total loans 146,288 128,346 118,000
Allowance for loan losses 1,953 2,274 2,553
------- ------- -------
Net loans 144,335 126,072 115,447
------- ------- -------
Fixed assets 4,015 4,298 4,155
Other assets 3,091 2,558 3,048
------- ------- -------
Total assets $ 222,127 203,381 195,080
======= ======= =======
Deposits
Demand $ 13,133 11,379 11,105
NOW 27,200 27,092 29,014
Money market 6,245 7,662 9,529
Savings 34,091 34,604 41,459
Certificates of deposit 59,084 51,809 46,306
Certificates of deposit over $100,000 12,510 12,595 13,168
------- ------- -------
Total deposits 152,263 145,141 150,581
Borrowed funds 48,241 39,906 28,425
Other liabilities 716 234 80
------- ------- -------
Total liabilities 201,220 185,281 179,086
------- ------- -------
Common stock 752 1,522 1,516
Additional paid in capital 3,544 2,699 2,652
Retained earnings 16,611 13,879 11,826
------- ------- -------
Total capital 20,907 18,100 15,994
------- ------- -------
Total liabilities and capital $ 222,127 203,381 195,080
======= ======= =======
- ----------------------------------------------------------------------------
Page 10
Rate Volume Analysis
The following tables present the changes in interest income and the changes in
interest expense attributable to the change in interest rates, the change in
volume, and the change in rate/volume1 of interest-earning assets and interest-
bearing liabilities for the periods indicated. Tax-exempt income has been
calculated on a tax-equivalent basis, 34% being the tax rate used in 1996 and
1995.
- -----------------------------------------------------------------------------
Year ended December 31, 1996 compared to 1995
Rate/
Dollars in thousands Volume Rate volume(1) Total
- -----------------------------------------------------------------------------
Interest on earning assets
Loans $ 1,674 $ (309) $ (43) $ 1,322
Loans held for sale 23 3 1 27
Investment securities (32) (31) 0 (63)
Interest-bearing deposits 10 (4) (1) 5
------- ------- ------- -------
Total interest income $ 1,675 $ (341) $ (43) $ 1,291
------- ------- ------- -------
Interest expense
Deposits $ 213 $ 6 $ - $ 219
Other borrowings(2) 506 (236) (49) 221
------- ------- ------- -------
Total interest expense $ 719 $ (230) $ (49) $ 440
------- ------- ------- -------
Change in net interest income $ 956 $ (111) $ 6 $ 851
======= ======= ======= =======
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Year ended December 31, 1995 compared to 1994
Rate/
Dollars in thousands Volume Rate volume(1) Total
- -----------------------------------------------------------------------------
Interest on earning assets
Loans $ 852 $ 1,290 $ 113 $ 2,255
Loans held for sale - - 71 71
Investment securities (178) 211 (9) 24
Interest-bearing deposits - - 28 28
------- ------- ------- -------
Total interest income $ 674 $ 1,501 $ 203 $ 2,378
------- ------- ------- -------
Interest expense
Deposits $ (178) $ 1,203 $ (49) $ 976
Other borrowings(2) 540 390 158 1,088
------- ------- ------- -------
Total interest expense $ 362 $ 1,593 $ 109 $ 2,064
------- ------- ------- -------
Change in net interest income $ 312 $ (92) $ 94 $ 314
======= ======= ======= =======
- -----------------------------------------------------------------------------
(1)Represents the change not solely attributable to change in rate or change in
volume, but a combination of these two factors.
(2)Includes federal funds purchased.
Page 11
Funds Management
Management places significant attention on funds management to minimize the
effect that changing interest rates have on current-year as well as future-year
earnings. In recognition of the importance of interest rate sensitivity to the
overall operating results, the Company has funds management policies in place
which are frequently reviewed by Management and the Board of Directors. The
following table illustrates the interest rate sensitivity of the Company's
earning assets and liabilities as of December 31, 1996. Certain investment
securities are presented using call date rather than maturity date, and
mortgage-backed securities are presented using assumptions on scheduled
principal payments as well as anticipated principal prepayments. Savings and
demand deposits have been placed in the 5+ year repricing category because they
are less sensitive to changes in market interest rates.
- ----------------------------------------------------------------------------
Dollars in thousands 0-90 91-365 1-5 5+
Interest rate risk repricing days days years years
- ----------------------------------------------------------------------------
Interest-bearing deposits $ 975 - - -
Investment securities at amortized cost 10,680 4,873 29,614 15,377
Loans held for sale 302 - - -
Loans 58,908 43,412 43,875 10,775
Non-rate-sensitive assets - - - 11,521
------ ------ ------ ------
Total assets 70,865 48,285 73,489 37,673
------ ------ ------ ------
Deposits 24,419 44,308 20,258 51,899
Borrowed funds 35,588 14,205 1,354 -
Non-rate-sensitive liabilities and equity - - - 38,281
------ ------ ------ ------
Total liabilities and equity $ 60,007 58,513 21,612 90,180
====== ====== ====== ======
Period gap $ 10,858 (10,228) 51,877 (52,507)
Percent of total assets 4.71% -4.44% 22.52% -22.80%
Cumulative gap (current) $ 10,858 630 52,507 -
Percent of total assets 4.71% 0.27% 22.80% 0.00%
- -----------------------------------------------------------------------------
At December 31, 1996, the Bank was slightly asset sensitive with a
cumulative repricing gap from 0-90 days of 4.71% of assets and a cumulative
repricing gap from 91-365 days of 0.27%. Repricing of investment securities is
presented using call dates rather than maturity dates. As part of its
asset/liability management process, the Bank does extensive balance sheet
modeling and net interest income simulation. At December 31, 1996, the results
of this modeling showed very little change in net interest income with an
interest rate movement of 200 basis points, up or down.
The following table provides a listing of loans by category, excluding
loans held for sale, between variable and fixed rates as of December 31, 1996.
Page 12
- ------------------------------------------------------------------
Dollars in thousands Amount % of total
- ------------------------------------------------------------------
Variable-rate loans
Residential adjustable-rate mortgages $ 45,082 28.72%
Equity loans 7,887 5.02%
Other consumer loans 5,239 3.34%
Commercial loans 37,468 23.87%
------- -------
Total 95,676 60.95%
Fixed-rate loans 61,294 39.05%
------- -------
Total loans $156,970 100.00%
======= =======
- ------------------------------------------------------------------
Approximately 37.5% of the loan portfolio would be repriced within 90 days,
and 65.2% within one year. The Bank has $6.0 million or 9.9% of investments
maturing in 1997. On the liability side, $53.3 million or 72.5% of certificates
of deposit will mature by December 31, 1997.
Capital Resources
Capital on December 31, 1996 was sufficient to meet the requirements of
regulatory authorities. Average equity to average assets was 9.41% at year end
in 1996, versus 8.90% in 1995. Leverage capital, or total shareholders' equity
divided by total assets, stood at 9.74% on December 31, 1996, versus 9.22% in
1995.
At December 31, 1996, the Bank had tier-one risk-based capital of 14.80%
and tier-two risk-based capital of 16.05%, versus 13.80% and 15.05% in 1995,
respectively. To be rated "well-capitalized", requirements call for minimum
tier-one and tier-two risk-based capital ratios of 6% and 10%, respectively.
These were comfortably above the standards to be rated "well-capitalized" by
regulatory authorities.
The Company declared a 10% stock dividend in 1993, payable January 15, 1994
to shareholders of record as of December 31, 1993. This stock dividend increased
the outstanding number of shares to 605,172, compared to 550,181 at year end
1993, and required a cash payout of $555 for fractional shares. All per share
information in this Report has been prepared showing the effect of the stock
dividend, and information for prior years has been adjusted to reflect the
effect of the stock dividend.
During 1996, the Company declared cash dividends of $.17 per share for the
first quarter, $.18 per share for the second quarter, $.19 per share for the
third quarter, and $.20 per share for the fourth quarter. In addition, the
Company declared a special cash dividend of $.20 per share in the fourth
quarter. The Company's dividend payout ratio was 16.82% in 1996, 15.66% in
1995, and 15.36% in 1994.
In determining future dividend payout levels, the Board of Directors
carefully analyzes capital requirements and earnings retention, as set forth
in the Bank's Dividend Policy. The ability of the Company to pay cash
dividends to its shareholders depends on receipt of dividends from its
subsidiary, the Bank. The subsidiary may pay dividends to its parent out of so
much of its net profits as the Bank's directors deem appropriate, subject to
the limitation that the total of all dividends declared by the Bank in any
calendar year may not exceed the total of its net profits of that year
combined with its retained net profits of the preceding two years. The amount
available for dividends in 1997 will be that year's net income plus $5,142,000.
Page 13
In 1996, 7,366 shares of common stock were issued via stock programs for
$278,000. The Company also purchased 834 shares of common stock, of which all
834 shares were re-issued via stock programs before year-end.
Management knows of no present trends, events or uncertainties that will
have or are reasonably likely to have a material effect on capital resources,
liquidity, or results of operations.
Capital Purchases
In 1995, the Bank commenced work on expanding its offices in Boothbay Harbor to
better serve customer needs. This expansion included adding on to the existing
structure and creating additional parking on an abutting property that was
purchased in 1994. The expansion was completed in the summer of 1996 at a total
cost of $363,000.
Liquidity
As of December 31, 1996, the Bank had primary sources of liquidity of $35.9
million, or 15.6% of its assets. It is Management's opinion that this is
adequate. The Bank has established guidelines for liquidity management, with
policies and procedures prescribed in its funds management policy.
The Bank's principal sources of funds are deposits, cash and due from
banks, federal funds sold, loan and dividend payments, loan and investment
maturities, and borrowed funds from the Federal Home Loan Bank. To compensate
for the seasonal flow in its deposit structure, the Bank maintains adequate
funding for its loan portfolio by monitoring maturities within its investment
portfolio, and utilizing advances from the Federal Home Loan Bank or entering
into securities repurchase agreements.
Through the Federal Home Loan Bank, the Bank has a credit line of $8.0
million for overnight borrowings, and total short-term and long-term advance
capacity of $89.6 million. The Bank's liquidity position is further supplemented
with securities repurchase agreements with Bear Stearns and Tucker Anthony.
Deposits grew steadily during 1996, ending the year at $155,674,000. Most
of this growth was seen in non-interest bearing demand deposits and in the CD
portfolio. Management has not seen any significant deposit runoff trends which
would have a material effect on the Bank's liquidity position.
At December 31, 1996, the Bank had a net unrealized gain of $14,000 (net of
$7,000 in deferred income taxes) in available for sale securities. While the
Bank maintains an available for sale portfolio to enhance its overall liquidity
position, its present policy is not to liquidate securities to meet short-term
liquidity needs. Instead, the Bank uses Federal Home Loan Bank advances or its
securities repurchase agreements for this purpose.
Investment Activities
During 1996 the Company's investment portfolio declined 1.6% to end the year at
$60,564,000, compared to $61,570,000 on December 31, 1995. This drop was due to
matured and called securities that were replaced with loans instead of
investment securities.
The Company's investment securities are classified in two categories:
securities available for sale and securities to be held to maturity. Securities
available for sale consists primarily of debt securities which Management
intends to hold for indefinite periods of time. They may be used as part of the
Company's funds management strategy, and may be sold in response to changes in
interest rates, changes in prepayment risk, changes in liquidity needs, to
Page 14
increase capital, or for other similar factors. Securities to be held to
maturity consists primarily of debt securities which Management has acquired
solely for long-term investment purposes, rather than for trading or future
sale. For securities to be held to maturity, Management has the intent and the
Company has the ability to hold such investments until their respective maturity
dates. The Company does not hold trading account securities.
All investment securities are managed in accordance with a written
investment policy adopted by the Board of Directors. It is the Company's general
policy that investments for either portfolio be limited to government debt
obligations, time deposits, bankers acceptances, corporate bonds and commercial
paper with one of the three highest ratings given by a nationally recognized
rating agency.
In December, 1995, the Company made a one-time transfer of securities from
the securities to be held to maturity category to the securities available for
sale category in accordance with the Financial Accounting Standards Board
implementation guidance issued during November, 1995. The market value of these
securities was $23,555,000 and resulted in an unrealized gain of $239,000. A
security was also transferred from the securities available for sale category to
the securities to be held to maturity category. Amortized cost was $987,000,
which approximated the market value of the security. These transfers were the
result of asset/liability planning strategies.
In 1996, the Company's investment portfolio saw a shift away from U.S.
Treasury securities and toward mortgage-backed securities. This change was made
to enhance the portfolio's overall yield. The following table sets forth the
Company's investment securities at book carrying amount as of December 31, 1996,
1995 and 1994.
- -----------------------------------------------------------------------
Dollars in thousands 1996 1995 1994
- -----------------------------------------------------------------------
Securities available for sale:
U.S. Treasury and agency $ 9,411 21,216 5,514
Mortgage-backed securities 2,085 2,466 1,608
State and political subdivisions - - -
Other securities 6,996 10,554 9,411
------ ------ ------
18,492 34,236 16,533
------ ------ ------
Securities to be held to maturity:
U.S. Treasury and agency 8,994 10,991 28,517
Mortgage-backed securities 23,860 8,652 5,773
State and political subdivisions 3,632 2,050 3,565
Other securities 5,586 5,641 11,266
------ ------ ------
42,072 27,334 49,121
------ ------ ------
$ 60,564 61,570 65,654
====== ====== ======
- ----------------------------------------------------------------------
The following table sets forth certain information regarding the yields and
expected maturities of the Company's investment securities as of December 31,
1996. Yields on tax-exempt securities have been computed on a tax-equivalent
basis using a tax-rate of 34%.
Page 15
- ------------------------------------------------------------------------------
Available for sale Held to maturity
Amortized Yield to Amortized Yield to
Dollars in thousands cost maturity cost maturity
- ------------------------------------------------------------------------------
U.S. Treasury and Agency:
Due in 1 year or less $ 2,006 6.19% - 0.00%
Due in 1 to 5 years 6,485 5.11% 6,998 5.90%
Due in 5 to 10 years 997 7.30% 1,995 7.32%
Due after 10 years - 0.00% - 0.00%
------ ---- ------ -----
9,488 5.57% 8,993 6.21%
------ ---- ------ -----
Mortgage-backed securities:
Due in 1 year or less - 0.00% - 0.00%
Due in 1 to 5 years - 0.00% 3,363 5.52%
Due in 5 to 10 years 491 7.32% 2,285 6.05%
Due after 10 years 1,509 7.38% 18,212 7.99%
------ ---- ------ -----
2,000 7.37% 23,860 7.46%
------ ---- ------ -----
State and political subdivisions:
Due in 1 year or less - 0.00% 405 7.72%
Due in 1 to 5 years - 0.00% 1,114 6.11%
Due in 5 to 10 years - 0.00% - 0.00%
Due after 10 years - 0.00% 2,113 5.48%
------ ---- ------ -----
- 0.00% 3,632 5.92%
------ ---- ------ -----
Other securities:
Due in 1 year or less 1,585 7.33% 2,000 7.78%
Due in 1 to 5 years 500 7.99% 3,556 7.05%
Due in 5 to 10 years - 0.00% 31 6.99%
Due after 10 years - 0.00% - 0.00%
Equity securities 4,898 6.40% - 0.00%
------ ---- ------ -----
6,983 6.72% 5,587 7.31%
------ ---- ------ -----
$18,471 6.20% 42,072 7.04%
====== ==== ====== =====
- -----------------------------------------------------------------------------
Lending Activities
The loan portfolio experienced growth in all areas during 1996, with the most
significant increase in residential real estate loans. Total loans were
$156,970,000 at December 31, 1996, a 17.8% increase from total loans of
$133,245,000 on December 31, 1995. This continues the loan growth trend
experienced by the Company over the past five years.
The following table summarizes the Bank's loan portfolio as of December 31,
1996, 1995, 1994, 1993 and 1992. Some loans were reclassified in 1994 between
commercial real estate and commercial and industrial loans. This internal
reclassification was not significant.
Page 16
- ----------------------------------------------------------------------------
Dollars in thousands
As of December 31, 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------
Commercial loans
Real estate $ 18,220 17,578 21,308 29,085 23,210
Other 26,907 24,918 18,491 9,576 14,857
Residential real estate loans
Construction 3,278 2,167 1,919 1,364 1,860
Term 81,088 65,935 60,211 48,243 49,002
Consumer loans 20,288 18,439 16,196 15,771 12,489
State and municipal 7,189 4,208 2,169 1,249 2,082
------- ------- ------- ------- -------
Total $ 156,970 133,245 120,294 105,288 103,500
======= ======= ======= ======= =======
- ----------------------------------------------------------------------------
On December 31, 1996, 53.75% of the Bank's loan portfolio was in
residential real estate loans, 11.61% was in commercial real estate loans,
17.14% was in other commercial loans, 12.92% was in consumer loans, and 4.58%
was in state and municipal loans. This compares to 1995 and 1994 figures for
residential real estate loans of 51.11% and 51.65%, respectively, commercial
real estate loans of 13.19% and 17.71%, respectively, other commercial loans of
18.70% and 15.37%, respectively, consumer loans of 13.84% and 13.46%,
respectively, and 3.16% and 1.81%, respectively, in state and municipal loans.
The Bank offers variable-rate residential mortgages, and these accounted for a
significant amount of the increase in residential real estate mortgage loans
seen in 1994, 1995 and 1996.
The Bank's loan delinquency ratio increased slightly in 1996, and was 1.70%
on December 31, 1996, versus 1.50% on December 31, 1995. This increase was
related to a larger number of delinquent commercial loans in the 31 to 60 day
category at year-end 1996 compared to year-end 1995. The 91 day and over
category showed a decrease from 1995 to 1996, however. In management's opinion,
this is not indicative of a trend in increased overdue loans.
The Bank issues its own VISA and MasterCard. These loans totaled $2,099,000
as of December 31, 1996, $1,571,000 as of December 31, 1995, $920,000 as of
December 31, 1994, $954,000 as of December 31, 1993, and $892,000 as of December
31, 1992. The number of credit cards outstanding increased 21.0% in 1996 to end
the year at 2,995.
The following table sets forth certain information regarding the maturities
of the Bank's loan portfolio as of December 31, 1996.
- ----------------------------------------------------------------------------
Dollars in thousands < 1 Year 1-5 Years 5-10 Years >10 Years Total
- ----------------------------------------------------------------------------
Commercial real estate $ 865 2,271 3,975 11,109 18,220
Commercial other 2,875 5,246 6,487 12,299 26,907
Residential real estate - 4,000 4,742 72,346 81,088
Residential construction 1,846 39 118 1,275 3,278
Consumer 5,132 9,581 2,578 2,997 20,288
State and municipal 3,865 2,121 532 671 7,189
------- ------- ------- ------- -------
Totals $14,583 23,258 18,432 100,697 156,970
======= ======= ======= ======= =======
- ----------------------------------------------------------------------------
Page 17
Loan Concentrations
As of December 31, 1996, 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 1994, 1995 and 1996, the Bank placed a relatively small volume of residential
mortgages into the secondary market compared to prior years. Loans held for sale
are carried at the lower of cost or market value, which was $302,000 at December
31, 1996 and $4,066,000 at December 31, 1995.
Non-Performing Assets
The aggregate dollar amount of loans more than 90 days past-due or on non-
accrual status decreased during 1996. The following table sets forth a summary
of the value of delinquent loans (more than ninety days in arrears) by category,
total loans carried on a non-accrual basis, and income not recognized from non-
accrual loans as of December 31, 1996, 1995, 1994, 1993 and 1992.
- ----------------------------------------------------------------------------
Dollars in thousands
As of December 31, 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------
Commercial real estate
& business $ 203 580 1,359 2,127 953
Residential real estate 359 558 408 457 573
Consumer 39 61 67 47 66
------ ------- ------ ------ ------
Total 601 1,199 1,834 2,631 1,592
====== ====== ====== ====== ======
Non-accrual loans included
in above total 440 1,034 1,722 2,585 1,073
====== ====== ====== ====== =======
Income not recognized from
non-accrual loans $ 62 114 106 185 107
====== ====== ====== ====== ======
- ----------------------------------------------------------------------------
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 1996. At December 31 it included 11 properties
valued at $965,000, compared to 13 properties valued at $704,000 at December 31,
1995.
Other real estate owned and repossessed assets owned is comprised of (i)
properties or other assets acquired through a foreclosure proceeding, or
acceptance of a deed or title in lieu of foreclosure, (ii) properties which
secure loans where the Bank obtains possession of the underlying collateral from
the borrower, and (iii) other assets repossessed in connection with non-real
estate loans. Other real estate and repossessed assets owned are carried at the
lower of cost or fair value less the estimated selling expenses of the
Page 18
collateral. An allowance is established for the amount by which cost exceeds
fair value less estimated selling expenses on a property by property basis.
Losses arising from the acquisition of such properties are charged against the
allowance for loan losses. Operating expenses and any subsequent provisions to
reduce the carrying value are charged to operations. Gains and losses upon
disposition are reflected in earnings as realized.
Allowance for Loan Losses and Loan Loss Experience
The Bank maintains an allowance for loan losses, which is a valuation reserve
for estimated future losses on loans. Management's judgment as to the adequacy
of the allowance is based upon a continuing review of loans which considers a
variety of factors including the risk characteristics of the loan portfolio,
current economic conditions and past experience.
Management believes that the allowance for loan losses at December 31, 1996
is adequate. While Management uses available information to recognize losses on
loans, changing economic conditions and the economic prospects of borrowers
might necessitate future additions to the allowance. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance based on their
judgments about information available to them at the time of their examination.
During 1996, a provision of $60,000 was made to the allowance. No
provisions were made in 1995 and 1994. At December 31, 1996, the allowance for
loan losses stood at $1,906,000, or 1.21% of total loans outstanding. This
compares to $2,059,000, or 1.55% of total loans outstanding at December 31,
1995, and $2,428,000, or 2.02% of total loans outstanding at December 31, 1994.
On January 1, 1995, the Bank adopted SFAS 114, "Accounting by Creditors for
Impairment of a Loan." SFAS 114 requires creditors to measure impaired loans at
the net present value of future cash flows, discounted at the loan's effective
interest rate, or at fair market value of collateral if the loan is collateral
dependent. This is done by allocating a portion of the allowance for loan
losses to impaired loans. The adoption of this statement had no effect on the
allowance for loan losses since the Bank was adequately reserved for these
loans.
The following table reflects allocation of the Bank's allowance for loan
losses by category of loan as of December 31, 1996, 1995, 1994, 1993 and 1992.
- ------------------------------------------------------------------------------
Dollars in thousands
As of December 31, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------
Real estate loans $ 419 54% 412 51% 267 51% 403 47% 337 47%
Commercial loans 1,010 33% 1,153 35% 1,578 35% 1,860 38% 1,701 39%
Consumer loans 477 13% 494 14% 583 14% 356 15% 305 14%
----- ---- ----- ---- ----- ---- ----- ---- ----- ----
Total $1,906 100% 2,059 100% 2,428 100% 2,619 100% 2,343 100%
===== ==== ===== ==== ===== ==== ===== ==== ===== ====
- ------------------------------------------------------------------------------
(1) Percentage is amount in each category for the stated year
(2) Includes commercial real estate loans
Net loans charged off in 1996 were $213,000, or 0.14% of average loans
outstanding for the year. This compares to net loan chargeoffs of $369,000 in
1995 and $191,000 in 1994.
Page 19
The following table summarizes the activity with respect to loan losses for
the years ended December 31, 1996, 1995, 1994, 1993 and 1992.
- ----------------------------------------------------------------------------
Dollars in thousands
As of December 31, 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------
Balance at beginning
of period $ 2,059 2,428 2,619 2,343 1,719
------- ------- ------- ------- -------
Loans charged off:
Commercial(1) 154 197 213 128 304
Real estate mortgage 65 131 - 46 177
Consumer 148 156 93 79 174
------- ------- ------- ------- -------
Total 367 484 306 253 655
------- ------- ------- ------- -------
Recoveries on loans
previously charged off:
Commercial(1) 81 30 34 14 14
Real estate mortgage 16 - - - 1
Consumer 57 85 81 60 64
------- ------- ------- ------- -------
Total 154 115 115 74 79
------- ------- ------- ------- -------
Net loans charged off 213 369 191 179 576
Provision for loan losses 60 - - 455 1,200
------- ------- ------- ------- -------
Balance at end of period $ 1,906 2,059 2,428 2,619 2,343
======= ======= ======= ======= =======
Ratio of net loans charged
off to average loans
outstanding 0.14% 0.29% 0.16% 0.17% 0.56%
- ----------------------------------------------------------------------------
(1)Includes commercial real estate loans
Deposits
The Bank, with $155,674,000 in deposits as of December 31, 1996 realized an
increase of 3.5% in 1996 compared to a 5.6% increase in deposits in 1995 and a
9.1% decrease in deposits in 1994. Most of the growth in 1996 and 1995 has been
seen in the Bank's CD portfolio, although non-interest-bearing demand deposits
also increased significantly in 1996 due to higher-than-normal balances being
carried by the Bank's commercial customers. Average deposits for 1996 were
higher than average deposits for 1995.
The Bank's deposit balances generally increase during the summer and autumn
months of each year due to increased business activity from seasonal tourist
trade. In 1996, deposits peaked during the month of September at $159,577,000.
Because of uncertainty about future interest rates, in the past few years
investors have shown a strong preference for shorter-term deposits which could
reprice quickly should rates begin to rise.
The average cost of funds on interest-bearing deposits was 3.97% for the
year ended December 31, 1996, compared to 3.97% for the year ended December 31,
1995 and 3.10% for the year ended December 31, 1994. The following table sets
forth the average daily balance for the Bank's principal deposit categories for
the period indicated.
Page 20
- ------------------------------------------------------------------------
Dollars in thousands % growth
1996
Years ended December 31, 1996 1995 1994 vs. 1995
- ------------------------------------------------------------------------
Demand deposits $ 13,133 11,379 11,105 15.4%
NOW accounts 27,200 27,092 29,014 0.4%
Money market accounts 6,245 7,662 9,529 -18.5%
Savings 34,091 34,604 41,459 -1.5%
Certificates of deposit 71,594 64,404 59,474 11.2%
------- ------- ------- ------
Total deposits $ 152,263 145,141 150,581 4.9%
======= ======= ======= ======
- ------------------------------------------------------------------------
The following table sets forth the average cost of each category of
interest-bearing deposits for the periods indicated.
- ------------------------------------------------------------------
Years ended December 31, 1996 1995 1994
- ------------------------------------------------------------------
NOW accounts 1.37% 1.74% 1.74%
Money market accounts 2.50% 2.50% 2.28%
Savings accounts 3.02% 3.20% 2.79%
Certificates of deposit 5.54% 5.49% 4.13%
----- ----- -----
Total interest-bearing deposits 3.97% 3.97% 3.10%
===== ===== =====
- ------------------------------------------------------------------
As of December 31, 1996, the Bank held a total of $12,061,000 in
certificate of deposit accounts with balances in excess of $100,000. The
following table summarizes the time remaining to maturity for these certificates
of deposit:
- ---------------------------------------
Dollars in thousands
- ---------------------------------------
Within 3 months $ 4,405
3 months through 6 months 2,913
6 months through 12 months 1,984
Over 12 months 2,759
------
Total $ 12,061
======
- ---------------------------------------
Borrowed Funds
Borrowed funds consists mainly of advances from the Federal Home Loan Bank of
Boston (FHLB) which are secured by stock in the FHLB, funds on deposit with
FHLB, mortgage-backed securities and qualifying first mortgage loans. Advances
at December 31, 1996 totaled $42,735,000, with a weighted average interest rate
of 5.45% and maturities ranging from one month to five years. The maximum amount
outstanding at any month-end during the year was $49,787,000 at the end of
November. The average amount outstanding during the year was $32,734,000, with a
weighted average interest rate of 5.62%. This compares to an average outstanding
Page 21
amount of $32,013,000 in 1995, with a weighted average interest rate of 6.21%.
The average daily balance outstanding on the Bank's borrowed funds for the year
ended December 31, 1994 was $27,052,000, with a weighted average interest rate
of 4.72%.
The Bank began offering securities repurchase agreements to municipal and
larger corporate customers during 1994 as an alternative to deposits. The
outstanding balance of all securities repurchase agreements as of December 31,
1996 was $8,413,000, compared to $5,739,000 on December 31, 1995 and $4,010,000
on December 31, 1994. The Bank also sells securities under agreement to
repurchase to brokerage firms. At December 31, 1996, there were no securities
involved in these transactions.
Trust Department
As of December 31, 1996, the Bank's Trust Department had assets with a market
value of $61,350,000 under management. This amount consisted of 212 trust
accounts, estate accounts, agency accounts, and self-directed individual
retirement accounts.
Effect of Future Interest Rates on Postretirement Benefit Liabilities
In evaluating the Company's postretirement benefit liabilities, Management
believes that changes in assumptions, especially with regard to discount rates,
will not have a significant impact on future operating results and financial
condition.
Accounting Pronouncements
During 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
SFAS No. 121 is effective for fiscal years beginning after December 15, 1995.
SFAS No. 121 requires entities to review long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. The adoption of SFAS No. 121 did not have an effect on the
financial statements.
SFAS No. 122, "Accounting for Mortgage Servicing Rights" was adopted in
1996. SFAS No. 122 requires the recognition of rights to service mortgage loans
for others as separate assets, regardless of whether the rights were originated
or purchased, and subsequent, periodic evaluations of the capitalized rights for
impairment. Prior to SFAS No. 122, only purchased servicing rights were
capitalized. The adoption of this statement did not have a material effect on
the financial statements.
The Company adopted SFAS No. 123, "Accounting for Stock Based
Compensation", and has elected the intrinsic value method whereby additional
disclosures of stock based compensation are required. The financial statements
are not affected, however.
SFAS No. 125 and No. 127 relate to the accounting for transfers and
servicing of financial assets and extinguishment of certain liabilities and are
effective for years beginning January 1, 1997.
The adoption of these standards is not expected to have a material effect
on the financial statements.
Page 22
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 and analyses compiled for this report. The financial statements
and related notes have been prepared in conformity with generally accepted
accounting principles and, in the judgment of management, present fairly and
consistently First National Lincoln Corporation's financial position and results
of operations. Management also believes that financial information elsewhere in
this report is consistent with that in the financial statements, and that the
amounts contained in the financial statements are based on management's best
estimates and judgment.
First National Lincoln Corporation maintains internal control systems which are
designed to provide reasonable assurance that transactions are properly executed
and reported in accordance with appropriate Corporate authorization and recorded
properly to permit the preparation of financial statements in accordance with
generally accepted accounting principles. 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 Bank's loan-review staff designs and monitors uniform loan
delinquency reporting and periodically inspects and analyzes credit files and
loan documents. An assessment of loan concentration and quality appears on page
18 of this report.
The Board of Directors discharges its responsibility for First National Lincoln
Corporation's financial statements through its Audit Committee. The Audit
Committee regularly meets with the independent auditors, internal auditor, and
representatives of management to assure that each is meeting its responsibility.
The Committee also reviews the independent auditors' reports and findings as
they are submitted throughout the year. Both the independent auditors and
internal auditor have direct access to the Audit Committee to discuss the scope
and results of their work, the adequacy of internal controls, and the quality of
financial reporting.
Daniel R. Daigneault
President & Chief Executive Officer
F. Stephen Ward
Treasurer
Page 23
Berry, Dunn, McNeil & Parker
Certified Public Accountants
Independent Auditors' Report
The Board of Directors and Stockholders
First National Lincoln Corporation
We have audited the consolidated balance sheets of First National Lincoln
Corporation and subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly in all
material respects, the consolidated financial position of First National Lincoln
Corporation and subsidiary as of December 31, 1996 and 1995, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
Berry, Dunn, McNeil & Parker
Portland, Maine
January 31, 1997
Page 24
Consolidated Balance Sheets
First National Lincoln Corporation
- ------------------------------------------------------------------------------
As of December 31, 1996 1995
- ------------------------------------------------------------------------------
Assets
Cash and due from banks $ 6,023,000 $ 5,404,000
Interest-bearing deposits in other banks 975,000 2,700,000
Securities available for sale 18,492,000 34,236,000
Securities to be held to maturity, market value
of $41,873,000 in 1996 and $27,473,000 in 1995 42,072,000 27,334,000
Loans held for sale at cost, market value
$302,000 in 1996 and $4,127,000 in 1995 302,000 4,066,000
Loans 156,970,000 133,245,000
Less allowance for loan losses 1,906,000 2,059,000
----------- -----------
Net loans 155,064,000 131,186,000
Accrued interest receivable 1,702,000 1,708,000
Bank premises and equipment 4,172,000 4,146,000
Other real estate owned 814,000 648,000
Other assets 1,152,000 854,000
----------- -----------
Total assets $ 230,768,000 $ 212,282,000
=========== ===========
Liabilities and Shareholders' Equity
Demand deposits (non-interest bearing) $ 14,786,000 $ 12,989,000
NOW deposits 26,349,000 27,064,000
Money market deposits 6,314,000 7,179,000
Savings deposits 34,688,000 32,943,000
Certificates of deposit(including certificates
of $100,000 or more of $12,061,000 in 1996
and $12,758,000 in 1995) 73,537,000 70,293,000
----------- -----------
Total deposits 155,674,000 150,468,000
Borrowed funds 51,148,000 41,225,000
Other liabilities 1,469,000 1,024,000
----------- -----------
Total liabilities 208,291,000 192,717,000
----------- -----------
Shareholders' equity:
Common stock, one cent par value in 1996,
$2.50 stated value in 1995 6,000 1,524,000
Additional paid-in capital 4,486,000 2,719,000
Retained earnings 17,971,000 15,123,000
Net unrealized gain on securities
available for sale, net of tax 14,000 202,000
Treasury stock at cost (110 shares in 1995) - (3,000)
----------- -----------
Total shareholders' equity 22,477,000 19,565,000
----------- -----------
Commitments and contingent liabilities (note 11)
Total liabilities and shareholders' equity $ 230,768,000 $ 212,282,000
=========== ===========
- ------------------------------------------------------------------------------
Page 25
Common stock
Number of shares authorized 6,000,000 1,200,000
Number of shares issued and outstanding 616,176 609,534
- ------------------------------------------------------------------------------
The accompanying footnotes are an integral part of these consolidated financial
statements
Page 26
Consolidated Statements of Income
First National Lincoln Corporation
- ------------------------------------------------------------------------------
Years ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $ 13,242,000 $ 11,930,000 $ 9,601,000
Interest on deposits with other banks 33,000 28,000 -
Interest and dividends on investments
(includes tax-exempt income of
$117,000 in 1996, $106,000 in
1995 and $147,000 in 1994) 4,242,000 4,310,000 4,274,000
---------- ---------- ----------
Total interest income 17,517,000 16,268,000 13,875,000
---------- ---------- ----------
Interest expense:
Interest on deposits 5,525,000 5,306,000 4,330,000
Interest on borrowed funds 2,645,000 2,424,000 1,336,000
---------- ---------- ----------
Total interest expense 8,170,000 7,730,000 5,666,000
---------- ---------- ----------
Net interest income 9,347,000 8,538,000 8,209,000
Provision for loan losses 60,000 - -
---------- ---------- ----------
Net interest income after provision
for loan losses 9,287,000 8,538,000 8,209,000
---------- ---------- ----------
Other operating income:
Trust department income 306,000 237,000 195,000
Service charges on deposit accounts 491,000 471,000 454,000
Net realized loss on securities
available for sale (4,000) (76,000) (46,000)
Net realized gain on securities
to be held to maturity 6,000 30,000 -
Other 547,000 474,000 393,000
---------- ---------- ----------
Total other operating income 1,346,000 1,136,000 996,000
---------- ---------- ----------
Other operating expenses:
Salaries and employee benefits 2,988,000 2,979,000 3,054,000
Occupancy expense 330,000 308,000 306,000
Premises and equipment expense 571,000 586,000 577,000
Other 1,733,000 1,811,000 2,163,000
---------- ---------- ----------
Total other operating expenses 5,622,000 5,684,000 6,100,000
---------- ---------- ----------
Income before income taxes 5,011,000 3,990,000 3,105,000
Income tax expense 1,587,000 1,270,000 931,000
---------- ---------- ----------
Net income $ 3,424,000 $ 2,720,000 $ 2,174,000
========== ========== ==========
- ------------------------------------------------------------------------------
Earnings per share $ 5.60 $ 4.47 $ 3.58
Cash dividends declared per share 0.94 0.70 0.55
Weighted average number of
shares outstanding 611,154 608,201 606,444
- -------------------------------------------------------------------------------
Page 27
The accompanying footnotes are an integral part of these consolidated financial
statements
Page 28
Consolidated Statement of Changes in Shareholders' Equity
First National Lincoln Corporation
- -------------------------------------------------------------------------------------------------------
Years ended December 31, 1996, 1995 and 1994
Net
unrealized
gain
Number Addi- (loss) on Total
of tional securities Share
common Common paid-in Retained available Treasury holders'
shares stock capital earnings for sale stock equity
- -------------------------------------------------------------------------------------------------------
Balance at
December 31,
1993 605,172 $1,513,000 $2,627,000 $10,989,000 $ -0- $ -0- $15,129,000
Cumulative effect
of change in
method of
accounting for
investments
as of
January 1, 1994 -0- -0- -0- -0- 160,000 -0- 160,000
Net income -0- -0- -0- 2,174,000 -0- -0- 2,174,000
Cash dividends
declared -0- -0- -0- (334,000) -0- -0- (334,000)
Stock issued 2,605 6,000 51,000 -0- -0- -0- 57,000
Net unrealized
loss on
securities
available
for sale,
net of taxes
of $154,000 -0- -0- -0- -0- (294,000) -0- (294,000)
------- --------- --------- ---------- ------- ------ ----------
Balance at
December 31,
1994 607,777 1,519,000 2,678,000 12,829,000 (134,000) -0- 16,892,000
------- --------- --------- ---------- ------- ------ ----------
Page 29
Net income -0- -0- -0- 2,720,000 -0- -0- 2,720,000
Cash dividends
declared -0- -0- -0- (426,000) -0- -0- (426,000)
Stock issued 1,867 5,000 39,000 -0- -0- -0- 44,000
Treasury stock
purchases (1,935) -0- -0- -0- -0- (54,000) (54,000)
Treasury stock
sold 1,825 -0- 2,000 -0- -0- 51,000 53,000
Net unrealized
gain on
securities
available
for sale,
net of taxes
of $173,000 -0- -0- -0- -0- 336,000 -0- 336,000
------- --------- --------- ---------- ------- ------ ----------
Balance at
December 31,
1995 609,534 1,524,000 2,719,000 15,123,000 202,000 (3,000) 19,565,000
------- --------- --------- ---------- ------- ------ ----------
Effect of change
to $0.01 par value
from $2.50 stated
value on common stock -0- (1,518,000) 1,518,000 -0- -0- -0- -0-
Net income -0- -0- -0- 3,424,000 -0- -0- 3,424,000
Cash dividends
declared -0- -0- -0- (576,000) -0- -0- (576,000)
Stock issued 6,532 -0 248,000 -0- -0- -0- 248,000
Treasury stock
purchases (724) -0- -0- -0- -0- (26,000) (26,000)
Treasury stock
sold 834 -0- 1,000 -0- -0- 29,000 30,000
Net unrealized
loss on
securities
available
for sale,
net of taxes
of $97,000 -0- -0- -0- -0- (188,000) -0- (188,000)
------- --------- --------- ---------- ------- ------ ----------
Balance at
December 31,
1996 616,176 $ 6,000 $4,486,000 $17,971,000 $ 14,000 $ -0- $22,477,000
======= ========= ========= ========== ======= ====== ===========
- -------------------------------------------------------------------------------------------------------
The accompanying footnotes are an integral part of these consolidated financial
statements
Page 30
Consolidated Statements of Cash Flows
First National Lincoln Corporation
- ------------------------------------------------------------------------------
Years ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 3,424,000 $ 2,720,000 $ 2,174,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 530,000 528,000 463,000
Provision for loan losses 60,000 - -
Provision for losses on
other real estate owned 25,000 15,000 17,000
Loans originated for resale (2,391,000) (5,780,000) (3,228,000)
Proceeds from sales of loans 2,232,000 1,714,000 3,069,000
Net loss on sale of securities
available for sale 4,000 76,000 46,000
Net gain on sale of investment
securities to be held to maturity (6,000) (30,000) -
Losses related to other real estate owned 7,000 10,000 148,000
Net change in other assets and
accrued interest receivable (274,000) 164,000 526,000
Net change in other liabilities 454,000 195,000 (317,000)
Net amortization of premium
on investments 141,000 9,000 49,000
---------- ---------- ----------
Net cash provided by
operating activities 4,206,000 (379,000) 2,947,000
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sales, maturities and calls
of securities available for sale 16,437,000 7,076,000 8,038,000
Proceeds from maturities and calls of
securities to be held to maturity 7,421,000 7,713,000 7,649,000
Proceeds from sales of other
real estate owned 441,000 189,000 558,000
Additional investment in
other real estate owned (36,000) (7,000) (20,000)
Purchases of securities
available for sale (988,000) (2,001,000) (8,626,000)
Purchases of securities
to be held to maturity (22,306,000) (8,234,000) (7,580,000)
Purchases of interest-bearing
deposits in other banks - (2,700,000) -
Maturities of interest-bearing
deposits in other banks 1,725,000 - -
Net increase in loans (20,618,000) (13,622,000) (15,365,000)
Capital expenditures (556,000) (189,000) (765,000)
---------- ---------- ----------
Net cash used in investing activities (18,480,000) (11,775,000) (16,111,000)
---------- ---------- ----------
Page 31
Cash flows from financing activities:
Net increase (decrease) in
demand deposits, savings, and
money market accounts 1,962,000 (8,521,000) (3,568,000)
Net increase (decrease) in
certificates of deposits 3,244,000 16,544,000 (10,697,000)
Net increase in other borrowings 9,923,000 4,615,000 28,212,000
Purchase of Treasury stock (26,000) (54,000) -
Proceeds from sale of Treasury stock 30,000 53,000 -
Proceeds from stock issuance 248,000 44,000 57,000
Dividends paid (488,000) (353,000) (320,000)
---------- ---------- ----------
Net cash provided by
financing activities 14,893,000 12,328,000 13,684,000
---------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents 619,000 174,000 520,000
Cash and cash equivalents at
beginning of year 5,404,000 5,230,000 4,710,000
---------- ---------- ----------
Cash and cash equivalents at
end of year $ 6,023,000 $ 5,404,000 $ 5,230,000
========== ========== ==========
- ------------------------------------------------------------------------------
Interest paid $ 8,145,000 $ 7,730,000 $ 5,541,000
Income taxes paid 1,482,000 871,000 715,000
Non-cash transactions:
Transfers from securities
available for sale to
securities to be held to maturity - 987,000 -
Transfers from securities to
be held to maturity to
securities available for sale - 23,555,000 -
Loans transferred to
other real estate owned (net) 604,000 303,000 327,000
Loans held for sale transferred
to loan portfolio 3,923,000 - -
Net change in unrealized gain (loss)
on available for sale securities (285,000) 508,000 (204,000)
- ------------------------------------------------------------------------------
The accompanying footnotes are an integral part of these consolidated financial
statements
Page 32
First National Lincoln Corporation
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
The accounting and reporting policies of First National Lincoln Corporation
conform to generally accepted accounting principles and to general practice
within the banking industry. The following is a description of the more
significant policies.
Principles of Consolidation
The consolidated financial statements include the accounts of First National
Lincoln Corporation (the Company) and its wholly-owned subsidiary, The First
National Bank of Damariscotta (the Bank). All inter-company accounts and
transactions have been eliminated.
Business
The Bank provides a full range of banking services to individual and corporate
customers in Mid-Coast Maine. The Bank is subject to competition from other
financial institutions. The Bank is subject to the regulations of certain
federal agencies and undergoes periodic examinations by those regulatory
authorities.
Basis of Financial Statement Presentation
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual
results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
in the near-term relate to the determination of the allowance for loan losses
and the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowance for
loan losses and the carrying value of real estate owned, management obtains
independent appraisals for significant properties.
Statements of Cash Flows
For purposes of the statements of cash flows, cash and cash equivalents includes
cash on hand and amounts due from banks.
Investment Securities
The Bank adopted SFAS 115, "Accounting for Certain Investments in Debt and
Equity Securities", on January 1, 1994. Investment securities are classified as
trading, available for sale or held to maturity when purchased.
Securities available for sale consists primarily of debt securities which
management intends to hold for indefinite periods of time. They may be used as
part of the Bank's funds management strategy, and may be sold in response to
changes in interest rates, changes in prepayment risk, changes in liquidity
needs, to increase capital, or for other similar reasons. These assets are
accounted for at fair value, with unrealized gains or losses adjusted through
shareholders' equity. Gains and losses on sales of these securities are
determined using the amortized cost of the specific security sold.
Securities to be held to maturity consist primarily of debt securities
which management has acquired solely for long-term investment purposes, rather
than to acquire such securities for purposes of trading or future sale. For
securities to be held to maturity, management has the intent and the Company has
the ability to hold such securities until their respective maturity dates, and
as such the securities are carried at cost adjusted for amortization of premiums
and accretion of discount. There are no trading account securities.
Page 33
Investment securities transactions are accounted for on a settlement date
basis. The reported amounts would not be materially different than those
accounted for on a trade date basis. Gains and losses on the sales of investment
securities are determined using the amortized cost of the specific security
sold.
Loans Held for Sale
Loans held for sale consist of residential real estate mortgage loans and are
carried at the lower of aggregate cost or market value, as determined by current
investor yield requirements.
Other Real Estate Owned
Other real estate owned and repossessed assets owned is comprised of (i)
properties or other assets acquired through a foreclosure proceeding, or
acceptance of a deed or title in lieu of foreclosure, (ii) properties which
secure loans where the Bank obtains possession of the underlying collateral from
the borrower, (iii) other assets repossessed in connection with non-real estate
loans. Other real estate and repossessed assets owned are carried at the lower
of cost or fair value less the estimated selling expenses of the collateral. An
allowance is established for the amount by which cost exceeds fair value less
estimated selling expenses on a property by property basis. Losses arising from
the acquisition of such properties are charged against the allowance for loan
losses. Operating expenses and any subsequent provisions to reduce the carrying
value are charged to operations. Gains and losses upon disposition are reflected
in earnings as realized.
Bank Premises and Equipment
Premises, furniture and equipment are stated at cost, less accumulated
depreciation. Depreciation expense is computed by the straight-line and
accelerated methods over the estimated useful life of each type of asset.
Loan Fees and Costs
Loan origination fees and certain direct loan origination costs are deferred and
recognized in interest income as an adjustment to the loan yield over the life
of the related loans. The unamortized net deferred fees and costs are included
on the balance sheets with the related loan balances. The amount charged to
income is included with the related interest income.
Allowance for Loan Losses
Loans considered to be uncollectible are charged against the allowance for loan
losses. The allowance for loan losses is maintained at a level determined by
management to be adequate to absorb possible losses. This allowance is increased
by provisions charged to operating expenses and recoveries on loans previously
charged off. Arriving at an appropriate level of allowance for loan losses
necessarily involves a high degree of judgment.
In determining the appropriate level of allowance for loan losses,
management takes into consideration the following factors: non-performing loans,
performing watch report loans, size of loan portfolio by category, and economic
conditions. Although management utilizes its best judgment in providing for
possible losses, there can be no assurance that the Company 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 Company's
results of operations.
Impaired loans, including restructured loans, are measured at the present
value of expected future cash flows discounted at the loan's effective interest
rate, at the loan's observable market price, or the fair value of the collateral
if the loan is collateral dependent. Management takes into consideration
impaired loans in addition to the above mentioned factors in determining the
appropriate level of allowance for loan losses.
Page 34
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the 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 on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period the change is enacted.
Accrual of Interest Income and Expense
Interest on loans and investment securities is taken into income using methods
which relate the income earned to the balances of loans and investment
securities outstanding. Interest expense on liabilities is derived by applying
applicable interest rates to principal amounts outstanding. Recording of
interest income on problem loans, which includes impaired loans, ceases when
collectibility of principal and interest within a reasonable period of time
becomes doubtful. Cash payments received on non-accrual loans, which includes
impaired loans, are applied to reduce the loan's principal balance until the
remaining principal balance is deemed collectible, after which interest is
recognized when collected. As a general rule, a loan may be restored to accrual
status when payments are current and repayment of the remaining contractual
amounts is expected or when it otherwise becomes well secured and in the process
of collection.
Earnings Per Share
Earnings per share data are based on the weighted average number of common
shares outstanding during each year after giving effect to the exercise of
outstanding stock options if the effect is dilutive under the treasury stock
method.
Postretirement Benefits
The cost of providing postretirement benefits is accrued during the active
service period of the employee.
Effect of New Financial Accounting Standards
During 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
SFAS No. 121 is effective for fiscal years beginning after December 15, 1995.
SFAS No. 121 requires entities to review long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. The adoption of SFAS No. 121 did not have an effect on the
financial statements.
SFAS No. 122, "Accounting for Mortgage Servicing Rights" was adopted in
1996. SFAS No. 122 requires the recognition of rights to service mortgage loans
for others as separate assets, regardless of whether the rights were originated
or purchased, and subsequent, periodic evaluations of the capitalized rights for
impairment. Prior to SFAS No. 122, only purchased servicing rights were
capitalized. The adoption of this statement did not have a material effect on
the financial statements.
The Company adopted SFAS No. 123, "Accounting for Stock Based
Compensation", and has elected the intrinsic value method whereby additional
disclosures of stock based compensation are required. The financial statements
are not affected, however.
SFAS No. 125 and No. 127 relate to the accounting for transfers and
servicing of financial assets and extinguishment of certain liabilities and are
effective for years beginning January 1, 1997. The adoption of these standards
is not expected to have a material effect on the financial statements.
Page 35
Note 2. Cash and Due from Banks
At December 31, 1996 the Company was required by the Federal Reserve Board to
maintain a reserve of $500,000 at the Federal Reserve Bank.
Note 3. Investment Securities
The following tables summarize the amortized cost and estimated market value of
investment securities at December 31, 1996 and 1995:
- --------------------------------------------------------------------------------
Amortized Unrealized Unrealized Market Value
December 31, 1996 Cost Gains Losses (Estimated)
- --------------------------------------------------------------------------------
Securities available for sale:
U.S. Treasury and agency $ 9,488,000 22,000 (99,000) 9,411,000
Mortgage-backed securities 2,000,000 94,000 (9,000) 2,085,000
Other securities 6,983,000 13,000 - 6,996,000
----------- ------- --------- ----------
18,471,000 129,000 (108,000) 18,492,000
=========== ======= ========= ==========
Securities to be held to maturity:
U.S. Treasury and agency 8,994,000 32,000 (134,000) 8,892,000
Mortgage-backed securities 23,860,000 76,000 (290,000) 23,646,000
State and
political subdivisions 3,632,000 59,000 (8,000) 3,683,000
Other securities 5,586,000 70,000 (4,000) 5,652,000
----------- ------- --------- ----------
42,072,000 237,000 (436,000) 41,873,000
=========== ======= ========= ==========
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Amortized Unrealized Unrealized Market Value
December 31, 1995 Cost Gains Losses (Estimated)
- --------------------------------------------------------------------------------
Securities available for sale:
U.S. Treasury and agency $ 21,105,000 197,000 (86,000) 21,216,000
Mortgage-backed securities 2,348,000 126,000 (8,000) 2,466,000
Other securities 10,478,000 89,000 (13,000) 10,554,000
----------- ------- --------- ----------
33,931,000 412,000 (107,000) 34,236,000
=========== ======= ========= ==========
Securities to be held to maturity:
U.S. Treasury and agency 10,991,000 109,000 (76,000) 11,024,000
Mortgage-backed securities 8,652,000 10,000 (118,000) 8,544,000
State and political
subdivisions 2,050,000 48,000 (3,000) 2,095,000
Other securities 5,641,000 174,000 (5,000) 5,810,000
----------- ------- --------- ----------
27,334,000 341,000 (202,000) 27,473,000
=========== ======= ========= ==========
- --------------------------------------------------------------------------------
Page 36
The contractual maturities of investment securities at December 31, 1996, are
shown below. For purposes of this table, mortgage-backed securities, which are
not due at a single maturity date, have been allocated over maturity groupings
based on the weighted-average contractual maturities of the underlying
collateral, adjusted for anticipated principal pre-payments in accordance with
current interest rates.
- -----------------------------------------------------------------------------
Securities Securities to be
available for sale: held to maturity:
Amortized Market Value Amortized Market Value
Cost (Estimated) Cost (Estimated)
- -----------------------------------------------------------------------------
Due in 1 year or less $ 3,938,000 3,952,000 5,769,000 5,757,000
Due in 1 to 5 years 7,972,000 7,959,000 21,642,000 21,547,000
Due in 5 to 10 years 1,397,000 1,406,000 8,339,000 8,251,000
Due after 10 years 266,000 277,000 6,322,000 6,318,000
Equity securities 4,898,000 4,898,000 - -
---------- ---------- ---------- ----------
$ 18,471,000 18,492,000 42,072,000 41,873,000
========== ========== ========== ==========
- -----------------------------------------------------------------------------
Realized gains on securities to be held to maturity totaled $6,000 in 1996,
the result of a security which was called at par value by the issuer.
At December 31, 1996 securities carried at $16,366,000, with a market value of
$16,161,000, were pledged to secure borrowings from the Federal Reserve Bank,
public deposits, and for other purposes as required by law.
Gains and losses on the sale of securities available for sale are computed
by subtracting the amortized cost at the time of sale from the security's
selling price, net of accrued interest to be received. Information regarding the
sales of securities available for sale is summarized below:
- -----------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------
Proceeds from sales $ 4,479,000 5,433,000 3,895,000
Gross gains - - 13,000
Gross losses (4,000) (76,000) (59,000)
------- ------- -------
Net gain (loss) (4,000) (76,000) (46,000)
======= ======= =======
Related income taxes $ (1,000) (26,000) (16,000)
- -----------------------------------------------------------------------------
Page 37
Note 4. Loans
The following table shows the composition of the Company's loan portfolio as of
December 31, 1996 and 1995:
- -----------------------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------------------
Real estate loans
Residential $ 81,088,000 65,935,000
Commercial 18,220,000 17,578,000
Commercial and industrial loans 26,907,000 24,918,000
State and municipal loans 7,189,000 4,208,000
Consumer loans 20,288,000 18,439,000
Residential construction loans 3,278,000 2,167,000
----------- -----------
Total loans $ 156,970,000 133,245,000
=========== ===========
- -----------------------------------------------------------------------------
At December 31, 1996 and 1995, loans on non-accrual status totaled $440,000
and $1,034,000, respectively. Interest income which would have been recognized
on these loans, if interest had been accrued, was $62,000 for 1996, $114,000 for
1995 and $106,000 for 1994. Loans past due greater than 90 days which are
accruing interest totaled $161,000 at December 31, 1996 and $165,000 at December
31, 1995. The Company continues to accrue interest on these loans because it
believes collection of principal and interest is reasonably assured.
Transactions in the allowance for loan losses for the years ended December
31, 1996, 1995 and 1994 were as follows:
- ------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------
Balance at beginning of year $ 2,059,000 2,428,000 2,619,000
Provision charged to operating expenses 60,000 - -
--------- --------- ---------
2,119,000 2,428,000 2,619,000
--------- --------- ---------
Loans charged off (367,000) (484,000) (306,000)
Recoveries on loans 154,000 115,000 115,000
--------- --------- ---------
Net loans charged off (213,000) (369,000) (191,000)
--------- --------- ---------
Balance at end of year $ 1,906,000 2,059,000 2,428,000
========= ========= =========
- ------------------------------------------------------------------------------
Information regarding impaired loans for the period ended December 31, 1996
and 1995 is as follows:
- ----------------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------------
Average investment in impaired loans $ 309,000 574,000
Interest income recognized on impaired
loans, including cash basis - -
- ----------------------------------------------------------------------
Page 38
- ----------------------------------------------------------------------
Balance of impaired loans $ 174,000 558,000
Less portion for which no allowance
for loan losses is allocated (97,000) (228,000)
-------- --------
Portion of impaired loan balance for which
an allowance for loan losses is allocated $ 77,000 330,000
======== ========
Portion of allowance for loan losses allocated
to the impaired loan balance $ 33,000 102,000
======== ========
- ----------------------------------------------------------------------
Loans to directors, officers and employees totaled $4,418,000 at December
31, 1996 and $4,402,000 at December 31, 1995. A summary of loans to directors
and executive officers, which in the aggregate exceed $60,000, is as follows:
- ----------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------
Balance at beginning of year $ 2,692,000 2,210,000
New loans 650,000 227,000
Repayments (1,173,000) (157,000)
---------- ----------
Balance at end of year $ 2,169,000 2,280,000
========== ==========
- ----------------------------------------------------------------
Note 5. Bank Premises and Equipment
Bank premises and equipment are carried at cost and consist of the following:
- ----------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------
Land $ 749,000 569,000
Land improvements 308,000 285,000
Bank buildings 3,405,000 3,290,000
Equipment 3,965,000 3,733,000
--------- ---------
8,427,000 7,877,000
Less accumulated depreciation 4,255,000 3,731,000
--------- ---------
$ 4,172,000 4,146,000
========= =========
- ----------------------------------------------------------------
Page 39
Note 6. Other Real Estate Owned
The following summarizes the composition of other real estate owned:
- ----------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------
Real estate acquired in settlement
of loans $ 845,000 704,000
Less: allowance for losses 31,000 56,000
------- -------
Other real estate owned, net $ 814,000 648,000
======= =======
- ----------------------------------------------------------------
Changes in the allowance for each of the three years ended December 31 were
as follows:
- -------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------
Beginning balance $ 56,000 53,000 36,000
Losses charged to allowance (50,000) (12,000) (148,000)
Provisions charged to income 25,000 15,000 165,000
-------- -------- --------
Ending balance $ 31,000 56,000 53,000
======== ======== ========
- -------------------------------------------------------------------------
Note 7. Income Taxes
The current and deferred components of income tax expense were as follows:
- ---------------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------
Federal income tax:
Current $ 1,413,000 977,000 756,000
Deferred 115,000 236,000 136,000
--------- --------- ---------
1,528,000 1,213,000 892,000
State income tax 59,000 57,000 39,000
--------- --------- ---------
$ 1,587,000 1,270,000 931,000
========= ========= =========
- ---------------------------------------------------------------------------
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:
Page 40
- -----------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------
Expected tax expense $ 1,704,000 1,357,000 1,056,000
Non-taxable interest income (121,000) (99,000) (131,000)
State income taxes 39,000 38,000 26,000
Qualified housing investment tax credit (38,000) (38,000) (38,000)
Other 3,000 12,000 18,000
--------- --------- ---------
$ 1,587,000 1,270,000 931,000
========= ========= =========
- -----------------------------------------------------------------------------
The items that give rise to the deferred income tax assets and liabilities
and the tax effect of each at December 31 are as follows:
- ---------------------------------------------------------------------
1996 1995
- ---------------------------------------------------------------------
Allowance for loan losses and OREO $ 448,000 489,000
Deferred loan fees 17,000 59,000
Nonaccrual loan interest 57,000 47,000
Accrued pension and post-retirement 84,000 103,000
Depreciation (126,000) (141,000)
Unrealized loss on securities available
for sale (7,000) (103,000)
Other assets 71,000 68,000
Other liabilities (67,000) (48,000)
------- -------
Net deferred income tax asset $ 477,000 474,000
======= =======
- ---------------------------------------------------------------------
These amounts are included in other assets on the balance sheets. The
deferred income tax asset and liability at December 31, 1996 and 1995 is as
follows:
- ----------------------------------------
1996 1995
- ----------------------------------------
Asset $ 677,000 766,000
Liability $ 200,000 292,000
- ----------------------------------------
Note 8. Borrowed Funds
Borrowed funds consists of advances from the Federal Home Loan Bank of Boston
(FHLB) and securities sold under agreements to repurchase with local municipal
customers, commercial customers and brokers. Advances from FHLB include
overnight borrowings on an $8,000,000 line of credit. Pursuant to collateral
agreements, FHLB advances are secured by all stock in the FHLB, funds on deposit
with FHLB and qualifying first mortgage loans. Securities sold under agreements
to repurchase include U.S. Treasury and Agency securities with an aggregate
amortized cost of $8,588,000 and $11,172,000 at December 31, 1996 and 1995,
respectively, and an aggregate market value of $8,491,000 and $11,189,000 at
December 31, 1996 and 1995, respectively. Borrowed funds at December 31, 1996
and 1995 have the following range of interest rates and maturity dates:
Page 41
- -------------------------------------------------------------------------
December 31, 1996
- -------------------------------------------------------------------------
Federal Home Loan Bank Advances
Maturities within one year 5.35%-5.56% $ 41,000,000
Maturities over one year 5.53% 1,735,000
----------
42,735,000
----------
Repurchase agreements
Municipal and commercial customers 4.25%-5.50% 8,413,000
----------
8,413,000
----------
$ 51,148,000
==========
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
December 31, 1995
- -------------------------------------------------------------------------
Federal Home Loan Bank Advances
Maturities within one year* 5.74%-6.67% $ 30,000,000
-------------
30,000,000
Repurchase agreements
Municipal and commercial customers 4.50%-6.35% 5,739,000
Brokers 6.13% 5,486,000
-------------
11,225,000
-------------
$ 41,225,000
=============
- -------------------------------------------------------------------------
*Certain advances have periodic rate adjustments prior to stated maturity.
Note 9. Employee Benefit Plans
Pension Plans
Effective May 31, 1996, the Board of Directors ratified the termination of the
Bank's defined benefit pension plan, which covered virtually all employees.
Regulatory approval for termination of the Plan was filed for and received in
1996, and all assets were distributed before year end.
At the time of distribution, the Plan's assets, which had been invested in
U.S. Government obligations and cash equivalents, totaled $2,092,000. The
accumulated benefit obligation for each covered participant was settled with the
purchase of annuity contracts issued by a major insurance company or through
lump sum payments. All assets were distributed to the Plan participants.
Following the provisions of Statement of Financial Accounting Standards No.
88 relating to the termination of a defined benefit plan, the Bank recognized a
gain on termination of $64,000. The Bank's net periodic pension cost for the
Plan was $91,000 in both 1995 and 1994.
The Bank also sponsors a non-qualified supplemental retirement plan for
certain officers. The agreement provides supplemental retirement benefits
Page 42
payable in installments over 20 years upon retirement or death. The costs for
this plan are recognized over the service lives of the participating officers.
The expense of this supplemental plan was $11,000 in 1996, $15,000 in 1995, and
$8,000 in 1994. As of December 31, 1996, the accrued liability of this plan was
$86,000.
401(k) Plan
The Bank also has a defined contribution plan available to substantially all
employees who have completed six months of service. Employees may contribute
from 0% to 15% of their compensation, to which the Bank may match 15% of the
monies contributed. In 1997, this match will change to 50% up to the first 6%
which is contributed. The Board of Directors may also make a profit-sharing
contribution to the Plan each year, which in 1996 was equal to 4% of each
eligible employee's compensation. This profit-sharing contribution was added in
1996 as a replacement for the termination of the pension plan, and there was no
profit-sharing contribution in 1995 or 1994.
The Bank's expense relating to the 401(k) plan was $121,000, $22,000, and
$18,000 in 1996, 1995 and 1994, respectively. The amounts of both the match and
profit-sharing contributions are at the discretion of the Board of Directors of
the Bank.
Postretirement Benefit Plans
The Bank sponsors two defined benefit postretirement plans. One plan provides
fixed postretirement health insurance benefit payments to certain employees
hired prior to June 30, 1988. The other plan provides life insurance coverage to
full-time employees who work until retirement. These plans are not pre-funded.
The Bank also provides health insurance for retired directors.
These plans are accounted for under the provisions of Statement of
Financial Accounting Standards No. 106 "Employers' Accounting for Postretirement
Benefits Other than Pensions", which requires accrual of the cost of providing
postretirement benefits during the active service period of the employee. The
Bank elected to recognize the accumulated postretirement benefit obligation as
of January 1, 1993 of $578,000 as a component of net periodic postretirement
benefit cost over a 20-year period.
The Bank amended the postretirement health insurance plan during 1995 to
make benefits available only to employees hired prior to June 30, 1988 who
retire on or before June 30, 1996. The amendment also defines the maximum
monthly benefit that a retired director can receive.
The following table sets forth the plans' accumulated postretirement
benefit obligation reconciled with the amount shown in the statements of
financial position at December 31:
- -----------------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $ 371,000 357,000
Other active plan participants 153,000 210,000
------- -------
524,000 567,000
Unrecognized net (gain) loss (23,000) 28,000
Unrecognized transition obligation 382,000 390,000
------- -------
Accrued postretirement benefit cost $ 165,000 149,000
======= =======
- -----------------------------------------------------------------------
Page 43
Net periodic postretirement benefit cost includes the following components:
- -----------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------
Service cost-benefits attributed to
service during the period $ 6,000 9,000 16,000
Interest cost on accumulated benefit
obligation 36,000 38,000 43,000
Amortization of transition obligation
over 20 years 29,000 24,000 29,000
Amortization of net gain (7,000) 3,000 2,000
------- ------ ------
Net periodic postretirement benefit cost $ 64,000 74,000 90,000
======= ====== ======
- -----------------------------------------------------------------------
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7%.
Note 10. Shareholders' Equity
At the Annual Meeting of Shareholders on April 30, 1996, it was voted to change
the Company's common stock from no par value with a $2.50 stated value per share
to a par value of $0.01 per share. The effect of this change was to reduce the
common stock component of shareholders' equity by $1,518,000 and increase
additional paid in capital by the same amount. At the same meeting, the
Company's shareholders also voted to increase the number of authorized shares of
common stock from 1,200,000 to 6,000,000.
The Company has reserved 60,000 shares of its common stock to be made
available to directors and employees who elect to participate in the directors'
deferral, stock purchase, or savings and investment plans. As of December 31,
1996, 26,389 shares had been issued pursuant to these plans, leaving 33,611
shares available for future use. The issuance price is based on the market price
of the stock at issuance date.
Sales of stock to directors and employees amounted to 7,366 shares and
3,692 shares in 1996 and 1995, respectively. For the stock sold to directors and
employees in 1996, 834 shares were issued from Treasury stock.
In 1995, the Company's shareholders adopted a Stock Option Plan and
authorized 50,000 shares to be reserved for options to be granted to certain key
officers of the Company and the Bank. The option exercise price will be equal to
the fair market value of the shares on the date of the grant, and options are
generally not exercisable before two years from the date they are granted. All
options expire 10 years from the date they are granted.
The following table sets forth options outstanding and the related activity
for 1996, 1995 and 1994:
Page 44
- ------------------------------------------------------------ ---------------
1996 1995 1994
- ----------------------------------------------------------------------------
Balance at January 1 24,000 - -
Granted during year 6,000 24,000 -
Weighted-average exercise price of
options granted during year 33 26 -
Balance at December 31 30,000 24,000 -
Weighted-average life of all options
outstanding at December 31 8.3 years 9.1 years -
Weighted-average exercise price of all
options outstanding at December 31 27 26 -
- ----------------------------------------------------------------------------
The exercise price of options granted in 1996 was $33.00 and the exercise
price of options granted in 1995 ranged from $25.50 to $26.00. As of December
31, 1996, none of the options granted were exercisable.
No compensation cost has been recognized for the Plan. The fair market
value of the options granted was $44,000 in 1996 and $155,000 in 1995. The fair
market value is estimated on the date of the grant assuming: quarterly dividends
of $0.14 in 1995 and $0.16 in 1996, a risk-free interest rate of 5.13% in 1996
and 5.95% in 1995, volatility of 4.91% in 1996 and 8.91% in 1995, and an
expected life of 10 years.
Had compensation cost been expensed, net of related income taxes, based on
the fair market value of the options at the grant dates, the Company's net
earnings and earnings per share would have been reduced to the pro forma amounts
shown in the following table:
- -----------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------
Net income
As reported $ 3,424,000 2,720,000 2,174,000
Pro forma $ 3,395,000 2,618,000 2,174,000
Earnings per share
As reported $ 5.60 4.47 3.58
Pro forma $ 5.56 4.30 3.58
- -----------------------------------------------------------------------------
Note 11. Off-Balance Sheet Financial Instruments
and Concentrations of Credit Risk
Commitments for unused lines are agreements to lend to a customer provided there
is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the borrower.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers.
The Company is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
Page 45
These financial instruments include commitments to originate or purchase loans
and standby letters of credit. The instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the consolidated
statement of condition. The contract amounts of those instruments reflect the
extent of involvement the Company has in particular classes of financial
instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and standby letters
of credit is represented by the contractual amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
At December 31, the Company had the following off-balance sheet financial
instruments, whose contract amounts represent credit risk:
- ----------------------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------------------
Unused lines, secured by residential real estate $ 6,718,000 6,265,000
Unused credit card lines 6,785,000 5,404,000
Other unused commitments 13,240,000 8,677,000
Standby letters of credit 145,000 127,000
Commitments to extend credit 4,112,000 2,313,000
- ----------------------------------------------------------------------------
The Company grants residential, commercial and consumer loans to customers
principally located in the mid-coast area of Maine. Collateral on these loans
typically consists of residential or commercial real estate, or personal
property. Although the loan portfolio is diversified, a substantial portion of
its debtors' ability to honor their contracts is dependent on the economic
conditions in the area, especially in the real estate sector.
Note 12. Fair Value of Financial Instruments
Fair value estimates, methods, and assumptions are set forth below for the
Company's financial instruments.
Cash and Due from Banks and Federal Funds Sold
The carrying value of cash and due from banks approximates their relative fair
values.
Investment Securities
The fair values of investment securities are estimated based on bid prices
published in financial newspapers or bid quotations received from securities
dealers. The fair value of certain state and municipal securities is not readily
available through market sources other than dealer quotations, so fair value
estimates are based on quoted market prices of similar instruments, adjusted for
differences between the quoted instruments and the instruments being valued.
Fair values are calculated based on the value of one unit without regard to any
premium or discount that may result from concentrations of ownership of a
financial instrument, possible tax ramifications, or estimated transaction
costs. If these considerations had been incorporated into the fair value
estimates, the aggregate fair value could have been changed. The carrying values
of restricted equity securities approximate fair values.
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. The fair values of performing loans are calculated by
Page 46
discounting scheduled cash flows through the estimated maturity using estimated
market discount rates that reflect the credit and interest risk inherent in the
loan. The estimates of maturity are based on the Company's historical experience
with repayments for each loan classification, modified, as required, by an
estimate of the effect of current economic and lending conditions, and the
effects of estimated prepayments.
Fair values for significant non-performing loans are based on estimated
cash flows and are discounted using a rate commensurate with the risk associated
with the estimated cash flows. Assumptions regarding credit risk, cash flows,
and discount rates are judgmentally determined using available market
information and specific borrower information.
Management has made estimates of fair value using discount rates that it
believes to be reasonable. However, because there is no market for many of these
financial instruments, management has no basis to determine whether the fair
value presented above would be indicative of the value negotiated in the actual
sale.
The fair value estimate for credit card loans is based on the carrying
value of existing loans. This estimate does not include the value that relates
to estimated cash flows from new loans generated from existing cardholders over
the remaining life of the portfolio.
Loans Held for Sale
The fair value of loans held for sale is determined by the current investor
yield requirements.
Accrued Interest Receivable
The fair value estimate of this financial instrument approximates the carrying
value as this financial instrument has a short maturity. It is the Company's
policy to stop accruing interest on loans which it is probable that the interest
is not collectible. Therefore, this financial instrument has been adjusted for
estimated credit loss.
Deposits
The fair value of deposits with no stated maturity, such as non-interest-bearing
demand deposits, savings and NOW accounts, and money market accounts, is equal
to the amount payable on demand. The fair value of certificates of deposit is
based on the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for deposits of similar remaining
maturities. The fair value estimates do not include the benefit that results
from the low-cost funding provided by the deposits compared to the cost of
borrowing funds in the market. If that value were considered, the fair value of
the Company's net assets could increase.
Borrowed Funds
The fair value of borrowed funds is based on the discounted value of contractual
cash flows. The discount rate is estimated using the rates currently available
for borrowings of similar remaining maturities.
Off-Balance-Sheet Instruments
Off-balance-sheet instruments include loan commitments. Fair values for loan
commitments have not been presented as the future revenue derived from such
financial instruments is not significant.
Limitations
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These values
do not reflect any premium or discount that could result from offering for sale
at one time the Company's entire holdings of a particular financial instrument.
Page 47
Because no market exists for a significant portion of the Company's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance-sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial instruments include the deferred tax asset, bank premises
and equipment, and other real estate owned. In addition, tax ramifications
related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in any
of the estimates.
The estimated fair values for the Company's financial instruments as of
December 31, 1996 and 1995 were as follows:
- -----------------------------------------------------------------------------
-- December 31, 1996 -- -- December 31, 1995 --
Carrying Estimated Carrying Estimated
amount fair value amount fair value
- -----------------------------------------------------------------------------
Financial assets
Cash and due from banks $ 6,023,000 6,023,000 5,404,000 5,404,000
Interest-bearing deposits
in other banks 975,000 975,000 2,700,000 2,700,000
Securities available
for sale 18,492,000 18,492,000 34,236,000 34,236,000
Securities to be
held to maturity 42,072,000 41,873,000 27,334,000 27,473,000
Loans held for sale 302,000 302,000 4,066,000 4,127,000
Loans (net of allowance
for loan losses) 155,064,000 154,128,000 131,186,000 130,992,000
Accrued interest
receivable 1,702,000 1,702,000 1,708,000 1,708,000
Financial liabilities
Deposits 155,674,000 157,133,000 150,468,000 150,940,000
Borrowed funds 51,148,000 51,142,000 41,225,000 41,283,000
- -----------------------------------------------------------------------------
Note 13. Certificates of Deposit
At December 31, 1996, the scheduled maturities of certificates of deposit are as
follows:
- ------------------------------------
1997 $ 53,237,000
1998 14,219,000
1999 2,835,000
2000 1,804,000
2001 1,442,000
----------
Total $ 73,537,000
==========
- ------------------------------------
Page 48
Interest on time certificates of deposit of $100,000 or more was $709,000,
$726,000 and $575,000 in 1996, 1995 and 1994, respectively.
Note 14. Other Operating Income and Expense
Other operating income includes the following items greater than 1% of revenues.
- --------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------
Merchant discount fees $ 196,000 - -
- --------------------------------------------------------------------
Other operating expense includes the following items greater than 1% of
revenues.
- ---------------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------
FDIC insurance $ - - 394,000
Professional fees - - 148,000
Writedowns and other expenses
for other real estate owned - - 204,000
- ---------------------------------------------------------------------
Note 15. Regulatory Capital Requirements
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 and subject to minimum regulatory capital requirements. The
amount available for dividends in 1997 will be 1997 earnings plus retained
earnings of $5,142,000 from 1995 and 1996.
The Bank is subject to various regulatory capital requirements administered
by federal banking agencies. Failure to meet minimum capital requirements can
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,
1996, that the Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 1996, 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
Page 49
adequately capitalized the Bank must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
The actual capital amounts and ratios for the Bank are presented in the
following table:
- ----------------------------------------------------------------------------
To be
well-capitalized
For capital under prompt
adequacy corrective action
Actual purposes provisions
- ----------------------------------------------------------------------------
As of December 31, 1996:
Tier 2 capital to $ 23,253,000 8,693,000 14,488,000
risk-weighted assets 16.05% 6.00% 10.00%
------------------------------------------------
Tier 1 capital to 21,442,000 5,795,000 8,693,000
risk-weighted assets 14.80% 4.00% 6.00%
------------------------------------------------
Tier 1 capital to 21,442,000 9,154,000 11,443,000
average assets 9.37% 4.00% 5.00%
- ----------------------------------------------------------------------------
As of December 31, 1995:
Tier 2 capital to 20,282,000 8,086,000 13,477,000
risk-weighted assets 15.05% 6.00% 10.00%
------------------------------------------------
Tier 1 capital to 18,597,000 5,391,000 8,086,000
risk-weighted assets 13.80% 4.00% 6.00%
------------------------------------------------
Tier 1 capital to 18,597,000 8,212,000 10,265,000
average assets 9.06% 4.00% 5.00%
- ----------------------------------------------------------------------------
The actual capital amounts and ratios for the Company, on a consolidated
basis, are presented in the following table:
Page 50
- ----------------------------------------------------------------------------
To be
well-capitalized
For capital under prompt
adequacy corrective action
Actual purposes provisions
- ----------------------------------------------------------------------------
As of December 31, 1996:
Tier 2 capital to $ 24,278,000 8,714,000 14,523,000
risk-weighted assets 16.72% 6.00% 10.00%
------------------------------------------------
Tier 1 capital to 22,463,000 5,809,000 8,714,000
risk-weighted assets 15.47% 4.00% 6.00%
------------------------------------------------
Tier 1 capital to 22,463,000 9,173,000 11,466,000
average assets 9.80% 4.00% 5.00%
- ----------------------------------------------------------------------------
As of December 31, 1995:
Tier 2 capital to 21,052,000 8,107,000 13,511,000
risk-weighted assets 15.58% 6.00% 10.00%
------------------------------------------------
Tier 1 capital to 19,363,000 5,405,000 8,107,000
risk-weighted assets 14.33% 4.00% 6.00%
------------------------------------------------
Tier 1 capital to 19,363,000 8,228,000 10,285,000
average assets 9.41% 4.00% 5.00%
- ----------------------------------------------------------------------------
Note 16. Condensed Financial Information of Parent
Condensed financial information for First National Lincoln Corporation exclusive
of its subsidiary is as follows (amounts in thousands):
- ----------------------------------------------------------
Balance Sheets
December 31, 1996 1995
- ----------------------------------------------------------
Assets
Cash $ 603 265
Dividends receivable 250 158
Investments - 102
Investment in subsidiary 21,456 18,798
Other assets 414 400
-------- --------
$ 22,723 19,723
======== ========
Liabilities and shareholders' equity
Dividends payable $ 246 158
Shareholders' equity 22,477 19,565
-------- --------
$ 22,723 19,723
======== ========
- ----------------------------------------------------------
Page 51
- ---------------------------------------------------------------------
Statements of Income
Years ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------
Investment income $ 2 7 9
Gain (loss) on sale of investments 1 - (12)
Other income - 56 53
-------- -------- --------
Total income 3 63 50
Other expense 4 65 43
-------- -------- --------
Total expense 4 65 43
Equity in earnings of Bank:
Remitted 488 353 320
Unremitted 2,937 2,369 1,847
-------- -------- --------
Net income $ 3,424 2,720 2,174
======== ======== ========
- ---------------------------------------------------------------------
- ----------------------------------------------------------------------
Statements of Cash Flows
Years ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 3,424 2,720 2,174
Adjustments to reconcile net income
to net cash provided by
operating activities:
Net realized (gain) loss on sale of
securities available for sale (1) - 12
Decrease (increase) in other assets (14) 25 (64)
Unremitted earnings of Bank (2,937) (2,369) (1,847)
-------- -------- --------
Net cash provided by operating activities 472 376 275
-------- -------- --------
Cash flows from investment activities:
Proceeds from sales and maturities of
securities available for sale 102 486 217
Purchases of investments - (490) (98)
-------- -------- --------
Net cash provided by investing activities 102 (4) 119
-------- -------- --------
Cash flows from financing activities:
Proceeds from sale of stock 248 44 57
Purchase of Treasury stock (26) (54) -
Sale of Treasury stock 30 53 -
Dividends paid (488) (353) (320)
-------- -------- --------
Net cash used in financing activities (236) (310) (263)
-------- -------- --------
Net increase in cash 338 62 131
Cash, beginning of year 265 203 72
-------- -------- --------
Cash, end of year $ 603 265 203
======== ======== ========
- ---------------------------------------------------------------------
Page 52
ITEM 9. Changes in and/or Disagreements with Accountants
None.
Page 53
ITEM 10. Directors and Executive Officers of the Registrant
The Articles of Incorporation of the Company provide that the Board of
Directors shall consist of not fewer than five nor more than 25 persons as
determined by the Board prior to each Annual Meeting, with Directors serving
for "staggered terms" of three years. A resolution of the Board of Directors
adopted pursuant to the Company's Articles of Incorporation has established the
number of Directors at nine. 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 1997, and each will be nominated for
re-election for a three-year term:
Daniel R. Daigneault, 44, has served as President and Chief Executive
Officer of the Company since April 26, 1994, and has served as President and
Chief Executive Officer of the Bank since March 7, 1994 and as a member of the
Board of Directors of both the Company and the Bank since March 1994. Prior to
being employed by the Bank, Mr. Daigneault was Vice President, Senior
Commercial Loan Officer at Camden National Bank, Camden, Maine.
Robert B. Gregory, 43, was elected a Director of the Company and the Bank
in October, 1987. Mr. Gregory has been a practicing attorney since 1980, first
in Lewiston, Maine and since 1984 in Damariscotta, Maine. Mr. Gregory is a
member of several legal societies and associations.
Parker L. Spofford, 68, has been a Director of the Company since its
organization in 1985 and has served as a Director of the Bank since 1979. Mr.
Spofford is a Realtor in Waldoboro, Maine. He has been active in that capacity
since 1955 and is a Past President of the Maine Association of Realtors as well
as a former director of the National Association of Realtors. He began his
banking affiliation with the Provident Institution for Savings in Boston and
has served in an advisory capacity for the former Depositors Trust Company and
the former Heritage Savings Bank.
The following Directors' terms will expire in 1998:
M. Robert Barter, 67, has been a Director of the Company since its
organization in 1985 and has served as a Director of the Bank since 1982, and
Chairman of both the Company and the Bank since April, 1989. Mr. Barter has
owned and operated Bob's Photo-TV store in Boothbay Harbor, Maine since 1953.
Mr. Barter is also serving as Town Clerk for the Town of Boothbay Harbor and is
County Commissioner for Lincoln County, Maine. Representing Maine, Mr. Barter
is a Director of the National Association of Counties in Washington, DC.
Bruce A. Bartlett, 63, has been a member of the Board of Directors since
the Company's organization in 1985. Mr. Bartlett served as President and Chief
Executive Officer of the Company until his retirement on April 26, 1994 and as
President and Chief Executive Officer of the Bank until his retirement on March
7, 1994. He has served as a Director of the Bank since 1981.
Malcolm E. Blanchard, 62, has been a Director of the Company since its
organization in 1985, has served as a Director of the Bank since 1976, and is
Chairman of the Executive Committee of the Bank. Mr. Blanchard has been
actively involved, either as sole proprietor or as a partner, in real estate
development since 1970.
The following Directors' terms will expire in 1999:
Katherine M. Boyd, 46, was elected a Director of the Company and the Bank
in 1993. A resident of Boothbay Harbor, she owns Boothbay Region Greenhouses
with her husband. Ms. Boyd is a director of the Boothbay Region YMCA,
Chairperson of the YMCA Annual Fund Drive, and past Chairperson of the YMCA
Camp Committee.
Carl S. Poole, Jr., 51, has been a Director of the Company since its
organization in 1985 and has served as a Director of the Bank since 1984. Mr.
Page 54
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., 50, was elected a Director of the Company and the
Bank in June, 1989. Mr. Soule has been practicing law in Wiscasset since 1971.
He spent two terms in the Maine House of Representatives and is a past
President of the Lincoln County Bar Association and is a former Public
Administrator, Lincoln County. He has served on the Boards of Directors of Bath
area YMCA and of the Coastal Economic Development Corporation and as a Trustee
of the Wiscasset Library. He was Selectman, Town of Westport from 1975 to
1976 and served as Chairman of the Board of Selectmen from 1993 to 1995.
The Bank has seven standing committees of the Board of Directors:
Executive, Audit, Asset/Liability, Trust, Personnel/Retirement, Directors'
Loan, and Compliance. The Compensation Committee is a subcommittee of the
Executive Committee. In addition to the committee memberships stated in the
above biographies, all members of the Board serve on the Asset/Liability
Committee. Certain members of management also serve on some committees. The
aggregate attendance of committee meetings by members of the Board of Directors
in 1996 was in excess of 90%. The Company has no standing committees of the
Board of Directors.
There are no family relationships among any of the Directors of the
Company, and there are no arrangements or understandings between any Director
and any other person pursuant to which that Director has been or is to be
elected. No Director of the Bank or the Company serves as a Director on the
board of any other corporation with a class of securities registered pursuant
to Section 12 of the Securities Exchange Act or subject to the reporting
requirements of Section 15(d) of the Securities Exchange Act or any company
registered as an investment company under the Investment Company Act of 1940,
as amended.
Executive Officers
Each Executive Officer of the Company and the Bank is identified in the
following table which also sets forth their respective ages, offices, and
periods served as an Executive Officer of the Bank:
Name and Age (1) Office & Position Period Served
- -------------------- ----------------------------------- -------------
Daniel R. Daigneault President & Chief Executive Officer 1994 to date
44 of the Company and of the Bank
F. Stephen Ward Treasurer of the Company; 1993 to date
43 Vice President and Chief
Financial Officer of the Bank
Donald C. Means Clerk of the Company; 1973 to date
59 Senior Vice President and
Senior Loan Officer of the Bank
Walter F. Vietze Senior Vice President and 1984 to date
55 Senior Operations Officer of the Bank
John T. Blamey Vice President and Banking Services 1994 to date
50 Officer of the Bank
Edythe A. Jordan Vice President and Trust Officer 1992 to date
52 of the Bank
Page 55
Michael T. Martin Vice President and Credit 1993 to date
41 Administration Officer of the Bank
Alden B. McFarland Vice President and Commercial Loan 1988 to date
49 Officer of the Bank
Janet E. Spear Vice President and Mortgage Loan 1990 to date
54 Officer of the Bank
Deborah C. Yates Vice President and Loan Operations 1992 to date
48 Officer and Trust Operations
Officer of the Bank
(1) As of December 31, 1996
Daniel R. Daigneault has served as President and Chief Executive Officer
of the Company since April 26, 1994, and has served as President and Chief
Executive Officer of the Bank since March 7, 1994 and as a member of the Board
of Directors of both the Company and the Bank since March 1994. Prior to being
employed by the Bank, Mr. Daigneault was Vice President, Senior Commercial
Loan Officer at Camden National Bank, Camden, Maine.
F. Stephen Ward has been employed by the Bank since 1990. Mr. Ward served
as Assistant Vice President and Marketing Officer from 1990 to 1993. From 1978
to 1990 Mr. Ward was employed by Downeast Enterprises, Inc. He is presently
completing a Masters of Business Administration degree in Finance.
Donald C. Means has been employed by the Bank since 1973. From 1962 to
1973 Mr. Means was employed by First National Bank of Boston, a major New
England financial institution. While there, Mr. Means' primary responsibilities
involved commercial lending.
Walter F. Vietze has been employed by the Bank since 1984. From 1979 to
1984, Mr. Vietze was employed by Casco Bank. His primary responsibilities
involved providing online banking services to correspondent banks. Prior to
1979, Mr. Vietze was affiliated with BayBanks in Massachusetts.
John T. Blamey has been employed by the Bank since 1989. Mr. Blamey has
held various positions and most recently served as Strategic Planning Director
prior to assuming his responsibilities as Vice President of Banking Services.
Prior to joining the Bank, Mr. Blamey retired from the United States Air Force
as Lieutenant Colonel.
Edythe A. Jordan joined the Bank in 1992 as Vice President and Trust
Officer. She has 27 years' experience in trust banking with Key Trust Company
and Casco Northern Bank. She most recently served as manager of Key Trust
Company's Presque Isle, Maine, office.
Michael T. Martin has been employed by the Bank since 1993. He was
employed by Fleet Bank from 1980 to 1992, and by Canal National Bank from 1977
to 1980. His primary responsibilities were in Loan Review and Credit
Administration.
Alden B. McFarland has been employed by the Bank since 1975. From 1984 to
1988, Mr. McFarland served as Assistant Vice President and Commercial Loan
Officer of the Bank.
Janet E. Spear has been employed by the Bank since 1977. Mrs. Spear served
as Assistant Vice President and Mortgage Loan Officer of the Bank from 1987-
1990, and as Mortgage Loan Officer from 1985-87. From 1982 to 1985 she was the
Manager of the Bank's Waldoboro office.
Deborah C. Yates has been employed by the Bank since 1971. Ms. Yates
served as Assistant Vice President and Loan Operations Officer from 1986 to
1992.
There are no family relationships among any of the Executive Officers,
nor are there any arrangements or understandings between any Executive Officer
and any other person pursuant to which that Executive Officer has been or is to
be elected.
Page 56
ITEM 11. Executive Compensation
The table below sets forth cash compensation paid to the President and
Chief Executive Officer during 1995 and 1996, and to the two individuals that
served as President and Chief Executive Officer during 1994. No other Executive
Officers of the Bank received compensation in excess of $100,000 for the years
ended December 31, 1996, 1995 and 1994.
- ----------------------------------------------------------------------------
Annual Long Term
Compensation Compensation
------------------------------------- ------------
Name and
Principal
Position Year Salary Bonus(2) Other # Options
- ----------------------------------------------------------------------------
Daniel R. Daigneault 1996 $143,000 $ 15,730 $ 7,425(3) 2,000
President and CEO 1995 130,000 15,839 1,386 16,000
(1)1994 85,000 21,000 -0- -0-
- ----------------------------------------------------------------------------
Bruce A. Bartlett 1996 -0- -0- -0- -0-
President and CEO 1995 -0- -0- -0- -0-
(1)1994 54,000 -0- 61,000 -0-
- ----------------------------------------------------------------------------
(1) Mr. Daigneault joined the Bank on March 7, 1994 and succeeded Mr. Bartlett
as President and CEO of the Company when Mr. Bartlett retired on April 26,
1994. 1994 salaries reflect only a partial year for both individuals.
(2) Bonuses are listed in the year earned and normally accrued. Such bonuses may
be paid in the following year.
(3) Amounts shown include contributions paid by the Company to the respective
accounts of the Named Executive Officer in the 401-k Plan. In 1996 the Company
and The First National Bank of Damariscotta contributed to the First National
Bank of Damariscotta Savings and Investment Plan, a matching amount of 15% of
the salary deferred by Mr. Daigneault and a profit-sharing component of 4% of
Mr. Daigneault's earnings, which were subject to IRS regulations which limit the
maximum amount of an officer's earnings eligible for matching or profit-sharing
401(k) contributions to $150,000. These percentages were equivalent to the 401-
(k) Plan match and profit sharing contributions made for all eligible employees.
Director Compensation
Each of the outside directors of the Bank, with the exception of the
Chairman of the Board, is paid a director's fee in the amount of $350 for each
meeting attended and $100 for each meeting attended of a committee of which the
director is a member. The Chairman of the Board is paid an annual fee of
$13,500. Directors may elect to defer their fees to be invested in shares of
Company stock. As of December 31, 1996, M. Robert Barter and Parker L. Spofford
elected to have 100% of their fees invested under the Directors' Compensation
Deferral Agreement. Certain Board members are also paid fees for appraisals and
consulting services, and such fees are on terms no more favorable to the
recipient than are generally available to the Bank for such services from other
providers in the area. Fees paid to Directors as a group in 1996 totaled
$54,150. No directors' fees are paid to Directors of the Company as such.
President Daigneault, who is the only director who is also an officer of
the Company, receives no additional compensation for serving on the Board of
Directors of the Company or the Bank.
Page 57
Executive Compensation Committee Report
The Compensation Committee consists of the members of the Executive
Committee of the Board of Directors, which is comprised of four outside
Directors including the Chairman of the Board. This Committee has the
responsibility for conducting the annual evaluation of the President and
renders recommendations to the full Board of Directors regarding compensation
for the President. The compensation of the President consists of a base salary
plus a bonus, under an approved plan adopted for all employees of the Bank, and
other cash bonuses which the Committee may deem appropriate based on the overall
performance of the President and the achievement of prescribed goals. These
goals are a combination of financial targets and corporate objectives such as
implementation of the strategic plan, satisfactorily addressing issues
identified as priorities by the banking regulators and overall performance of
the management team. The financial goals pertain to profitability, growth and
loan portfolio quality.
The compensation philosophy of the Company for all executive officers is
to pay a competitive base salary commensurate with salaries paid by other
similar sized financial institutions within the State of Maine, plus a short-
term incentive which is tied to the achievement of certain performance levels.
In 1994 the Company instituted a formal performance-based compensation program
called "Performance Compensation for Stakeholders". The overall objective of
the program is to shift a greater portion of employee compensation from base
salary to performance based payments. The program, which was developed by Mike
Higgins & Associates, Inc., is currently being utilized by over 200 banks
across the country. In 1996, total cash payout under this Stakeholder
Performance Compensation program was 11.00% of the participating employees' base
salaries. The cash payout may be deferred to the following calendar year.
This performance compensation program's overall objective is to maximize
the long-term viability of the Company. It addresses this by tying the bonus
compensation to multiple goals which include profit, growth, productivity and
quality. The guiding principle is to reach a balance of profitability, growth,
productivity and quality which should have a positive impact on maximizing long-
term shareholder value. It rewards current performance which contributes toward
the achievement of long-term goals. Each year specific key performance
indicators are chosen along with financial performance levels. In 1996 some of
the indicators were: loan volume, deposit volume, non-performing loan levels,
net interest income, salaries and wages as a percentage of income and operating
expenses as a percentage of net income.
The amount of compensation potentially payable to the President was
determined by reviewing an independent salary survey of compensation of
officers and employees for comparably sized financial institutions within the
State of Maine. The survey was conducted by an independent accounting firm.
The committee took into consideration the salary ranges and actual salaries
paid to Presidents and CEOs of similar banks in establishing the base salary
for President Daigneault.
The President is given annual goals relating to both financial performance
and corporate objectives, which are established by the Committee pursuant to
discussions with the President. On an annual basis the Committee conducts a
formal evaluation of the President, compares his performance to the established
goals, assesses the overall performance of the Bank and makes recommendations as
appropriate.
President Daigneault's base compensation for 1996 was based on the
Company's overall financial performance in 1995, which, in the opinion of the
Compensation Committee, was considered very good. All 1995 goals set for
President Daigneault were met or exceeded, which included reaching certain
targets for asset growth, asset quality, and overall profitability. Also
considered were the actual salaries of CEOs of other financial institutions of
Page 58
similar size and complexity, located within the State of Maine. Taking these
various factors into consideration, the committee increased his base salary by
10% as of January 1, 1996.
President Daigneault's 1996 bonus compensation was 11.00% of base
compensation, paid in accordance with the Company's Stakeholder Performance
Compensation program for all employees, which was described previously.
Compensation Committee Members:
M. Robert Barter
Malcolm E. Blanchard
David B. Soule, Jr.
Parker L. Spofford.
Stock Option Plan
In addition to the cash compensation, in April 1995 the stockholders
approved a Stock Option Plan. The purpose of the Stock Option Plan is to
encourage the retention of key employees by facilitating their purchase of a
stock interest in the Company. The 1995 Stock Option Plan provides for grants
of options to purchase Company common stock and is administered by an Options
Committee which consists of four outside directors. During 1995 and 1996, stock
options were granted under the 1995 Stock Option Plan and set forth in the
accompanying table.
Option Committee Members:
M. Robert Barter
Malcolm E. Blanchard
Robert B. Gregory.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
During 1996, Directors Barter, Blanchard, Soule and Spofford served as
members of the Compensation Committee. No member of the Committee was, or ever
has been, an officer or employee of the Company or the Bank. All Committee
members are customers of and engage in banking transactions with the Bank in the
ordinary course of business. As described in the section entitled "Certain
Relationships and Related Transactions", all loans were made on substantially
the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with other persons and, in the opinion of
management, did not involve more than the normal risk of collectibility or
present other unfavorable features.
Long-Term Compensation
Long-term compensation may be distinguished from annual compensation by
the time frame for which performance results are measured to determine awards.
While annual compensation covers a calendar year, long-term compensation is
provided through the Company's stock option plan which covers a period of two
to ten years.
The following table sets forth information with respect to the named
executive and all other employees concerning grants of stock options during
1996:
Page 59
Option Grants During the Year Ended December 31, 1996
- -------------------------------------------------------------------------------
Number % of Potential realizable
of total value at assumed
securities options Exercise rates of stock
underlying granted price Expir- appreciation
options in fiscal per ation for option term(1)
granted year share(2) date (3) 5% 10%
- -------------------------------------------------------------------------------
Daniel R. Daigneault 2,000 33.3% $33.00 01/26/06 $ 41,507 $ 98,422
All other employees 4,000 66.7% 33.00 01/26/06 83,014 196,844
All optionees 6,000 100.0% 33.00 01/26/06 124,521 295,266
- -------------------------------------------------------------------------------
1) The dollar gains under these columns result from calculations assuming 5%
and 10% growth rates compounded over a 10-year period as set by the Securities
and Exchange Commission and are not intended to forecast future price
appreciation of the Company's common stock. The gains reflect a future value
based upon growth at these prescribed rates. These values have also not been
discounted to present value. It is important to note that options have value to
the listed executive and to all option recipients only if the stock price
advances beyond the exercise price shown on the table during the effective
option period.
2) Under the Stock Option Plan, the exercise price may not be less than the
fair market value of the common stock on the date the option is granted.
3) The Stock Option Plan requires a vesting period of two years after the date
granted before 50% of the options may be exercised, and five years after the
date granted before 100% of the options may be exercised. All options expire 10
years after the date granted.
The following table sets forth information with respect to the named
executive and all other optionees concerning the exercise of options during
1996 and unexercised options held as of December 31, 1996:
Aggregated Option Exercises in 1996 and December 31, 1996 Option Values
- -------------------------------------------------------------------------------
Number of securities Value of
underlying unexercised
unexercised in-the-money
options options
at year end at year end
-------------------- -------------------
Shares acquired Value Exer- Unexer- Exer- Unexer-
on exercise realized cisable cisable cisable cisable
- -------------------------------------------------------------------------------
Daniel R.
Daigneault -0- -0- -0- 18,000 -0- $256,500
All other
employees -0- -0- -0- 12,000 -0- $152,000
All optionees -0- -0- -0- 30,000 -0- $408,500
- -------------------------------------------------------------------------------
Page 60
Description of the Company's Benefit Plans
The Company has reserved 60,000 shares of its common stock (15,000 shares
prior to the four-for-one stock split on November 1, 1989) 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, 1996, 26,389 shares had been issued pursuant to these plans, leaving 33,611
shares available for future issuance. The issuance price is based on the market
price of the stock at issuance date.
All shares for these plans are issued pursuant to an exemption from
registration under the Securities Act of 1933, as amended, contained in Section
3(a)(11) thereof and Rule 147 promulgated thereunder. During the period ending
nine months after the date of issuance of these shares, these shares may be
transferred only to residents of the State of Maine. Each certificate issued for
these plan shares bears a legend referring to this restriction.
The Bank's 401(k) Plan (The First National Bank of Damariscotta Savings
and Investment Plan) is the Bank's sole retirement plan, and was modified in
1996 after termination of the Bank's traditional defined benefit pension plan.
It is available to any employee who has attained the age of 21 and completed six
months of service (500 hours during a 12 month period). Eligible employees may
contribute a percentage of compensation, up to a maximum of 15% annually. The
Bank may, by annual vote of its Directors, make matching contributions. In
addition, also by vote of its Directors, make an annual profit sharing
contribution to the Plan. The 401(k) Plan is administered by a special committee
appointed by the Board of Directors with the assistance of Berry, Dunn, McNeil &
Parker, the Company's independent public accountants.
Employee contributions are 100% vested at all times, while employer
contributions are vested over a five-year period. Upon termination of employment
for any reason, a plan participant may receive his or her contribution account
and earnings allocated to it, as well as the vested portion of his or her
employer-matching account and earnings allocated to it. Non-vested amounts are
forfeited and re-allocated among the accounts of the remaining plan
participants. The Bank paid $24,000 in matching contributions and $97,000 in
profit-sharing contributions to this plan in 1996. 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, 1996, 9,690 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. Originally, 5,000 shares of the Company's common stock were allocated to
this plan. The number of allocated shares was increased to 20,000 in 1989 as
the result of a four-for-one stock split. Employees who have been employed by
the Bank for three consecutive calendar months are eligible to purchase shares
on a quarterly basis through payroll deduction. The price per share for shares
sold pursuant to the plan is based on fair market value as determined by the
Plan Committee appointed by the Board of Directors. As of December 31, 1996,
6,911 shares of the Company's stock had been purchased pursuant to the plan.
On January 15, 1987, the Bank adopted a Compensation Deferral Agreement
pursuant to which Directors (other than the Chief Executive Officer) are
permitted to defer payment of directors' fees until their retirement from the
Board. The Savings and Investment Plan Committee has sole discretion to invest
the deferred fees as it sees fit. Two Directors had signed Compensation
Deferral Agreements for 1996.
The Bank provides all full-time employees with group life, health, and
long-term-disability insurance through Independent Bankers' Employee Benefits
Trust of Maine. A Flexible Benefits Plan is available to all full-time
employees after satisfying eligibility requirements and to part-time employees
scheduled to work 20 or more hours a week.
Page 61
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, 50,000 shares
(subject to adjustment to reflect stock splits and similar events) are reserved
from the authorized but unissued common stock of the Company for future
issuance by the Company upon exercise of stock options granted to certain key
employees of the Company and the Bank from time to time.
The purpose of the Option Plan is to encourage the retention of such key
employees by facilitating their purchase of a stock interest in the Company.
The Option Plan is intended to provide for the granting of incentive stock
options under Section 422 of the Internal Revenue Code of 1986, as amended (the
Code) to employees of the Company or the Bank.
The Option Plan is administered by the Options Committee of the Company's
board of directors, which is comprised solely of directors who are ineligible
to receive grants of stock options under the Option Plan and who have not
received grants of options within the 12 months preceding their appointment to
the Options Committee. The Options Committee selects the employees of the Bank
and the Company to whom options are to be granted and the number of shares to
be granted. The Option Plan may be amended only by the vote of the holders of
a majority of the Company's outstanding common stock if such amendment would
increase the number of shares available for issuance under the Option Plan,
change the eligibility criteria for grants of options under the Option Plan,
change the minimum option exercise price or increase the maximum term of
options. Other amendments may be effected by the Options Committee.
Employees selected by the Options Committee receive, at no cost to them,
options under the Option Plan. The option exercise prices are equal to the
fair market value of the shares on the date of the grant, and no option is
exercisable after the expiration of 10 years from the date it is granted. The
fair market value of the shares is determined by the Options Committee as
specified in the Option Plan. The optionee cannot transfer or assign any
option other than by will or in accordance with the laws of descent and
distribution, and the option may be exercised only by the employee during the
employee's lifetime. After an employee's death, options may be exercised by
the employee's estate or heirs up to one year following the date of death.
Code Section 422 limits option grants by providing that during the term of the
Option Plan, no grant may be made to any employee owning more than 10% of the
shares unless the exercise price is at least 110% of the shares' fair market
value and such option is not exercisable more than five years following the
option grant. The aggregate fair market value of the stock for which any
employee may be granted options in any calendar year may generally not exceed
$100,000.
While generally no options may be exercisable before the second
anniversary of the grant date, in the event of a change in control involving
the Company all options (other than those held by officers or directors of the
Company or the Bank for less than six months) shall become immediately
exercisable. Also, an employee whose employment is terminated in connection
with or within two years after such a change in control event shall be entitled
to exercise all options for up to three months following the date of
termination; provided that options held by officers or directors shall not be
exercisable until six months after the grant date. Employees whose services
are terminated, other than following a change in control as described above,
shall thereupon forfeit any options held, provided, however, that following
termination due to disability an employee shall be entitled to exercise options
for up to one year (provided, further, that officers and directors may exercise
only with respect to options held for at least six months).
The Company receives no monetary consideration for the granting of
incentive stock options. Upon the exercise of options, the Company receives
Page 62
payment in cash from optionees in exchange for shares issued. No federal income
tax consequences are incurred by the Company at the time incentive stock
options are granted or exercised, unless the optionee incurs liability for
ordinary income tax treatment upon exercise of the option, as discussed below,
in which event the Company would be entitled to a deduction equal to the
optionee's ordinary income attributable to the options. Provided the employee
holds the shares received on exercise of a stock option for the longer of two
years after the option was granted or one year after it was exercised, the
optionee will realize capital gains income (or loss) in the year of sale in an
amount equal to the difference between the sale price and the option exercise
price paid for shares. If the employee sells the shares prior to the
expiration of the period, the employee realizes ordinary income in the year of
disposition equal to the difference between the fair market value of the shares
on the date of exercise and the exercise price and capital gains income (or
loss) equal to the difference (if any) between the sale price of the shares and
the fair market value of the shares on the date of exercise.
In addition to the tax consequences discussed above, the excess of the
option price over the fair market value of the optioned stock at the time of
option exercise is required to be treated by an incentive optionee as an item
of tax preference for purposes of the alternative minimum tax.
Performance Graph
Set forth below is a line graph comparing the five-year cumulative total
return of the Company's common stock ("FNLC"), assuming reinvestment of all
cash dividends and retention of the 10% stock dividend paid January 15, 1994 to
shareholders of record on December 31, 1993, with that of the Standard & Poor's
500 Index ("S&P 500") and the NASDAQ Combined Bank Index ("NASD Bank"). The
NASD Bank index is a capitalization-weighted index designed to measure the
performance of all NASDAQ stocks in the banking sector.
Insert Performance Graph from Excel
Performance graph data:
- -------------------------------------------------------------------
1991 1992 1993 1994 1995 1996
- -------------------------------------------------------------------
FNLC 100.00 106.13 135.13 181.93 245.25 311.54
S&P 500 100.00 107.43 118.11 119.61 164.03 201.24
NASD Bank 100.00 152.02 196.67 198.84 287.95 363.26
- -------------------------------------------------------------------
Page 63
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the number of shares of common stock
beneficially owned (1) as of December 31, 1996 by each Director and Executive
Officer named in the Summary Compensation Table, and by all Directors and
Executive Officers as a group:
---------------------------------------------------
Name Number of Percent
of Director Shares Ownership(1)
------------------- --------- ------------
M. Robert Barter 10,092 1.64%
Bruce A. Bartlett 2,300 .37%
Malcolm E. Blanchard 6,828 1.11%
Katherine M. Boyd 2,010 .33%
Daniel R. Daigneault 3,010 .49%
Robert B. Gregory 2,510 .41%
Carl S. Poole, Jr. 20,691 3.36%
David B. Soule, Jr. 1,433 .23%
Parker L. Spofford 6,391 1.04%
------- ------
Total ownership of all
Directors and Executive
Officers as a group 60,807 9.87%
---------------------------------------------------
(1)For purposes of this table, beneficial ownership has been determined in
accordance with the provisions of Rule 13d-3 promulgated under the Securities
Exchange Act of 1934, as amended. In general, a person is deemed to be the
beneficial owner of a security if he has or shares the power to vote or to
direct the voting of the security or the power to dispose or direct the
disposition of the security, or if he has the right to acquire beneficial
ownership of the security within 60 days. The figure set forth includes
director's qualifying shares owned by each person listed.
To the knowledge of the management of the Company, the following
shareholders beneficially owned more than 5% of First National Lincoln
Corporation stock as of December 31, 1996.
-----------------------------------------------------------------------
Name & Address of Beneficial Owner Amount Percentage
------------------------------------- ------------- ----------
Daniel P. Thompson, Edith I. Thompson 35,201 shares 5.71%
HC 61 Box 039, New Harbor, ME 04545
-----------------------------------------------------------------------
Page 64
ITEM 13. Certain Relationships and Related Transactions
The Federal Reserve Act permits the Bank to contract for or purchase
property from any of its Directors only when such purchase is made in the
regular course of business upon terms not less favorable to the Bank than those
offered by others unless the purchase has been authorized by a majority of the
Board of Directors not interested in the transaction. Similarly, the Federal
Reserve Act prohibits loans to Executive Officers of the Bank unless such loans
are on terms not more favorable than those afforded other borrowers and certain
other prescribed conditions have been met.
The Bank has had, and expects to have in the future, banking transactions
in the ordinary course of its business with Directors, Officers and principal
shareholders of the Company and their associates. All such transactions have
been made upon substantially the same terms, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with others.
In the opinion of management, such loans have not involved more than the
normal risk of collectibility nor have they presented other unfavorable
features. The total amount of loans outstanding at December 31, 1996 to the
Company's Directors, Executive Officers and their associates was $2,456,000,
which constituted 1.56% of the Bank's total loans outstanding at that date.
Page 65
ITEM 14. Exhibits
Exhibit 3 Articles of Incorporation and Bylaws, filed as Exhibit 3 to
Company's Registration Statement No. 2-96573.
Exhibit 3.1 Articles of Amendment, filed as part of Exhibit 3 to the
Company's Registration Statement No. 2-96573.
Exhibit 3.2 Amendments to Articles of Incorporation filed as part of
Exhibit 3 to the Company's quarterly filing on Form 10-Q for the second quarter
of 1996.
Exhibit 4.1 Articles of Incorporation and Bylaws, filed as Exhibit 3 to
the Company's Registration Statement No. 2-96573.
Exhibit 10.3 EastPoint Technology Purchase and Licensing Agreement, filed
as Exhibit 10.3 to the Company's 1993 Annual Report on Form 10-K.
Exhibit 27 Financial Data Schedule.
Page 66
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
------------------------------------------------
FIRST NATIONAL LINCOLN COPORATION
By Daniel R. Daigneault
Daniel R. Daigneault, President
March 26, 1997
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
Daniel R. Daigneault President and
Director
Daniel R. Daigneault (Principal Executive
Officer)
F. Stephen Ward Treasurer
F. Stephen Ward (Principal Financial
Officer, Principal
Accounting Officer)
M. Robert Barter Director and
M. Robert Barter Chairman
of the Board
Bruce A. Bartlett Director
Bruce A. Bartlett
Malcolm E. Blanchard Director
Malcolm E. Blanchard
Katherine M. Boyd Director
Katherine M. Boyd
Robert B. Gregory Director
Robert B. Gregory
Carl S. Poole, Jr. Director
Carl S. Poole, Jr.
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David B. Soule, Jr. Director
David B. Soule, Jr.
Parker L. Spofford Director
Parker L. Spofford
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